<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
*****
FORM 10-Q
*****
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 0-21730
-------
STECK~VAUGHN PUBLISHING CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 33-0556929
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8701 North Mopac Expressway, Suite 200 Austin, Texas 78759-8364
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (512) 343-8227
----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
14,331,917 common stock shares outstanding at July 29, 1996.
_____________________________________________________________________________
<PAGE> 2
STECK~VAUGHN
PUBLISHING CORPORATION
CONSOLIDATED BALANCE SHEETS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(amounts in thousands, except share counts) 1996 1995 1995
-------- ------------ --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,682 $ 10,041 $ 13,103
Marketable securities 1,399 1,748 1,950
Receivables, net of allowance of $1,421, $468 and $258 16,864 10,909 11,413
Inventories and supplies 21,090 18,099 13,317
Prepaid and deferred marketing expenses 4,290 1,456 2,930
Note receivable from parent company 3,000 4,000 2,000
Deferred plant costs 2,780 2,854 2,301
Other current assets 2,331 1,667 1,440
-------- ------------ --------
Total current assets 53,436 50,774 48,454
LAND, BUILDINGS AND EQUIPMENT, net 8,863 6,741 6,702
ACQUIRED INTANGIBLE ASSETS, net 15,274 8,998 5,064
DEFERRED PLANT COSTS 3,398 3,015 3,240
OTHER ASSETS 1,348 -- --
-------- ------------ --------
$ 82,319 $ 69,528 $ 63,460
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 6,779 $ 4,551 $ 2,163
Accrued royalties 2,730 2,129 3,070
Accrued commissions 984 343 832
Accrued salaries, wages and bonuses 1,152 345 529
Payable to parent company 631 1,299 1,076
Current portion of long-term debt 2,345 343 343
Accrued and deferred income taxes 684 691 2,018
Other liabilities 189 -- --
-------- ------------ --------
Total current liabilities 15,494 9,701 10,031
-------- ------------ --------
LIABILITIES PAYABLE AFTER ONE YEAR
Long-term debt, less current portion 12,063 2,904 1,200
Deferred income taxes 629 629 189
-------- ------------ --------
12,692 3,533 1,389
-------- ------------ --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized and unissued -- -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
14,587,000, 14,573,000, and 14,568,000 shares issued 146 146 146
Additional paid-in capital 36,855 36,828 36,792
Retained earnings 18,964 21,143 16,905
Unrealized gain on marketable securities, net of tax effect 1 10 30
-------- ------------ --------
55,966 58,127 53,873
Treasury stock, at cost (255,000 shares) (1,833) (1,833) (1,833)
-------- ------------ --------
Total stockholders' equity 54,133 56,294 52,040
-------- ------------ --------
$ 82,319 $ 69,528 $ 63,460
======== ============ ========
</TABLE>
2
<PAGE> 3
STECK~VAUGHN
PUBLISHING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(amounts in thousands, except per share amounts) 1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
NET REVENUES $ 18,296 $ 15,278 $ 33,757 $ 26,425
Product cost and fulfillment 5,704 4,137 10,846 7,493
-------- -------- -------- --------
GROSS PROFIT 12,592 11,141 22,911 18,932
Product development 3,198 2,069 5,864 4,375
Selling and marketing 5,798 4,684 10,787 8,104
General and administrative 1,335 1,269 2,603 2,484
Provision for doubtful accounts 30 29 45 49
Amortization of acquired intangible assets 465 185 811 369
Write-off of acquired in-process research
and development costs 4,100 -- 4,100 --
-------- -------- -------- --------
OPERATING INCOME (LOSS) (2,334) 2,905 (1,299) 3,551
Interest income 265 475 590 750
Interest expense (218) (50) (293) (99)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (2,287) 3,330 (1,002) 4,202
Income taxes 689 1,253 1,177 1,593
-------- -------- -------- --------
NET INCOME (LOSS) $ (2,976) $ 2,077 $ (2,179) $ 2,609
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE $ (0.21) $ 0.14 $ (0.15) $ 0.18
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 14,429 14,357 14,407 14,345
======== ======== ======== ========
</TABLE>
3
<PAGE> 4
STECK~VAUGHN
PUBLISHING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
(amounts in thousands) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net income (loss) $ (2,976) $ 2,077 $ (2,179) $ 2,609
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 283 324 569 637
Amortization of acquired intangible assets 465 185 811 369
Write-off of acquired in-process research
and development costs 4,100 -- 4,100 --
Provision for doubtful accounts 30 29 45 49
Loss on sale of assets (1) 27 (2) 27
Change in assets and liabilities net of effects from
acquisitions:
Receivables (3,300) (2,833) (4,449) (3,436)
Inventories and supplies (259) (80) (2,875) (497)
Prepaid and deferred marketing expenses 388 217 (2,834) (1,314)
Deferred plant costs (88) (163) (309) 242
Receivable from/payable to parent company 95 744 (668) 1,624
Accounts payable and accrued expenses (3,121) 197 914 736
Other (66) (48) 3 (24)
-------- -------- -------- --------
NET CASH FOR OPERATING ACTIVITIES (4,450) 676 (6,874) 1,022
-------- -------- -------- --------
CASH FLOWS FOR INVESTING ACTIVITIES:
Net sales (purchases) of marketable securities 85 (23) 333 5,423
Note receivable from parent company, net activity -- (2,000) 1,000 (2,000)
Additions to land, buildings and equipment (802) (265) (1,537) (498)
Dispositions of land, buildings and equipment 4 115 32 115
Acquisition costs, net of cash acquired (10,658) (8) (10,749) (123)
-------- -------- -------- --------
NET CASH FOR INVESTING ACTIVITIES (11,371) (2,181) (10,921) 2,917
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in current portion of long-term debt (1,444) (168) 456 (219)
Additions to long term debt 11,024 -- 11,024 --
Reductions in long-term debt (85) (86) (2,071) (171)
Proceeds from issuance of common stock 4 -- 27 --
Purchase of treasury stock -- -- -- (150)
-------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES 9,499 (254) 9,436 (540)
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (6,322) (1,759) (8,359) 3,399
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 8,004 14,862 10,041 9,704
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD $ 1,682 $ 13,103 $ 1,682 $ 13,103
======== ======== ======== ========
</TABLE>
4
<PAGE> 5
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS, CONTINUED
Note 1 - Summary of Accounting Policies
Steck-Vaughn Publishing Corporation (the Company) was incorporated on March 10,
1993, as a wholly-owned subsidiary of National Education Corporation (NEC).
Effective April 2, 1993, NEC made a capital contribution of all of the stock of
Steck-Vaughn Company (SVC) to the Company. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Steck-Vaughn Company, SV Distribution Company (parent company of
Summit Learning, Inc.), and Edunetics Ltd. and Edunetics Corporation (together
referred to as "Edunetics" herein).
Due to the seasonal nature of the Company's traditional selling cycle, a
substantial portion of selling and marketing costs of the Company are deferred
in the first half of the year and fully amortized later in the calendar year to
properly match the costs with revenues.
Effective January 1, 1995, the Company changed its method of valuing
inventories to the first-in, first-out (FIFO) method from the last-in,
first-out (LIFO) method. Financial statements of all prior years were restated
to apply the FIFO method retroactively.
The Company follows Statement of Financial Accounting Standards 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 such
costs are capitalized and amortized over the estimated economic life of the
product. These costs are becoming increasingly material to the Company's
financial statements with the addition of more software-based training and
education products through its recent acquisition of Edunetics.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments of a normal recurring nature
necessary to present fairly financial position, results of operations, and cash
flows. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. It is suggested that these
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's 1995 Form 10-K. The results of
operations for interim periods are not necessarily indicative of the results of
operations to be expected for the year.
5
<PAGE> 6
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS, CONTINUED
Note 2 - Investments
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(amounts in thousands) 1996 1995 1995
-----------------------------------
<S> <C> <C> <C>
Available-for-sale securities $ 1,399 $ 1,748 $ 1,950
Held-to-maturity securities -- 1,000 9,700
-----------------------------------
1,399 2,748 11,650
Less securities classified as cash equivalents -- (1,000) (9,700)
-----------------------------------
Total marketable securities $ 1,399 $ 1,748 $ 1,950
==================================
</TABLE>
During the six months ended June 30, 1996 and 1995, the Company did not realize
a material gain or loss from the sale of available-for-sale securities.
Note 3 - Inventories and Supplies
<TABLE>
<CAPTION>
June 30 December 31, June 30,
(amounts in thousands) 1996 1995 1995
-----------------------------------
<S> <C> <C> <C>
Finished Goods $ 20,365 $ 17,111 $ 12,644
Work in process 72 81 45
Raw materials and supplies 653 907 628
------------------------------------
Total $ 21,090 $ 18,099 $ 13,317
====================================
</TABLE>
Note 4 - Business Combinations
On April 30, 1996, the Company acquired all of the stock of Edunetics Ltd., an
Israel 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 and the Company's bank line of credit. The acquisition was
accounted for using the purchase method of accounting. Accordingly, 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. 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 required by generally accepted accounting
principles. As a result of the acquisition, acquired intangible assets
increased $7,200,000, consisting primarily of goodwill, and will be amortized
over a weighted average life of approximately ten years. In addition, net
deferred tax assets of $1,600,000 were recorded in conjunction with the
acquisition.
6
<PAGE> 7
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Percentage change
June 30, June 30, From Prior Year Period
1996 1995 1996 1995 Q2 1996 YTD 1996
--------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Steck-Vaughn Revenues
Elementary/High School 38.3% 57.2% 41.9% 55.1% (19.9)% (2.8)%
Adult education 18.3 24.2 18.3 24.8 (9.7) (6.1)
Library 23.3 18.6 23.7 20.1 50.6 50.8
--------- --------- --------- ---------
79.9 100.0 83.9 100.0 (4.4) 7.1
Summit Learning revenues 14.0 - 12.8 - - -
Edunetics revenues 6.1 - 3.3 - - -
--------- --------- --------- ---------
TOTAL NET REVENUES 100.0 100.0 100.0 100.0 19.8 27.7
Product cost and fulfillment 31.2 27.1 32.1 28.4 37.9 44.7
--------- --------- --------- ---------
GROSS PROFIT 68.8 72.9 67.9 71.6 13.0 21.0
Product development 17.5 13.5 17.4 16.6 54.6 34.0
Selling and marketing 31.7 30.7 32.0 30.6 23.8 33.1
General and administrative 7.3 8.3 7.7 9.4 5.2 4.8
Provision for doubtful accounts 0.2 0.2 0.1 0.2 3.4 (8.2)
Amortization of acquired
intangible assets 2.5 1.2 2.4 1.4 151.4 119.8
Write-off of acquired in-process
research and development costs 22.4 - 12.1 - - -
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (12.8) 19.0 (3.8) 13.4 - -
Interest income 1.5 3.1 1.7 2.9 (44.2) (21.3)
Interest expense (1.2) (0.3) (0.9) (0.4) 336.0 196.0
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (12.5) 21.8 (3.0) 15.9 - -
Income taxes (3.8) (8.2) (3.5) (6.0) (45.0) (26.1)
--------- --------- --------- ---------
NET INCOME (LOSS) (16.3)% 13.6% (6.5)% 9.9% - -
========= ======== ======== =========
</TABLE>
The discussion in this document contains trend analysis and other forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document.
7
<PAGE> 8
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
NET REVENUES
<TABLE>
<CAPTION>
NET REVENUES BY PRODUCT LINE Three Months Ended Six Months Ended
June 30, June 30,
(amounts in thousands) 1996 1995 1996 1995
-------------------------------------
<S> <C> <C> <C> <C>
Steck-Vaughn
Elementary and High School (El/Hi) $ 7,000 $ 8,744 $14,152 $14,564
Adult Education 3,339 3,698 6,160 6,563
Library 4,272 2,836 7,991 5,298
-------------------------------------
14,611 15,278 28,303 26,425
Summit Learning 2,565 -- 4,334 --
Edunetics 1,120 -- 1,120 --
-------------------------------------
TOTAL $18,296 $15,278 $33,757 $26,425
=====================================
</TABLE>
In April 1996, the Company reengineered its primary distribution facility,
involving significant additions of material handling equipment, the
reconfiguration of the flow of products between picking locations and the
shipping dock, and the implementation of a new warehouse management system
(WMS), to significantly enhance the Company's material handling processes.
Difficulties were encountered during the start-up and ramp-up phases of the new
equipment and WMS. By the end of the quarter though, virtually all of the
problems caused by the system implementation had been eliminated. During the
last week of June, the average rate of orders processed each day was 20%-30%
higher than the comparable period under the previous methodology. As
Distribution personnel become more accustomed to the new system and additional
minor modifications are made, the Company expects to approach a 100%
improvement in the order processing rate.
Order intake for the quarter grew approximately 21% compared to the prior year.
Coupling the temporary focus on the implementation of the new WMS with the
increase in orders received, a significant backlog of unfulfilled business
accumulated by quarter-end. As of June 30, 1996, the Company had approximately
$3,200,000 of orders in-house that management believes would have been shipped
had the difficulties implementing the WMS not occurred.
El/Hi sales declined 20% for the three months ended June 30, 1996, compared to
the previous year and Adult sales declined 9.7% for the quarter due to the
backlog of orders that could have been shipped under normal circumstances.
Library sales continued their strong growth, with sales for the three months
ended June 30, 1996, up 51% over the same period in 1995. Year-to-date sales
also increased 51% when compared to last year. Much of the growth is
attributable to sales of products developed by Wayland Publishers, Abdo and
Daughters, and Larousse Kingfisher Chambers, Inc., for which the Company has
exclusive distribution rights. The release in January of the Company's revised
53-volume Portrait of America series has made a sizable contribution to the
increase in revenues.
With the growth of the library product line, management believes that the size
of its current sales force is insufficient to adequately present all of the
library product to school and public libraries while representing the Company's
elementary curriculum product line at the same time. To expand its coverage of
the library market, the Company has begun to engage independent sales
organizations to carry all of its library products. By the end of the third
quarter, it is expected that independent reps will be under contract for all of
the most populous states, allowing the Company's own field sales force to focus
their attention on selling elementary curriculum product. In addition, the
Company is expanding its telemarketing sales force, creating rep teams for each
of its three main library product lines.
8
<PAGE> 9
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Revenues were also augmented by general price increases of 10.1% and 5.7%
effective September 1, 1995 and 1994, respectively.
Summit Learning sales of $2,565,000 were incremental to the Company, following
the acquisition of Summit in December 1995. The Company has added selected
Steck-Vaughn print and Edunetics CD-ROM products to the Summit catalogs,
included significant new product in the fall Science and Math catalogs, and
increased the quantities of the 1996 Young Explorers catalog to be distributed
to consumers in the fall.
Edunetics revenue for the most part is tied to contractual obligations for
systems installations until the new modular products are ready for sale later
this year. In June 1996, the Company entered into a three-year, $3.4 million
contract with Detroit public schools to provide Edunetics' proprietary
educational software programs to 60 schools within the district.
The following table presents revenues as if the backlog of shippable orders had
been shipped by June 30, 1996.
<TABLE>
<CAPTION>
NET REVENUES BY PRODUCT LINE
(WITH PRO FORMA SALES) Three Months Ended Six Months Ended
June 30, June 30,
(amounts in thousands) 1996 1995 1996 1995
---------------------------------------
<S> <C> <C> <C> <C>
Steck-Vaughn
Elementary and High School (El/Hi) $ 8,856 $ 8,744 $16,008 $14,564
Adult Education 3,986 3,698 6,807 6,563
Library 4,969 2,836 8,688 5,298
----------------------------------------
17,811 15,278 31,503 26,425
Summit Learning 2,565 -- 4,334 --
Edunetics 1,120 -- 1,120 --
----------------------------------------
TOTAL $21,496 $15,278 $36,957 $26,425
========================================
</TABLE>
The following comments reflect the Company's publishing revenues with the
$3,200,000 of unshipped business included. While management is confident that
the $3,200,000 of unshipped backlog will be shipped during the third quarter,
no assurance can be given that some portion of the backlog will not be canceled
prior to shipment.
El/Hi sales were relatively flat during the quarter ended June 30, 1996, when
compared to 1995, although year-to-date sales were up 9.9% relative to the
prior year. The flat results are attributable to a seasonal fluctuation
consistent with the end of the school-year, with third quarter revenues
typically much higher for this segment. Revenue increases for the year
resulted from sales of traditional skills products in reading, spelling, and
math, as well as testing and assessment products. The strength of both of
these types of products is indicative of the return of schools to teaching
basic skills and the increased use of standardized tests as a means of
assessing students' progress and measuring the success of individual schools.
Sales of adult education products for the second quarter increased 7.8% over
the previous year primarily due to the addition of the Educational Development
Laboratories, Inc. (EDL) technology product to the Company's line of
early-skills level computer instruction. Sales of traditional adult product
for the quarter were down 11% relative to the prior year as funding remains
under pressure with no improvement noted in 1996 to date.
Library sales were even more robust with the inclusion of the pro forma sales,
up 75% for the second quarter and 64% year-to-date. These increases are
attributable to the same factors cited above.
9
<PAGE> 10
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
PRODUCT COST AND FULFILLMENT EXPENSE
Product cost and fulfillment expense as a percentage of revenues increased for
the three-month period and six-month period ended June 30, 1996, as compared to
1995, primarily due to the inclusion of the Summit Learning business for the
first time. Product cost and fulfillment for the Company's publishing
operations excluding Summit and Edunetics for the three months ended June 30,
1996, represented 28.1% of publishing revenues as compared to 27.1% for the
same period in the previous year. Increases in the cost of print products
resulted from the increase in products acquired through distribution
agreements, as opposed to internal development, and the increased use of
wholesalers to sell library titles. These cost increases were offset by the
increased sales of technology and testing products, which carry higher gross
margins, and the decline in royalty expense due to the increase in products
acquired through distribution agreements. Fulfillment expenses were also
higher due to increases in labor costs necessary to implement the new warehouse
management system and eliminate the backlog. Summit Learning's product and
fulfillment costs, at 56.7% of revenues, reflect the non-proprietary nature of
the product line.
PRODUCT DEVELOPMENT EXPENSE
The following table reconciles product development investment to product
development expense for each of the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(amounts in thousands) 1996 1995 Change 1996 1995 Change
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product development investment $ 3,287 $ 2,233 47.2% $ 6,174 $ 4,137 49.2%
Plant costs capitalized (809) (720) 12.4 (2,006) (1,285) 56.1
Plant costs amortized 720 556 29.5 1,696 1,523 11.4
------------------ ------------------
Product development expense $ 3,198 $2,069 54.6 $ 5,864 $ 4,375 34.0
================== ==================
</TABLE>
Product development investment for the three months and six months ended June
30, 1996, increased almost 50% as compared to the prior year. The higher cost
is attributable to the inclusion of all of the Company's new product lines:
EDL, Edunetics, and proprietary product for Summit catalogs. Departmental
expenses were higher with the addition of the EDL development office in South
Carolina, the expansion of the library development office in New Jersey to
accommodate growth in the segment, and full staffing in the Austin office as
more of the design work is being done internally. Amortization costs increased
due to higher sales as the amortization rate is a function of revenue.
10
<PAGE> 11
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
SELLING AND MARKETING EXPENSE
The following table reconciles selling and marketing costs to selling and
marketing expense for each of the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(amounts in thousands) 1996 1995 Change 1996 1995 Change
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing costs $6,253 $4,678 33.7% $12,914 $ 9,829 31.4%
Selling and marketing deferred (455) 6 -- (2,127) (1,725) (23.3)
--------------------- ------------------
Net selling and marketing expense $5,798 $4,684 23.8 $10,787 $ 8,104 33.1
===================== ==================
</TABLE>
Selling and marketing costs increased for the three months and six months ended
June 30, 1996, as compared to the prior year, due to higher commissions
resulting from increased revenues and higher catalog expense. Catalog costs
increased as the Company circulated two new smaller catalogs targeted to
specified audiences during the first quarter, accelerated the recognition of
catalog expenses in accordance with the Company's adoption of the new
accounting standard, and acquired Summit Learning, a catalog marketer, in
December 1995.
OPERATING INCOME BY PRODUCT LINE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Percentage of Revenue
June 30, June 30, Year-To-Date
(amount in thousands) 1996 1995 1996 1995 1996 1995
------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Steck-Vaughn $ 1,939 $2,905 $ 3,189 $3,551 11.3% 13.4%
Summit Learning 15 -- (200) -- (4.6) --
Edunetics (188) -- (188) -- (16.8) --
----------------- -----------------
1,766 2,905 2,801 3,551 8.3 13.4
Write-off of research
and development (4,100) -- (4,100) --
------------------ -----------------
Operating Income $(2,334) $2,905 $(1,299) $3,551
================== =================
</TABLE>
Operating income as a percentage of revenues for the six months ended June 30,
1996, as compared to 1995, declined for Steck-Vaughn Company due to the backlog
of unshipped orders. The operating results of Summit and Edunetics reflect the
seasonality of Summit's business and the start-up phase of both divisions.
When pro forma operating income of $1,440,000 arising from the shippable
backlog of $3,200,000 is added to the Steck-Vaughn operating income of
$3,189,000, the pro forma operating margin is 14.7% compared to 13.4% last
year. The increase is attributable to the 19.2% increase in sales on a pro
forma basis.
11
<PAGE> 12
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The net loss for the second quarter of 1996 on a pro forma basis would
approximate ($2,083,000) or ($.15) per share and net income of $2,017,000 or
$.14 per share excluding the Edunetics research and development write-off,
compared to $2,077,000 or $.14 per share for the second quarter of 1995. The
net loss for the six months ended June 30, 1996, on a pro forma basis would
approximate ($1,286,000) or ($.09) per share and net income of $2,814,000 or
$.20 per share excluding the Edunetics research and development write-off,
compared to $2,609,000 or $.18 per share for the previous year.
AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS
Amortization expense increased due to the acquisitions of Edunetics in April
1996 and substantially all of the assets of EDL in October 1995 and Summit
Learning in December 1995.
INTEREST INCOME AND EXPENSE
Interest income for the three-month period ended June 30, 1996, was lower than
the previous year, reflecting the use of all excess cash-on-hand to fund the
three recent acquisitions, but includes the commitment fee and interest earned
of $169,000 and $305,000 for the three-month periods ending June 30, 1996 and
1995, respectively, on the Company's line of credit agreement with NEC.
Interest expense for the three months ended June 30, 1996, was higher than the
prior year due to advances made on the Company's bank line of credit to fund
the acquisition of Edunetics and to the debt incurred in the acquisition of
EDL.
INCOME TAXES
Income tax expense for the three-month and six-month periods ended June 30,
1996, was accrued at 38% of income before income taxes excluding the write-off
of acquired in-process research and development costs, which is not deductible
for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash, marketable securities,
cash provided from operations, and the Company's bank line of credit. At June
30, 1996, the Company had $3,081,000 in cash and marketable securities. The
Company's uses of cash include product development, capital expenditures,
working capital requirements of the Company, and selected acquisitions of
complementary businesses and product lines.
The Company maintains a revolving bank credit agreement, the amount of which
was increased to $15,000,000 and the maturity date of which was extended to
June 10, 1998 during the first quarter of 1996. The agreement provides for
borrowings at prime or, at the Company's option, LIBOR plus 1.5 percent. The
bank credit agreement replaced the Company's borrowing ability from NEC
pursuant to an intercompany agreement. At June 30, 1996, $11,000,000 was
outstanding under the bank credit facility.
On April 30, 1996, the Company acquired all of the stock of Edunetics Ltd., an
Israel 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 and the Company's bank line of credit. The acquisition was
accounted for using the purchase method of accounting. Accordingly, 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. The estimated value
of the in-process research and development projects was written off in the
second quarter of 1996 as required by generally accepted accounting principles.
In conjunction with the acquisition of EDL, the Company issued a note to the
seller of approximately $1,900,000 with interest at 6% payable quarterly and
principal due on February 29, 1997.
12
<PAGE> 13
STECK~VAUGHN
PUBLISHING CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Under the revolving loan agreement between the Company and NEC, NEC had the
ability to borrow up to $5,000,000 from the Company. The revolving loan
agreement governing all advances was extended to December 31, 1996 during the
second quarter of 1996. At June 30, 1996, $3,000,000 was outstanding under the
NEC credit facility. On July 25, 1996, NEC paid the loan in full and
terminated the revolving loan agreement.
Net cash outflow for operating activities for the three months ended June 30,
1996, was $4,450,000 compared to net cash inflow of $676,000 for the prior year
period. The decrease reflects the lower level of income and the decrease in
payables resulting from the payments for the inventories associated with the
new library product distribution agreements.
Net cash outflow for operating activities for the six months ended June 30,
1996, was $6,874,000 compared to net cash inflow of $1,022,000 for the prior
year period. The decrease is attributable to the lower level of income, the
increase in receivables resulting from the timing of customer billings
consistent with the shipping delays experienced at the distribution center, the
increase in inventories associated with the new library product distribution
agreements, and the increase in deferred catalog expense resulting from the
inclusion of Summit Learning's operations.
In May 1994, the Company announced a program to repurchase up to 500,000 shares
of its common stock. As of June 30, 1996, 255,000 shares had been repurchased
for an aggregate amount of $1,833,000, increasing NEC's ownership to 83.1% of
the common stock of the Company. The Company has not repurchased any of its
shares during 1996.
The Company expects that cash, cash provided from operations, and the revolving
credit facility will be sufficient to provide for planned working capital
requirements, debt service, and capital expenditures for the foreseeable
future.
13
<PAGE> 14
STECK~VAUGHN
PUBLISHING CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-Laws of the Company. (1)
4.1 Specimen of Common Stock Certificate of the Company. (1)
10.1 Modification and Renewal of Note, dated December 28, 1992, between NationsBank of Texas, N.A., as
holder, and Steck-Vaughn Company, as borrower, secured by and as purchase money for the Company's
distribution center in Austin, Texas. (2)
10.2 Office Lease, dated July 1991, between Bristol Group, Inc., as landlord, and Steck-Vaughn Company, as
tenant, for the Company's principal offices in Austin, Texas. (3)
10.3 Agreement, dated June 1, 1990, between the American Council on Education and Steck-Vaughn Company,
granting exclusive license for reproduction and distribution of official GED Practice
Tests and Addendum effective July 28, 1992. (4)
10.4 Form of Intercompany Agreement between the Company and National Education Corporation. (5)
10.5 First Amendment to Intercompany Agreement between the Company and National Education Corporation dated
June 10, 1994. (6)
10.6 Form of Tax Sharing Agreement between the Company and National Education Corporation. (7)
10.7 Form of Indemnification Agreements between the Company and its Officers and Directors. (8)
10.8 The Company's 1993 Stock Option Plan as amended through May 17, 1995. (9)
10.9 National Education Corporation Supplemental Executive Retirement Plan (10)
10.10 Asset Purchase Agreement, dated as of April 26, 1993, by and between Steck-Vaugh Company as
purchaser, and Creative Edge, Inc., as seller (11)
10.11 Revolving Line of Credit Note and Option Agreement between the Company and National
Education Corporation, dated February 28, 1995 (12)
10.12 Addendum to Agreement between the American Council on Education and and Steck-Vaughn
Company extending the expiration of the Agreement to August 31, 2001 (13)
10.13 The Company's 1995 Directors' Stock Option and Award Plan (14)
10.14 Renewal and Extension Agreement between the Company and National Education Corporation,
effective December 31, 1995 (15)
</TABLE>
14
<PAGE> 15
STECK~VAUGHN
PUBLISHING CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
<TABLE>
<S> <C>
10.15 First Amendment to Stock Option Agreement between the Company and National Education
Corporation, effective December 31, 1995. (16)
10.16 Letter Amendment to Stock Option Agreement between the Company and National Education
Corporation, dated February 1, 1996. (17)
10.17 Agreement between the Company and Edunetics Ltd. dated February 29, 1996. (18)
10.18 Loan Agreement between NationsBank of Texas, N.A., and Steck-Vaughn Company, dated April
29, 1996. (19)
10.19 Second Renewal and Extension Agreement between the Company and NationalEducation
Corporation, effective March 31, 1996. (20)
10.20 Second Amendment to Stock Option Agreement between the Company and National Education
Corporation, effective March 31, 1996. (21)
10.21 Office lease, dated April 26, 1996, between Quarry Lake Business Center, Ltd. as landlord, and
Steck-Vaughn Company, as tenant, for the Company's principal offices in Austin, Texas, beginning
November 1, 1996. (22)
10.22 Third Renewal and Extension Agreement between the Company and National Education
Corporation, effective June 30, 1996. (22)
10.23 Third Amendment to Stock Option Agreement between the Company and National Education
Corporation, effective June 30, 1996. (22)
11.1 Statement re Calculation of Earnings Per Share. (22)
27.1 Financial Data Schedule. (22)
</TABLE>
15
<PAGE> 16
STECK~VAUGHN
PUBLISHING CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
<TABLE>
<S> <C>
(1) Incorporated by reference to the identically numbered exhibit in Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-62334, filed with the Securities and Exchange Commission on June 17, 1993
("Amendment No. 1 to S-1 Registration Statement").
(2) Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, File
No. 33-62334, filed with the Securities and Exchange Commission on May 7, 1993 (the "S-1 Registration Statement").
(3) Incorporated by reference to Exhibit 10.5 to the Company's S-1 Registration Statement.
(4) Incorporated by reference to Exhibit 10.7 to the Company's Amendment No. 1 to S-1 Registration Statement.
(5) Incorporated by reference to Exhibit 10.8 to the Company's Amendment No. 1 to S-1 Registration Statement.
(6) Incorporated by reference to Exhibit 10.15 in the Company's Form 10-Q for the quarterly period ended June 30,
1994, filed with the Securities and Exchange Commission on August 11, 1994.
(7) Incorporated by reference to Exhibit 10.9 to the Company's Amendment No. 1 to S-1 Registration Statement.
(8) Incorporated by reference to Exhibit 10.10 to the Company's Amendment No. 1 to S-1 Registration Statement.
(9) Incorporated by reference to Exhibit 10.11 to the Company's Amendment No. 1 to S-1 Registration Statement.
(10) Incorporated by reference to Exhibit 10.12 to the Company's S-1 Registration Statement.
(11) Incorporated by reference to Exhibit 10.13 to the Company's S-1 Registration Statement.
(12) Incorporated by reference to Exhibit 10.12 in the Company's Form 10-K for the year ended December 31, 1994,
filed with the Securities and Exchange Commission on March 29, 1995.
(13) Incorporated by reference to Exhibit 10.13 in the Company's Form 10-Q for the quarterly period ended March
31, 1995, filed with the Securities and Exchange Commission on May 12, 1995.
(14) Incorporated by reference to Exhibit A in the Company's Proxy Statement furnished in connection with
the Annual Meeting of Stockholders held May 17, 1995, filed with the Securities and Exchange
(15) Incorporated by reference to Exhibit 10.16 in the Company's Form 10-K for the year ended December 31, 1995,
filed with the Securities and Exchange Commission on March 25, 1996.
(16) Incorporated by reference to Exhibit 10.17 in the Company's Form 10-K for the year ended December 31, 1995,
filed with the Securities and Exchange Commission on March 25, 1996.
</TABLE>
16
<PAGE> 17
STECK~VAUGHN
PUBLISHING CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
<TABLE>
<S> <C>
(17) Incorporated by reference to Exhibit 10.18 in the Company's Form 10-K for the year ended December 31, 1995,
filed with the Securities and Exchange Commission on March 25, 1996.
(18) Incorporated by reference to Exhibit 10.19 in the Company's Form 10-K for the year ended December 31, 1995,
filed with the Securities and Exchange Commission on March 25, 1996.
(19) Incorporated by reference to Exhibit 10.18 in the Company's Form 10-Q for the quarterly period ended March 31,
1996, filed with the Securities and Exchange Commission on May 14, 1996.
(20) Incorporated by reference to Exhibit 10.19 in the Company's Form 10-Q, for the quarterly period ended March 31,
1996, filed with the Securities and Exchange Commission on May 14, 1996.
(21) Incorporated by reference to Exhibit 10.20 in the Company's Form 10-Q, for the quarterly period ended March 31,
1996, filed with the Securities and Exchange Commission on May 14, 1996.
(22) Filed herewith.
(b) A Form 8-K was filed on May 14, 1996, reporting the Company's acquisition of all of the stock of
Edunetics, Ltd.
</TABLE>
17
<PAGE> 18
STECK~VAUGHN
PUBLISHING CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STECK-VAUGHN PUBLISHING CORPORATION
Date: August 12, 1996 By /s/ FLOYD D. ROGERS
---------------------------
Floyd D. Rogers
Vice President, Finance and
Chief Financial Officer
18
<PAGE> 19
STECK~VAUGHN
PUBLISHING CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE NO.
- ----------- ---------------------------------------------------------- --------
<S> <C> <C>
10.21 Office Lease, dated April 26, 1996, between Quarry 20
Lake Business Center, Ltd., as landlord, and Steck-Vaughn
Company, as tenant, for the Company's principal offices in
Austin, Texas, beginning November 1, 1996.
10.22 Third Renewal and Extension Agreement between the 51
Company and National Education Corporation, effective
June 30, 1996.
10.23 Third Amendment to Stock Option Agreement between 54
the Company and National Education Corporation, effective
June 30, 1996.
11.1 Statement re Calculation of Earnings Per Share. 58
27.1 Financial Data Schedule. 59
</TABLE>
19
<PAGE> 1
LEASE
BY AND BETWEEN
QUARRY LAKE BUSINESS CENTER, LTD.,
A TEXAS LIMITED PARTNERSHIP
AND
STECK-VAUGHN COMPANY,
A DELAWARE CORPORATION
20
<PAGE> 2
LEASE
BY AND BETWEEN
QUARRY LAKE BUSINESS CENTER, LTD.,
A TEXAS LIMITED PARTNERSHIP
AND
STECK-VAUGHN COMPANY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I.
PRINCIPAL LEASE PROVISIONS 1
1.1 Project 1
1.2 Building 1
1.3 Premises 1
1.4 Suite Number 1
1.5 Floor Number 1
1.6 Area of Premises 1
1.7 Rent Schedule 1
1.8 Tenant's Percentage of Project 2
1.9 Lease Term 2
1.10 Commencement Date 2
1.11 Expiration Date 2
1.12 Security Deposit 2
1.13 Parking 2
1.14 Use of Premises 2
1.15 Tenant's Broker 2
1.16 Tenant Improvements 2
1.17 Prorations 2
1.18 Late Charge 2
1.19 Landlord's Address 3
1.20 Tenant's Address 3
ARTICLE II.
PREMISES 3
2.1 Premises 3
2.2 Parking 3
2.3 Common Area 4
ARTICLE III.
TERMS AND POSSESSION 4
3.1 Term 4
3.2 Time for Delivery of Possession 4
3.3 Tenant's Failure to Conduct Business 5
3.4 Acceptance of Premises 5
3.5 Quiet Enjoyment 5
3.6 Security Deposit 5
</TABLE>
21
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV.
RENT 5
4.1 Monthly Rent 5
4.2 Additional Rent 6
4.3 Effect of Tenant Bankruptcy 6
ARTICLE V.
DIRECT EXPENSES 7
5.1 Direct Expenses 7
ARTICLE VI.
SERVICES AND UTILITIES 7
6.2 Charge for Excess Services 8
6.3 Interruption of Service 9
ARTICLE VII.
USE AND OCCUPANCY 9
7.1 Use and Occupancy 9
7.2 Rules and Regulations 9
ARTICLE VIII.
MAINTENANCE, REPAIRS AND ALTERATIONS 10
8.1 Tenant Maintenance and Repairs 10
8.2 Landlord Maintenance and Repairs 10
8.3 Alterations 10
ARTICLE IX.
LIENS 11
ARTICLE X.
INDEMNIFICATION 11
10.1 Limitation on Landlord's Liability 11
10.2 Tenant's Indemnification of Landlord 11
10.3 No Security of Common Area 12
ARTICLE XI.
INSURANCE 12
11.1 Insurance Carried by Landlord 12
11.2 Insurance Carried by Tenant 13
11.3 Insurance Policies 13
11.4 Blanket Insurance 14
11.5 Waiver of Subrogation 14
11.6 Tenant's Failure to Carry Insurance 14
11.7 Effect of Termination of Lease 14
</TABLE>
22
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE XII.
DAMAGE TO TENANT'S PROPERTY 15
ARTICLE XIII.
DAMAGE AND DESTRUCTION 15
13.1 Damage to the Premises 15
13.2 Damage to the Project 15
13.3 Damage Near End of Term 16
13.4 Repair of Damage; Rent Abatement 16
ARTICLE XIV.
EMINENT DOMAIN 16
14.1 Effect on Lease 16
14.2 Award 17
14.3 Rebuilding 17
ARTICLE XV.
ASSIGNMENT, SUBLETTING, HYPOTHECATION 17
15.1 Limitation of Tenant's Rights to Assign,
Sublet or Hypothecate 17
15.2 Notice Required 18
15.3 Tenant's Liability 19
15.4 Form Required 19
ARTICLE XVI.
TENANT'S BREACH; LANDLORD'S LIEN; LANDLORD'S REMEDIES 19
16.1 Tenant's Breach 19
16.2 Landlord's Lien 20
16.3 Landlord's Remedies 20
16.4 Right to Cure Tenant's Default 22
16.5 Right to Rents, Issues and Profits 22
16.6 Late Charge 23
16.7 Cumulative Remedies 23
ARTICLE XVII.
LANDLORD'S DEFAULT; TENANT REMEDIES 23
17.1 Landlord's Default 23
17.2 Tenant's Remedies 23
ARTICLE XVIII.
MORTGAGE OF LANDLORD'S INTEREST 24
18.1 Subordination of Tenant's Rights 24
18.2 Tenant's Obligations with Respect to
Landlord's Mortgage 24
18.3 Non-Disturbance Agreement 25
ARTICLE XIX.
LANDLORD'S ACCESS 25
</TABLE>
23
<PAGE> 5
<TABLE>
<S> <C> <C>
ARTICLE XX.
RELOCATION OF TENANT BY LANDLORD 25
ARTICLE XXI.
BANKRUPTCY 26
21.1 Effect of Tenant Bankruptcy 26
21.2 Effect of Lease Assignment 26
ARTICLE XXII.
SIGNS, DISPLAYS AND ADVERTISING 27
22.1 Signs 27
22.2 Displays 27
22.3 Maintenance of Signs 27
22.4 Advertised Name 27
ARTICLE XXIII.
GENERAL PROVISIONS 27
23.1 Estoppel Certificate 27
23.2 Waiver 28
23.3 Surrender of Premises; Holdover Tenancy 28
23.4 Notices 29
23.5 Partial Invalidity; Severability; Construction 29
23.6 Corporate Resolution 29
23.7 Limited Partnership 29
23.8 Captions 29
23.9 Short Form Lease 29
23.10 Broker's Commissions 29
23.11 Attorneys' Fees 30
23.12 Counterparts 30
23.13 Sole Agreement 30
23.14 Successors and Assigns 30
23.15 Licensees; Concessionaires 30
23.16 No Merger 30
23.17 Modification for Lender 30
23.18 Compliance with Law 31
23.19 Joint and Several Obligations 31
23.20 Light, Air, View 31
23.21 No Offer 31
23.22 Legal Tender 31
23.23 Conflict of Laws; Venue 31
23.24 Indemnification 31
23.25 Time is of the Essence 31
23.26 No Third Party Beneficiaries 32
23.27 Grammatical Construction 32
23.28 Exhibits 32
23.29 Dispute Resolution and Arbitration 32
</TABLE>
24
<PAGE> 6
LEASE
This Lease ("Lease") dated ________________ ___, 1996, is made and entered
into by and between QUARRY LAKE BUSINESS CENTER, LTD., a Texas Limited
Partnership ("Landlord") and STECK-VAUGHN COMPANY, a Delaware corporation
("Tenant").
ARTICLE I.
PRINCIPAL LEASE PROVISIONS
This Article sets forth certain basic terms of this Lease; however, the
other Articles of this Lease contain a considerable number of adjustments and
exceptions which qualify the provisions of this Article.
1.1 Project. Lots 2 & 3, Block A, Quarry Subdivision Section 3, a
subdivision in Travis County, Texas as shown by map or plat thereof recorded in
Volume 95, Pages 274 and 275 of the Plat Records of Travis County, Texas,
together with the office buildings, all parking areas, and all other
improvements currently located or subsequently placed or constructed thereon
(collectively, the "Project"). The name of the Project is "The Quarry Lake
Business Center" and its local address is 4515 Seton Center Parkway, Austin,
Texas 78759.
1.2 Building. The Project includes one office building, hereinafter
referred to as the "Building".
1.3 Premises. The space being leased to Tenant hereunder is referred to
herein as the "Premises." The location of the Premises in the Building is
shown on the floor plan attached as Exhibit A.
1.4 Suite Number. 300.
1.5 Floor Number. 3rd.
1.6 Area of Premises. 42,268 square feet of net rentable area, subject to
adjustment during the first two (2) years of the Lease term, as described in
Section 2.1 below.
1.7 Rent Schedule.
<TABLE>
<CAPTION>
Annual per sq. ft. Monthly Rent Amount
------------------ -------------------
<S> <C> <C>
Year 1: $18.00 $63,402.00*
Year 2: $18.625 $65,603.46*
Year 3: $19.25 $67,804.92
Year 4: $19.75 $69,566.08
Year 5: $20.75 $73,088.42
Year 6: $21.50 $75,730.17
Year 7: $22.25 $78,371.92
</TABLE>
* Subject to adjustment, as provided in Section 4.1 below.
1.8 Tenant's Percentage of Project. The percentage represented by the net
rentable area of the Premises, as may be increased from time to time divided by
the total net rentable area of the Project, which, for purposes of this Lease,
is 117,200 square feet.
25
<PAGE> 7
1.9 Lease Term. Seven (7) years, subject to extension under Exhibit H.
1.10 Commencement Date. The earlier of occupancy of the Premises by
Tenant or November 1, 1996; provided, however, if the Premises are not ready
for occupancy as evidenced by a certificate of occupancy issued by the City of
Austin or other applicable regulatory authority by November 1, 1996, then the
Commencement Date shall be the date of issuance of a certificate of occupancy.
Notwithstanding the foregoing, Tenant shall have thirty (30) days prior to the
Commencement Date to move-in and install furniture, trade fixtures, equipment
and other Tenant personal property.
1.11 Expiration Date. Seven (7) years from the Commencement Date set
forth in 1.10.
1.12 Security Deposit. None.
1.13 Parking. Non-Reserved Surface Parking: One parking space for each
200 square feet of net rentable area of the Premises at $0 per month per car;
twenty six (26) of which spaces shall be reserved covered parking and
designated visitor space strictly for Tenant.
1.14 Use of Premises. General Office, storage and training.
1.15 Tenant's Broker. Michael K. Tipps/Michael A. Kennedy-Oxford
Commercial, Inc.
Landlord's Broker. N/A
1.16 Tenant Improvements. Set forth on Exhibit C.
1.17 Prorations. Set forth in Exhibit D.
1.18 Late Charge. Five percent (5%).
1.19 Landlord's Address. c/o Riverside Resources Corporation
100 Congress Avenue, Suite 1540
Austin, Texas 78701
1.20 Tenant's Address. Prior to the Commencement Date:
8701 North Mopac Expressway
Suite 200
Austin, Texas 78759
After the Commencement Date, Tenant's address for notices shall be
the Premises. A copy of each notice to Tenant shall also be sent to Michael K.
Tipps/Michael A. Kennedy, Oxford Commercial, 515 Congress Avenue, Suite 1500,
Austin, Texas 78701.
Exhibits: (Line out if not attached)
A. Floor Plan of Premises
B. Parking Areas
C. Tenant Improvements
D. Direct Expenses
E. Rules and Regulations
F.
G. Prohibited Uses/Environmental Indemnity/Reporting obligations
H. Special Provisions
I. Tenant's Computer Equipment
J. Janitorial Specifications
K. Commission Agreement
26
<PAGE> 8
L. Subordination, Non-Disturbance and Attornment Agreement
M. Self-Help Remedies
ARTICLE II.
PREMISES
2.1 Premises. Landlord hereby leases to Tenant and Tenant hires from
Landlord the Premises described in Section 1.1 through 1.6 inclusive.
Notwithstanding the 42,268 net rentable square foot figure set forth in Section
1.6 above, Tenant may occupy less than that amount of space and pay a reduced
rent during the first two years of the Lease term as set forth in Section 4.1
below. At all other times, Tenant shall pay rent based on the actual square
footage of the Premises, as set forth in Section 1.6 above.
2.2 Parking. Landlord shall permit Tenant and its employees to park the
number of cars set forth in Section 1.13 in designated reserved and
non-exclusive areas of the parking area shown on Exhibit B.
2.3 Common Area. Tenant shall have the nonexclusive right, in common
with other tenants, to the use of common entrances, driveways, sidewalks,
aisles, elevators, stairs, service ways and other like areas (the "Common
Area"), in the Project. Landlord may exclude any portion of the Project from
the Common Area provided such exclusion does not materially affect Tenant's
access to the Premises or parking. Landlord may assign parking spaces to Tenant
or other tenants at Landlord's option. Landlord's exclusion of any portion of
the Project from the Common Area and/or the assigning of parking spaces shall be
made in a reasonable and fair manner that is in keeping with a common theme and
which is fairly apportioned by and between all tenants of the Project.
ARTICLE III.
TERMS AND POSSESSION
3.1 Term. The Term of this Lease shall be for the Term set forth in
Section 1.9 herein (the "Term") commencing on the date set forth in Section
1.10 herein ("Commencement Date") and expiring on the date set forth in Section
1.11 herein ("Expiration Date"), unless sooner terminated pursuant to any
provision of this Lease. As used herein, the term "Lease Year" shall mean and
refer to each twelve (12) month period during the Term, commencing upon the
commencement of the Term, except that if the Term commences on other than the
first day of a calendar month, then the Term shall include those prorated days
in the initial month plus the next succeeding twelve (12) full months which
shall constitute the first Lease Year of the Term of this Lease. In the event
of conflict between 1.9 and 1.11, then 1.9 will control.
3.2 Time for Delivery of Possession. Landlord shall deliver possession
of the Premises to Tenant on or before the Commencement Date. If Landlord,
for any reason whatsoever, other than force majeure (as defined below) or
Tenant Delay (as defined in Exhibit C below) cannot deliver the Premises to
Tenant on or before October 1, 1996, this Lease shall not be void or voidable,
but Landlord will be responsible for paying Tenant's actual and direct holdover
costs in its current space. "Force Majeure" shall mean any delay in
performance of Landlord's obligations hereunder when Landlord is prevented from
doing so by cause or causes beyond Landlord's control which shall include,
without limitation, weather delays beyond normal climatic conditions, all labor
disputes, civil disturbance, war, war-like operations, invasions, rebellion,
hostilities, military or usurped power, sabotage, governmental regulations or
controls, fires or other casualty, moratoriums or acts of God. If Landlord
cannot deliver possession of the Premises by January 1, 1997, then ten (10)
days after Tenant's notice to Landlord of its intention to terminate the Lease
if possession has not been delivered in ten (10) days, Tenant shall have the
right to terminate the Lease if possession has not been delivered to Tenant by
the end of the ten day period. In the event of such termination, Landlord
shall pay any and all costs associated with such failure to deliver said space
including, but not limited to, additional holdover costs, attorney's fees and
any cost differential between the Lease terms contained herein and the
resulting terms in a similar class "A" building in the Austin Suburban market.
Tenant agrees in such case to use its reasonable efforts to negotiate
competitive terms in such instance.
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3.3 Tenant's Failure to Conduct Business. In the event that Landlord
notifies Tenant that the Premises are ready for delivery and Tenant fails to
take possession and to open the Premises for business the later of thirty (30)
days from notice or November 1, 1996, then Tenant shall commence paying Initial
Monthly Rent as set forth in Section 1.7 and Section 4.1 and performing all
other obligations of Tenant hereunder on the Commencement Date.
3.4 Acceptance of Premises. When Landlord considers the Premises to be
substantially complete, it shall notify Tenant of same. Within five (5)
business days of receipt of Landlord's notice, Tenant and Landlord shall make
an inspection to determine whether the Premises is substantially complete. If
Tenant's inspection discloses any item, excluding only mechanical adjustments
or minor details of construction or decoration which do not unreasonably
prevent Tenant from installing trade fixtures and furnishings in the Premises
and readying the Premises for the operation of Tenant's business ("Punchlist
Items"), which is not in accordance with the final plans, Landlord shall
correct such items before the Premises shall be deemed substantially complete
and Tenant is required to accept the Premises. The correction or completion of
any Punchlist Items allowed under this Section 3.4 shall be completed by
Landlord within thirty (30) days after Tenant's inspection under, or such
longer time as may be necessary, provided Landlord has commenced correction or
completion of such items and is diligently pursuing completion or correction.
3.5 Quiet Enjoyment. Upon Tenant paying the rent reserved hereunder and
observing the performance of all the covenants, conditions and provisions on
Tenant's part hereunder, Tenant shall have quiet enjoyment of the Premises for
the entire Term hereof, subject to all of the provisions of this Lease.
3.6 Security Deposit. [INTENTIONALLY DELETED]
ARTICLE IV.
RENT
4.1 Monthly Rent. Subject to the provisions set forth below, Tenant
shall pay to Landlord beginning February 1, 1997 the amount set forth in Section
1.7 ("Initial Monthly Rent"), and pay any and all Additional Rent, in advance on
or before the first day of each calendar month during the Term, without any
deduction or offset and without prior notice or demand by Landlord, as the
monthly rent for the Premises ("Monthly Rent"). In the event that Tenant fails
to pay Monthly Rent within seven (7) days of the due date, Tenant shall pay to
Landlord a late charge as set forth in Section 16.6 below. The Monthly Rent for
any fractional part of a month at the beginning of the Term shall be prorated
based on a thirty (30) day calendar month. Additional Rent shall be adjusted
annually, effective the first day of each Lease Year following the first Lease
Year, and shall be as set forth in Exhibit D. Notwithstanding any provision to
the contrary, Tenant may pay reduced Initial Monthly Rent during the first two
years of the Lease term as follows:
(a) During each month of the first twelve (12) months of
the Lease term, Tenant shall pay as Initial Monthly Rent the
greater of (i) $18.00 per rentable square foot of the
Premises which Tenant is actually occupying during the
particular month divided by twelve or (ii) $18.00 times
36,000 divided by twelve or $54,000. By way of example, if
Tenant were to occupy 35,000 square feet during the first six
months and 38,000 square feet during the second six months of
the first year, then Tenant would pay an Initial Monthly
Rental of $54,000 (36,000 multiplied by $18.00, then divided
by twelve) during months one through six and $57,000 (38,000
multiplied by $18.00, then divided by twelve) during months
seven through twelve. In no event would Tenant pay Initial
Monthly Rental during the first year of the Lease term based
on any less than 36,000 rentable square feet notwithstanding
the amount of space actually occupied.
(b) During each month of the second twelve (12) months
of the Lease term, Tenant shall pay as Initial Monthly Rent
the greater of (i) $18.625 per rentable square foot of the
Premises which Tenant is actually occupying during the
particular
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<PAGE> 10
month divided by twelve or (ii) $18.625 times 39,000 divided
by twelve or $60,531.25. By way of example, if Tenant were to
occupy 38,000 square feet during months thirteen through
eighteen and 41,000 square feet during months nineteen through
twenty-four, then Tenant would pay an Initial Monthly Rental
of $60,531.25 during months thirteen through eighteen and
$63,635.42 during months nineteen through twenty-four. In no
event would Tenant pay Initial Monthly Rental during the
second year of the Lease term based on any less than 39,000
rentable square feet notwithstanding the amount of space
actually occupied.
4.2 Additional Rent. In addition to Initial Monthly Rent, Tenant shall
also pay, as Additional Rent hereunder, Tenant's pro rata share of Direct
Expenses in excess of the Base Year Direct Expenses as defined in Exhibit D and
all other charges, fees, costs, taxes, impositions, expenses and other sums
required to be paid by Tenant under the terms of this Lease whether or not the
same shall be designated as "Additional Rent." In the event of nonpayment of
all or any part thereof when due, Landlord shall have all of the rights and
remedies provided hereunder or by law or equity for the nonpayment of rent or
for the breach of a condition.
4.3 Effect of Tenant Bankruptcy. Notwithstanding anything in this Lease
to the contrary, all amounts payable by Tenant to or on behalf of Landlord,
whether or not expressly denominated as rent, shall constitute rent for the
purposes of Section 502(b)(6) of the Bankruptcy Code.
ARTICLE V.
DIRECT EXPENSES
5.1 Direct Expenses. Tenant shall timely pay its pro rata share of
increases in Direct Expenses over 1997 Base Year Direct Expenses as set forth
in Exhibit D and the payment of same shall be considered Additional Rent due to
Landlord hereunder, as described in Section 4.2 above.
ARTICLE VI.
SERVICES AND UTILITIES
6.1 Services Provided by Landlord. Provided that Tenant is not in
default hereunder, Landlord agrees to furnish or cause to be furnished to the
Premises, the utilities and services described below, subject to the Rules and
Regulations for the Project and conditions and standards set forth below:
(a) Landlord shall provide twenty-four (24) hours, non-exclusive
automatic elevator service, except at such time as Tenant chooses to
limit public access to its floor(s); subject, however, to fire code or
other applicable regulations and subject, further, to the rights of any
same-floor tenant to access the floor where the Premises is located.
(b) Landlord shall ventilate the Premises and shall furnish heat or
air conditioning which, in the judgment of Landlord, is required for the
comfortable occupancy of the Premises on generally accepted business days
and which is comparable to other class "A" Suburban office buildings in
Northwest Austin, Texas, to be determined by Landlord in its sole
discretion, during all standard business hours as set forth in Subsection
6.1(g), subject to any governmental requirements or standards relating
to, among other things, energy conservation. Upon request, Landlord
shall make available at Tenant's expense after-hours heat or air
conditioning and the actual cost thereof shall be reasonably determined
by Landlord and confirmed in writing to Tenant, as the same may change
from time to time as such actual costs change. Landlord may discontinue
said heating and air conditioning service without any abatement of rent
to Tenant whatsoever in the event that Tenant is in breach of Section
16.1(e) or (g) of this Lease. Landlord shall invoice Tenant for
after-hours heat and air-conditioning at a rate equal to Landlord's
direct cost for such. Landlord will provide split DX systems with
electric heat. The Project
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<PAGE> 11
will contain heating and cooling zones of approximately 1,500 square feet
which allows for flexible operating hours.
(c) Landlord shall furnish to the Premises, subject to interruptions
beyond Landlord's control, electric current as required by standard
office lighting and receptacles. At all times, Tenant's use of electric
current shall never exceed the capacity of the feeders to the Premises or
the risers or wiring installation. Tenant shall not install or use or
permit the installation or use of any computer or electronic data
processing equipment, except personal computers and mini-computers,
including without limitation Tenant's existing IBM A.S. 400 and
supporting peripheral equipment (as shown on Exhibit I, attached hereto
and incorporated herein by reference), in the Premises without the prior
written consent of Landlord. Landlord shall also maintain and keep
lighted the common stairs, common entries and restrooms in the Project of
which the Premises are a part. Landlord warrants and agrees that the
Project meets or exceeds the electrical capacity necessary to operate
Tenant's equipment described on Exhibit I.
(d) Landlord shall furnish water only for drinking, lavatory and
kitchen purposes.
(e) Landlord shall provide restroom facilities.
(f) Landlord shall provide reasonable janitorial services to the
Premises five (5) days per week except on Project holidays, provided that
Tenant shall maintain the offices to Landlord's satisfaction. Said
services shall be performed by persons approved by Landlord and no one
other than persons approved by Landlord shall be permitted to enter the
Premises for such purposes. Janitorial specifications are attached as
Exhibit J to the Lease.
(g) Except as limited elsewhere in this Lease, Landlord's services
shall be provided during the following hours, Project holidays excluded:
<TABLE>
<CAPTION>
Days Hours
---- -----
<S> <C>
Monday-Friday 7:00 A.M.-7:00 P.M.
Saturday 8:00 A.M.-1:00 P.M.
</TABLE>
Project holidays for purposes of this Lease shall include New Year's Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
(h) Landlord shall provide an on-site maintenance engineer during
standard hours of building operation to address minor problems in the
Premises and to coordinate service for major problems with common
facilities and/or building services such as restrooms, lighting and
water.
6.2 Charge for Excess Services. Landlord may impose a reasonable charge
for any utilities and services, including without limitation air conditioning,
electric current and water, required to be provided by Landlord for the use of
the Premises at any time other than the generally accepted business days as set
forth above, or which exceed the level of utilities and services usually
furnished for the use of the Premises for their original intended purpose, or
special electrical, cooling and ventilating needs created in certain areas by
telephone equipment, computers and other similar equipment or uses. At
Landlord's option, separate meters, wiring or circuiting for such utilities and
services may be installed for the Premises, and Tenant shall, within ten (10)
days after receipt of an invoice from Landlord, pay Landlord for the utilities
at the then current rate charged by the applicable City of Austin utility
service or department. If Landlord chooses to install separate meters in the
future, Landlord agrees to pay for the installation, maintenance, repair,
wiring, and circuiting costs associated with such meters unless the separate
metering is necessitated, in Landlord's reasonable opinion, by a request from
Tenant for an unusual or non-customary service for the Premises. Tenant agrees
to cooperate fully at all times with Landlord and to abide by all reasonable
regulations and requirements which Landlord may prescribe for the use of the
above facilities and services. Any failure to pay any excess costs as
described above shall constitute a breach of the covenant to pay rent under
this Lease and shall entitle Landlord rights herein granted for such breach.
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<PAGE> 12
6.3 Interruption of Service. Landlord shall not be liable for Landlord's
failure to furnish any of the foregoing when such failure is caused by
accident, breakage, repairs, strikes, lockouts or other labor disputes of any
character, governmental regulation, moratorium or other governmental action,
inability by exercise of reasonable diligence to obtain electricity, water or
fuel, or by any other cause beyond Landlord's reasonable control, nor shall any
such failure, stoppage or interruption of any such service be construed either
as an eviction of Tenant, or relieve Tenant from the obligation to perform any
covenant or agreement or entitle Tenant to any abatement or reduction of rent.
Notwithstanding the above, should such services fail to be delivered for a
period of three (3) consecutive business days during which time such failure
interferes with Tenant's normal business operations, then Tenant shall have
rent abated from the date of the first occurrence.
ARTICLE VII.
USE AND OCCUPANCY
7.1 Use and Occupancy. Tenant shall use and occupy the Premises for
general office, storage and training purposes as described in Section 1.14 and
for no other purpose. Tenant shall not do or permit anything to be done in or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants or occupants of the Project, or injure or annoy them, or use
or allow the Premises to be used for any improper, immoral, unlawful or
objectionable purpose, nor shall Tenant cause, maintain or commit any waste in
or upon the Premises. Tenant shall not do or permit anything to be done in or
about the Premises nor bring or keep anything therein which will in any way
increase the existing insurance premium rate or affect any fire or other type
of insurance coverage upon the Project or any of its contents, or cause
cancellation of any insurance policy covering said Project or any part thereof
or any of its contents. In the event Tenant's permitted use of the Premises
results in an insurance rate increase for the Premises or the Project of which
the Premises are a part, such insurance rate increase shall be charged to and
payable by Tenant monthly as Additional Rent during the Term.
7.2 Rules and Regulations. Tenant and its employees, agents, and
visitors shall comply with the Rules and Regulations attached hereto as Exhibit
E and made a part hereof, and such other and further reasonable rules and
regulations as Landlord may from time to time adopt. Landlord shall not be
liable to Tenant for any violation of the Rules and Regulations or any breach of
any lease provision by any other tenant or other party in the Project. Landlord
agrees that it will not selectively enforce the Rules and Regulations against
some tenants in the Project but not others.
ARTICLE VIII.
MAINTENANCE, REPAIRS AND ALTERATIONS
8.1 Tenant Maintenance and Repairs. Except as provided in Section 8.2
below, during the Term hereof Tenant shall, at Tenant's sole cost and expense,
keep the Premises and fixtures therein in good condition and repair in a
quality and class equal to the original work, ordinary wear and tear excepted.
Without in any way limiting the foregoing, in the event that Tenant fails to
maintain the Premises in accordance with the standards set forth in this
Article VIII (which shall include, but is not limited to the repair or
maintenance required by any laws, ordinances, governmental authorities or
insurance carriers) Landlord may enter the Premises and cause any such
maintenance or repairs to be performed at Tenant's expense. Tenant agrees to
reimburse Landlord on demand for all costs incurred by Landlord, and Landlord
shall not be liable for any loss or damage to Tenant caused by such maintenance
or repair. Landlord shall have no obligation to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof. Upon surrender of
the Premises to Landlord, Tenant shall deliver the Premises to Landlord in as
good an order, condition and repair as they are on the Commencement Date,
ordinary and reasonable wear excepted.
8.2 Landlord Maintenance and Repairs. Landlord shall maintain the Common
Area in good order and condition during the Term hereof, subject to events
beyond Landlord's reasonable control, including but not limited to, labor
disputes, governmental orders and acts of God. Additionally, Landlord shall
repair and maintain the structural and mechanical portions of the Project,
including the roof, windows, walls, floors below coverings,
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<PAGE> 13
elevators, parking, basic plumbing, air conditioning and electrical systems (the
cost of the same to be included in Direct Expenses, to the extent set forth in
Exhibit D), unless such maintenance and repairs are caused in part or in whole
by the act, neglect, fault of or omission of any duty by Tenant, its agents,
employees or invitees, in which case Tenant shall pay to Landlord, upon receipt
of written notice, the reasonable costs of such maintenance and repairs.
Landlord shall not be liable for any failure to repair or maintain the Premises,
Common Area or Project unless such failure persists for an unreasonable time
after written notice by Tenant without good faith efforts on the part of
Landlord to repair. Tenant waives any rights to make repairs at Landlord's
expense under any law, statute or ordinance now or hereafter in effect. There
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business caused by Landlord's
maintenance or repair of the Premises, Common Area or Project provided that
Landlord has acted in a commercially reasonable manner consistent with other
class "A" building operators in the suburban Austin market.
8.3 Alterations. Tenant shall not make or permit any alterations,
additions, or improvements to be made to the Premises, except for
non-structural alterations, additions or improvements to the interior of the
Premises that cost, in the aggregate, less than $20,000 in any given year
without first obtaining Landlord's prior written consent which shall not be
unreasonably withheld or unduly delayed. If Landlord consents to the making of
any alterations, additions or improvements to the Premises by Tenant, the same
shall be made by Tenant at Tenant's sole cost and expense and any contractor or
person selected by Tenant to make same must be previously approved in writing
by Landlord. Tenant agrees to give Landlord written notice of the commencement
date of any alterations, additions or improvements to be made not later than
fifteen (15) days prior to the commencement of any such work, in order to give
Landlord time to post an appropriate notice of non-responsibility. All such
alterations, additions or improvements shall immediately become part of the
realty and belong to Landlord and shall be surrendered with the Premises at the
end of the Term. Any alterations, additions or improvements shall be approved
by all appropriate government agencies and all applicable permits and
authorizations shall be obtained at Tenant's sole cost and expense before
commencement of the alterations, additions or improvements. All alterations,
additions and improvements shall be completed with due diligence and in
compliance with the plans and specifications and working drawings which shall
have been approved by Landlord prior to the commencement of work.
ARTICLE IX.
LIENS
Tenant shall keep the Premises and the Project free from any liens arising
out of work performed, materials furnished, or obligations incurred by Tenant
and shall indemnify, hold harmless and defend Landlord from any liens and
encumbrances arising out of any work performed or materials furnished by or at
the discretion of Tenant, including the costs of attorneys' fees. This
obligation to indemnify, hold harmless and defend shall survive termination of
this Lease. Tenant shall cause any mechanic's lien or other liens filed
against the Premises or Project to be released and removed within thirty (30)
days of such filing either by satisfaction of such lien or by the posting of a
bond. Failure by Tenant to comply with this provision shall constitute a
material breach of this Lease.
ARTICLE X.
INDEMNIFICATION
10.1 Limitation on Landlord's Liability. Landlord shall in no event be
liable for any damage or destruction to any property or injury or death to any
person happening on, in or about the Premises during the entire Term of this
Lease from any cause whatsoever, including without limitation, any act or
negligence of other tenants or other parties, gas, fire, oil, electricity,
leakage of any character from the roof, walls, basement or other portion of the
Premises or Project of which the Premises are a part, except to the extent the
same results from the negligence or wilful misconduct of Landlord or its
employees, agents or contractors.
10.2 Tenant's Indemnification of Landlord. Tenant shall indemnify
Landlord and hold it harmless from and against any and all losses, liabilities,
judgments, costs or expenses (including attorneys' fees and other
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<PAGE> 14
costs of investigation and defense) which Landlord may suffer by reason of any
claim asserted by any person arising (or allegedly arising) out of (a) the use
or occupancy of the Premises by Tenant and/or any subtenants, licensees and
concessionaires; (b) any activity, work or other things done, permitted or
suffered by Tenant or such other persons in, upon or about the Premises; (c) any
failure by Tenant to perform any obligation to be performed by Tenant under the
terms of this Lease; or (d) any act, omission, negligence or misconduct of
Tenant, its agents, employees, invitees or customers. Landlord shall provide
prompt notice to Tenant of any claims for indemnification hereunder, and Tenant
shall have the right to assume defense of such claim, at Tenant's expense.
Should Landlord unreasonably delay in notifying Tenant of any claim for
indemnification, then Tenant's indemnification obligation shall be reduced to
the extent of any prejudice caused to Tenant by such delay in notifying Tenant
of any claim for indemnification. This indemnification shall survive the
termination of this Lease.
10.3 No Security of Common Area. Tenant hereby acknowledges that Landlord
shall not provide any security to the Building or Common Area. Landlord and
Tenant expressly agree that Tenant shall have the sole responsibility of
providing security for the Premises and the persons therein, and Landlord shall
have no responsibility with respect thereto. Under no circumstances shall
Landlord be liable to Tenant or to any other person by reason of any theft,
burglary, robbery, assault, trespass, unauthorized entry, vandalism, or any
other act of any third person occurring in or about the Premises except to the
extent the same results from any negligence or willful misconduct on the part
of Landlord or its employees, agents or contractors, and Tenant shall indemnify
Landlord and hold it harmless from and against any and all losses, liabilities,
judgments, costs or expenses (including attorneys' fees and other costs of
investigation or defense) which Landlord may suffer by reason of any claim
asserted by any person arising out of, or related to, any of the foregoing.
ARTICLE XI.
INSURANCE
11.1 Insurance Carried by Landlord. Landlord shall maintain, at
Landlord's expense (but subject to the last sentence of this Section 11.1), a
policy or policies of insurance protecting Landlord against the following:
(a) Fire and other perils normally included within the
classification of fire and all-risk (and sprinkler leakage, if
applicable) in an amount sufficient to cover the full replacement cost of
the Project, exclusive of trade fixtures and equipment belonging to
Tenant.
(b) Public liability and property damage insurance with respect to
the Common Area in amounts determined by Landlord from time to time;
provided, however, (i) said amounts shall be commercially reasonable and
in no event less than $2,000,000 per occurrence and $5,000,000 in the
aggregate; (ii) Tenant shall be named as an additional insured; and (iii)
the coverage under these policies must not be canceled without the
insurer providing at least twenty (20) days' prior written notice of
cancellation to Tenant.
(c) Rent loss insurance in an amount equal to at least one hundred
percent (100%) of the annual rentals receivable from all of the tenants
in the Project.
The foregoing limits may be increased from time to time as requested by the
holder of any first mortgage or first deed of trust, or in Landlord's
discretion on the advice of its insurance consultant. It is understood that
Landlord will acquire policies or a master policy for the Project complying
with the requirements of Section 11.1(a). All such insurance shall be included
as part of the Direct Expenses charged to Tenant hereunder. Landlord, upon
request of Tenant from time to time, agrees to provide to Tenant certificates
evidencing the insurance required under this Section 11.1.
11.2 Insurance Carried by Tenant. Tenant shall maintain in force a policy
or policies of insurance protecting Landlord and Tenant, as follows:
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<PAGE> 15
(a) Public liability and property damage insurance with respect to
the Premises insuring Tenant and naming Landlord as an additional
insured, against personal injury or death and property damage in an
amount not less than One Million Dollars ($1,000,000) combined single
limit liability for injury or death to one or more persons in any one
occurrence and damage to property. The amounts of such public liability
insurance shall be increased from time to time as Landlord may reasonably
determine. All such bodily injury or property damage insurance shall
specifically insure the performance by Tenant of the indemnity agreement
as to personal injury or property damage contained in Section 10.2 above,
including any injury claim or potential liability to Tenant's own
employees.
(b) Insurance covering alterations, additions or improvements
permitted under Article VIII above, trade fixtures and personal property
from time to time during the Term of this Lease, providing protection
against any peril included within the classification "fire and extended
coverage," together with insurance against vandalism and malicious
mischief. Any policy proceeds shall be used for the repair or
replacement of the property damaged or destroyed unless this Lease shall
terminate pursuant to Article XIII below.
(c) Workers' compensation insurance and employee liability insurance
with respect to personnel employed on the Premises, with a limit of no
less than the amount required by law.
11.3 Insurance Policies. All policies of insurance to be provided by
Tenant shall be issued by insurance companies with general policy holder's
rating of not less than "A" and a financial rating of not less than Class XII
as rated in the most current "Bests" Insurance Reports, and qualified to do
business in the state in which the Project is located. Such policies shall be
issued in the names of Tenant (or Tenant's parent corporation, National
Education Corporation) with Landlord as an additional named insured (except for
the policies covering Tenant's trade fixtures and personal property and
workers' compensation insurance which need not name Landlord as an additional
insured). The policies provided by Tenant shall be for the mutual and joint
benefit and protection of Landlord, Tenant and Mortgagee(s), and executed
copies of such policies of insurance or certificates thereof shall be delivered
to Landlord within ten (10) days after delivery of possession of the Premises
to Tenant and thereafter at least thirty (30) days prior to the termination or
expiration of the Term of each existing policy. All public liability and
property damage policies shall contain a provision that Landlord, although
named as an insured, shall nevertheless be entitled to recover under said
policies for any loss occasioned to it, its agents, employees, and invitees by
reason of the negligence of Tenant, its officers, agents and employees.
Further, such policies shall be written as primary policies, not contributing
with and not in excess of coverage which Landlord may carry. Upon the
expiration or termination of any policies, renewal or additional policies shall
be procured and maintained by Tenant to provide the required coverage. All
policies of insurance delivered to Landlord must contain a provision that the
company writing said policy will provide to Landlord twenty (20) days written
notice in advance of any cancellation or lapse or ten (10) days written notice
in the event of cancellation for non-payment.
11.4 Blanket Insurance. Notwithstanding anything herein to the contrary,
Tenant's obligation to carry the insurance described in this Article XI may be
brought within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Tenant, provided that (a) Landlord and the
Mortgagee(s) shall be named as additional insureds thereunder, as their
interests may appear, (b) the coverage afforded Landlord will not be reduced or
diminished by reason of the use of such blanket policy of insurance, and (c)
the requirements set forth herein are otherwise satisfied. Tenant agrees to
permit Landlord at all reasonable times to inspect the policies of insurance of
Tenant covering the Premises if such policies are not required to be delivered
to Landlord.
11.5 Waiver of Subrogation. Landlord and Tenant hereby mutually release
each other from liability and waive all right to recover against each other for
any loss from perils insured against under their respective fire insurance
policies, including any extended coverage and special form endorsements to said
policies; provided, however, this Section 11.5 shall be inapplicable if it would
have the effect, but only to the extent that it would have the effect, of
invalidating any insurance coverage of Landlord or Tenant providing that notice
of same has been provided by each party to the other. The parties shall obtain,
if available, from their respective insurance companies, a waiver of any right
of subrogation which said insurance company may have against Landlord or
Tenant, as the case may be.
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11.6 Tenant's Failure to Carry Insurance. If Tenant should fail either to
acquire the insurance required pursuant to this Article XI and to pay the
premiums therefore or to deliver required policies or certificates as required
by Landlord hereunder, Landlord may acquire such insurance and pay the
requisite premiums therefore, which premiums shall be payable by Tenant to
Landlord immediately upon demand.
11.7 Effect of Termination of Lease. In the event that this Lease is
terminated by reason of damage and destruction and Tenant is thus relieved of
its obligation to restore or rebuild the improvements on the Premises, any
insurance proceeds for damage to the Premises, including all fixtures and
leasehold improvements thereon (except Tenant's trade fixtures), shall belong
to Landlord, free and clear of any claims by Tenant.
ARTICLE XII.
DAMAGE TO TENANT'S PROPERTY
12.1 Landlord and/or its employees and agents shall not be liable for any
loss or damage to any property by theft or otherwise, nor for any injury or
damage to persons or property resulting from fire, explosion, falling building
materials, including but not limited to concrete, insulation, duct work,
ceiling tiles, lighting fixtures, lens or lamps, and wallboard or other wall
coverings, steam, gas, electricity, water or rain, which may leak from any part
of the Project, or from the pipes, appliances or plumbing works therein, or
from the roof, street or subsurface, or from any other place or resulting from
dampness or any other cause whatsoever except to the extent of the negligence
or willful misconduct of Landlord or its employees, agents or contractors.
Landlord and its employees and agents shall not be liable for interference with
the light or other incorporeal hereditaments, nor shall Landlord be liable for
any latent defect in the Premises or in the Project except during the first
year of the Lease term when the contractor's building warranty is in effect.
Tenant shall give prompt notice to Landlord in case of fire or accidents in the
Premises or in the Project or of defects therein or in the fixtures or
equipment.
ARTICLE XIII.
DAMAGE AND DESTRUCTION
13.1 Damage to the Premises. If the Premises should be damaged or
destroyed during the Term hereof by any casualty insurable under standard fire
and extended coverage insurance policies, Landlord shall (except as hereafter
provided) repair or rebuild the Premises to substantially the condition in
which the Premises were immediately prior to such destruction and this Lease
shall continue in full force and effect. In the event that (a) the Premises
are damaged as a result of any cause other than peril covered by Landlord's
insurance or (b) the Premises are damaged as a result of fire or other peril
covered by Landlord's insurance, but the cost to repair such damage shall
exceed available insurance proceeds, or Landlord's lender does not allow
Landlord to utilize sufficient insurance proceeds to repair the damage,
Landlord may, at its option, either repair such damage as soon as reasonably
practicable at Landlord's expense, in which event this Lease shall continue in
full force and effect, or give written notice to Tenant within sixty (60) days
after the occurrence of the damage of Landlord's intention to cancel and
terminate this Lease as of the date of the occurrence of such damage.
Notwithstanding anything to the contrary herein, Tenant shall be responsible
for and shall pay to Landlord the reasonable cost of repair of any damage or
destruction of the Premises caused by the negligence or willful misconduct of
Tenant, its employees, agents or invitees. Tenant's obligation to pay for such
repairs or restoration shall be reduced by any insurance proceeds payable to
Landlord, but only to the extent such insurance provides for a waiver of
subrogation which permits such a reduction of Tenant's obligations. Tenant
shall vacate such portion of the Premises as Landlord reasonably requires to
enable Landlord to repair the Premises.
13.2 Damage to the Project. In the event that the Project of which the
Premises are a part shall be damaged or destroyed to the extent of thirty-three
and one-third percent (33 %) or more of the then full replacement cost thereof,
whether or not the Premises are damaged or destroyed, Landlord may at
Landlord's option cancel and terminate this Lease by giving written notice to
Tenant of Landlord's election to do so within sixty (60) days after the date of
occurrence of such damage, in which event this Lease shall terminate on the
date such notice is given.
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13.3 Damage Near End of Term. Notwithstanding anything to the contrary in
this Article XIII, if the Premises are damaged during the last year of the Term
hereof, and the cost to repair shall exceed the aggregate Monthly Rent paid by
Tenant for the three (3) calendar months immediately preceding the month during
which the damage occurred, Landlord may, at Landlord's option, cancel and
terminate this Lease as of the date of occurrence of such damage by giving
written notice to Tenant of Landlord's election to do so within sixty (60) days
after the date of occurrence of such damage unless Tenant extends the term of
this Lease as provided herein.
13.4 Repair of Damage; Rent Abatement. If this Lease is terminated
pursuant to any of the provisions of this Article XIII, the Monthly Rent,
Additional Rent and other payments provided for herein shall be paid by Tenant
through the date of such termination, and an equitable adjustment shall be made
concerning advance rents and other payments made by Tenant to Landlord, based
on the extent to which the Premises cannot be used from the date of the
occurrence of the damage. Should such repairs to the Premises be estimated to
take six (6) months or more from the occurrence of the damage, Tenant shall
have the right to terminate the Lease. If this Lease is not so terminated,
Landlord shall, as soon as reasonably practicable (and subject to the
requirements of any Landlord's mortgage concerning the application of insurance
proceeds), restore and repair the Premises to the same condition, to the extent
possible, they were in immediately prior to the occurrence of the damage.
During the time when the Premises are under repair, the rent hereunder will be
abated to a fair and equitable extent, based upon the actual loss of use and
enjoyment experienced by Tenant. In addition, Landlord will assist Tenant in
locating temporary space. Landlord will not be liable for any moving expenses,
increased rental expenses or other costs which may be incurred by Tenant,
except to the extent that such damage was caused by the negligence or wilful
misconduct of Landlord, its employees, agents or contractors or to the extent
Landlord proceeds are available therefor. Notwithstanding the foregoing,
Tenant, at its own expense, shall promptly repair or replace (a) any
improvements, alterations, or additions made to the Premises by or at the
direction of Tenant or any subtenant, licensee or concessionaire, (b) any
fixtures, furniture, equipment or other personal property of Tenant, and (c) any
other property covered by insurance carried (or required to be carried) by
Tenant and Landlord shall have no obligation to repair or restore such items.
No abatement, diminution or reduction of the Monthly Rent, Additional Rents or
other charges shall be granted to Tenant except as provided in this Lease.
ARTICLE XIV.
EMINENT DOMAIN
14.1 Effect on Lease. If the Premises or any portion thereof are taken or
damaged under the power of eminent domain or by inverse condemnation or for any
public or quasi-public use, (all of which are herein called "condemnation")
this Lease shall terminate as to the part so taken as of the date the
condemning authority takes title or possession, whichever first occurs. If so
much of the Premises is taken by condemnation that the remainder is unsuitable
for Tenant's continued occupancy for the uses and purposes for which the
Premises are leased, then Tenant shall have the option, exercisable only by
written notice to Landlord within thirty (30) days after the condemning
authority takes such title or possession, to terminate this Lease; provided,
however, that if Landlord disagrees with Tenant's determination that the
portion of the Premises remaining after condemnation is unsuitable for Tenant's
occupancy, such controversy shall be settled by arbitration in accordance with
the commercial arbitration rules of the American Arbitration Association then
in effect. In the event that less than all of the Premises shall be taken by
condemnation and Tenant does not elect to terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Monthly Rent otherwise
payable hereunder shall be reduced in the same ratio that the floor area of the
portion of the Premises taken by such condemnation bears to the floor area
immediately before such condemnation. Notwithstanding anything as to the
contrary herein, in the event that more than twenty-five percent (25%) of the
leasable square footage of the Project is taken by condemnation, whether or not
any portion of the Premises is taken, then Landlord may, at its option, to be
exercised by written notice to Tenant within thirty (30) days after the date
the condemning authority shall take title or possession, whichever occurs
first, terminate this Lease as of the date of the taking of such title or
possession. Upon termination, this Lease shall expire and all interests of
Tenant in the Premises shall terminate, provided the Monthly Rent, Additional
Rent and all other sums due are paid in full up to and including the date of
such termination.
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14.2 Award. Landlord shall be entitled to and shall receive the total
amount of any award, income or payment made with respect to taking by
condemnation, regardless of the basis of such award; provided, however, that
Landlord shall not be entitled to any award for (a) loss of or damage to
Tenant's trade fixtures and removable personal property, (b) damage for
cessation or interruption of Tenant's business, (c) the cost of removal or
relocation of Tenant's property or business or (d) any other similar claim
which Tenant may be empowered by law to make.
14.3 Rebuilding. In the event that this Lease is not terminated by reason
of such condemnation, Landlord shall, to the extent of the award received and
subject to the provisions of Landlord's mortgage concerning the application of
condemnation awards, cause such restoration and repair to the remainder of the
Premises and the Project of which they are a part, to be done as may be
necessary to restore them to a reasonably suitable condition for the conduct of
the business of Tenant and the other occupants of the remaining portion of such
Project.
ARTICLE XV.
ASSIGNMENT, SUBLETTING, HYPOTHECATION
15.1 Limitation of Tenant's Rights to Assign, Sublet or Hypothecate.
(a) Tenant shall not assign this Lease or sublet the Premises, or
any part thereof, without Landlord's prior written consent; provided,
however, that Landlord will not withhold, or delay consent as to
assigning the Lease or subletting all or any part of the Premises so long
as (1) the proposed assignee or sublessee is engaged in a business using
the Premises for office purposes which is in keeping with the then
applicable standards of the Building; (2) Tenant shall remain primarily
liable under this Lease; (3) the occupancy by the proposed assignee or
sublessee will not create unreasonable elevator loads or otherwise
interfere with standard Building operations; (4) the representation and
credit standing of such proposed assignee or sublessee is acceptable to
Landlord in Landlord's reasonable judgment; and (5) the term of any
proposed sublease (together with all extensions or renewals thereof)
shall terminate on or before the end of the Term of this Lease.
(b) If Tenant desires at any time to assign this Lease or sublet all
or a part of the Premises, it shall first notify Landlord of its desire
to do so and shall submit in writing to Landlord (1) the name of the
proposed assignee, (2) the nature of the proposed assignee's business to
be carried on in the Premises, (3) a copy of the proposed assignment and
any other applicable agreement, and (4) such financial information as
Landlord may reasonably request concerning the proposed assignee; and (5)
such other information necessary to evaluate (1) through (5) set forth in
(a) above. Landlord agrees to advise Tenant in writing within two (2)
weeks as to whether or not a proposed assignee or sublease is acceptable,
as set forth in Section 15.2 below. In the event of assignment or
subleasing, Landlord retains the right, but not the obligation to
terminate this Lease on the portion of the Premises to be assigned or
subleased and deal directly with proposed subtenant or assignee, except
if such sublease is to hold the subleased space for Tenant's eventual
expansion, in which case the recapture right shall not apply (although
Landlord's consent must still be obtained as set forth above. Any
attempted assignment, transfer, mortgage or other encumbrance of Tenant's
interest in this Lease of the Premises or subletting or permissive use in
occupancy of the Premises without Landlord's written consent shall be
null and void and have no force and effect whatsoever and shall
constitute a breach of this Lease.
(c) Any attempted assignment, transfer, mortgage or other
encumbrance of Tenant's interest in this Lease of the Premises or
subletting or permissive use in occupancy of the Premises without
Landlord's written consent (which may not be withheld if the proposed use
by the assignee is as required above) shall be null and void and have no
force and effect whatsoever and shall constitute a breach of this Lease.
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(d) Notwithstanding any provision in this Lease to the contrary, the
provisions set forth in Exhibit H, Paragraph 2, concerning Tenant's right
of first refusal to lease adjacent space, shall not apply to any assignee
or subtenant.
15.2 Notice Required. After Tenant has: (i) notified Landlord of Tenant's
intent to assign, sublease, hypothecate, license, or otherwise encumber this
Lease, and (ii) provided to Landlord all of the information required under
Section 15.1 hereinabove, Landlord shall within two (2) weeks from receipt of
such notice and information to (a) consent to such proposed assignment,
subletting, hypothecation, licensing or encumbrance; (b) refuse such consent;
or (c) terminate this Lease (which Landlord shall have the right to do, subject
to the provisions of Section 15.1(b) above). Notwithstanding the foregoing,
Landlord's failure to notify Tenant of Landlord's intention shall constitute a
refusal of such consent. Any provision in this Lease to the contrary
notwithstanding, Landlord shall not have the "recapture" right described above
should the voting control of Tenant change (as described in Section 15.1(a)
above) so long as the financial condition of the Tenant has not been adversely
affected in a material way by any such change in voting control.
15.3 Tenant's Liability. Regardless of Landlord's consent, no subletting,
assignment, hypothecation, license, concession or encumbrance shall release
Tenant from Tenant's obligation or alter the primary liability of Tenant to pay
the Monthly Rent, Additional Rent, and other payments provided for herein and to
perform all other obligations to be performed by Tenant hereunder. The
acceptance of rent by Landlord from any other person shall not be deemed a
waiver by Landlord of any provision hereof. Consent to one assignment,
subletting, hypothecation, license, concession or encumbrance shall not be
deemed consent to any subsequent assignment, subletting, hypothecation, license,
concession or encumbrance. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor. Landlord may consent to subsequent
assignments, subletting, hypothecations, licenses, concessions or encumbrances
and to amendments or modifications to this Lease with assignees of Tenant
without notifying Tenant or any successor of Tenant, and without obtaining its
or their consent thereto and such action shall not relieve Tenant of liability
under this Lease, however such action shall not extend or expand such liability
either.
15.4 Form Required. Each transfer, assignment, subletting, hypothecation,
licensing, concession or encumbrance to which Landlord has consented shall be
evidenced by an instrument in form satisfactory to Landlord and shall be
executed by the transferor, assignor, sublessor, licensor, concessionaire,
hypothecator or mortgagee and the transferee, assignee, sublessee, licensee,
concessionaire, or mortgagor in each instance, as the case may be; and each
transferee, assignee or sublessee shall agree in writing to assume, to be bound
by, and to perform the terms, covenants and conditions of this Lease to be
done, kept and performed by Tenant. One executed copy of such instrument shall
be delivered to Landlord.
ARTICLE XVI.
TENANT'S BREACH; LANDLORD'S LIEN; LANDLORD'S REMEDIES
16.1 Tenant's Breach. The occurrence of any one of the following events
shall be considered a breach of this Lease by Tenant:
(a) Tenant shall (i) become bankrupt or insolvent, (ii) make a
fraudulent transfer, (iii) make an assignment for the benefit of
creditors, or (iv) take any action or have taken against Tenant any
proceedings of any kind under any provision of the Federal Bankruptcy Act
or under any other insolvency, bankruptcy or reorganization act and, in
the event any such proceedings are involuntary, Tenant is not discharged
from the same within ninety (90) days thereafter;
(b) A receiver is appointed for a substantial part of the assets of
Tenant;
(c) Tenant shall abandon the Premises;
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(d) Tenant shall make any transfer of assets, dividend or
distribution which shall have a materially adverse impact on Tenant's
ability to perform its obligations under this Lease;
(e) Tenant shall fail to pay any of the rents when due hereunder or
fail to reimburse Landlord for expenditures made on behalf of Tenant by
Landlord pursuant to this Lease, which failure continues for three (3)
business days after written notice thereof by Landlord to Tenant
(provided, however, Landlord shall not be required to give such written
notice more than three (3) times in any twelve (12) consecutive month
period);
(f) This Lease or any estate of Tenant hereunder shall be levied
upon by any attachment or execution;
(g) Tenant shall fail to observe or perform any of its other
covenants or obligations hereunder, including, without limitation, the
Rules and Regulations, which failure continues for thirty (30) days (or
such other time periods as herein specified) after written notice thereof
by Landlord to Tenant (provided that the aforesaid thirty (30) day period
may be extended in the event that Tenant commences curing such default
within such thirty (30) day period and continues the curing thereof with
due diligence);
(h) Tenant makes any written material misstatement of fact in
connection with the financial information given to Landlord prior to
Lease execution, or Tenant makes any written material misstatement of
fact in connection with any assignment, subletting, occupation or use of
the Premises by any other person, or in any other agreement to which
Landlord and Tenant are parties and the same is not cured or corrected
prior to Landlord having relied on such written misstatement to
Landlord's detriment.
16.2 Landlord's Lien. INTENTIONALLY DELETED
16.3 Landlord's Remedies. In the event of any breach of this Lease by
Tenant, Landlord, in addition to any other rights or remedies it may have at
law, in equity or otherwise, shall have the following rights:
(a) Landlord shall have the right of re-entry and may change the
locks on all doors and/or remove all persons and property from the
Premises subject to the provisions of subparagraphs (a)(i) and (ii)
below:
(i) Landlord may remove any and all personal property
located in the Premises and place such property in a
public or private warehouse at the sole cost and
expense of Tenant and the owner; any such warehouse
shall have all rights and remedies provided by law
against Tenant as owner of such stored personal
property. In the event that Tenant shall not
immediately pay the cost of storage after the property
has been stored for thirty (30) days or more, Landlord
may sell any and all property thereof at a public or
private sale in such manner and at such times and
places as Landlord in its sole discretion may deem
proper, without notice or demand on Tenant.
(ii) Tenant waives all claims for damage that may be
caused by Landlord's removal and/or selling of such
property and Tenant shall indemnify Landlord from any
and all losses, costs, damages, including without
limitation, reasonable attorneys, fees of Landlord
occasioned thereby. This Indemnity shall survive the
termination of this Lease.
(b) Should Landlord elect to re-enter, or should Landlord take
possession pursuant to any notice provided for by law, Landlord may
either terminate this Lease or it may, without terminating this Lease,
re-lease the Premises of any part thereof, for its own account or for the
account of Tenant, for such term and upon such terms and conditions as
Landlord in its sole discretion may deem advisable, with the right to
make improvements, alterations and repairs to the Premises. Rentals
received by
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Landlord from such re-leasing may be applied: first, to the payment of
rent (including interest thereon) due and unpaid hereunder; second, to the
payment of any indebtedness (including interest thereon) other than rent
due hereunder from Tenant to Landlord; third, to the payment of any cost
of such re-leasing, including without limitation reasonable attorneys'
fees, advertising costs and brokers' commissions; fourth, to the payment
of future rents as the same may become due and payable hereunder. Should
such rentals received from re-leasing during any month be less than that
amount due and payable by Tenant hereunder, then Tenant shall also pay to
Landlord, the amount of any such deficiency and as soon as ascertained,
the reasonable cost and expenses incurred by Landlord in such re-leasing
or in making such alterations and repairs. No such re-entry or taking of
possession of the Premises by Landlord shall be construed as an election
on its part to terminate this Lease unless a written notice of such
election is given to Tenant. Notwithstanding any such re-leasing without
termination, Landlord may at any time thereafter elect to terminate this
Lease for such previous breach.
(c) Landlord shall have the right to terminate this Lease by giving
written notice of termination to Tenant, and until such notice is given,
even though Tenant has breached or defaulted under this Lease and
abandoned the Premises, this Lease shall continue in effect and Landlord
may enforce all of its rights and remedies under this Lease, including but
not limited to the right to recover rental as it becomes due hereunder.
No act by Landlord other than giving express written notice to Tenant
shall terminate this Lease. Acts of maintenance, efforts to re-lease any
part of the Premises or any other action taken to protect Landlord's
interest under this Lease shall not constitute a termination or waiver of
Landlord's remedies hereunder. Should Landlord at any time terminate this
Lease for any breach, in addition to any other remedy it may have, it is
hereby agreed by Landlord and Tenant that, at Landlord's election, the
damages Landlord shall be entitled to recover shall include without
limitation:
(1) The value at the time of the award for damages,
hereinafter referred to as "Award" (computed by discounting
such amount at the discount rate of the Federal Reserve Bank
of Dallas at the time of the Award plus one percent) of (a)
the unpaid rent earned at the time of termination, (b) the
amount by which the unpaid rent which would have been earned
during the period from the time of termination until the time
of the Award exceeds the amount of such rental loss that
Tenant proves could be reasonably avoided, and (c) the amount
by which the unpaid rent for the balance of the Term after
the time of the Award exceeds the amount of such rental loss
that Tenant proves could be reasonably avoided;
(2) All reasonable legal expenses, including attorneys,
fees, and other related costs incurred by Landlord following
Tenant's default;
(3) All reasonable costs incurred by Landlord in
restoring the Premises to good order and condition, or in
remodeling, renovating or otherwise preparing the Premises
for re-leasing;
(4) All reasonable costs (including without limitation
any brokerage commissions) incurred by Landlord in re-leasing
the Premises; and
(5) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted
from time to time by applicable state law.
The terms "rent" and "rent(s)" as used in this Section 16.3 shall include
Monthly Rent, Additional Rent, and all other fees and charges of any kind or
nature required to be paid by Tenant pursuant to the provisions of this Lease.
16.4 Right to Cure Tenant's Default. Landlord, at any time after Tenant
commits a default or breach, may at its option cure the default at Tenant's
cost. If Landlord at
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any time, by reason of Tenant's default, pays any sum on behalf of Tenant, the
sum paid by Landlord shall be due immediately from Tenant to Landlord at the
time the sum is paid by Landlord until Landlord is reimbursed by Tenant. Such
sum, together with interest thereon, shall be Additional Rent hereunder.
16.5 Right to Rents, Issues and Profits. In the event this Lease is
terminated pursuant to this Article XVI, all of the right, title, estate and
interest of Tenant in and to (a) the Premises, (b) all rents, issues and
profits of the Premises whether then accrued or to accrue; (c) all insurance
policies and all insurance monies paid or payable thereunder; and (d) at the
election of Landlord, all subleases then in existence for any part or parts of
the Premises shall, without compensation being paid therefore, pass unto and
vest in and become the property of Landlord, free of any trust, or claim
thereto by Tenant. Tenant hereby assigns to Landlord all subrents and other
sums falling due from subtenants, licensees, and concessionaires for or to the
Premises during any period in which Landlord has the right to re-enter the
Premises upon Tenant's breach of this Lease and Tenant shall not have any
right, interest or claim in or to such sums during such period.
16.6 Late Charge. Tenant hereby acknowledges that late payment by Tenant
to Landlord of Monthly Rent, Additional Rent and all other sums due hereunder
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Accordingly, if any
installment of Monthly Rent, Additional Rent or any other sums due from Tenant
shall not be received by Landlord within seven (7) days after such amount shall
be due, Tenant shall pay to Landlord a late charge equal to the percentage shown
in Section 1.18 of such overdue amount. Such late charge shall be due
notwithstanding the fact that no notice is given by Landlord to Tenant of such
failure to pay. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount nor
prevent Landlord from exercising any of the other rights or remedies granted
hereunder.
16.7 Cumulative Remedies. The several rights and remedies granted to
Landlord under this Article XVI shall be cumulative and in addition to any
others it may be entitled to by law or in equity, and the exercise of one or
more rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of any other rights or remedies.
ARTICLE XVII.
LANDLORD'S DEFAULT; TENANT REMEDIES
17.1 Landlord's Default. Landlord shall not be deemed to be in default in
the performance of any of its obligations hereunder unless it has failed to
perform such obligation within thirty (30) days after written notice by Tenant
to Landlord specifying the nature of Landlord's default; provided, however,
that if the nature of the default is such that more than thirty (30) days are
required for its cure, then Landlord shall not be deemed to be in default if it
shall commence such cure within such thirty (30) day period and thereafter
diligently pursue completion thereof.
17.2 Tenant's Remedies. In consideration of the benefits accruing to it
hereunder, Tenant acknowledges, covenants and agrees that, in the event of any
actual or alleged failure, breach or default hereunder by Landlord, the sole
and exclusive remedy of Tenant shall be against Landlord's interest in the
Premises (and, in addition, the proceeds of any insurance available to Landlord
to cover the claim, if any) and that:
(a) Tenant's sole remedies shall be the following:
(i) by a suit or action at law or in equity and Tenant shall
not in any event or under any circumstances by entitled to withhold
rent or to terminate this Lease except as specifically provided for
herein; and
(ii) those self-help remedies set forth in Exhibit M, attached
hereto and incorporated herein by reference.
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(b) No partner, subsidiary, officer, shareholder, director,
employee, sister corporation or agent of Landlord shall be sued or named
as a party in any suit or action and no service of process shall be made
against any partner or Landlord (unless required to secure jurisdiction
of the partnership);
(c) No partner, subsidiary, officer, shareholder, director,
employee, sister corporation or agent of Landlord shall be required to
answer or otherwise file responsive pleadings; and
(d) No judgment shall be taken against any partner, subsidiary,
officer, shareholder, director, employee, sister corporation or agent of
Landlord and no writ of execution shall be levied against the assets of
any partner, subsidiary, officer, shareholder, director, employee, sister
corporation or agent of Landlord.
ARTICLE XVIII.
MORTGAGE OF LANDLORD'S INTEREST
18.1 Subordination of Tenant's Rights. Subject to Landlord's obligation
to provide a Non-Disturbance Agreement, as provided in Section 18.3 below, the
rights of Tenant hereunder shall be subject to and subordinated at all times to
all ground or underlying leases which are in effect or may hereafter be
executed affecting the Project, and the lien of all mortgages and deeds of
trust in any amount or amounts whatsoever now or thereafter placed on or
against the Project or on or against Landlord's interest or estate therein or
on or against all such ground underlying leases, all without the necessity of
having further instruments executed on the part of Tenant to effectuate such
subordination; PROVIDED, HOWEVER, that if requested, Tenant shall execute
whatever documentation may be required to further effect the provisions of this
section within ten (10) days of Tenant's receipt thereof.
18.2 Tenant's Obligations with Respect to Landlord's Mortgage. Tenant
shall at any time upon not less than ten (10) days prior written request by
Landlord, deliver to Landlord either or both of the following:
(a) Such financial information concerning Tenant and Tenant's
business as may be reasonably required by any mortgagee or prospective
mortgagee under any Landlord's mortgage that does or may encumber the
Premises or any part thereof;
(b) An executed and acknowledged instrument amending this Lease as
may be reasonably required by Landlord's mortgagee or a prospective
mortgagee, provided such amendment does not increase the monetary
obligations of Tenant or otherwise adversely affect the rights of Tenant
under this Lease.
18.3 Non-Disturbance Agreement. Landlord shall obtain from the current
holder of any mortgage or deed of trust encumbering all or any part of the
Project, a Subordination, Non-Disturbance and Attornment Agreement in the form
set forth in Exhibit L. Tenant's subordination of Tenant's rights, as set
forth in Section 18.1 above, shall apply only if Landlord obtains from any
future holder of any mortgage or deed of trust encumbering all or any part of
the Project, a similar agreement, commercially acceptable, providing among
other things, that the holder will recognize Tenant's lease of the Premises
hereunder and will not disturb Tenant's quiet possession of the Premises as
long as Tenant is not in default under the provisions of this Lease.
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ARTICLE XIX.
LANDLORD'S ACCESS
Landlord may enter the Premises at any time to: (a) inspect the same; (b)
exhibit the same to prospective purchasers, mortgagees or tenants; (c)
determine whether Tenant is complying with all its obligations hereunder; (d)
supply any service to be provided by Landlord to Tenant hereunder; (e) post
notice of nonresponsibility; (f) post "To Lease" signs of reasonable size upon
the Premises during the last ninety (90) days of the Term hereof; and (g) make
repairs required of Landlord under the terms hereof or repairs to any adjoining
space or utility services, or make alterations or additions to any other
portion of the Project; provided, however, that all such work shall be done as
promptly as reasonably possible and so as to cause as little interference to
Tenant as reasonably possible. Tenant hereby waives any claim for damage for
any injury or inconvenience to or interference with Tenant's business, or any
loss of occupancy or quiet enjoyment of the Premises in connection with
Landlord's entry into the Premises pursuant to this Article XIX. Landlord
shall at all times have and retain a key with which to unlock all of the doors
in, on and about the Premises (excluding Tenant's vaults, safes and similar
areas designated in writing by Tenant in advance) and Landlord shall have the
right to use any and all means which Landlord may deem proper to open doors in
an emergency in order to obtain entry to the Premises. Any entry to the
Premises obtained by Landlord by any of such means, or otherwise, shall not
under any circumstances be construed or deemed to be a force or unlawful entry
into or a detainer of the Premises or an eviction, actual or constructive, of
Tenant from the Premises, or any portion thereof.
ARTICLE XX.
RELOCATION OF TENANT BY LANDLORD
[INTENTIONALLY DELETED]
ARTICLE XXI.
BANKRUPTCY
21.1 Effect of Tenant Bankruptcy. If Tenant shall file a petition in
voluntary bankruptcy under Chapter 7, Chapter 11 or Chapter 13 of the
Bankruptcy Acts as then in effect, or if involuntary bankruptcy proceedings are
brought against Tenant and said involuntary bankruptcy proceedings have not
been vacated within ninety (90) days from the date thereof, or if a receiver or
trustee be appointed to Tenant's property and the order appointing such
receiver or trustee shall not be set aside or vacated within ninety (90) days
after the entry thereof, or if Tenant shall assign Tenant's estate for the
benefit of creditors, or if this Lease shall otherwise by operation of law
evolve or pass to any person or persons other than Tenant, then and in any such
event Landlord may terminate this Lease. Landlord, in addition to any and all
rights and remedies allowed by law or equity, shall upon such termination be
entitled to recover damages in an amount equal to the then present value of the
rent reserved in this Lease for the entire residue of the Term, less the fair
rental value of the Premises for the residue of the Term, and neither Tenant
nor any person claiming through or under Tenant, or by virtue of any statute or
order of any court, shall be entitled to possession of the Premises, but shall
forthwith quit and surrender the Premises to Landlord. Nothing herein
contained shall limit or prejudice the right of Landlord to prove and obtain as
liquidated damages by reason of any such termination an amount equal to the
maximum allowed by any statute or rule of law in effect at the time even though
such amount is greater than the amount of damages recoverable under the
provisions of this Section 21.1.
21.2 Effect of Lease Assignment. In the event that any proceeding under
the Bankruptcy Act is instituted in which Tenant is the debtor and this Lease
is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, 11 U.S.C. 101 et. seq., any and all monies or other
consideration payable or otherwise to be delivered in connection with such
assignment shall paid or delivered to Landlord and shall be and remain the
Exclusive property of Landlord and shall not constitute property of Tenant or
of the estate of Tenant
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within the meaning of the Bankruptcy Code. Any and all monies or other
consideration which constitutes Landlord's property under the preceding sentence
but which has not been paid or delivered to Landlord shall be held in trust for
the benefit of Landlord and be promptly paid to or turned over to Landlord. If
Tenant assumes this Lease and proposes to assign the same pursuant to 11 U.S.C.
101 et. seq. to any person or entity who shall have made a bona fide offer to
accept an assignment of this Lease on terms acceptable to Tenant, then notice of
such proposed assignment, setting forth (a) the name and address of such
persons, (b) all of the terms and conditions of such offer, (c) financial
statements of the proposed assignee, and (d) the adequate assurance to be
provided Landlord to assure such person's performance under this Lease,
including, without limitation the assurance referred to in Section 365(b)(3) of
the Bankruptcy Code, shall be given to Landlord by Tenant no later than twenty
(20) days after receipt by Tenant but in any event no later than ten (10) days
prior to the date that Tenant shall make application to the court of competent
jurisdiction for authority and approval to enter into such assignment and
assumption. Landlord shall thereupon have the prior right and option to accept
an assignment of this Lease on the same terms and conditions and for the same
consideration, if any, as the bona fide offer made by such person, less any
brokerage commissions which may be payable out of the consideration to be paid
by such person for the assignment of this Lease. Any person or entity to which
this Lease is assigned pursuant to 11 U.S.C. 101 et. seq. shall be deemed
without further act or deed to have assumed all of the obligations arising under
this Lease on and after the date of such assignment. Any such assignee shall
upon demand execute and deliver to Landlord an instrument confirming such
assumption.
ARTICLE XXII.
SIGNS, DISPLAYS AND ADVERTISING
22.1 Signs. No signs shall be permitted outside of the Premises unless
the same comply in all respects with sign criteria approved by Landlord in
writing. Landlord has no obligation to install any signs (except as expressly
set forth herein), and the entire expense of any sign permitted hereunder will
be borne in full by Tenant. Upon the installation of signs purchased by
Tenant, such signs shall immediately become part of the realty and belong to
Landlord. No signs other than those which comply with the approved sign
criteria shall be allowed. Landlord will provide exterior building signage on
the side of the Building facing Highway 183, subject to City of Austin approval
and shall provide monument signage as set forth in Paragraph 3 of Exhibit H
attached to this Lease.
22.2 Displays. Tenant may not display or sell merchandise outside the
defined exterior walls and permanent doorways of the Premises. Tenant further
agrees not to install any exterior lighting, amplifiers or similar devices for
use in or about the Premises or any advertising medium which may be heard or
seen outside the Premises, such as flashing lights, searchlights, loudspeakers,
phonographs or radio broadcasts.
22.3 Maintenance of Signs. Tenant shall at all times maintain its signs
in a neat, clean and orderly condition. If Tenant shall fail to do so after
ten (10) days written notice from Landlord, Landlord may repair, clean or
maintain such sign and the cost thereof shall be payable by Tenant to Landlord
upon demand as Additional Rent hereunder.
22.4 Advertised Name. The name of the Project is specified in Section 1.1
above. Landlord may change the name of the Project at any time upon ninety
(90) days written notice to Tenant. Tenant may use as its advertised business
address the name of the Project or such other name as Landlord may adopt;
provided, however, that Tenant or its agents, employees and invitees shall not
use such name for any other purpose without Landlord's prior written approval.
In the event Landlord changes the name of the Project, any resulting expenses
incurred by Tenant due to such name change shall be borne entirely by Tenant.
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<PAGE> 26
ARTICLE XXIII.
GENERAL PROVISIONS
23.1 Estoppel Certificate. Tenant shall at any time upon not less than
fifteen (15) days prior written notice from Landlord execute, acknowledge and
deliver to Landlord a statement in writing (1) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect) and the date to which the rent, security deposit and other
charges are paid in advance, if any, and (2) acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder,
or specifying such defaults, if any, which are claimed and such other items as
are reasonably requested by Landlord. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant (1) that this Lease is in full force and effect without
modification, except as may be represented by Landlord, (2) that there are no
uncured defaults in Landlord's performance, and (3) that no more than one (1)
month's rent has been paid in advance. Tenant's obligation to furnish estoppel
certificates in a timely fashion is a material inducement for this Lease.
Should Tenant request an estoppel certificate from Landlord, then Landlord
shall provide the same to Tenant upon the terms and conditions described
herein.
23.2 Waiver. No waiver by Landlord/Tenant of any breach by
Tenant/Landlord of any covenant or condition herein shall be effective unless
such waiver is in writing, signed by Landlord/Tenant and delivered to
Tenant/Landlord. The waiver by Landlord/Tenant of any such breach or breaches,
shall not constitute a waiver or relinquishment for the future of any such
covenant or condition or of any subsequent breach of any covenant or condition,
nor bar any right or remedy of Landlord/Tenant in respect of any such
subsequent breach. The receipt of any rent by Landlord or any portions
thereof, shall not operate as an accord and satisfaction or waiver of the right
of Landlord to enforce the payment of rents of any kind previously due or as a
bar to the termination of this Lease and the recovery of the Premises because
of default in the payment of such rents previously due, by any appropriate
remedy Landlord may elect.
23.3 Surrender of Premises; Holdover Tenancy. Tenant agrees on the last
day of the Term or on the earlier termination of this Lease to surrender the
Premises, including all improvements, alterations, additions and installations
made by Tenant (or any subtenant licensee or concessionaire) which Tenant is
not required to remove pursuant to the provisions hereof, in good order,
condition and repair. No account or thing done by Landlord or its agents
during the Term shall be deemed an acceptance of a surrender of the Premises
and no agreement to accept such surrender shall be valid unless in writing and
signed by Landlord. In the event Tenant shall hold the Premises after the
Expiration Date with the prior written consent of Landlord, such holding over
shall be deemed to have created a tenancy from month to month, terminable on
thirty (30) days written notice by either party to the other, at a Monthly Rent
equal to one hundred fifty percent (150%) of the Monthly Rent payable by Tenant
hereunder during the last full Lease Year of the Term, and otherwise subject to
all of the terms, conditions and provisions of this Lease. If Tenant fails to
surrender the Premises upon the termination of this Lease, Tenant agrees to and
shall indemnify and hold harmless and defend Landlord from and against any loss
or liability, including costs and attorneys' fees, resulting from such failure
to surrender, including, but not limited to, any claims made by any succeeding
Tenant based on or resulting from such failure to surrender. This indemnity,
hold harmless and duty to defend provision shall survive termination of this
Lease. Nothing contained herein shall be construed as a consent to any
occupancy or possession of any portion of the Project by Tenant beyond the
Expiration Date or earlier termination of this Lease.
23.4 Notices. All notices, demands, consents or approvals which may be
given by either party to the other shall be in writing and shall be delivered
either personally or by certified mail, return receipt requested, and addressed
to those addresses specified for Landlord, Tenant and Broker in Paragraphs 1.19
and 1.20. Notices sent by mail shall be deemed to have been given when
received and the postmark affixed by the United States Post Office shall be
conclusive evidence of the date of mailing.
23.5 Partial Invalidity; Severability; Construction. If any term or
provision of this Lease shall to any extent be held to be illegal, invalid or
unenforceable, the remainder of this Lease shall not be affected thereby,
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<PAGE> 27
and in lieu of such illegal, invalid, or unenforceable provision, there shall be
added as a part of this Lease a provision similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and be legal, valid and
enforceable. Tenant acknowledges that opportunity has been provided for review
and comment on the provisions in this Lease by Tenant's attorneys, and the rule
of construction that ambiguities are to be resolved against the drafting party
shall not be applicable to this Lease.
23.6 Corporate Resolution. If Tenant is a corporation, Tenant shall
deliver to Landlord, upon execution of this Lease, a certified copy of a
resolution of its board of directors authorizing the execution of this Lease
and naming the officers who are authorized to execute this Lease on behalf of
the corporation.
23.7 Limited Partnership. If Landlord herein is a limited partnership, it
is understood and agreed that any claims by Tenant against Landlord shall be
limited to the assets of the limited partnership. Tenant expressly waives any
and all rights to proceed against the individual partners, or its officers,
directors and shareholders or any corporate partners, except to the extent of
their interest in such limited partnership.
23.8 Captions. The captions and headings in this Lease are inserted only
as a matter of convenience and for reference, and they in no way define, limit
or describe the scope of this Lease or the intent of any provisions thereof.
23.9 Short Form Lease. Tenant shall not record a short form memorandum of
this Lease unless consented to in writing by Landlord. In the event a short
form memorandum is recorded, it shall be recorded in the office of the County
Recorder where the Project is located; provided, however, that the terms,
covenants and conditions of this Lease shall control such memorandum. In no
event shall Tenant record this Lease without prior written consent of Landlord.
23.10 Broker's Commissions. Each party represents to the other that it is
not obligated to any broker, finder or real estate or financing agent in
connection with this Lease except Oxford Commercial, Inc., Michael K.
Tipps/Michael A. Kennedy and each party agrees to defend, indemnify and hold
harmless the other from any claim, suit liability or demand made by the other
party by any other person, firm or corporation for brokerage fees, finder's
fees or commissions of other similar compensation with respect to this Lease or
any sublease on the Premises. Landlord agrees to pay Tenant's Broker a
commission in accordance with a separate agreement hereto attached as Exhibit
K. This provision shall survive termination of this Lease.
23.11 Attorneys' Fees. Notwithstanding the indemnity, hold harmless and
duty to defend provisions hereunder in the event of litigation regarding this
Lease, the losing party shall pay to the prevailing party its costs of
litigation including reasonable attorneys' fees.
23.12 Counterparts. This Lease may be executed in counterparts, each of
which may be deemed an original but all of which together shall constitute one
and the same instrument.
23.13 Sole Agreement. This Lease contains all of the agreements of the
parties hereto with respect to the lease transaction, and no prior agreements,
oral or written, or representations of any nature whatsoever pertaining to any
such matters shall be effective for any purpose unless specifically
incorporated in writing. This Lease may not be modified, amended, or altered
except by an agreement in writing signed by Landlord and Tenant.
23.14 Successors and Assigns. Subject to the provisions hereof relative
to an assignment, this Lease shall be binding upon and inure to the benefit of
the heirs, executors, administrators, successors and assigns of the respective
parties thereto. In the event Landlord shall sell or otherwise transfer its
interest in the Premises and as a part of such transaction shall assign its
interest as Landlord in and to this Lease, then from and after the effective
date of such transfer, Landlord shall have no further liability, including any
monetary obligations, under this Lease to Tenant for acts, errors or omissions
occurring after the effective date of such transfer, it being intended that the
covenants contained herein shall be binding upon Landlord and its successors
and assigns only during their respective periods of ownership of Landlord's
interest hereunder.
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23.15 Licensees; Concessionaires. For the purpose of this Lease, any
concessionaire or licensee of Tenant conducting business upon or from the
Premises shall be deemed to be a subtenant of Tenant, and all of the provisions
of this Lease relating to subletting and subtenants shall apply to the granting
of any concession or license and shall apply to the concessionaire or licensee
thereunder with the same force and effect as though such provisions thereto
specifically applied.
23.16 No Merger. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Landlord, operate as an assignment to it of any or all
subleases or subtenancies.
23.17 Modification for Lender. If, in connection with obtaining financing
for the Project of which the Premises are a part, the lender shall request
reasonable modifications in this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay or deter its consent thereto, provided
that such modifications do not increase the monetary obligations of Tenant
hereunder or adversely affect the leasehold interest hereby created.
23.18 Compliance with Law. Tenant shall not use the Premises or permit
anything to be done in or about the Premises which will in any way conflict
with any law, statute, ordinance or government rule or regulation or any
covenant, condition or restriction now in force or which may hereafter be
enacted or promulgated. Tenant, at its sole expense, shall comply with all
laws (including, without limitation, Environmental Requirements, as defined
herein, and laws regarding access for handicapped or disabled persons),
ordinances and regulations, and all declarations, covenants, and restrictions,
applicable to Tenant's use or occupation of the Premises, and with all
governmental orders and directives of public officers which impose any duty or
restriction with respect to the use or occupation of the Premises. Outside
storage, including without limitation, storage of trucks and other vehicles, is
prohibited without Landlord's prior written consent. Tenant shall cause
additional improvements to the Premises done after the Commencement Date to
comply with the Americans with Disabilities Act or similar state statutes or
local ordinances or any regulations promulgated thereunder, all as may be
amended from time to time (the "ADA"), and Tenant shall cause the Premises (and
to the extent required by the Premises, the Project) to hereafter comply with
the ADA. Notwithstanding the foregoing, as of the Commencement Date, Landlord
shall make the exterior of the Building and Landlord's Improvements defined in
Exhibit C and other work to be performed and described in Exhibit B in
compliance with the ADA. Landlord will cause the exterior of the Premises to
be in compliance with future changes as required by state or federal agencies.
23.19 Joint and Several Obligations. If more than one person or entity is
Tenant, the obligations imposed on that party shall be joint and several. If
Tenant is a partnership, the obligations of each general partner shall be joint
and several.
23.20 Light, Air, View. Any diminution or shutting off of light, air or
view by any structure which may be erected on lands adjacent to the Premises
shall in no way affect this Lease or impose any liability on Landlord.
23.21 No Offer. The submission of this document for examination and
discussion does not constitute an offer to lease, or a reservation of, or
option for, the Premises. This document will become effective and binding only
upon execution and delivery by Landlord to Tenant.
23.22 Legal Tender. Rent and all other sums payable under this Lease must
be paid in lawful money of the United State of America.
23.23 Conflict of Laws; Venue. This Lease shall be governed by and
construed pursuant to the laws of the state in which the Premises are situated.
The exclusive venue for any action brought under this Lease shall be in the
county in which the Premises are situated.
23.24 Indemnification. All indemnification, hold harmless and duty to
defend provisions hereunder shall survive termination of this Lease.
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23.25 Time is of the Essence. Time is of the essence in all things
pertaining to the performance of this Lease.
23.26 No Third Party Beneficiaries. There are no third party
beneficiaries with respect to this Lease.
23.27 Grammatical Construction. Where appropriate, the masculine gender
may include the feminine or neuter, and the singular may include the plural,
and vice versa.
23.28 Exhibits. All Exhibits attached hereto are incorporated by
reference herein.
23.29 Dispute Resolution and Arbitration.
(a) Negotiation Between Executives. The parties shall attempt in
good faith to resolve any dispute arising out or relating to this Lease
promptly by negotiation between executives who have authority to settle the
controversy and who are at a higher level of management than the persons
with direct responsibility for administration of this Lease. Any party may
give the other party written notice of any dispute not resolved in the
normal course of business. Within 15 days after delivery of the notice the
receiving party shall submit to the other a written response. The notice
and the response shall include (i) a statement of each party's position and
a summary of arguments supporting that position, and (ii) the name and
title of the executive who represents that party and of any other person
who will accompany the executive. Within 10 days after delivery of the
receiving party's notice, the executives of both parties shall meet at a
mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to attempt to resolve the dispute. All
reasonable requests for information made by one party to the other will be
honored. If the matter has not been resolved within 45 days of the
disputing party's notice, or if the parties fail to meet within 10 days,
either party may initiate arbitration of the controversy or claim as
provided hereinafter. All negotiations pursuant to this clause are
confidential and shall be treated as compromise and settlement negotiations
for purposes of the Federal Rules of Evidence, the Texas Evidence Code and
other states' rules and codes of evidence.
(b) Arbitration. Any dispute arising out of or relating to this
Lease or the breach, termination or the validity thereof, which has not
been resolved by the nonbinding meet and confer provisions provided in
Section 23.29(a), shall be settled by arbitration in accordance with the
then-current End Dispute-Judicial Arbitration and Mediation Services (JAMS)
rules for arbitration of business disputes by a sole arbitrator who shall
be a former superior court or appellate court judge or justice with
significant experience in resolving business disputes. Judgment upon the
award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration shall be Austin, Texas.
THE ARBITRATOR IS NOT EMPOWERED TO AWARD DAMAGES IN EXCESS OF COMPENSATORY
DAMAGES (INCLUDING REASONABLE ATTORNEYS' FEES IN ACCORDANCE WITH SECTION
23.11 ABOVE) AND EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO RECOVER
SUCH DAMAGES (INCLUDING, WITHOUT LIMITATION, PUNITIVE DAMAGES), IN ANY
FORUM. The arbitrator may award equitable relief in those circumstances
where monetary damages would be inadequate, such as either party's
violation of the confidential information provisions hereof. The
arbitrator shall be required to follow the applicable law as set forth in
the governing law section of this Lease.
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LANDLORD:
QUARRY LAKE BUSINESS CENTER, LTD., a Texas
limited partnership
By: QLBC, Inc., a Texas corporation, its
General Partner
By: /s/ DONALD J. REESE, PRESIDENT
------------------------------
Donald J. Reese, President
Date: April 26, 1996
--------------
TENANT:
STECK-VAUGHN COMPANY,
a Delaware corporation
By: /s/ ROY MAYERS, PRESIDENT AND CEO
----------------------------------
Name: Roy Mayers
Title: President and CEO
Date: May 2, 1996
-----------
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Exhibits intentionally omitted and will be furnished upon request of the
Commission
50
<PAGE> 1
THIRD RENEWAL AND EXTENSION AGREEMENT
WHEREAS, National Education Corporation ("Borrower") executed a
Revolving Line of Credit Note (the "Note") dated February 28, 1995, payable to
the order of Steck-Vaughn Publishing Corporation ("Lender"), in the original
principal sum of $10,000,000.00;
WHEREAS, the indebtedness evidenced by the Note, as renewed, modified
and extended, is secured by an Intercreditor Pledge Agreement Pledge and
Security Agreement (the "Security Agreement") dated January 19, 1996 between
Borrower, as Pledgor, and BZW Division of Barclays Bank PLC, as collateral
agent, covering, among other collateral, all of the issued and outstanding
shares of capital stock at any time owned by Borrower of Lender;
WHEREAS, Borrower and Lender have heretofore renewed, modified and
extended the Note pursuant to a Renewal and Extension Agreement (the "First
Renewal") dated as of December 31, 1995 and a Second Renewal and Extension
Agreement ("the Second Renewal") dated as of March 31, 1996 between Borrower
and Lender;
WHEREAS, Borrower has requested Lender to again renew and extend the
term of the Note;
NOW, THEREFORE, Borrower and Lender agree that:
1. After the effective date hereof, the Note shall be due and
payable as follows, to wit:
Interest only shall be due and payable monthly as it accrues
on the first day of each month beginning July 1, 1996 and
continuing on the first day of each month thereafter until
December 31, 1996 when the entire balance of unpaid principal
and accrued, unpaid interest shall be due and payable in full.
Each installment shall be applied first to the payment of
accrued interest payable on the unpaid principal balance, with
the remainder being applied to the reduction of principal.
2. The principal balance of the Note from time to time remaining
unpaid shall continue to bear interest at the rate of interest
applicable thereto as set forth in the Note, provided that the
interest payable shall not exceed the maximum amount that may
be lawfully charged.
After default or maturity, principal and past-due interest
shall bear interest at the rate of interest applicable thereto
as set forth in the Note, provided that the interest payable
shall not exceed the maximum amount that may be lawfully
charged.
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<PAGE> 2
3. All agreements between Borrower and Lender, whether now
existing or hereafter arising and whether written or oral, are
hereby limited so that in no contingency, whether by reason of
demand for payment or acceleration of the maturity of the
Note, as renewed, modified and extended, or otherwise, shall
the interest contracted for, charged or received by Lender
exceed the maximum amount permissible under applicable law.
If, from any circumstance whatsoever, interest would otherwise
be payable to Lender in excess of the maximum lawful amount,
the interest payable to Lender shall be reduced to the maximum
amount permitted under applicable law; and if from any
circumstance Lender shall ever receive anything of value
deemed interest by applicable law in excess of the maximum
lawful amount, an amount equal to any excessive interest shall
be applied to the reduction of the principal of the Note, as
renewed, modified and extended, and not to the payment of
interest, or if such excessive interest exceeds the unpaid
balance of principal of the Note, as renewed, modified and
extended, such excess shall be refunded to Borrower. All
interest paid or agreed to be paid to the holder of the Note,
as herein renewed, modified and extended, shall, to the extent
permitted by applicable law, be amortized, prorated,
allocated, and spread so that the interest thereon shall not
exceed the maximum amount permitted by applicable law. This
paragraph shall control all agreements between Borrower and
Lender.
4. Borrower hereby renews the Note and promises to pay to the
order of Lender at its offices at 1025 Northern Boulevard,
Roslyn, New York (or such other place of payment as the Lender
shall notify Borrower) the principal sum thereof as may be
advanced and remains unpaid, with interest as specified in the
Note, as renewed, modified and extended, and to perform all of
Borrower's obligations under the Note, the Security Agreement,
and any other documents pertaining thereto (the "Other
Documents").
5. Borrower covenants and warrants that the Note, the Security
Agreement and the Other Documents are not in default after
giving effect to the extension, modification and renewal
herein granted; there are no defenses, counterclaims or
offsets to the Note, the Security Agreement or the Other
Documents; that the Note and Security Agreement, as renewed,
modified and extended, are in full force and effect, and that
the Security Agreement shall continue to secure payment of the
indebtedness evidenced by the Note, as renewed, modified and
extended.
6. Borrower further covenants and warrants to Lender that the
execution and delivery of this Third Renewal and Extension
Agreement by Borrower will not be in contravention of or cause
a default under any agreement to which Borrower is a party.
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<PAGE> 3
7. THE NOTE, AS RENEWED, MODIFIED AND EXTENDED, SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS
IN THE STATE OF NEW YORK.
8. The Note, the Security Agreement and the Other Documents shall
remain in full force and effect as renewed, modified and
extended by the First Renewal, the Second Renewal and by this
Third Renewal and Extension Agreement. Without limiting the
foregoing the modifications to the Note contained in paragraph
numbers 1 and 2 of the Second Renewal pertaining to reducing
the maximum amount that may be drawn under the Note and
modifying an Event of Default under the Note shall continue to
remain in full force and effect.
9. This Third Renewal and Extension Agreement may be executed in
duplicate originals and each duplicate shall have the same
force and effect as an original.
EXECUTED to be effective as of June 30, 1996.
"BORROWER"
NATIONAL EDUCATION CORPORATION
By: /s/ KEITH K. OGATA
---------------------------------------
Name: KEITH K. OGATA
----------------------------------
Title: VICE PRESIDENT, CFO AND TREASURER
---------------------------------
"LENDER"
STECK-VAUGHN PUBLISHING CORPORATION
By: /s/ FLOYD D. ROGERS
---------------------------------------
Name: FLOYD D. ROGERS
---------------------------------
Title: VICE PRESIDENT OF FINANCE AND CFO
---------------------------------
53
<PAGE> 1
THIRD AMENDMENT TO
STOCK OPTION AGREEMENT
This Third Amendment to Stock Option Agreement is made and entered
into by and between National Education Corporation, a Delaware Corporation
("Company") and Steck-Vaughn Publishing Corporation ("Optionee") as of June 30,
1996.
Recitals
1. Company and Optionee entered into that certain Stock Option
Agreement (the "Stock Option Agreement") dated as of February 28, 1995 pursuant
to which the Company granted Optionee a stock option to purchase from the
Company 290,000 shares of the stock of Optionee owned by the Company.
2. The Stock Option Agreement has heretofore been amended by that
certain First Amendment to Stock Option Agreement (the "First Amendment") dated
as of December 31, 1995, and that certain Second Amendment to Stock Option
Agreement (the "Second Amendment") dated as of March 31, 1996.
3. Company and Optionee desire to again amend the Stock Option
Agreement to extend certain dates and to amend certain other matters contained
therein.
Agreement
Now, Therefore, for $10.00 and other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged by the Company and
Optionee hereby agree as follows, to wit:
4. Section 2 of the Stock Option Agreement is hereby amended in
its entirety to hereafter read as follows, to wit:
2. Term of Option
Unless earlier exercised pursuant to Section 3 of this
Agreement, the Option shall terminate on, and shall not be exercisable
after the earlier of (a) December 31, 1997, or (b) the date, if any,
the Option is terminated pursuant to Section 8 below.
5. Subsection 3.1 of the Stock Option Agreement is hereby amended
in its entirety to hereafter read as follows, to wit:
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<PAGE> 2
3.1 Exercisability
This Option may only be exercised, in whole or in part, once
at any time after the earlier of (i) February 28, 1997 or (ii) any
time one or more Events of Default (which have not been cured within
any applicable cure period) have occurred under and as defined in that
certain Revolving Line of Credit Note dated February 28, 1995 in the
original principal amount of $10,000,000.00 executed by the Company
and payable to the order of Optionee as renewed, modified and extended
by that certain Renewal and Extension Agreement (the "First Renewal")
dated as of December 31, 1995, that certain Second Renewal and
Extension Agreement (the "Second Renewal") dated as of March 31, 1996
and that certain Third Renewal and Extension Agreement (the "Third
Renewal") dated as of June 30, 1996 and each between the Company and
Optionee (said Revolving Line of Credit Note as so renewed, modified
and extended by said First Renewal, Second Renewal and Third Renewal
being herein referred to as the "Note"), until the expiration of the
term of the Option as provided in Section 2 hereof. For purposes
hereof, a business day shall mean any day which is not a Saturday,
Sunday or federal legal holiday.
6. Section 8 of the Stock Option Agreement is hereby amended in
its entirety to hereafter read as follows, to wit:
8. Redemption
At any time on or after the Credit Line Termination Date
(hereafter defined) and provided that the Option has not theretofore
been exercised, the Company may redeem the Option upon written notice
of such redemption and payment of the Redemption Price (hereafter
defined) by the Company to Optionee. Upon the written notice of such
redemption and payment of the Redemption Price by the Company to
Optionee on or after the Credit Line Termination Date, the Option, to
the extent not theretofore exercised, shall terminate for all purposes
and shall not be of any further force and effect; provided that such
termination shall not impair or affect Optionee's rights with respect
to Shares previously exercised pursuant to the Option or Shares
previously acquired by Optionee pursuant to the Option. The
"Redemption Price" shall mean the greater of (i) the Yield Amount
(hereafter defined) plus the Adjustment Amount (hereafter defined) or
(ii) $1,012,500 plus $1,250 per day for each day after June 30, 1996
until and including the earlier of (x) December 31, 1996 or (y) the
date of payment of the Redemption Price by the Company to Optionee.
The "Yield Amount" shall mean an amount equal to (i) twenty-five
percent (25%) per annum on the principal balance from time to time
outstanding under the Note from the Grant Date to and including the
Credit Line Termination Date; less (ii) all interest which at any time
has accrued under the Note from the Grant Date to and including the
Credit Line Termination Date. The "Adjustment Amount" shall mean an
amount equal to twenty-five percent (25%) per annum on the Yield
Amount from the Credit Line Termination Date to and including the date
of payment of the Redemption Price by the
55
<PAGE> 3
Company to Optionee. For purposes of this Section 8, the Credit Line
Termination Date means (i) December 31, 1996, if the indebtedness
evidenced by the Note is paid in full on such date and the Company has
not prior to December 31, 1996 agreed by a written notice delivered to
Optionee that the revolving line of credit available under and
evidenced by the Note has been terminated, (ii) the date on which the
indebtedness evidenced by the Note is fully paid, if the indebtedness
evidenced by the Note is not fully paid on December 31, 1996, or (iii)
the date on which both the indebtedness evidenced by the Note has been
fully paid and the Company has agreed by a written notice delivered to
Optionee that the revolving line of credit available under and
evidenced by the Note has been terminated, if the Company has agreed
by a written notice delivered to Optionee that the revolving line of
credit available under and evidenced by the Note is terminated prior
to December 31, 1996. The Redemption Price may be paid by the Company
to Optionee, at the Company's option, in either or a combination of
(i) cash, or (ii) shares of Optionee's common stock owned by the
Company having a fair market value equal to the Redemption Price (or
such balance thereof not otherwise paid in cash) based upon the close
price for shares of Optionee's common stock on the NASDAQ National
Market on the most recent day that Optionee's shares of common stock
were traded on the NASDAQ National Market prior to the date of full
payment of the Redemption Price by the Company to Optionee, provided
that such shares of Optionee's common stock paid in payment of the
Redemption Price are paid and delivered by the Company to Optionee
free and clear of all liens and encumbrances. In the event Optionee's
common stock is no longer traded on the NASDAQ National Market, then
the fair market value of Optionee's common stock for purposes of
determining payment of the Redemption Price shall be determined on
such other basis as the Company and Optionee shall mutually agree.
The Redemption Price may be prepaid by the Company to Optionee in such
proportions and at such times as the Company may elect provided that
the Option shall not be redeemed until the Redemption Price is fully
paid and the other terms of this Section 8 are complied with by the
Company. Notwithstanding anything contained in this Section 8 to the
contrary, and unless Optionee otherwise agrees in writing, the Company
shall have no right to redeem and terminate the Option pursuant to
this Section 8 at anytime any one or more Events of Default (as
defined in the Note) exists and is continuing. Nothing contained in
this Agreement (i) shall be construed to extend or to commit to extend
the revolving line of credit available under the Note or the maturity
of the Note past December 31, 1996; or (ii) impair or affect
Optionee's rights and remedies with respect to any collateral securing
the indebtedness evidenced by the Note. The redemption of the Option
pursuant to this Section 8 may be made after notice of exercise of the
Option has been given by the Optionee to the Company provided that
written notice of such redemption and payment of the Redemption Price
is made by the Company to Optionee prior to the Exercise Date
specified in Optionee's notice of exercise of the Option to be given
to the Company pursuant to Section 3.2.
56
<PAGE> 4
7. THIS THIRD AMENDMENT TO STOCK OPTION AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
8. The Company covenants and warrants to Optionee that the
execution and delivery of this Third Amendment to Stock Option Agreement by the
Company is not in contravention of and will not cause a default under any
agreement to which the Company is a party.
9. To the extent of any conflict between the terms of this Third
Amendment to Stock Option Agreement and the First Amendment or the Second
Amendment, the terms and provisions of this Third Amendment to Stock Option
Agreement shall govern and control.
10. Except as amended hereby and by the First Amendment and the
Second Amendment, the Stock Option Agreement shall remain in full force in
effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have entered into this Third Amendment
to Stock Option Agreement as of the date first above written.
"COMPANY" "OPTIONEE"
NATIONAL EDUCATION CORPORATION STECK-VAUGHN PUBLISHING
CORPORATION
By:/S/ KEITH K. OGATA By: /S/ FLOYD D. ROGERS
------------------ ---------------------
Name: KEITH K. OGATA Name: FLOYD D. ROGERS
---------------- --------------------
Title: V.P., CFO AND TREASURER Title: V.P. OF FINANCE AND CFO
------------------------- -------------------------
57
<PAGE> 1
STECK~VAUGHN
PUBLISHING CORPPORATION
EXHIBIT 11.1
To Form 10-Q dated June 30, 1996
CALCULATION OF EARNINGS PER SHARE
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------------------- ------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (2,976) $ 2,077 $ (2,179) $ 2,609
==================== ==================
Common Stock:
Shares outstanding from the beginning
of the period 14,317 14,313 14,313 14,338
Shares issued,weighted for period held 3 -- 4 --
Assumed exercise of stock options using the 109 44 90 23
treasury stock method
Purchase of treasury shares,
weighted for period held -- -- -- (16)
-------------------- ------------------
Weighted Average Shares Outstanding 14,429 14,357 14,407 14,345
==================== ==================
Earnings (Loss) Per Share $ (0.21) $ 0.14 $ (0.15) $ 0.18
==================== ==================
</TABLE>
58
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,682
<SECURITIES> 1,399
<RECEIVABLES> 18,285
<ALLOWANCES> 1,421
<INVENTORY> 21,090
<CURRENT-ASSETS> 53,436
<PP&E> 13,554
<DEPRECIATION> 4,691
<TOTAL-ASSETS> 82,319
<CURRENT-LIABILITIES> 15,494
<BONDS> 0
<COMMON> 37,001
0
0
<OTHER-SE> (1,833)
<TOTAL-LIABILITY-AND-EQUITY> 82,319
<SALES> 18,296
<TOTAL-REVENUES> 18,296
<CGS> 5,704
<TOTAL-COSTS> 10,331
<OTHER-EXPENSES> 4,565
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 218
<INCOME-PRETAX> (2,287)
<INCOME-TAX> 689
<INCOME-CONTINUING> (2,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,976)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
