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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to ___________
Commission File Number 0-21730
STECK-VAUGHN PUBLISHING CORPORATION
(Exact name of registrant as specified in charter)
Delaware 33-0556929
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4515 Seton Center Parkway, Suite 300, Austin, Texas 78759-8365
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (512) 343-8227
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock, $.01 par value The Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant based on the average bid and asked prices of
such stock as of February 28, 1997, was $28,005,662.
The number of shares of registrant's Common Stock outstanding as of
February 28, 1997, was 14,345,917.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from material that will be
filed with the Securities and Exchange Commission within 120 days of
registrant's fiscal year end (December 31, 1996), as part of a Proxy Statement
for the registrant's Annual Meeting of Stockholders to be held May 29, 1997.
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PART I
ITEM 1. BUSINESS
General
Steck-Vaughn Publishing Corporation (the "Company") is one of the nation's
largest publishers of supplemental educational materials used in elementary,
secondary and adult education. The term "supplemental materials" traditionally
refers to softcover, curriculum-based books, workbooks and other support
materials that are used in conjunction with or instead of hardcover basal
textbooks. More recently, "supplemental materials" often includes educational
computer software programs. The Company also is a significant publisher and
distributor of reference books for the children's and young adult library
market.
National Education Corporation, a Delaware corporation, ("NEC") is the parent
corporation and owner of 83% of the Company. The Company was incorporated in
Delaware on March 10, 1993, as a wholly owned subsidiary of NEC. Steck-Vaughn
Company, a Delaware corporation, was acquired by NEC in 1979 and was a direct
wholly owned subsidiary of NEC from that time until April 2, 1993, when NEC
contributed the capital stock of Steck-Vaughn Company then held by NEC to the
Company. Steck-Vaughn Company, together with its predecessors, has been a
publisher of educational materials since 1936. The Company itself is a holding
company. The business of the Company is conducted by its subsidiaries,
Steck-Vaughn Company, SV Distribution Company, Edunetics Corporation and
Edunetics Limited. (See "Notes to Consolidated Financial Statements", Note 1.)
In July 1993, the Company closed an initial public offering of 2,668,000 shares,
then constituting 18.3% of the Company's outstanding shares. During 1994 the
Company announced a program to repurchase in the public market up to 500,000
shares of its Common Stock; as of December 31, 1995, the Company had repurchased
255,000 shares in open market transactions, effectively raising NEC's ownership
of the Company's stock from 81.7% to 83.1%. No additional shares were
repurchased by the Company in the year ended December 31, 1996.
Company Developments in 1996
The following is a discussion of significant developments in the Company's
business in the year ended December 31, 1996. A discussion of the Company's
results of operations for 1996 appears in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 15
below.
The Company's performance was strong in 1996 in its traditional print-based
product lines in the Company's three business segments: elementary/high school
education ("El/Hi"), adult education and library. Additionally, the Company made
significant efforts in 1996 to strategically position itself as a significant
publisher of educational software products for the school marketplace. The
Company believes that these efforts are important to the continuing success of
the Company's business as educators increasingly use technology-based
supplemental materials in addition to, and in conjunction with, traditional
print-based materials.
In May 1996, the Company acquired Edunetics Ltd. ("Edunetics"), an Israel
corporation that develops, markets and supports instructional software for
grades K-12. The Edunetics product line consists of nearly 1,000 hours of
curriculum-based computer software in the areas of science and math. In
addition, Edunetics' expertise in the development of educational software
products adds to the Company's product development capabilities enabling the
Company to develop multiple-media products integrating both print and software
formats in the preparation of curriculum-based content. In June 1996, Edunetics
launched its first eight multimedia CD-ROM titles as part of a 30-program series
to cover the K-5 integrated math, science and social studies curriculum. (See
"Principal Products -Elementary and Secondary Education Market.")
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In September 1996, Anita Kopec replaced Roy E. Mayers as President and Chief
Executive Officer of the Company. The selection of Ms. Kopec was based on her
many years of experience in publishing educational materials, particularly
including educational software products for the school market. In addition, in
January 1997, Ms. Kopec hired a new Executive Vice President-Research and
Development and a new Vice President-Marketing of the Company. Both of these new
officers have previous experience in the development and/or marketing of
educational technology products. (See "Executive Officers of the Company.")
In the fourth quarter of 1996, the Company realigned its sales force in part to
strengthen the Company's marketing of its software-based products. The Company
entered into agreements with 99 independent sales representatives nationwide to
focus solely on the Company's library segment which experienced dramatic growth
in 1996, thereby allowing the Company's traditional sales staff to concentrate
more on marketing the Company's expanding line of technology-based products.
Additionally, in January 1997, the Company hired six new account specialists
with previous software sales experience to further strengthen the Company's
ability to successfully market its software products. (See "Principal Methods of
Distribution.")
The Company continued its efforts in the year to increase its market share
through indirect channels. In December 1995, the Company acquired substantially
all of the assets of Summit Learning, Inc. ("Summit"), a well-established direct
response marketing company with sales aimed at classroom teachers and other key
site-based decision makers as well as consumers and focusing primarily on math
and science manipulatives and kit-based products. In 1996, the Company expanded
the product offerings in the Summit catalogs to include products proprietary to
the Company as well as additional non-proprietary products and increased the
quantity of Summit catalogs mailed. (See Principal Methods of Distribution -
Catalog Sales, Advertisements and Exhibits.") In January 1997, a new General
Manager of Summit was hired by the Company to continue expanding this channel of
distribution.
Principal Markets
Approximately 52 million El/Hi students currently attend more than 106,000
public and private elementary and secondary schools throughout the country.
Another 4.0 million adult education students take courses at numerous public
high schools, community colleges, adult learning centers, correctional
facilities, and other public and job site locations. There are approximately
16,000 public libraries and branches that contain reference materials for El/Hi
students, in addition to the libraries located in schools.
Elementary and Secondary Education
El/Hi education has undergone significant changes over the last quarter century.
The range of skill levels and educational needs of classroom populations has
become increasingly diverse. School systems are facing larger class sizes,
curtailment of stand-alone special education and remedial programs and, in some
parts of the country, large non-English speaking immigrant populations. At the
same time, teachers have become better trained and more innovative, recognizing
the need to tailor instructional materials to the abilities of individual
students rather than to the class as a whole. School administrators are facing
budgetary constraints that limit the amount of funds available for educational
materials, yet increasingly are being held accountable by concerned parents for
the quality of the education their children receive. As a result of the
foregoing, educators are employing new teaching methods and philosophies. The
Company believes that supplemental materials are more adaptable to these new
methods and philosophies than are traditional hardcover basal textbooks which
typically are written to meet the skills and educational needs of "average"
students within a given grade level.
Additionally, the instructional materials marketplace has continued its
trend toward site-based selling, as more personnel at the school and facility
level, including individual teachers, have become involved in the purchasing
decisions for educational materials. Also, there is a trend in El/Hi education
toward returning to skills-based instruction in such areas as spelling, math and
reading as well as an increased emphasis on testing and assessment.
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Adult Education
Adult education programs in the United States continue to be important due to a
variety of factors, including high adult illiteracy rates, the large number of
high school dropouts who need to establish qualifications for job opportunities
or college enrollment, the growth in the number of immigrants who need to
develop English language skills in order to integrate into American society, and
the large pool of underskilled workers who need education programs in order to
obtain employment or improve their job opportunities. These programs are
designed to provide adults with a broad range of educational opportunities
including basic education in reading, writing and math, occupational training
for career enhancement or career change, and daily living skills.
Library
School and public libraries are continually seeking books specifically designed
for use by students at varying levels. As in the El/Hi market, there has been a
shift in purchasing decisions from the district level to the school level, with
librarians having increasing responsibility for the buying decisions to support
classroom needs. The Company believes that multicultural, high interest,
visually pleasing library materials for all levels of readers are attractive to
librarians seeking to expand their fiction and nonfiction collections.
Principal Products
The Company publishes and distributes supplemental educational materials used in
elementary, secondary and adult education as well as hardcover reference books
for the children's and young adult library market. The supplemental materials
span all ages, learning needs and subject areas and are multicultural in
presentation. For elementary and secondary students, the Company's products
encompass most curriculum areas, not only for mainstream students, but also for
children with remedial and special needs. The hardcover library books, which
mostly cover contemporary nonfiction topics, are presented at levels that enable
students in kindergarten through high school to research select areas of current
curricula. The Company's products may be used with the products of basal
textbook publishers; however, the Company does not develop or market its
products in conjunction with these publishers.
Elementary and Secondary Education Market
The Company's supplemental materials in the El/Hi market support the instruction
of reading, language arts, test preparation and assessment, social studies,
science, history, geography, mathematics, literature and health. The Company's
principal products in this market include the following:
READING
Steck-Vaughn Phonics is a five-book series with five teacher's editions
and picture cards for grade levels K-4. The series builds reading and language
skills through phonics analysis, structural analysis, dictionary clues and
context clues.
Pair-It Books(TM), released in 1996, is a 50-book series with ten Big
Books, ten audio cassettes and a teacher's guide for grade levels K-2. The
series pairs fiction and nonfiction books with high interest topics emphasizing
language and phonics concepts.
LANGUAGE ARTS
Steck-Vaughn Spelling is an eight-book softcover series with activity
masters for grade levels 2-8, comprehension masters for grade levels 7-8, and
eight teacher's editions. The series teaches spelling in the context of reading,
writing, and language arts and supports all major basal reading and language
arts programs.
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Vocabulary Connections is an eight-book series with correlated software
for grade levels 1-8 that presents a content-area approach to vocabulary
development.
Language Exercises includes an eight-book series with a review book and
nine teacher's guides for grade levels 1-8 that emphasize language mechanics,
writing and study skills.
TEST PREPARATION AND ASSESSMENT
Test Best(R) is a multiple-book series with teacher's editions for grade
levels K-8 that is a test-preparation program proven to boost scores on the
California Achievement Tests (CAT/5)(R), the Iowa Test of Basic Skills(R), the
Stanford Achievement Test(R), the Comprehensive Tests of Basic Skills(R) and the
Metropolitan Achievement Tests (MAT 7)(R).
Strategies for Success is a Steck-Vaughn/Berrent Publications
multiple-book series with teacher resource books for grade levels 2 through high
school that is a test preparation and skills improvement program covering five
levels in reading, writing and mathematics.
Soaring Scores on the CTB Reading Test is a six-book series for grade
levels 3-8 that is a test preparation and skills improvement program covering
six levels in reading comprehension.
SOCIAL STUDIES
Go West! The Homesteader's Challenge(TM) is an Edunetics interactive
multimedia CD-ROM product and printed user's guide for grade levels 4-8 that
simulates pioneer life and supports curriculum objectives in social studies as
well as in the areas of language arts, mathematics, geography, economics,
science and technology. In December 1996, the product received the Newsweek
Editors' Choice(TM) award as one of the 50 best in children's CD-ROM products.
America's Story is a two-book softcover series, also available as a
one-book hardcover edition, with a teacher's guide and teacher's resource binder
presenting current American history content for students with limited reading
skills in grade levels 5-10.
SCIENCE
Message in a Fossil: Uncovering the Past(TM) is an Edunetics interactive
multimedia CD-ROM product and printed user's guide for grade levels 1-7 that
simulates a paleontologist's excavation site and supports science curriculum. In
1996, the product was recognized by "Technology and Learning" magazine as one of
the top 50 software titles in the U.S.
The Wonders of Science is a six-book series plus six teacher's editions
for grade levels 7-12 presenting a complete core science program for students
with limited reading skills.
Adult Education Market
The Company's extensive line of adult education products covers a wide range of
adult learning needs, including General Education Development ("GED"), Adult
Basic Education ("ABE"), English as a Second Language ("ESL") and general
self-improvement and job skills programs. The Company believes it is the only
publisher of adult education materials offering "one-stop shopping" for all
adult educational material needs.
In 1996, the Company's adult education product line benefitted from the addition
of the Educational Development Laboratories, Inc. ("EDL") product line, which
offers computer-based instructional programs in the areas of basic reading,
vocabulary and writing for adult and secondary students complementary to the
Company's Pre-GED and
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GED software products. The Company acquired substantially all of the assets of
EDL in October 1995. The Company's principal products in the adult education
market include the following:
GED
The Company sells a comprehensive line of GED materials including pre-GED
and GED test preparation materials and is the exclusive distributor of the
official GED Practice Tests sanctioned by the GED Testing Service of the
American Council for Education.
Pre-GED 2001(TM) and GED 2000 are software versions of the Company's
pre-GED and GED preparatory materials, respectively. GED 2001(TM), a newly
revised version of GED 2000, will be released in 1997.
ESL
Real-Life English is a five-book series with four workbooks, five sets of
audio cassettes and five teacher's editions for adults and young adults with
limited or no English reading skills presenting an interactive approach to
language and life skills.
LITERACY
Learning 100(R) and Learning 100(R) On-Line, Steck-Vaughn-EDL products,
are print and interactive software materials, respectively, that are sold
individually or together and present an integrated language system teaching
vocabulary words and corresponding language skills at ten reading levels
enabling secondary and adult learners to acquire higher-level communication and
thinking skills.
Reading Strategies Software, a Steck-Vaughn-EDL product, is a
software-based reading comprehension program, including vocabulary and spelling
skills, covering nine reading levels.
Library Market
The Company's library product offerings include encyclopedias, a complete atlas
of the world, and over 2,000 other titles. These products cover mostly
nonfiction topics reflecting current curricula, including social studies,
science and health, as well as some fiction, classics and the arts. The
Company's library offerings are presented at levels that enable students in
kindergarten through high school to research and understand various topics in
selected areas of curriculum and instruction. Many of the library products
address contemporary issues, such as the environment, social pressures, and
culture. Others provide hands-on science experiments for children primarily in
kindergarten through grade eight.
Many of the Company's library products are offered pursuant to exclusive
distribution agreements with other library publishers. In 1996, the Company
entered into an agreement with Wayland Publishers Limited ("Wayland"), one of
England's largest library and reference publishers, granting the Company
exclusive distribution rights in the United States and, as of January 1997,
Canada for Americanized editions of 200 pre-existing Wayland titles as well as
80 new Wayland titles to be released each year during the next five years ("New
Titles"). Under this unique arrangement, the New Titles will be co-developed by
Wayland and the Company, and the Company will own the copyrights to the New
Titles in the United States.
In September 1995, Steck-Vaughn entered into an exclusive distribution agreement
with Abdo & Daughters ("Abdo"), a small but well-respected library publisher.
Abdo publishes a variety of high interest/low readability books for grades K-8.
The titles include a 54-book animal series as well as many biographies and
social studies topics, including a series on the Holocaust and a complete series
on environmental studies. This agreement resulted in the addition of 100 Abdo
titles to the Company's library product line. The Company also is the exclusive
distributor to the schools
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and public libraries markets in the United States of the Larousse Kingfisher
Chambers, Inc. line of books. This 52-title product line includes several
multivolume encyclopedias and foreign language dictionaries.
The Company's principal products in the library market include the following:
Portrait of America, newly revised for the 1996 school year, is a 53-book
reference collection for ages 9-13 presenting comprehensive profiles of each of
America's 50 states and certain territories focusing on the history, economy,
culture and future.
Raintree Steck-Vaughn Illustrated Science Encyclopedia, newly revised for 1997,
is a comprehensive 24 volume resource on science, nature and technology for ages
9-15 that meets the National Science Education Standards developed by the
National Research Council and the Benchmarks for Science Literacy developed by
the American Association for the Advancement of Science.
Remarkable World, newly launched in 1996 as a result of the Company's agreement
with Wayland, is a 16-book series with high interest content for students ages 9
through adult with limited reading skills.
Postcards From . . ., expanded in 1996, is a 24-book series covering 24
countries around the world and describing features of each country through a
"postcard" that could have been written by a child visiting that country.
Inside the NFL is a 30-book series from the Abdo collection that is a
comprehensive high-interest resource on the National Football League including
individual profiles on each team in the league.
Product Development
In 1996, the Company introduced the following numbers of new products and
product revisions: 129 new products and 25 product revisions for the elementary
market; 76 new products, including 51 EDL titles, and six product revisions for
the secondary and adult education markets; and 270 new titles for either new or
continuing series in the library market. Each product consists of one or more
components, including books, workbooks, software programs, maps, audio tapes,
manipulatives, teacher's manuals and other resources.
The Company's investment in Company-sponsored product development in 1996, 1995
and 1994 totaled approximately $13.0 million, $9.0 million and $8.0 million,
respectively.
New Products
In January 1997, the Company implemented a new internal organizational structure
for product development under which a management team headed by a project leader
is appointed and responsible for all aspects of development of a product or
product line from budgeting and strategic planning to resource planning and
production. This new structure enables the Company to fully integrate the
research and development efforts and capabilities of Edunetics as to
software-based products and the Company's development of its more traditional
print-based products.
The Company generally develops products based upon extensive formal quantitative
and qualitative market research and feedback about curriculum needs from
teachers, school administrators, librarians and others. In the development of
its print-based products, the Company typically commissions an independent
writer or outside development house to author the product on a fee or royalty
basis. The use of development houses allows the Company to develop a large
number of product components each year while maintaining a relatively small
internal production staff. Generally, manuscripts are delivered to the Company
by the author or development house on a computer disk and are edited
electronically. The Company's graphic designers and electronic publishing group
plan the layout and prepare illustrations and photos, while editors create and
revise the text. The Company utilizes a sophisticated desktop
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publishing network to minimize the cost and development time involved. The end
product, already on a computer disk, is sent to an outside service to be
transferred to film before being sent to the printer.
The majority of the Company's software-based products are developed completely
internally through the coordinated efforts of the Edunetics product development
staff in Israel and Plano, Texas, and the Company's product
development staff in Austin, Texas. Certain of the Company's software-based
products are developed utilizing outside services. Products are designed and
developed to meet specific instructional objectives, maximize the use of the
technology involved, integrate with the Company's print-based products either
existing or under development, and appeal to a national market.
All products under development are extensively reviewed internally and tested
with regional teacher focus groups to determine whether they meet the
requirements of the target market. Software-based products generally are tested
both with teacher groups at the Alpha stage of development (product is fully
designed but not fully programmed) and with student groups in classroom settings
at the Beta stage of development (product is fully programmed).
Approximately 70% of the Company's new library product offerings (other than
those acquired pursuant to distribution agreements) are developed in and
imported from England. The foreign publisher typically bears most of the
development costs, with the Company paying a contribution to those costs,
including adaptation costs, plus the cost of duplicate film and royalties. This
import/conversion procedure generally costs the Company significantly less than
the cost of completely developing the same product in-house.
Revisions
The Company's educational materials generally have an initial life of five to
ten years. Revising a successful product and adapting it to a changing market
may extend the life of the product and generate significant additional revenue
for a relatively small investment. For example, one of the Company's
best-selling programs, Language Exercises, first was published in the early
1940's and has been revised from five to eight times, most recently in 1994.
Similarly, Wonders of Science, Steck-Vaughn GED, Steck-Vaughn Spelling, the
53-volume Portrait of America series, and the 24-volume Raintree Illustrated
Science Encyclopedia recently were revised and reintroduced to the market.
Principal Methods of Distribution
National Sales Organization
The Company sells its products primarily through its more than 140-person
national sales organization, of which 91 persons are field sales representatives
who make direct personal contact with school district personnel, teachers,
principals and adult educators. These sales personnel regularly meet with
individual administrators and educators providing catalogs, sample materials and
other product information for the prospective purchasers to review and
soliciting feedback on the Company's products. The Company believes that having
direct access to individual teachers, principals and librarians is important as
purchasing decisions particularly as to supplemental educational materials
increasingly are being made at the school site level rather than at the school
district level. In comparison, basal textbook publishers direct their selling
efforts principally to the school district level.
The field sales personnel are divided into two distinct sales groups. One group
focuses on the elementary product line and the other group focuses on the high
school and adult education product lines. This structure allows the sales
representatives to develop and enhance their expertise as to the Company's
constantly expanding line of products, focus on particular market niches and
provide the Company's customers with the best possible support. In 1996, the
Company's field sales representatives participated in training to better
represent the Company's software-based products. Additionally, in January 1997,
the Company hired six new "Curriculum Integration Specialists" to work with the
Company's other sales representatives as well as independently in providing
technology-based solutions and
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multiple-media products to larger customers with special curriculum needs. Each
of these new sales specialists has experience in selling technology products to
large accounts.
In addition to the Company's field sales representatives, sales personnel
conduct telemarketing from the Company's offices. The telemarketing group was
expanded in 1996 to include 24 people who focus solely on sales of the
Company's library product line to school and public libraries; seven people who
focus on sales of the Company's software-based and multiple-media products to
schools; and five people who represent the Company's entire product line in
states in which the Company has no regular field sales representatives.
Independent Sales Representatives
In October 1996, the Company entered into agreements with 99 independent sales
representatives nationwide to represent the Company's growing library product
line to school and public libraries. The Company also has agreements with
independent sales representatives and/or distributors to sell the Company's
entire product line in Australia, New Zealand, the Caribbean, Mexico, Puerto
Rico, Japan, South Korea, Singapore and Taiwan and to schools for dependents of
U.S. military personnel in Europe, Africa and the Middle East. In Canada,
substantially all of the Company's El/Hi and adult education products are
distributed exclusively by Gage Educational Publishing Company, a division of
Canada Publishing Corp., ("Gage") pursuant to a five-year agreement between the
Company and Gage effective December 1, 1995. Also in Canada, the Company's
library product line is distributed exclusively by Saunders Book Co. pursuant to
a five-year agreement effective January 1, 1996. Additionally, independent sales
representatives sell the Company's products to retail book stores.
The Company's independent sales representatives work on a commission basis,
receiving no salary or expense reimbursement. Distributors buy the Company's
products for their own account at a discount for resale to their customers.
Sales to retail book stores accounted for less than 2% of the Company's 1996
revenues. Arrangements with retail book stores generally permit the return for
credit of unsold products.
Catalog Sales, Advertisements and Exhibits
The Company also sells its products through direct mail and catalogs. The
Company produces catalogs for each market segment as well as catalogs of the
Company's technology-based products. These catalogs function both as a sales
tool for the field sales force and as direct mail solicitation documents. Summit
catalogs include products proprietary to the Company as well as non-proprietary
products in the areas of math and science and are targeted at classroom teachers
and other key site-based decision-makers. Summit's Young Explorers catalog is
targeted at the consumer market. Mailings of catalogs and other product guides
and promotional materials were made by the Company over 30 times in 1996,
including six mailings of a total of 4,850,000 copies of Summit catalogs during
the year and three mailings of a total of 1,800,000 copies of the Young
Explorers catalog during the fall/winter gift-giving season. The Company
anticipates increasing the number of mailings of its Summit and Young Explorers
catalogs in 1997. The Company believes such direct marketing efforts complement
the efforts of its national sales organization and enhance the Company's ability
to reach persons making purchasing decisions at every level within each school
district.
The Company places extensive advertisements in all major trade journals and
trade magazines. The Company's representatives also attend more than 1,000
national, state and local exhibits and conventions annually ranging from
three-hour district or countywide gatherings to national conventions at which
the Company may display products for up to five days.
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Manufacturing, Warehousing and Delivery
Manufacturing
The majority of the Company's books and software products are manufactured by
independent companies located throughout the United States. The Company believes
that it has sufficient alternative sources of manufacturing services to meet its
foreseeable needs. Vendors generally are selected on the basis of competitive
bidding, quality, schedules and delivery dates. To take advantage of certain
manufacturing economies, several library series are manufactured outside the
United States.
The availability and prices of paper are important to the Company's business.
Historically, paper prices have been volatile, and the Company believes that no
reasonable estimate can be made as to the potential effect of fluctuating paper
prices on the Company's business in the future. Notwithstanding, the Company's
continually growing product line and substantial reprint needs have enabled it
to negotiate favorable prices and quantity discounts with key vendors of paper,
printing and binding.
Warehousing and Delivery
The Company owns a 101,000-square-foot distribution center located in Austin,
Texas, which houses its inventory of El/Hi, library and adult education
materials. A new automated warehouse management system was implemented at this
facility in 1996 to improve order processing and customer service. At December
31, 1996, the new system was fully operational. Additionally, the Company leases
approximately 23,000 square feet of warehouse space in Ft. Collins, Colorado to
meet the needs of the Summit Learning distribution operation.
The accurate and prompt fulfillment of product orders following receipt are
important factors in the Company's customer service and in closing a sale. The
industry norm is to ship products within one week of receipt of a customer
order, and in general the Company meets or betters this timetable. The Company
ships its materials to customers via common carrier and the United States Postal
Service.
Due to the importance of shipping products promptly upon receipt of a customer
order, the Company maintains a reasonable inventory of current products. At
December 31, 1996, and at December 31, 1995, the Company had virtually no orders
unshipped.
Consignment to in-state depositories often is required by those states that
prohibit sale of certain educational materials unless the materials first are
adopted by the state's educational authorities, a requirement more common for
basal textbooks than for supplemental materials. Less than 3% of the Company's
inventory currently is consigned to book depositories.
Educational Funding
Most funding for educational materials is dependent on government support from
one or more sources. The purchase of supplemental educational materials by
school districts generally is funded from state and local taxation revenues and,
to a far lesser extent, from federal funding. The Company's sales of materials
for the special education market are dependent to a significant extent on
continued federal funding under the Individuals with Disabilities Education Act.
Sales of adult education materials depend largely on federal funding under the
Adult Education Act and the Job Training Partnership Act of 1982.
The Company and other educational materials publishers are vulnerable to reduced
availability of tax revenues and resulting decreases in purchases by school
administrators. However, the Company believes that the supplemental educational
materials market generally has proven to be relatively resistant during
contraction of educational spending as school systems look for a less expensive
alternative to the hardcover textbook. The Company's library market is
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affected by budget cuts as expenditures for library materials often are
considered a lower priority than expenditures for curriculum materials.
Competition
The market for educational materials is both highly competitive and highly
fragmented. There are many other publishers of supplemental texts for the El/Hi
market, adult education materials and hardcover childrens library books. The
Company believes that the ability of its field sales organization to call on
multiple categories of purchasers of supplemental educational materials at a
single location along with extensive mailings of both Steck-Vaughn and Summit
catalogs provide a competitive advantage. The Company and other supplemental
publishers also compete with basal publishers for shares of the same limited
school budgets.
The Company believes that the principal competitive factors in its industry are
breadth and quality of product offerings, price, quality of support services and
market responsiveness. Although the Company believes it competes favorably on
the basis of these factors, there are competitors within each of the Company's
market niches with significantly greater financial and marketing resources than
the Company. For example, in the El/Hi market, the Company's competitors include
Modern Curriculum Press, a division of Simon and Schuster, and SRA, a subsidiary
of McGraw-Hill. In the adult education market, Contemporary Book Company, owned
by the Tribune Co., and Prentice Hall/Regents Cambridge Adult Education are
major competitors of the Company. Children's Press, a division of Grolier, Inc.,
continues to be a major supplier of library titles for school and public
libraries. Competitors to Summit Learning, Inc. include Creative Publications,
J.L. Hammett, and Delta Education, Inc.
Seasonality of Business
A disproportionate amount of the Company's sales are made in the third quarter
of the calendar year because most of the Company's customers purchase
educational materials in the summer months in anticipation of classes commencing
in the fall. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations.") There is no customer to whom sales are made in an
amount which exceeds 5% or more of the Company's annual net revenues.
Copyrights and Trademarks
The Company holds copyrights in substantially all of its books, software
products and other educational materials. Many of these copyrights are federally
registered with the Copyright Office of the United States Library of Congress.
Certain of the Company's educational materials are copyrighted in the names of
the respective independent authors. As to copyrights owned by the Company, the
term of copyright extends for 75 years from the date of first publication of the
work or 100 years from the date of creation of the work, whichever is shorter.
Federal registration of a copyright extends for the duration of the copyright.
Additionally, the Company owns the rights to numerous trademarks, many of which
are federally registered on the Principal Register with the United States Patent
and Trademark Office. Federal registration of a trademark extends for ten years
and thereafter may be renewed indefinitely provided the trademark continues to
be used in commerce and such use can be demonstrated to the U.S. Patent and
Trademark office. The Company believes that trademark and copyright protections
are important but are less significant to the Company's success than factors
such as the breadth and quality of its products, the knowledge, ability and
experience of the Company's personnel, its product development capabilities, its
national sales force, and product loyalty from its customers.
10
<PAGE> 12
Employees
At December 31, 1996, the Company employed a total of 580 persons of which 456
were full time and 124 were part time. The Company believes that its relations
with its employees generally are good. None of its employees are unionized.
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding executive officers of
the Company as of February 28, 1997. Officers serve at the discretion of the
Board.
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION
<S> <C> <C>
Anita Kopec ..........................50 President, Chief Executive Officer and Director
Floyd D. Rogers.......................59 Vice President-Finance and Chief Financial Officer
Richard Y. Blumenthal.................49 Vice President-Alternate Channels
Leslie M. Ford........................47 Vice President-Editor-in-Chief
Elayne E. Schulman....................53 Executive Vice President-Research and Development
Jennie Buchanan.......................45 Vice President-Marketing
Philip C. Maynard.....................42 Vice President and Secretary
Keith K. Ogata........................42 Vice President and Treasurer
Sam Yau ..............................48 Chairman of the Board of Directors
</TABLE>
ANITA KOPEC has served as President and Chief Executive Officer and
Director of the Company since September 1996. Also since that date, she has held
the following positions: President, Steck-Vaughn Company; President, SV
Distribution Company; Director, Edunetics Corporation; and Director, Edunetics
Ltd. in Israel. Prior to her affiliation with the Company, from 1991-1996, Ms.
Kopec served in two executive capacities at Computer Curriculum Corporation in
Sunnyvale, California, a division of Simon and Schuster and the nation's largest
publisher of educational software for the school market. As Vice President of
Product Planning and Strategic Alliances, Ms. Kopec was responsible for the
overall strategic direction for product development in the kindergarten through
adult markets. As Vice President of Curriculum Development, she was responsible
for the planning, conceptualization and development of several important product
lines, including the "Exploreware" product line, for the kindergarten through
grade 12 markets and managed nearly 200 employees in Curriculum, Multimedia and
Publications. From 1990 to 1991, Ms. Kopec served as Vice President, Publisher
at Globe Book Company and from 1978 to 1990, she held various managerial
positions primarily in marketing and product planning and development at
MacMillan/McGraw-Hill School Division in Oklahoma City.
FLOYD D. ROGERS has served as Vice President-Finance and Chief Financial
Officer of the Company since March 1993, and Vice President-Finance of
Steck-Vaughn Company since February 1983, and served as Controller of
Steck-Vaughn Company from 1981 to 1983.
RICHARD Y. BLUMENTHAL has served as Vice President-Alternate Channels of
the Company since January 1997. Prior to that time, he served as Vice
President-Marketing of the Company since March 1993 and of Steck-Vaughn Company
since September 1991. Mr. Blumenthal joined Steck-Vaughn Company in January 1990
as a marketing manager.
11
<PAGE> 13
LESLIE M. FORD has served as Vice President-Editor-in-Chief of the Company
since March 1993 and of Steck-Vaughn Company since September 1988.
ELAYNE E. SCHULMAN has served as Executive Vice President-Research and
Development of the Company since January 1997. From 1995 to 1997, she served as
Director of Math and Science Curriculum for Product Development at Computer
Curriculum Corporation. From 1989 to 1995, Ms. Schulman served in two capacities
at IBM Company. From 1993 to 1995, she served as Senior Planner of Interactive
Television, and from 1989 to 1993, she served as Senior Project Coordinator for
Eduquest, a business unit of IBM. In this capacity she was responsible for all
aspects of select projects integrating curriculum and technology including the
design and planning of multiple software products in the areas of math and
science for the elementary and secondary markets. Ms. Schulman served as a
member of the "Blue Ribbon Panel" appointed to evaluate and select schools as
schools of excellence for the President and the U.S. Department of Education and
is a member of the National Science Foundation Task Force on Learning and
Technology in the Future. She has authored a number of publications relating to
educational technology.
JENNIE BUCHANAN has served as Vice President-Marketing of the Company
since January 1997. From 1985 to 1996, she held various marketing and sales
positions at MacMillan/McGraw Hill. From February 1995, she served as Director
of Marketing and Field Services for Technology responsible for developing and
executing marketing and public relations campaigns for technology products. From
1993 to 1995, Ms. Buchanan was a Regional Marketing Manager serving as an
editorial liaison for product development. From 1989 to 1993, Ms. Buchanan
served as a sales representative for that company's school division.
PHILIP C. MAYNARD has served as Vice President and Secretary of the
Company and of Steck-Vaughn Company since February 1, 1994. He also has served
as Vice President, Secretary and General Counsel of NEC since February 1, 1994.
During 1993, Mr. Maynard was General Counsel for Orchids Paper Products Company.
From 1989 to 1993, Mr. Maynard was Chief Executive Officer and a Principal of
McClellan Development.
KEITH K. OGATA has served as Vice President and Treasurer of the Company
since March 1993 and of Steck-Vaughn Company since 1987. He also is Vice
President, Chief Financial Officer and Treasurer of NEC and has served as such
since April 1991. He was Vice President and Treasurer of NEC from April 1989 to
April 1991 and Treasurer from January 1987.
SAM YAU has served as Chairman of the Board of Directors of the Company
since May 1995. Also since that time he has served as President, Chief Executive
Officer and a Director of NEC. From May 1993 to November 1994, he was Chief
Operating Officer of Advacare, Inc., a medical management company. Prior to that
time he was Senior Vice President of Finance and Administration for Archive
Corporation (now a part of Seagate Technologies, Inc.), a computer storage
(tape) company from May 1989 to May 1993. Mr. Yau also is a Director of
Powerwave, Inc.
ITEM 2. PROPERTIES.
The Company owns a 101,000 square foot warehouse facility and a 5,000 square
foot office building located on approximately 13 acres of land in Austin, Texas.
The Company leases approximately 47,000 square feet of office space as its
corporate headquarters in Austin. The Company also leases the following
properties: approximately 23,000 square feet of warehouse space in Ft. Collins,
Colorado, housing the Summit Learning distribution operation; approximately
2,400 square feet of office space in Chatham, New Jersey, housing the library
division editorial staff; approximately 1,000 square feet of office space in
Roslyn, New York, housing the Berrent product development and editorial staff;
approximately 2,000 square feet of office space in Irmo, South Carolina housing
the EDL product development and editorial staff; approximately 9,000 square feet
of office space in Herzliya, Israel, housing the majority of the Edunetics
product development staff; and approximately 4,000 square feet of office space
in Plano, Texas, housing the remainder of the Edunetics product development
staff as well as its technical support staff. The
12
<PAGE> 14
Company believes that these existing facilities are suitable and adequate to
meet its needs for the foreseeable future. (See "Notes to Consolidated Financial
Statements," Notes 7, 8 and 9.)
ITEM 3. LITIGATION.
The Company is involved from time to time in litigation incidental to its
business. The Company believes that none of its pending litigation matters,
individually or in the aggregate, will have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
Since July 1993, the Company's Common Stock has traded in the over-the-counter
market and appears on The Nasdaq National Market ("Nasdaq") under the symbol
STEK. The range of reported high and low bid quotations for shares of the
Company's Common Stock as reported by Nasdaq for the two years ended December
31, 1996 are set forth below:
<TABLE>
<CAPTION>
1996 1995
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 10 7 3/8 6 3/4 5
June 30 14 3/4 9 1/2 8 3/4 6 1/4
September 30 12 3/4 9 3/4 8 3/4 6 1/2
December 31 12 10 1/2 8 1/4 6 3/4
</TABLE>
The number of stockholders of record of the Company's Common Stock as of
February 28, 1997, was 57. The number of record holders is based upon the actual
number of holders registered on the stock transfer books for the Company at such
date and does not include holders of shares in "street names" or persons,
partnerships, associations, corporations or other entities identified in
security position listings maintained by depository trust companies.
Although the Company historically has paid dividends to NEC from time to time
with respect to its capital stock, the Company does not intend to pay any cash
dividends with respect to its Common Stock in the foreseeable future. The
Company intends to retain any earnings for use in the operation of its business.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
(amounts in thousands, except per share amount)
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL HIGHLIGHTS
1996 1995 1994 1993 1992
----------------------------------------------------------------------
NET REVENUES BY PRODUCT LINE
- --------------------------------------
<S> <C> <C> <C> <C> <C>
Elementary/High School $ 39,820 $ 34,971 $ 31,578 $29,377 $ 24,786
Adult Ed 14,048 12,677 12,934 13,817 12,547
Library 16,563 10,578 9,096 9,962 7,791
----------------------------------------------------------------------
Total Core Business 70,431 58,226 53,608 53,156 45,124
Summit 10,738 -- -- -- --
Edunetics 4,336 -- -- -- --
----------------------------------------------------------------------
TOTAL NET REVENUES $ 85,505 $ 58,226 $ 53,608 $53,156 $ 45,124
- -------------------------------------- ----------------------------------------------------------------------
OPERATING INCOME $ 7,616 $ 9,499 $ 10,459 $13,074 $ 11,920
- --------------------------------------
Interest (income) expense, net (9) (1,545) (301) 33 129
Other income* -- -- -- -- (521)
Income taxes 4,455 4,197 4,196 4,956 4,425
----------------------------------------------------------------------
NET INCOME $ 3,170 $ 6,847 $ 6,564 $ 8,085 $ 7,887
- -------------------------------------- ----------------------------------------------------------------------
PER SHARE DATA **
- --------------------------------------
Earnings per share $ 0.22 $ 0.48 $ 0.45 $ 0.62 $ 0.59
----------------------------------------------------------------------
Weighted average shares outstanding 14,420 14,351 14,517 13,059 13,338
SELECTED FINANCIAL INFORMATION
- --------------------------------------
Net cash from operating activities $ (835) $ 3,689 $ 6,432 $13,256 $ 7,242
Product development investment 12,993 8,990 8,052 8,290 6,039
Total assets 84,868 69,528 59,471 56,395 39,329
Total debt 10,278 3,247 1,933 2,464 3,053
Dividends declared -- -- -- 19,999 5,300
Stockholders' equity 59,684 56,294 49,516 44,670 26,809
Return on average equity 5.5% 12.9% 13.9% 22.6% 30.9%
Gross profit margin 69.7% 74.7% 74.8% 76.2% 75.4%
Income before income taxes
as a percentage of revenue 8.9% 19.0% 20.1% 24.5% 27.3%
</TABLE>
See Note 2 and Note 9 of Notes to Consolidated Financial Statements for a
discussion of acquisition activity and unusual items.
* In 1992, the Company recorded to other non-operating income a gain from the
sale of a warehouse facility in the amount of $521,000.
**Steck-Vaughn Publishing Corporation was incorporated on March 10, 1993, as a
holding company for Steck-Vaughn Company. The consolidated financial
statements include the accounts of Steck-Vaughn Publishing Corporation and its
wholly owned subsidiaries, Steck-Vaughn Company, SV Distribution Company,
Edunetics Corp. and Edunetics Ltd. The 1992 earnings per share and shares
outstanding reflect the assumed issuance of 1,438,000 shares of Steck-Vaughn
Publishing Corporation common stock that would have been required to be sold
in order to settle the cash portion of the dividend declared to NEC during
1993.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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.
The following table sets forth for the periods indicated the percentage of
revenues of certain income statement items and the percentage change in each
from the prior period.
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES PERCENTAGE CHANGE
YEAR ENDED DECEMBER 31, FROM PRIOR PERIOD
1996 1995 1994 1996 1995
--------------------------------------------------------
NET REVENUES
- --------------------------------------------
<S> <C> <C> <C> <C> <C>
Elementary/High School 46.6% 60.1% 58.9% 13.9% 10.7%
Adult education 16.4% 21.8% 24.1% 10.8% (2.0%)
Library 19.4% 18.1% 17.0% 56.6% 16.3%
-----------------------------
Total Core Business 82.4% 100.0% 100.0% 21.0% 8.6%
Summit 12.6% -- --
Edunetics 5.0% -- --
-----------------------------
TOTAL NET REVENUES 100.0% 100.0% 100.0% 46.9% 8.6%
- --------------------------------------------
Product costs and fulfillment 30.3% 25.3% 25.2% 75.9% 8.9%
-----------------------------
GROSS PROFIT 69.7% 74.7% 74.8% 37.0% 8.5%
- --------------------------------------------
Product development 13.8% 15.3% 14.2% 32.8% 16.7%
Selling and marketing 32.8% 32.2% 32.6% 49.5% 7.2%
General and administrative 7.1% 7.6% 7.6% 36.6% 9.4%
Provision for doubtful accounts 0.1% 0.2% 0.2% (41.2%) 73.9%
Amortization of acquired intangible assets 2.2% 1.4% 0.7% 139.6% 107.3%
Unusual items 4.8% 1.6% --
-----------------------------
OPERATING INCOME 8.9% 16.4% 19.5% (19.8%) (9.2%)
- --------------------------------------------
Interest (income) expense, net -- (2.6%) (0.6%) (99.4%) 413.3%
-----------------------------
INCOME BEFORE INCOME TAXES 8.9% 19.0% 20.1% (31.0%) 2.6%
- --------------------------------------------
Income taxes 5.2% 7.2% 7.8% 6.1%
-----------------------------
NET INCOME 3.7% 11.8% 12.3% (53.7%) 4.3%
- -------------------------------------------- -----------------------------
</TABLE>
A large portion of the Company's business is highly seasonal, with operating
results varying substantially from quarter to quarter (see Notes to the
Consolidated Financial Statements). Revenues for the Elementary/High School
market are traditionally lowest in the first quarter and highest in the third
quarter of the calendar year as schools purchase educational materials in summer
months in anticipation of the beginning of the school year. These quarterly
fluctuations are somewhat mitigated by revenues from the adult education market
and library products which generally are not as subject to significant
seasonality. Due to the seasonal nature of the Company's revenues, a substantial
portion of selling and marketing costs are deferred and fully amortized within
the calendar year to better match these costs with revenues.
15
<PAGE> 17
1996 COMPARED TO 1995
Revenues of $85,505,000 increased 46.9% over revenues of $58,226,000 in the
previous year. Growth in the Company's core business segments, coupled with the
acquisitions of Summit Learning and Edunetics Ltd., led to the significant
increase in revenues. Net income of $3,170,000 or $.22 per share in 1996
declined from net income of $6,847,000 or $.48 per share in 1995. The lower net
income in 1996 reflects the one-time write-off of in-process research and
development costs of $4,100,000, or $.28 per share, related to the acquisition
of Edunetics Ltd. and $861,000, or $.04 per share, in expenses related to the
change in the Company's chief executive officer in the third quarter.
Revenues from the Company's core business of $70,431,000 increased 21.0% in 1996
over 1995 revenues of $58,226,000 as all business segments continued to perform
well. Sales of elementary and high school products of $39,820,000 were up 13.9%
over last year as sales of basic skills products, particularly in spelling,
reading comprehension and phonics, continued to reflect the renewed emphasis by
educators on skills training. Testing and assessment products grew
significantly, as states continued their emphasis on standardized tests to
measure the performance of schools and students.
Library sales of $16,563,000 were up 56.6% as a result of the Company's
distribution agreements with Wayland Publishers, Abdo and Daughters, and
Larousse Kingfisher Chambers, Inc. and the employment of a new independent
library sales force in the fourth quarter. Library sales were also bolstered by
the release of two major product revisions in 1996: the 53-volume Portrait of
America and the 24-volume Raintree Illustrated Science Encyclopedia.
Sales of products for the adult education market of $14,048,000 were up 10.8%,
primarily attributable to the acquisition of the product line of Educational
Development Laboratories, Inc. (EDL) in October 1995. The EDL line expanded the
breadth of the Company's computer instruction product line by complementing the
existing GED and Pre-GED products.
Revenue growth in the Company's core business was also supported by general
price increases of 5.1% and 10.1% effective September 1, 1996 and 1995,
respectively.
The catalog business of Summit Learning was acquired in December 1995 to
increase the Company's market penetration in the teacher and consumer markets.
Summit contributed revenues of $10,738,000 in 1996. Given the lead time in
preparing a catalog for mailing, the Company had little impact on the spring
1996 catalogs. The fall catalogs, however, particularly the Young Explorers
catalog mailed for the holiday gift season, showed significant gains over
revenues in the fall of the prior year. The Company expects to grow this
business by expanding the line to include language arts and social studies,
developing more proprietary product, and including more software and print
products from the Company's other lines.
Edunetics was acquired in April 1996 to strengthen the Company's position in the
emerging educational software market. Edunetics revenues of $4,336,000 were
primarily due to its exclusive joint development project with the Plano, Texas,
Independent School District, contractual deliveries to school districts of
integrated learning systems, and sales of modular product through distributors
and the Company's direct sales force. Sales of Edunetics' CD-ROM products began
in the latter part of the year and were introduced in retail stores in time for
the holiday season. Edunetics won numerous national awards for a number of these
software products.
Operating income excluding unusual items for 1996 was $11,716,000, or 13.7% of
revenues, compared to $10,469,000, or 18.0% of revenues, in 1995. Operating
income excluding unusual items in 1996 included non-recurring charges associated
with the change in CEOs, losses from Edunetics attributable to higher product
development expenses, and losses at Summit stemming from higher marketing
expenses.
16
<PAGE> 18
Product cost and fulfillment as a percentage of revenues of 30.3% increased from
25.3% in the prior year, due primarily to the addition of the Summit Learning
catalog business and its sales of mostly non-proprietary products. Manufacturing
costs also rose due to the increase in the sale of library titles acquired
through distribution agreements as opposed to internal development as well as
increased sales of library titles to wholesalers at more deeply discounted
prices. Royalty costs were lower due to the development of several significant
products with lower royalty rates as well as the addition of the new library
lines through distribution arrangements.
Fulfillment costs increased during 1996 as the Company reengineered its primary
distribution facility to significantly increase capacity, 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 to enhance the Company's material handling
processes. The installation necessitated additional labor to implement the
system and relieve the resultant order backlog. The system is now fully
operational, and the Company has realized a significant productivity improvement
in its order processing rate.
The following table reconciles product development investment to product
development expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENTAGE
(amounts in thousands) 1996 1995 CHANGE
----------------------------------------
<S> <C> <C> <C>
Product development investment $12,993 $ 8,990 44.5%
Plant costs capitalized (4,508) (3,522) 28.0%
Plant costs amortized 3,335 3,433 (2.9)%
-------------------------
Product development expense $11,820 $ 8,901 32.8%
-------------------------
</TABLE>
Product development investment and capitalized plant costs increased as the
Company continued to expand its product offerings. The increase in investment is
primarily attributable to the addition of the Edunetics and EDL product lines
plus the initial development of proprietary product for the Summit catalog.
Library investment also increased with the completion of the revision of the
Raintree Illustrated Science Encyclopedia.
Selling and marketing expense as a percentage of revenues increased over the
prior year with the addition of the Summit catalog division. Summit relies
exclusively on its catalogs to generate sales, and the catalogs represent a
significant expense for the division. As Summit refines its mailing list, it
expects to increase the success rate of each catalog and reduce the
proportionate marketing costs accordingly. Total selling and marketing expense
also increased due to greater commissions attributable to both the large revenue
increase and the introduction of the new independent library sales force, the
expansion of the telemarketing sales force in conjunction with the increased
library product lines, and the addition of several new catalogs focused on niche
markets.
General and administrative expense was higher with the addition of Edunetics
offices in Arlington, Virginia, and Israel as well as $861,000 of costs
associated with the change in CEOs in September 1996. The provision for doubtful
accounts declined relative to the prior year due to a significant charge in 1995
upon the termination of a distributor. Amortization of acquired intangible
assets increased with the addition of EDL, Edunetics, and Summit.
The write-off of acquired in-process research and development costs stemmed from
the acquisition of Edunetics. 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. 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
17
<PAGE> 19
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 based on an independent appraisal and was written off
in the second quarter of 1996.
Interest income declined for the year with the retirement of the line of credit
with the Company's parent company, National Education Corporation (NEC), and the
reduction in cash used in the acquisition of Edunetics. Interest expense
increased as the Company borrowed under its bank line of credit partially to
fund the acquisition of Edunetics.
The Company's effective income tax rate, excluding the non-deductible write-off
of acquired in-process research and development costs, was 38.0% for both 1996
and 1995. The Company is a member of an affiliated group (with NEC and its other
subsidiaries) that joins in filing consolidated tax returns. See Notes to the
Consolidated Financial Statements.
1995 COMPARED TO 1994
Revenues of $58,226,000 increased $4,618,000 or 8.6% from revenues of
$53,608,000 in the prior year. Net income for 1995 was $6,847,000 or $.48 per
share compared to net income of $6,564,000 or $.45 per share in 1994. Revenue
growth was supported by general price increases of 10.1% and 5.7% effective
September 1, 1995 and 1994, respectively.
Revenue growth stemmed from the elementary, high school and library markets.
Revenue from the elementary and high school market, up 10.7%, was bolstered by
strong sales from basic skills products in spelling, math, and reading. The
Company's testing and assessment products also boosted sales, enhanced by the
Berrent Publications product line purchased in November 1994.
Library sales, up 16.3%, were stimulated by the Company's strong list of new
titles, as well as new exclusive distribution agreements with Larousse
Kingfisher Chambers, Inc. and Abdo & Daughters. Adult sales were down 2.0% due
to continued federal budget constraints reducing the funding for adult
education. The Company purchased the product line of Educational Development
Laboratories, Inc. (EDL) in October 1995 to strengthen its future adult
offerings.
Product costs and fulfillment as restated remained constant as a percentage of
revenues. Manufacturing costs as a percentage of revenues rose due to the
increased cost of paper and the increased sales of library titles to wholesalers
at more deeply discounted prices. The Company's unusually large price increase
offset much of the increase in paper cost. Royalty expense declined as a
percentage of revenues due to the acquisition of product lines with lower
royalty costs and the addition of the new library lines through distribution
arrangements rather than internal development.
The Company has accounted for the cost of inventories using the first-in,
first-out (FIFO) method, whereas in all prior years the last-in, first-out
(LIFO) method was used. The new method was adopted to provide a better means of
matching current costs with current revenues. Financial statements of all prior
years have been restated to apply the FIFO method retroactively.
18
<PAGE> 20
The following table reconciles product development investment to product
development expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENTAGE
(amounts in thousands) 1995 1994 CHANGE
-----------------------------------------
<S> <C> <C> <C>
Product development investment $ 8,990 $ 8,052 11.6%
Plant costs capitalized (3,522) (3,987) (11.7)%
Plant costs amortized 3,433 3,562 (3.6)%
-------------------------
Product development expense $ 8,901 $ 7,627 16.7%
-------------------------
</TABLE>
Product development investment increased as the Company continued to augment its
product offerings with new and revised titles. Of particular interest is the
revision of two major series scheduled for release in 1996: the 53-volume
Portrait of America series and the Raintree Illustrated Science Encyclopedia.
The acquisitions of Berrent Publications and EDL, whose separate development
offices were retained, also contributed to the increase. Capitalized costs as a
percentage of total product development investment decreased as more design work
was done internally.
As a percentage of revenues, selling and marketing expense was down slightly. In
nominal terms, expenses rose due to increased commissions on the higher sales
volume and the adoption of the new accounting standard for amortizing catalog
expenditures. The accounting change resulted in the acceleration into 1995 of
costs which otherwise would have been expensed in the following year. Some cost
reductions were seen in a slight reduction in the field sales force and an 18%
reduction in the telemarketing sales force.
General and administrative costs were higher due to increased head count,
enhancement of MIS capabilities, and nonrecurring insurance credits in 1994. The
provision for doubtful accounts was higher due to a charge for a single
distributor upon the termination of the distribution agreement. Amortization of
acquired intangible assets increased as a result of the three acquisitions made
in the last fourteen months.
Subsequent to year-end, the Company settled a lawsuit brought by a product
development company in 1995. Settlement costs and legal expenses associated with
the lawsuit totaled $970,000 and were included in the results of operations for
the year ended December 31, 1995.
Interest income was higher due to the intercompany loan with NEC at a rate
significantly higher than was being earned on fixed-income investments. Interest
expense increased due to higher interest rates on the mortgage note.
The Company's effective income tax rates were 38.0% and 39.0% for 1995 and 1994,
respectively. The Company is a member of an affiliated group (with NEC and its
other subsidiaries) that joins in filing consolidated tax returns.
See Notes to the Consolidated Financial Statements.
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. The Company's
uses of cash include product development, capital expenditures, working capital
requirements, and selected acquisitions of complementary businesses and product
lines.
At December 31, 1996, the Company had $6,274,000 in cash and marketable
securities versus $11,789,000 at December 31, 1995. The decrease was primarily
attributable to the use of cash on hand to purchase Edunetics.
19
<PAGE> 21
Cash used for operating activities in 1996 of $835,000 was $4,524,000 less than
the cash generated by operating activities of $3,689,000 reported in the prior
year. The decrease is primarily attributable to increases in receivables and
prepaid plant costs and decreases in intercompany payables to NEC. The increase
in receivables is primarily attributable to acquired receivables and revenues
from Edunetics. The increase in deferred plant costs is due to the increase in
product development spending.
On April 30, 1996, the Company acquired all of the stock of Edunetics Ltd. 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.
Effective February 28, 1995, the Company and NEC entered into a revolving loan
agreement which provided NEC the ability to borrow up to $10,000,000 from the
Company from time to time. On July 25, 1996, NEC paid the loan in full and
terminated the revolving loan agreement.
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 National Education
Corporation pursuant to an intercompany agreement. At December 31, 1996,
$7,000,000 was outstanding under the bank credit facility.
The Company expects that cash, cash provided from operations, and the revolving
credit facility will be sufficient to provide for investment in product
development, planned working capital requirements, debt service, and capital
expenditures for the foreseeable future.
Inflation had little impact on the Company's net income in 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements at December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, and the
Report of Price Waterhouse LLP, Independent Accountants, are included in this
Annual Report on Form 10-K on pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has no information to report in response to this item.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
(a) The information required by Item 10 with respect to the directors
of the Company is incorporated herein by reference from material that will be
filed with the Securities and Exchange Commission within 120 days after the
Company's fiscal year end (December 31, 1996) as part of a Proxy Statement for
the Company's 1997 Annual Meeting of Stockholders.
(b) The information required by Item 10 with respect to executive
officers of the Company is furnished in a separate item captioned "Executive
Officers of the Company" and included in Part I of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end (December 31, 1996) as part
of a Proxy Statement for the Company's 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end (December 31, 1996) as part
of a Proxy Statement for the Company's 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days after the Company's fiscal year end (December 31, 1996) as part
of a Proxy Statement for the Company's 1997 Annual Meeting of Stockholders.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page Number
-----------
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS:
Report of Independent Accountants.............................. F-1
Consolidated Balance Sheets at December 31, 1996 and 1995...... F-2
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1996............ F-3
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1996............ F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31, 1996..... F-5
Notes to Consolidated Financial Statements..................... F-6
(2) FINANCIAL STATEMENT SCHEDULES: **
II Valuation and Qualifying Accounts.......................... F-18
** Schedules numbered in accordance with Rule 5.04 of Regulation
S-X. All other financial statement schedules are omitted
because they are not applicable or the required information is
shown in the financial statements or notes thereto.
(3) EXHIBITS: EXHIBITS REQUIRED TO BE FILED WITH THIS ANNUAL REPORT ON
FORM 10-K ARE SET FORTH IN THE EXHIBIT INDEX ON PAGES 23 AND 24.
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS AND ARRANGEMENTS
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS ANNUAL REPORT ON FORM
10-K ARE DENOTED WITH AN "**" AFTER THE EXHIBIT NUMBER.
(b) No reports on Form 8-K were filed during the fourth quarter of 1996.
(c) The exhibits required by this Item are listed in accordance with Item
14(a)(3) above.
(d) The consolidated financial statements required by this Item are listed under
Item 14(a)(2) above.
22
<PAGE> 24
Index to Exhibits
(Item 14(a))
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
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 Company's distribution center in Austin, Texas (2) ... *
10.2 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 (3) ........ *
10.3 Form of Intercompany Agreement between the Company and
National Education Corporation (4).............................. *
10.4 First Amendment to Intercompany Agreement between the Company
and National Education Corporation, dated June 10, 1994 (5)..... *
10.5 Form of Tax Sharing Agreement between the Company and
National Education Corporation (6).............................. *
10.6 Form of Indemnification Agreements between the Company and
its Officers and Directors (7).................................. *
10.7 ** The Company's 1993 Stock Option Plan, as amended (8) ........... *
10.8 ** National Education Corporation Supplemental Executive
Retirement Plan (9) ............................................ *
10.9 Revolving Line of Credit Note and Option Agreement between
the Company and National Education Corporation dated February
28, 1995 (10)................................................... *
10.10 Addendum to Agreement between the American Council on
Education and Steck-Vaughn Company extending the expiration
of the Agreement to August 31, 2001 (11) ....................... *
10.11 ** The Company's 1995 Directors' Stock Option and Award Plan
(12) ........................................................... *
10.12 Renewal and Extension Agreement between the Company and
National Education Corporation, effective December 31, 1995
(13) ........................................................... *
10.13 First Amendment to Stock Option Agreement between the Company
and National Education Corporation, effective December 31,
1995 (14) ...................................................... *
23
<PAGE> 25
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
10.14 Letter Amendment to Stock Option Agreement between the
Company and National Education Corporation, dated February 1,
1996 (15) ...................................................... *
10.15 Agreement between the Company and Edunetics Ltd. dated
February 29, 1996 (16) ......................................... *
10.16 Loan Agreement between NationsBank of Texas, N.A., and
Steck-Vaughn Company dated April 29, 1996 (17).................. *
10.17 Second Renewal and Extension Agreement between the Company
and National Education Corporation, effective March 31, 1996
(18) ........................................................... *
10.18 Second Amendment to Stock Option Agreement between the
Company and National Education Corporation, effective March
31, 1996 (19) .................................................. *
10.19 Third Renewal and Extension Agreement between the Company and
National Education Corporation, effective June 30, 1996
(20) ........................................................... *
10.20 Third Amendment to Stock Option Agreement between the Company
and National Education Corporation, effective June 30, 1996
(21) ........................................................... *
10.21 ** Employment Agreement between the Company and Anita Kopec
dated September 10, 1996 (22) .................................. *
10.22 Revised and Restated Office Lease dated January 20, 1997,
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 (23) ......
11.1 Statement re Calculation of Primary Earnings Per Share (23).....
21 Subsidiaries of the Company (23)................................
23 Consent of Price Waterhouse, LLP (23)...........................
27 *** Financial Data Schedule......................................... ***
- ------------------
* incorporated by reference from a previously filed document
** denotes management contract or compensatory plan or arrangement
*** filed only with electronic version of Form 10-K
(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").
24
<PAGE> 26
(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 10.7 to the Company's Amendment No. 1
to S-1 Registration Statement.
(4) Incorporated by reference to Exhibit 10.8 to the Company's Amendment No. 1
to S-1 Registration Statement.
(5) 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.
(6) Incorporated by reference to Exhibit 10.9 to the Company's Amendment No. 1
to S-1 Registration Statement.
(7) Incorporated by reference to Exhibit 10.10 to the Company's Amendment No. 1
to S-1 Registration Statement.
(8) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8, file no. 333-22235, filed with the Securities and
Exchange Commission on February 24, 1997.
(9) Incorporated by reference to Exhibit 10.12 to the Company's S-1
Registration Statement.
(10) 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.
(11) 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.
(12) 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 Commission on March 29,
1995.
(13) 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 21, 1996.
(14) 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 21, 1996.
(15) 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 21, 1996.
(16) 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 21, 1996.
(17) 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.
(18) 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.
25
<PAGE> 27
(19) 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.
(20) Incorporated by reference to Exhibit 10.22 in the Company's Form 10-Q for
the quarterly period ended June 30, 1996, filed with the Securities and
Exchange Commission on August 13, 1996.
(21) Incorporated by reference to Exhibit 10.23 in the Company's Form 10-Q for
the quarterly period ended June 30, 1996, filed with the Securities and
Exchange Commission on August 13, 1996.
(22) Incorporated by reference to Exhibit 10.24 in the Company's Form 10-Q for
the quarterly period ended September 30, 1996, filed with the Securities
and Exchange Commission on November 13, 1996.
(23) Filed herewith.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STECK-VAUGHN PUBLISHING CORPORATION Date
By /s/ ANITA KOPEC March 24, 1997
-------------------------------------
Anita Kopec
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date
By /s/ ANITA KOPEC March 24, 1997
------------------------------------
Anita Kopec
President and Chief
Executive Officer
(Principal Executive Officer)
By /s/ FLOYD D. ROGERS March 24, 1997
---------------------------------
Floyd D. Rogers, Vice President
and Chief Financial Officer
(Principal Financial Officer)
By /s/ KEITH K. OGATA March 23, 1997
-----------------------------------
Keith K. Ogata, Vice President
and Treasurer
(Principal Accounting Officer)
27
<PAGE> 29
Date
By: /s/ LEONARD W. JAFFE March 21, 1997
-------------------------------
Leonard W. Jaffe, Director
By: /s/ MICHAEL R. KLEIN March 24, 1997
--------------------------------
Michael R. Klein, Director
By: /s/ MANUEL J. JUSTIZ March 21, 1997
---------------------------------
Manuel J. Justiz, Director
By: /s/ N. COLIN LIND March 23, 1997
-----------------------------------
N. Colin Lind, Director
By: /s/ SAM YAU March 24, 1997
------------------------------------
Sam Yau, Director
28
<PAGE> 30
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Board of Directors and Stockholders of Steck-Vaughn Publishing
Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and 14(a)(2) present fairly, in all material
respects, the financial position of Steck-Vaughn Publishing Corporation and
its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Austin, Texas
January 31, 1997
F-1
<PAGE> 31
STECK-VAUGHN PUBLISHING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(amounts in thousands, except share counts) 1996 1995
------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
- ------------------------------------------------
Cash and cash equivalents $4,827 $10,041
Marketable securities 1,447 1,748
Receivables, net of allowance of $1,342 17,492 10,909
and $468
Inventories and supplies 21,776 18,099
Prepaid and deferred marketing expenses 1,635 1,456
Receivable from parent company - 4,000
Deferred plant costs 3,876 2,854
Other current assets 2,910 1,667
-------------------
Total current assets 53,963 50,774
LAND, BUILDINGS AND EQUIPMENT, net 9,866 6,741
ACQUIRED INTANGIBLE ASSETS, net 14,655 8,998
DEFERRED PLANT COSTS 4,042 3,015
OTHER ASSETS 2,342 -
-------------------
$84,868 $69,528
-------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
- ------------------------------------------------
Accounts payable and accrued expenses $6,618 $4,551
Accrued royalties 2,296 2,129
Accrued commissions 736 343
Accrued salaries, wages and bonuses 1,965 345
Payable to parent company 976 1,299
Current portion of long-term debt 3,547 343
Accrued and deferred income taxes 2,266 691
Other liabilities 49 -
-------------------
Total current liabilities 18,453 9,701
-------------------
LIABILITIES PAYABLE AFTER ONE YEAR
- ------------------------------------------------
Long-term debt, less current portion 6,731 2,904
Deferred income taxes - 629
-------------------
6,731 3,533
-------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
- ------------------------------------------------
Preferred stock, $.01 par value; 5,000,000 shares - -
authorized and unissued
Common stock, $.01 par value; 25,000,000
shares authorized; 14,600,000 and
14,573,000 shares issued 146 146
Additional paid-in capital 36,998 36,828
Retained earnings 24,313 21,143
Unrealized gain on marketable securities,
net of tax effect 60 10
-------------------
61,517 58,127
Treasury stock, at cost (255,000 shares) (1,833) (1,833)
-------------------
Total stockholders' equity 59,684 56,294
-------------------
$84,868 $69,528
==================
</TABLE>
See notes to Consolidated Financial Statements
F-2
<PAGE> 32
STECK-VAUGHN PUBLISHING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(amounts in thousands, except per share 1996 1995 1994
amounts)
-------------------------
<S> <C> <C> <C>
NET REVENUES $85,505 $58,226 $53,608
- ----------------------------------
Product costs and fulfillment 25,875 14,714 13,507
--------------------------
GROSS PROFIT 59,630 43,512 40,101
- ----------------------------------
Product development 11,820 8,901 7,627
Selling and marketing 28,009 18,738 17,472
General and administrative 6,078 4,451 4,069
Provision for doubtful accounts 90 153 88
Amortization of acquired intangible assets 1,917 800 386
Unusual items (Notes 2 & 9) 4,100 970 -
--------------------------
OPERATING INCOME 7,616 9,499 10,459
- ----------------------------------
Interest income 787 1,757 490
Interest expense (778) (212) (189)
--------------------------
INCOME BEFORE INCOME TAXES 7,625 11,044 10,760
- ----------------------------------
Income taxes 4,455 4,197 4,196
--------------------------
NET INCOME 3,170 6,847 6,564
- ---------------------------------- --------------------------
EARNINGS PER SHARE $0.22 $0.48 $0.45
- ---------------------------------- --------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 14,420 14,351 14,517
- -----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 33
STECK-VAUGHN PUBLISHING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(amounts in thousands) 1996 1995 1994
--------------------------------
<S> <C> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES
Net Income $ 3,170 $ 6,847 $ 6,564
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,533 1,200 1,178
Amortization of acquired intangible assets 1,917 800 386
Unusual Item - R&D Write-off 4,100 -- --
Provision for doubtful accounts 90 153 88
Loss on sale of assets (1) 20 --
Changes in assets and liabilities, net of effects from acquisitions:
Receivables (5,613) (2,253) 1,150
Inventories and supplies (3,561) (4,047) (349)
Prepaid and deferred marketing expenses (179) 160 (100)
Deferred plant costs (2,049) (86) (426)
Receivable from/payable to parent company (323) 1,847 (1,501)
Accounts payable and accrued expenses 743 174 (971)
Accrued and deferred income taxes 916 (875) 611
Other (1,578) (251) (198)
--------------------------------
NET CASH FOR OPERATING ACTIVITIES (835) 3,689 6,432
--------------------------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Net sales (purchase) of investments 381 5,600 (1,616)
Note receivable from parent company,net activity 4,000 (4,000) --
Additions to land, buildings and equipment (3,405) (938) (890)
Dispositions of land, buildings and equipment 45 115 123
Acquisition costs, net of cash acquired (10,736) (3,453) (2,560)
--------------------------------
NET CASH FOR INVESTING ACTIVITIES (9,715) (2,676) (4,943)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in current portion of long-term debt 1,551 (219) 29
Additions to long-term debt 7,024 -- --
Reductions in long-term debt (3,409) (343) (560)
Proceeds from issuance of common stock 170 36 --
Purchase of treasury stock -- (150) (1,683)
--------------------------------
NET CASH FROM FINANCING ACTIVITIES 5,336 (676) (2,214)
--------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,214) 337 (725)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,041 9,704 10,429
================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,827 $ 10,041 $ 9,704
================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 34
STECK-VAUGHN PUBLISHING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995 1994
(amounts and shares in thousands) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND PAID-IN CAPITAL
- --------------------------------
Balance at beginning of year 14,573 $36,974 14,568 $36,938 14,568 $36,938
Issuance of common stock 27 170 5 36 -- --
---------------------------------------------------------------------
BALANCE AT END OF YEAR 14,600 $37,144 14,573 $36,974 14,568 $36,938
- -------------------------------- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
RETAINED EARNINGS
- --------------------------------
Balance at beginning of year $21,143 $14,296 $7,732
Net income 3,170 6,847 6,564
----------------------------------------------
BALANCE AT END OF YEAR $24,313 $21,143 $14,296
- -------------------------------- ----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TREASURY STOCK
- --------------------------------
Balance at beginning of year 255 $(1,833) 230 $(1,683) -- $ --
Purchase of common stock for treasury -- -- 25 (150) 230 (1,683)
------------------------------------------------------------------------
BALANCE AT END OF YEAR 255 $(1,833) 255 $(1,833) 230 $(1,683)
- --------------------------------- ------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 35
STECK - VAUGHN PUBLISHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
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 to the Company. The accompanying financial
statements have been prepared to give retroactive effect to such
contribution. The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Steck-Vaughn Company, SV
Distribution Company (d.b.a. Summit Learning), and Edunetics Ltd. and
Edunetics Corporation (together referred to as "Edunetics" herein). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The Company develops, publishes, and sells supplemental educational materials
to schools, adult education centers, and libraries principally in the United
States. The materials primarily consist of print, multiple media and
manipulative products for students of all ages. As the Company's principal
customers are supported by government funding, the demand for the Company's
product is subject to the availability of such funds and the inherent
uncertainty and risk resulting therefrom. With educational funding
controlled primarily by state and local governments, however, management
believes that the Company's broad national customer base would mitigate the
impact of funding restrictions at a relatively few locations.
The Company is subject to credit risk through its trade receivables, for
which no collateral is held. This risk is mitigated by the national,
diversified customer base and that no one customer represents a significant
portion of total receivables.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
In August 1993, the Company completed an initial public offering in which
2,668,000 shares were sold for net proceeds of $29,775,000. The shares sold
represented 18.3% of the outstanding shares of the Company.
REVENUES AND EXPENSES
Revenues from print and manipulative products are recognized upon shipment of
such products. A portion of each year's selling and marketing expenses is
capitalized and deferred in the first half of the year and fully amortized in
the second half of the year to better match the expenses with revenues due to
the seasonal nature of sales.
The Company recognizes software-related revenue in accordance with AICPA
Statement of Position 91-1 (Software Revenue Recognition). License revenues
from the sale of individual software titles is recognized as product is
shipped. Revenues from contracts for multiple installations or development
of software are recognized upon completion of certain milestones stipulated
in such contracts.
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
F-6
<PAGE> 36
amortized over the estimated economic life of the product. Capitalized software
development costs amounted to $1,677,000 during 1996 and was immaterial in prior
years.
Plant costs include certain expenditures for the development of print
products, including external design work, typesetting, and film. These costs
are incurred and capitalized prior to the commencement of printing and are
then charged to expense as the product is sold. For a product with
unamortized plant costs remaining at the end of the year, amortization for
the remaining life of the product is projected to determine the
classification of the balance of plant costs as current or non-current. In
addition, revenues for each product are forecasted to determine whether all
remaining costs will be recovered, with unrecoverable costs written off.
Based on a study of historical revenue patterns, in 1996, the Company changed
its method of determining amortization rates for print products released
after January 1, 1996. The new method is based on annual amortization rates
that approximate units sold. The change was treated prospectively as a
change in estimate as it only affects future products. The effect on the
financial statements for the year ended December 31, 1996, was immaterial.
Effective January 1, 1995, the Company adopted AICPA Statement of Position
93-7 (Reporting on Advertising Costs). In accordance with the statement, the
Company records as advertising expense the production and distribution costs
of advertising as such advertising is distributed or placed. The catalogs of
SV Distribution Company are treated as direct response advertising, with the
cost of the catalogs charged to expense in accordance with historical
response rates. Included in assets are advertising costs of $1,635,000 and
$1,456,000 at December 31, 1996 and 1995, respectively, comprised primarily
of costs of catalogs in process, undistributed completed catalogs, and
development costs. Advertising expense was $7,569,000, $3,455,000 and
$2,565,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt securities with an original
maturity of less than three months to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash items,
accrued liabilities, accrued income taxes, and short-term borrowings
approximate fair value due to the short-term nature of these instruments.
The carrying amounts reported for long-term debt also approximate fair value
when the term and interest rates attached to these instruments are considered.
INVESTMENTS
The Company's investments in debt and equity securities have been classified
and their carrying values adjusted in accordance with Statement of Financial
Accounting Standards No. 115 (Accounting for Certain Investments in Debt and
Equity Securities). All debt securities mature within one year, have been
classified as held-to-maturity, and are recorded at amortized cost. All
equity securities have been classified as available-for-sale and are recorded
at fair value. Unrealized gains and losses on available-for-sale securities
are excluded from earnings and are reported as a separate component of
stockholders' equity, net of applicable taxes, until realized.
INVENTORIES AND SUPPLIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method (FIFO).
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are stated at cost and are depreciated
principally using the straight-line method over the estimated useful lives of
the various classes of property.
F-7
<PAGE> 37
ACQUIRED INTANGIBLE ASSETS
Acquired identifiable intangible assets, which include product and text
materials, copyrights and other intangibles, are amortized ratably over
various useful lives which do not exceed ten years. Acquired intangible
assets representing the excess of cost over identifiable assets purchased by
the Company are amortized ratably over estimated useful lives which do not
exceed forty years. Included in acquired intangible assets is goodwill of
$9,638,000 and $4,433,000 and accumulated amortization of $3,318,000 and
$1,401,000 at December 31, 1996 and 1995, respectively.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach as
prescribed in Statement of Financial Accounting Standards No. 109 (Accounting
for Income Taxes). SFAS 109 requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the financial statement and tax bases of assets and
liabilities at the applicable enacted tax rates.
The Company is a member of an affiliated group of companies that joins in
filing a consolidated federal tax return. The tax provision is calculated
under the terms of a tax sharing agreement entered into between the Company
and NEC. Under the agreement , the provision for income taxes generally is
determined on a separate company basis subject to certain adjustments.
Benefits for credits and other tax attributes are recognized by the Company
when recognizable by NEC on a consolidated reporting basis. Current income
taxes represent amounts payable to or receivable from NEC determined in
accordance with the tax sharing agreement.
Under federal tax law, the Company and each of its subsidiaries included in
an NEC consolidated federal income tax return are jointly and severally
liable with NEC and its subsidiaries for the federal income tax liabilities
of all of the companies included in such NEC consolidated federal income tax
return. NEC and its subsidiaries have agreed to indemnify the Company and
its subsidiaries, subject to certain conditions, for tax liabilities
allocated to NEC and its subsidiaries under the tax sharing agreement. The
Company and its subsidiaries have agreed to indemnify NEC and its
subsidiaries, subject to certain conditions, for tax liabilities allocated to
the Company and its subsidiaries under the tax sharing agreement.
EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1996, 1995 and 1994, are
based on the weighted average number of shares outstanding in each period and
include dilutive stock options.
RECLASSIFICATIONS
Certain financial statement items from prior years have been reclassified to
conform with the current year format.
NOTE 2: 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, and the operating
results of Edunetics have been included in the company's consolidated
financial statements since the date of acquisition. 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
based on an independent appraisal and was written off in the second quarter
of 1996 as the in-process projects acquired
F-8
<PAGE> 38
had no alternative future use. As a result of the acquisition, acquired
intangible assets increased $7,673,000, consisting primarily of goodwill, and
will be amortized over a weighted average life of approximately twelve years. In
addition, net deferred tax assets of $1,600,000 were recorded in conjunction
with the acquisition.
Effective December 1, 1995, the Company purchased substantially all of the
assets of Summit Learning, Inc. (Summit) from its parent company, American
Educational Products, Inc. Summit distributes math and science manipulative
products for the school and consumer markets through direct-response
catalogs. The transaction was accounted for as a purchase, and the operating
results of Summit have been included in the Company's consolidated financial
statements since the date of acquisition.
Pro forma consolidated results of operations, assuming Edunetics and Summit
had been acquired as of January 1, 1995, are as follows:
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1996 1995
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $86,525 $74,091
Net income $ 5,730 $ 3,396
Earnings per share $ .40 $ .24
</TABLE>
The above pro forma results are presented for comparative purposes only and
may not be indicative of the results of operations which would have resulted
had the combinations been in effect on January 1, 1995, or of the ensuing
results of operations of the consolidated entities.
The pro forma information excludes the $4,100,000 unusual item representing
the write-off of in-process research and development costs related to the
acquisition of Edunetics. Reported net income for the year ended December
31, 1996, excluding this $4,100,000 unusual item, would have been $7,270,000
($.50 per share) compared to the pro forma net income of $5,730,000 ($.40 per
share) shown above.
Effective October 1, 1995, the Company purchased substantially all of the
assets of Educational Development Laboratories, Inc. (EDL), a publisher and
developer of basic reading, vocabulary and writing products based in both
print and software for the high school and adult education markets. A
purchase acquisition note in the amount of $1,900,000 was issued in
conjunction with the purchase of EDL. In November 1994, the Company
purchased substantially all of the assets of Berrent Publications, Inc., a
publisher of test preparation and assessment materials. The assets acquired
in each of the transactions were principally accounts receivable, inventory,
and intangible assets. These transactions were accounted for as purchases,
and the operating results of the businesses acquired have been included in
the Company's consolidated financial statements since the dates of these
acquisitions.
Note 3: Income Taxes
Income (loss) before tax was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Domestic $ 13,207 $ 11,044 $ 10,760
Foreign (5,582) -- --
-----------------------------------
Total $ 7,625 $ 11,044 $ 10,760
===================================
</TABLE>
F-9
<PAGE> 39
Income taxes were provided as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 3,951 $ 4,737 $ 3,370
State and local 250 335 215
-----------------------------------
Total current provision 4,201 5,072 3,585
-----------------------------------
Deferred tax expense:
Domestic 725 (875) 611
Foreign (471) -- --
-----------------------------------
Total deferred provision (benefit) 254 (875) 611
-----------------------------------
Total income tax provision $ 4,455 $ 4,197 $ 4,196
-----------------------------------
</TABLE>
The deferred tax liabilities and assets reflected in the balance sheets at
December 31, 1996 and 1995, are comprised of the following:
<TABLE>
<CAPTION>
December 31,
(amounts in thousands) 1996 1995
------------------
<S> <C> <C>
Deferred tax liabilities:
Prepaid expenses $ 3,846 $ 3,119
Other 272 646
------------------
Gross deferred tax liabilities $ 4,118 $ 3,765
==================
Deferred tax assets:
Inventories $ 1,336 $ 1,704
Loss carryforwards 5,586
Other 847 741
------------------
Gross deferred tax assets 7,769 2,445
Deferred tax assets valuation allowance (3,655) --
------------------
Deferred tax assets, net of valuation allowance $ 4,114 $ 2,445
==================
</TABLE>
The company recorded a valuation allowance in the amount set forth in the above
table for certain deductible temporary differences for which it is unlikely, at
this time, that the Company will receive future tax benefit. A valuation
allowance of $4,750,000 related to the acquisition of Edunetics was established
during the year and reduce by $915,000 in the current year primarily due to the
utilization of loss carryforwards. Realization of the remaining deferred tax
assets is dependent on generating sufficient future taxable income. Although
realization is not assured, management believes it is more likely than not that
the remaining deferred tax assets will be realized. The amount of the deferred
tax asset considered realizable, however, could change if estimates of future
taxable income change.
At December 31, 1996, the Company had federal net operating loss carryforwards
of approximately $3,200,000 related to Edunetics Corporation which can only be
used against that company's future taxable
F-10
<PAGE> 40
income. These losses, which expire in years through 2010, are also subject to an
annual limitation on the amount available for utilization. In addition, the
Company had foreign tax loss carryforwards of approximately $7,000,000 related
to Edunetics Ltd. which do not expire.
A reconciliation of the income tax provision with the amount computed by
applying the federal statutory tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995 1994
----------------------------
<S> <C> <C> <C>
Tax provision computed at statutory rates $ 2,669 $ 3,866 $ 3,766
State taxes, net of federal benefit 163 218 140
Effect of foreign operations 48
Non-deductible research and development costs written off 1,435 -- --
Amortization of excess costs over acquired net assets 150 14 --
Other, net (10) 99 290
----------------------------
Total income tax provision $ 4,455 $ 4,197 $ 4,196
----------------------------
</TABLE>
Note 4: Related Party
The Company obtains various services from NEC which are paid through
intercompany accounts and charged to expense as incurred. The following table
lists the fees paid by the Company to NEC for the three years ended December 31,
1996:
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995 1994
------------------------------
<S> <C> <C> <C>
Insurance and employee benefits $1,266 $1,240 $ 588
------------------------------
Data processing services 141 91 58
Payroll services 104 57 43
General services 630 700 720
------------------------------
875 848 821
------------------------------
Total allocations $2,141 $2,088 $1,409
------------------------------
</TABLE>
The Company participates with NEC and its subsidiaries in the above programs and
services for which the Company pays its proportionate share of the cost.
Management does not believe that there would have been a material impact on net
income if the Company obtained these services independent of NEC. The amount of
insurance and benefits paid in 1994 was reduced by nonrecurring insurance
credits resulting from favorable loss experience.
Effective February 28, 1995, the Company and NEC entered into a revolving loan
agreement which provided NEC the ability to borrow up to $10,000,000 from the
Company from time to time. On July 25, 1996, NEC paid the loan in full and
terminated the revolving loan agreement. At December 31, 1995, $4,000,000 was
outstanding under the NEC loan. NEC paid the Company interest expense and other
charges required under the revolving loan agreement of $430,000, $971,000, and
$0 for the years ended December 31, 1996, 1995 and 1994, respectively.
F-11
<PAGE> 41
Note 5: Investments
The amortized cost and estimated fair value of the investment securities are as
follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(amounts in thousands) COST GAIN LOSS VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity funds $1,098 $ 116 $ -- $1,214
Preferred stock 250 -- (17) 233
-----------------------------------------------
Total available-for-sale 1,348 116 (17) 1,447
-----------------------------------------------
Less cash equivalents -- -- -- --
-----------------------------------------------
Total investment securities $1,348 $ 116 $ (17) $1,447
-----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(amounts in thousands) COST GAIN LOSS VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Municipal bonds $ 1,000 $ -- $ -- $ 1,000
-----------------------------------------------
Total held-to-maturity 1,000 -- -- 1,000
-----------------------------------------------
Available-for-sale:
Equity funds 1,231 52 (2) 1,281
Preferred stock 500 3 (36) 467
-----------------------------------------------
Total available-for-sale 1,731 55 (38) 1,748
-----------------------------------------------
Less cash equivalents (1,000) -- -- (1,000)
-----------------------------------------------
Total investment securities $ 1,731 $ 55 $ (38) $ 1,748
-----------------------------------------------
</TABLE>
Using the specific identification method, realized gains and losses on the
available-for-sale investment securities are as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Realized gains $ -- $ 18 $ --
Realized losses $ -- $ (6) $ --
</TABLE>
Note 6: Inventories and Supplies
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995
------------------------
<S> <C> <C>
Finished goods $21,213 $17,111
Work in process 72 81
Raw materials and supplies 491 907
------------------------
$21,776 $18,099
------------------------
</TABLE>
F-12
<PAGE> 42
Note 7: Land, Buildings and Equipment
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995
--------------------
<S> <C> <C>
Land $ 1,029 $ 1,029
Buildings and improvements (not to exceed 31.5 years)* 4,054 2,944
Leaseholds and improvements (life of lease)* 833 258
Machinery, equipment and furniture (not to exceed 10 years)* 10,241 6,637
--------------------
16,157 10,868
Less accumulated depreciation and amortization (6,291) (4,127)
--------------------
Total 9,866 6,741
--------------------
</TABLE>
* Depreciable lives
At December 31, 1996, machinery, equipment and furniture under capital leases
was $487,000 with accumulated depreciation and amortization of $53,000. At
December 31, 1995, there were no capital leases of machinery, equipment and
furniture. Depreciation expense was $1,533,000, $1,200,000 and $1,178,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Note 8: Debt
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995
--------------------
<S> <C> <C>
Long-term debt:
Bank line of credit $ 7,000 $ --
Purchase acquisition note maturing during 1997 1,900 1,876
Mortgage note maturing during 2000 1,029 1,371
Capitalized leases for machinery, equipment and furniture 349 --
--------------------
10,278 3,247
Less current portion of long-term debt (3,547) (343)
--------------------
Total long-term debt $ 6,731 $ 2,904
--------------------
</TABLE>
The purchase acquisition note bears interest at 6%, with interest payable
quarterly, and was paid in full in the first quarter of 1997.
The mortgage note in the original amount of $2,400,000 is collateralized by land
and a distribution center having a net book value of $4,667,000 as of December
31, 1996. The mortgage note bears interest at prime or, at the Company's option,
at the 90-day LIBOR rate plus 1.75%, with principal payable in quarterly
installments of $86,000 plus accrued interest. At December 31, 1996, the
interest rate on this note was 7.3%.
The Company maintains a revolving bank credit agreement in the amount of
$15,000,000 which matures June 10, 1998. The agreement provides for borrowings
at prime or, at the Company's option, LIBOR plus 1.5%. At June 10, 1997 any
outstanding borrowings will convert to a promissory note payable in twelve equal
quarterly installments with the first payment due September 10, 1997. Excluding
the payments due in the third and fourth quarter of 1997 totaling $1,167,000,
the Company has the intent and the ability to maintain the outstanding
borrowings beyond one year and, accordingly, the remaining balance of $5,833,000
is classified as long-term at December 31, 1996. The borrowings are secured by
the Company's accounts receivable and inventory. The revolving credit is subject
to restrictions on the transfer of property other than cash dividends,
restrictions on additional indebtedness, and certain financial
F-13
<PAGE> 43
performance criteria. The weighted average interest rate for the borrowings was
7.1% in 1996, and the average loan outstanding was approximately $6,474,000 for
the year ended December 31, 1996. Annual commitment fees of .25% are paid on the
unused line of credit.
Aggregate maturities of long-term debt, including capital leases, in each of the
following years are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
1997 $ 3,547
1998 2,825
1999 2,739
2000 1,167
-------
Total $10,278
=======
</TABLE>
Note 9: Commitments and Contingencies
Aggregate commitments at December 31, 1996 under noncancelable operating leases
for land, buildings and equipment are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
1997 $1,035
1998 977
1999 932
2000 956
2001 997
2002 and thereafter 1,909
-------
Total $6,806
=======
</TABLE>
Some of the leases contain renewal options, escalation clauses and requirements
that the Company pay taxes, insurance and maintenance costs. Total rent expense
aggregated $1,330,000, $1,116,000 and $1,059,000, for the years ended December
31, 1996, 1995 and 1994, respectively.
In March 1996, the Company settled a lawsuit brought by a product development
company in 1995. Settlement costs and legal expenses associated with the lawsuit
totaled $970,000 and were included as an unusual item in the results of
operations for the year ended December 31, 1995.
In the ordinary course of business, the Company is generally subject to claims,
complaints and legal actions. The litigation process is inherently uncertain,
and it is possible that the resolution of such matters might have a material
adverse effect upon the financial condition and results of operations of the
Company. Management is currently not aware of any such matters that could have
such a material adverse effect.
Note 10: Supplemental Cash Flow Information
<TABLE>
<CAPTION>
(amounts in thousands) 1996 1995 1994
----------------------------
<S> <C> <C> <C>
Interest paid $ 767 $ 182 $ 161
Assets acquired through capital leases $ 487 $ -- $ 828
Income taxes paid to parent company $3,466 $4,262 $4,355
Debt issued for acquisitions $ 24 $1,876 $ --
</TABLE>
F-14
<PAGE> 44
Note 11: Stock Options
At December 31, 1996, the Company had two stock-based compensation plans, which
are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (Accounting for Stock-Based Compensation). Accordingly, no compensation cost
is recognized for fixed stock options plans. Upon exercise, proceeds from the
sale of shares under the stock options plans are credited to common stock and
additional paid-in capital. Had compensation cost for the Company's stock
options plans been determined based on the fair value at the grant dates for
awards in 1996 and 1995, consistent with the method of SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1996 1995
------------------
<S> <C> <C>
Net earnings - as reported $ 3,170 $ 6,847
Net earnings - pro forma $ 2,775 $ 6,607
Earnings per share - as reported $ 0.22 $ 0.48
Earnings per share - pro forma $ 0.19 $ 0.46
</TABLE>
The Company uses the straight-line method of amortizing the pro forma
compensation expense. Because SFAS 123 does not require retroactive application
of the pro forma disclosure requirements, the pro forma results for 1995 include
only the amortization related to stock options granted in 1995. The remaining
amortization for stock options granted in 1995 will be reflected in subsequent
years. Thus, the pro forma results for 1996 include $332,000 of amortization of
options granted in 1995 and $304,000 of amortization of options granted in 1996.
The table below reflects the pro forma compensation expense, before income tax
benefits, recognized in the pro forma net income for 1995 and 1996 and the pro
forma compensation expense to be recognized in future periods.
<TABLE>
<CAPTION>
Pro Forma Compensation Expense
(amounts in thousands) 1995 1996 Thereafter
----------------------------------
Related to options granted in:
<S> <C> <C> <C>
1995 $ 388 $ 332 $ 92
1996 -- 304 1,897
----------------------------------
$ 388 $ 636 $1,989
==================================
</TABLE>
Under the 1993 Stock Option Plan as amended, the Company may grant options to
executives and key employees to purchase common stock of the Company for up to
860,000 shares of common stock as of December 31, 1996. The Options Committee of
the Board of Directors administers and approves grants of stock options under
the 1993 plan. The options granted shall vest and be exercisable in such
installments as the Options Committee determines, but each such installment
shall not be exercisable for at least six months after the date of grant. The
options are generally granted at the fair market value of the Company's common
stock at the date of grant, vest and become exercisable pro rata over time
(typically three or four years) following the date of grant, and expire in ten
years. The options are subject to certain conditions such as continued
employment.
Under the 1995 Directors' Stock Option and Award Plan, each eligible director
receives an initial stock option at fair market value to purchase 1,500 shares
of the Company's common stock. The initial option vests and first becomes
exercisable one year from the date of grant. In addition, at the first regular
Board meeting each calendar year through the year 1999, each eligible director
receives a stock option at fair
F-15
<PAGE> 45
market value, exercisable in full one year from the date of grant, to
purchase 1,500 shares of the Company's common stock. Such options expire ten
years from the date of grant.
Each of these plans provides that shares granted come from the Company's
authorized but unissued or reacquired common stock.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option- pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected volatility of 60%,
risk-free interest rates of 6.26% (1996) and 7.48% (1995), and expected lives of
5 years. The Company does not pay dividends; therefore, the dividend rate was
zero.
Information regarding these option plans for the years ended December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
--------------------------------------------------------------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 531 $ 8.51 245 $ 12.00
Options granted 407 10.17 291 5.55
Options exercised (27) 6.25 (5) 7.34
Options forfeited (97) 8.68 -- --
--------------- ------- ----------------
Options outstanding, end of year 814 9.44 531 8.51
--------------- ------- ----------------
Options price range at end of year $5.53 to $12.00 $5.53 to $ 12.00
Option price range for exercised shares $5.53 to $ 7.34 $ 7.34
Options available for grant at end of year 94 404
Weighted-average fair value of options
granted during the year $ 5.81 $ 3.24
<CAPTION>
1994
Weighted-
Average
Shares Exercise Price
-------------------------
(amounts in thousands, except per share amounts)
<S> <C> <C>
Options outstanding, beginning of year 250 $ 12.00
Options granted -- --
Options exercised -- --
Options forfeited (5) 12.00
----
Options outstanding, end of year 245 12.00
----
Options price range at end of year $ 12.00
Option price range for exercised shares --
Options available for grant at end of year 47
Weighted-average fair value of options
granted during the year $ --
</TABLE>
Subsequent to December 31, 1996, the Board of Directors increased by 500,000 the
number of shares available for issuance under the 1993 plan.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
(amounts in thousands, OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------------
except per share amounts) Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
$ 5.53 227 8.1 5.53 193 5.53
7.69 9.93 104 9.2 8.45 12 9.93
10.95 62 9.8 10.95 -- --
11.15 210 9.7 11.15 -- --
12.00 211 6.5 12.00 183 12.00
-------- -------
5.53 12.00 814 8.4 9.44 388 8.72
-------- -------
</TABLE>
F-16
<PAGE> 46
Note 12: Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(amounts in thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER
------------------------------------------
<S> <C> <C> <C> <C>
1996
NET REVENUES $ 15,461 $ 18,296 $ 32,419 $ 19,329
Product cost and fulfillment 5,142 5,704 8,785 6,244
------------------------------------------
GROSS PROFIT 10,319 12,592 23,634 13,085
Other costs 9,034 14,879 16,624 11,468
Income taxes 488 689 2,664 614
NET INCOME $ 797 $ (2,976) $ 4,346 $ 1,003
- ---------------------------- ------------------------------------------
EARNINGS PER SHARE $ 0.06 $ (0.21) $ 0.30 $ 0.07
- ---------------------------- ------------------------------------------
1995
NET REVENUES $ 11,147 $ 15,278 $ 20,372 $ 11,429
Product cost and fulfillment 3,356 4,137 4,997 2,224
------------------------------------------
GROSS PROFIT 7,791 11,141 15,375 9,205
Other costs 6,919 7,811 9,392 8,346
Income taxes 340 1,253 2,277 327
------------------------------------------
NET INCOME $ 532 $ 2,077 $ 3,706 $ 532
- ---------------------------- ------------------------------------------
EARNINGS PER SHARE $ 0.04 $ 0.14 $ 0.26 $ 0.04
- ---------------------------- ------------------------------------------
</TABLE>
Note 13: Subsequent Event
On March 12, 1997, National Education Corporation, the Company's parent company,
announced its plan to merge with Sylvan Learning Centers, Inc., with Sylvan to
be the surviving entity. The transaction is not expected to have a material
effect on the financial condition or results of operations of the Company.
F-17
<PAGE> 47
STECK - VAUGHN PUBLISHING CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
(amounts in thousands) beginning costs and Deductions/ at end
of period expenses Other of period
------------------------------------------------------
<S> <C> <C> <C> <C>
CLASSIFICATIONS
- -----------------------------------------------------
YEAR ENDED 1996
Allowance for doubtful receivables $ 468 $ 90 $ 784 $ 1,342
Reserve for obsolete inventories 1,568 621 (254) 1,935
Accumulated depreciation of buildings & equipment 4,127 1,533 631 6,291
Accumulated amortization of intangible assets 1,401 1,917 -- 3,318
Deferred tax assets valuation allowance -- (915) 4,570 3,655
YEAR ENDED 1995
Allowance for doubtful receivables $ 240 $ 153 $ 75 $ 468
Reserve for obsolete inventories 1,050 306 212 1,568
Accumulated depreciation of buildings & equipment 3,823 1,200 (896) 4,127
Accumulated amortization of intangible assets 601 800 -- 1,401
YEAR ENDED 1994
Allowance for doubtful receivables $ 227 $ 88 $ (75) $ 240
Reserve for obsolete inventories 1,296 (246) -- 1,050
Accumulated depreciation of buildings & equipment 2,777 1,178 (132) 3,823
Accumulated amortization of intangible assets 215 386 -- 601
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE> 1
EXHIBIT 10.22
REVISED AND RESTATED LEASE
BY AND BETWEEN
QUARRY LAKE BUSINESS CENTER, LTD.,
A TEXAS LIMITED PARTNERSHIP
AND
STECK-VAUGHN COMPANY,
A DELAWARE CORPORATION
<PAGE> 2
REVISED AND RESTATED LEASE
BY AND BETWEEN
QUARRY LAKE BUSINESS CENTER, LTD.,
A TEXAS LIMITED PARTNERSHIP
AND
STECK-VAUGHN COMPANY
INDEX
Page
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
i
<PAGE> 3
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
6.1 Services Provided by Landlord.............................. 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
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
ii
<PAGE> 4
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
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
iii
<PAGE> 5
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
iv
<PAGE> 6
REVISED AND RESTATED LEASE
This Revised and Restated 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"). This Lease revises, restates and supersedes the prior
Lease by and between Landlord and Tenant entered into on or about May 2, 1996
(the "Original Lease").
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.
I.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.
I.2 Building. The Project includes one office building, hereinafter
referred to as the "Building".
I.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. The Original Lease provided Tenant with
a total of 42,268 square feet with 6,000 square feet of hold space
(collectively, the "Original Space"). As provided herein, this Lease provides
Tenant with an additional 5,103 rentable square feet of space (the "Additional
Space"). Collectively, the Original Space and the Additional Space may be
referred to herein as the Premises.
I.4 Suite Number. 175 and 300.
I.5 Floor Number. 1st and 3rd.
I.6 Area of Premises. 47,371 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.
I.7 Rent Schedule. See attached Rent Schedule attached hereto as
Exhibit N and incorporated herein by this reference.
* Subject to adjustment, as provided in Section 4.1 below.
<PAGE> 7
I.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.
I.9 Lease Term. Seven (7) years, subject to extension under Exhibit H.
I.10 Commencement Date. With respect to the Original Space, the
Commencement Date is November 8, 1996. With respect to the Additional Space, the
Commencement Date shall be the earlier of the occupancy of the Additional Space
by Tenant or March 1, 1997; provided, however, if the Additional Space is not
ready for occupancy as evidenced by a certificate of occupancy issued by the
City of Austin or other applicable regulatory authority by March 1, 1997, then
the Commencement Date for the Additional Space 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 for the Additional Space to
move-in and install furniture, trade fixtures, equipment and other Tenant
personal property.
I.11 Expiration Date. November 30, 2003.
I.12 Security Deposit. None.
I.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 nine (29) of which spaces shall be reserved covered parking and
designated visitor space strictly for Tenant.
I.14 Use of Premises. General Office, storage and training.
I.15 Tenant's Broker. Michael K. Tipps/Michael A. Kennedy-Oxford
Commercial, Inc.
Landlord's Broker. N/A
I.16 Tenant Improvements. Set forth on Exhibit C.
I.17 Prorations. Set forth in Exhibit D.
I.18 Late Charge. Five percent (5%).
I.19 Landlord's Address. c/o Riverside Resources Corporation
100 Congress Avenue, Suite 1540
Austin, Texas 78701
I.20 Tenant's Address. Prior to the Commencement Date:
8701 North Mopac Expressway
Suite 200
2
<PAGE> 8
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
L. Subordination, Non-Disturbance and Attornment
Agreement
M. Self-Help Remedies
N. Rent Schedule
ARTICLE II.
PREMISES
II.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 47,371 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.
II.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.
II.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
3
<PAGE> 9
apportioned by and between all tenants of the Project.
ARTICLE III.
TERMS AND POSSESSION
III.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") for the Original Space and Additional Space
respectively, 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.
III.2 Time for Delivery of Possession. Landlord shall deliver
possession of the Premises to Tenant on or before the Commencement Date (as
applicable to the Original Space and Additional Space, respectively). Landlord
delivered the Original Space on November 8, 1996. 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 Additional Space to Tenant on or
before March 1, 1997, this Lease shall not be void or voidable. "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 Additional Space by
May 1, 1997, then ten (10) days after Tenant's notice to Landlord of its
intention to terminate the Lease as to the Additional Space if possession has
not been delivered in ten (10) days, Tenant shall have the right to terminate
the Lease as to the Additional Space 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 Additional Space including, but not limited to, additional holdover costs,
the loss of reduced Initial Monthly Rent contemplated by Section 4.1, 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.
III.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 March 1, 1997, 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.
III.4 Acceptance of Premises. When Landlord considers the Premises to
be
4
<PAGE> 10
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.
III.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.
III.6 Security Deposit. [INTENTIONALLY DELETED]
ARTICLE IV.
RENT
VI.1 Monthly Rent. Subject to the provisions set forth below, Tenant
shall pay to Landlord beginning February 1, 1997, as rent for the Original
Space, $18.00 per square foot on a monthly basis, equal to $63,402.00 monthly
for year one, subject to the terms of this paragraph. Beginning March 1, 1997,
Tenant shall pay to Landlord the amount set forth in Section 1.7 of this Lease,
which reflects the addition of the 5,103 rentable square feet at $22.50 per
square foot, ("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) $22.50 per rentable square
foot times 5,103 rentable square feet divided by
twelve plus $18.00 per rentable square feet of the
Premises (including both the Original Space and the
Additional Space) which Tenant is actually occupying
above the 5,103 rentable square feet during the
particular
5
<PAGE> 11
month divided by twelve or (ii) $22.50 per rentable
square foot times 5,103 rentable square feet divided
by twelve plus $18.00 times 37,582 divided by twelve
or $65,941.13.
(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) $22.50 per rentable square
foot times 5,103 rentable square feet divided by
twelve plus $18.625 per rentable square foot of the
Premises (including both the Original Space and the
Additional Space) which Tenant is actually occupying
above the 5,103 rentable square feet during the
particular month divided by twelve or (ii) $22.50 per
rentable square foot times 5,103 rentable square feet
divided by twelve plus $18.625 times 39,897 divided
by twelve or $71,491.59.
(c) Tenant shall have the right to make a one-time
adjustment to the calculation of the Premises
actually occupied upon move-in to the Additional
Space.
IV.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.
IV.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
V.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
VI.1 Services Provided by Landlord. Provided that Tenant is not in
default
6
<PAGE> 12
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
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.
7
<PAGE> 13
(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.
VI.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.
VI.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,
8
<PAGE> 14
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
VII.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.
VII.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
VIII.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
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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.
VIII.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, 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.
VIII.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
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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
X.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.
X.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 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.
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X.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
XI.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.
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XI.2 Insurance Carried by Tenant. Tenant shall maintain in force a
policy or policies of insurance protecting Landlord and Tenant, as follows:
(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.
XI.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
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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.
XI.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.
XI.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.
XI.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.
XI.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
XII.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
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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
XIII.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.
XIII.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 1/3%) 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.
XIII.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
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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.
XIII.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
XIV.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
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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.
XIV.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.
XIV.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
XV.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
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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.
(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.
XV.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.
XV.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
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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.
XV.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
XVI.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;
(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
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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.
XVI.2 Landlord's Lien. INTENTIONALLY DELETED
XVI.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.
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(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 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 releasing 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 releasing 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
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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.
XVI.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 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.
XVI.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.
XVI.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
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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.
XVI.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
XVI.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.
XVII.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.
(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
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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
XVIII.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.
XVIII.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.
XVIII.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
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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.
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
XXI.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
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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.
XXI.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 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
XXII.1 Signs. No signs shall be permitted outside of the Premises
unless the same
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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.
XXII.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.
XXII.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.
XXII.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.
ARTICLE XXIII.
GENERAL PROVISIONS
XXIII.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
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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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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, and in
lieu of such illegal, invalid, or unenforceable
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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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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.
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<PAGE> 35
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.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
30
<PAGE> 36
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.
XXIII.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.
XXIII.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.
XXIII.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.
XXIII.22 Legal Tender. Rent and all other sums payable under this Lease
must be paid in lawful money of the United State of America.
XXIII.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.
XXIII.24 Indemnification. All indemnification, hold harmless and duty
to defend provisions hereunder shall survive termination of this Lease.
XXIII.25 Time is of the Essence. Time is of the essence in all things
pertaining to the performance of this Lease.
XXIII.26 No Third Party Beneficiaries. There are no third party
beneficiaries with respect to this Lease.
XXIII.27 Grammatical Construction. Where appropriate, the masculine
gender may include the feminine or neuter, and the singular may include the
plural, and vice versa.
XXIII.28 Exhibits. All Exhibits attached hereto are incorporated by
reference herein.
XXIII.29 Dispute Resolution and Arbitration.
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<PAGE> 37
(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.
LANDLORD:
QUARRY LAKE BUSINESS CENTER, LTD., a
Texas limited partnership
By: QLBC, Inc., a Texas corporation, its
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<PAGE> 38
General Partner
By:__________________________________________
Donald J. Reese, President
Date:___________________________________________
TENANT:
STECK-VAUGHN COMPANY,
a Delaware corporation
By:_____________________________________________
Name:__________________________________
Title:_________________________________
Date:___________________________________________
33
<PAGE> 1
EXHIBIT 11.1
STECK-VAUGHN PUBLISHING CORPORATION
CALCULATION OF PRIMARY EARNINGS PER SHARE
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Net Income $ 3,170 $ 6,847 $ 6,564
- ------------------------------------------------------------------------ ----------------------------------------
Common Stock:
- ------------------------------------------------------------------------
Shares outstanding from beginning of period 14,318 14,338 14,568
Pro rata shares:
Shares issued, weighted for period outstanding 10 1 --
Assumed exercise of stock options, using the treasury stock method 92 33 --
Purchase of treasury shares, weighted for period held -- (21) (51)
----------------------------------------
Weighted average number of shares outstanding 14,420 14,351 14,517
----------------------------------------
Primary Earnings Per Share $ .22 $ .48 $ .45
- ------------------------------------------------------------------------ ----------------------------------------
</TABLE>
Primary and fully diluted earnings per share are the same for all years
presented.
<PAGE> 1
EXHIBIT 21
STECK-VAUGHN PUBLISHING CORPORATION
ACTIVE SUBSIDIARIES
COUNTRY OR STATE OF ORGANIZATION
--------------------------------
Steck-Vaughn Publishing Corporation Delaware
Its Subsidiaries:
- --------------------------------------------
Steck-Vaughn Company Delaware
SV Distribution Company Delaware
Edunetics Corp. Delaware
Edunetics Ltd. Israel
Its Subsidiary:
Edunetics International B.V. The Netherlands
<PAGE> 1
EXHIBIT 23
Steck-Vaughn Publishing Corporation
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-76402, No. 33-97354 and No. 333-22235 filed
February 24, 1997) of Steck-Vaughn Publishing Corporation of our report dated
January 31, 1997, appearing on page F-1 of this Form 10-K.
Price Waterhouse LLP
Austin, Texas
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,827
<SECURITIES> 1,447
<RECEIVABLES> 18,834
<ALLOWANCES> (1,342)
<INVENTORY> 21,776
<CURRENT-ASSETS> 53,963
<PP&E> 16,158
<DEPRECIATION> (6,292)
<TOTAL-ASSETS> 84,868
<CURRENT-LIABILITIES> 18,453
<BONDS> 0
0
0
<COMMON> 37,144
<OTHER-SE> (1,833)
<TOTAL-LIABILITY-AND-EQUITY> 84,868
<SALES> 85,505
<TOTAL-REVENUES> 85,505
<CGS> 25,875
<TOTAL-COSTS> 45,907
<OTHER-EXPENSES> 6,017
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 778
<INCOME-PRETAX> 7,625
<INCOME-TAX> 4,455
<INCOME-CONTINUING> 3,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,170
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
