-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TXohGLIRQA7z3EMFUaMIADNeeIX8EODYn0jzPfV+TO1iAeVk5oWGUZoz5bLkvfO1 fscfQ9D+vuccqa8imV/wsQ== 0000277821-96-000004.txt : 19960510 0000277821-96-000004.hdr.sgml : 19960510 ACCESSION NUMBER: 0000277821-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960509 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL EDUCATION CORP CENTRAL INDEX KEY: 0000277821 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 952774428 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06981 FILM NUMBER: 96558232 BUSINESS ADDRESS: STREET 1: 2601 MAIN STREET CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 714-474-9400 MAIL ADDRESS: STREET 1: 18400 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92715 10-Q 1 LIVE SUBMISSION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR " TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6981 NATIONAL EDUCATION CORPORATION (Exact name of registrant as specified in its charter) Delaware I.R.S. No. 95-2774428 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 2601 Main Street, Suite 700 Irvine, California 92714 (Address of principal executive offices, including zip code) 714/474-9400 (Registrant's telephone number, including area code) 18400 Von Karman Avenue, Irvine, California 92715-1594 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date 35,244,514 common stock shares outstanding at May 1, 1996 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Part I. FINANCIAL INFORMATION Item 1. Financial Statements
Three Months Ended March 31, _______________________ (amounts in thousands, except per share amounts) 1996 1995 _______________________________________________________________________________________________ Tuition and Contract Revenues $ 43,908 $ 44,812 Publishing Revenues 15,461 11,147 _____________________ Net Revenues 59,369 55,959 Costs and Expenses: Contract course materials and service costs 16,210 17,596 Publishing costs and materials 5,157 3,356 Product development 5,437 5,055 Selling and promotion 21,937 23,500 General and administrative 7,639 9,311 Amortization of prior period deferred marketing -- 1,311 Amortization of acquired intangible assets 378 565 Interest expense 2,021 1,977 Investment income (412) (409) Other expense (income) 61 (236) _____________________ Income (Loss) Before Tax Provision and Minority Interest 941 (6,067) Tax provision 141 -- _____________________ Income (Loss) Before Minority Interest 800 (6,067) Minority interest in consolidated subsidiary 135 90 _____________________ Net Income (Loss) $ 665 $ (6,157) ===================== Earnings (Loss) Per Share $ .02 $ (.21) ===================== Weighted Average Number of Shares Outstanding: Primary shares 36,265 29,632 Fully diluted shares 38,697 36,932 Unaudited See accompanying notes and management's discussion and analysis. /TABLE NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
March 31, December 31, March 31, (dollars in thousands) 1996 1995 1995 __________________________________________________________________________________________________________________________ ASSETS Current Assets Cash and cash equivalents $ 19,437 $ 22,120 $ 25,280 Investment securities 1,503 1,748 2,219 Receivables, net of allowance of $2,481, $2,742 and $1,585 32,047 36,397 31,426 Inventories and supplies 33,771 31,847 25,098 Net assets held for disposition -- -- 24,411 Income tax receivable 9,313 9,313 9,313 Prepaid and deferred marketing expenses 14,453 2,675 13,834 Other current assets 9,830 10,765 17,063 ____________________________________________ Total current assets 120,354 114,865 148,644 Land, buildings and equipment, less accumulated depreciation of $31,166, $31,992 and $63,200 24,631 24,028 26,146 Acquired intangible assets, less accumulated amortization of $9,551, $13,333 and $89,590 12,919 13,428 52,307 Deferred income taxes 24,768 24,768 28,482 Other assets 6,199 8,173 9,034 ____________________________________________ $ 188,871 $ 185,262 $ 264,613 ============================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 13,961 $ 6,072 $ 7,168 Accrued expenses 23,627 29,022 28,853 Accrued short-term restructuring charges 6,044 8,246 -- Accrued salaries and wages 6,530 5,627 6,750 Accrued disposition costs -- -- 23,281 Deferred contract revenues 6,421 7,421 12,507 Current portion of long-term debt and short-term borrowings 4,366 12,338 9,382 Accrued and deferred income taxes 14,281 14,446 10,712 ____________________________________________ Total current liabilities 75,230 83,172 98,653 ____________________________________________ Liabilities Payable After One Year Long-term debt, less current portion 18,330 8,839 6,222 Senior subordinated convertible debentures -- -- 20,000 Convertible subordinated debentures 57,494 57,494 57,494 Accrued long-term restructuring charges 10,059 10,089 -- Other noncurrent liabilities 8,985 8,683 7,818 ____________________________________________ 94,868 85,105 91,534 ____________________________________________ Minority Interest in Equity of Consolidated Subsidiary 9,656 9,504 8,216 ____________________________________________ NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) March 31, December 31, March 31, (dollars in thousands) 1996 1995 1995 _____________________________________________________________________________________________________________________________ Stockholders' Equity Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued -- -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 35,940,321, 35,820,468 and 30,275,381 shares issued 2,166 2,166 2,110 Additional paid-in capital 155,418 155,100 133,043 Accumulated deficit (135,819) (136,484) (56,401) Unrealized gain on available-for-sale securities, net of tax 13 10 21 Cumulative foreign exchange translation adjustment (6,808) (7,005) (7,655) Notes receivable under stock option plans (945) (1,398) -- ____________________________________________ 14,025 12,389 71,118 Less common stock in treasury, 697,556 shares (4,908) (4,908) (4,908) ____________________________________________ Total stockholders' equity 9,117 7,481 66,210 ____________________________________________ $ 188,871 $ 185,262 $ 264,613 ============================================ Unaudited See accompanying notes and management's discussion and analysis.
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
Three Months Ended March 31, _______________________ (amounts in thousands, except per share amounts) 1996 1995 _______________________________________________________________________________________________ Cash Flows From Operating Activities: Net income (loss) $ 665 $ (6,157) Adjustments to reconcile net income (loss) to net cash used for operating activities: Depreciation and amortization 1,213 1,372 Amortization of acquired intangible assets 378 565 Amortization of prior period deferred marketing -- 1,311 Provision for doubtful accounts (50) 110 (Gain) loss on foreign currency exchange 50 (239) Change in assets and liabilities: Receivables, net 7,016 14,213 Inventories and supplies (1,922) (1,131) Prepaid and deferred marketing expenses (11,782) (10,567) Accounts payable and accrued expenses 3,236 (44) Accrued restructuring reserve (2,072) -- Accrued and deferred income taxes (124) (245) Deferred contract revenues (978) 448 Other 785 (981) _____________________ Net cash from operating activities (3,585) (1,345) _____________________ Cash Flows For Investing Activities: Additions to land, building and equipment (1,915) (1,988) Dispositions of land, buildings and equipment 64 96 Proceeds from the sale or redemption of securities 250 8,682 Discontinued operations -- (379) _____________________ Net cash for investing activities (1,601) 6,411 _____________________ Cash Flows From Financing Activities: Reductions of long-term debt (514) (225) Changes in short-term borrowings 2,028 2,949 Minority interest in earnings of consolidated subsidiary 152 (5) Common stock, stock options and related tax benefits 318 -- Payments received on notes receivable under stock option plans 453 -- _____________________ Net cash from financing activities 2,437 2,719 _____________________ Effect of exchange rate changes on cash 66 198 _____________________ NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) Three Months Ended March 31, _______________________ (amounts in thousands, except per share amounts) 1996 1995 _______________________________________________________________________________________________ Net change in cash and equivalents (2,683) 7,983 Cash and equivalents at the beginning of the period 22,120 17,297 _____________________ Cash and equivalents at the end of the period $ 19,437 $ 25,280 ===================== Unaudited See accompanying notes and management's discussion and analysis.
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 1 - Summary of Accounting Policies _________________________________________ In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these financial statements be read in conjunction with the financial statements, accounting policies, and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the year. The Company accounts for its advertising costs in accordance with AICPA Statement of Position No. 93-7 ("SOP 93-7"), "Reporting on Advertising Costs". This SOP 93-7 generally requires advertising costs, other than direct-response advertising, to be expensed as incurred. As a result of the adoption of SOP 93-7 in 1994, a deferred marketing balance of $1,470,000 remained at December 31, 1994, of which $1,311,000 was amortized in the first quarter of 1995 in accordance with SOP 93-7. Certain prior year amounts have been reclassified to conform with the 1996 presentation. NOTE 2 - Restructuring _________________________________________ NETG experienced significant operating losses over the past several years. In the second quarter of 1995 management concluded that NETG could not return to profitability in the foreseeable future without significant changes in its operating structure and business direction. Accordingly, the Company approved a restructuring plan for NETG in June 1995 to discontinue certain product lines and to reorganize its sales and marketing efforts to enhance its channels of distribution. This restructure plan resulted in an unusual charge of $28,652,000 ($.90 per share). In the fourth quarter of 1995, NETG further reduced its organization in Germany and recorded a restructure charge of $1,952,000 ($.06 per share). No tax benefits were provided on these charges. The charges include severance related payments, excess facilities costs, the write-down of inventory and fixed assets of certain discontinued products and other restructuring related items such as charges related to canceled contracts and agreements. In addition, in the second quarter of 1995, the goodwill balance at NETG of $47,509,000 was written-off. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 2 - Restructuring (continued) _________________________________________ Set forth below is a summary of the restructuring activity for the first quarter of 1996.
Excess Severance (dollars in thousands) Facilities Payments Other Total _______________________________________________________________________________________________________ Accrued restructuring at December 31, 1995 $ 14,557 $ 2,611 $ 546 $ 17,714 Cash paid (1,102) (740) (219) (2,061) ___________________________________________________ Accrued restructuring at March 31, 1996 $ 13,455 $ 1,871 $ 327 $ 15,653 ===================================================
NOTE 3 - Business Disposition _________________________________________ At March 31, 1995, the estimated net realizable value of the discontinued Education Centers' assets was segregated on the balance sheet as net assets held for disposition and liabilities associated with the cost of completing the transaction and providing for future obligations retained by the Company were segregated as accrued disposition costs. As of December 31, 1995, substantially all of the operations and schools were sold or closed. As of December 31, 1995 and March 31, 1996, the remaining liabilities, which include accrued expenses for outstanding litigation and regulatory matters, and obligations to maintain and service future financial aid and accounting reporting requirements, are offset by certain notes receivable from buyers in connection with the sale of schools. Since the net amount of these assets and liabilities was not material to the consolidated financial statements of the Company, the amounts were not segregated on the balance sheet. NOTE 4 - Earnings (Loss) Per Share _________________________________________ Primary earnings (loss) per share are computed based on the weighted average number of common shares outstanding during the respective periods, including dilutive stock options. Fully diluted earnings (loss) per share were anti-dilutive for both periods and are not presented. Effective September 11, 1995, the holders of $20,000,000 of the Company's 10% senior subordinated convertible debentures converted such debentures, including accrued interest, into 5,021,000 of the Company's common stock. Loss per share for first quarter of 1995 on a pro forma basis, assuming the conversion had taken place at January 1, 1995, would have been ($.16) compared to the reported loss per share of ($.21). NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 5 - Statements of Cash Flows Supplementary Information _________________________________________
Three Months Ended March 31, _______________________ (amounts in thousands, except per share amounts) 1996 1995 _______________________________________________________________________________________________ Cash Paid During the Period For: Interest expense $ 852 $ 1,385 Income taxes, net of income tax refunds 197 249 Detail of Noncash Investing and Financing Activities: Assets acquired through capital leases $ 3 $ 84
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
Three Months Ended March 31, _____________________ Percent (dollars in thousands) 1996 1995 Variance Change ___________________________________________________________________________________________________________ Net Revenues ICS Learning Systems $ 34,006 $ 33,944 $ 62 0.2% Steck-Vaughn Publishing 15,461 11,147 4,314 38.7 NETG 9,363 10,016 (653) (6.5) Other 539 852 (313) (36.7) __________________________________ Total Net Revenues $ 59,369 $ 55,959 $ 3,410 6.1 ================================== Operating Income (Loss) ICS Learning Systems before amortization $ 2,904 $ 2,525 $ 379 15.0 Amortization of prior year deferred marketing -- (1,311) 1,311 n/m __________________________________ ICS Learning Systems 2,904 1,214 1,690 139.2 Steck-Vaughn Publishing 1,035 646 389 60.2 NETG 53 (4,994) 5,047 n/m Other 77 166 (89) (53.6) __________________________________ Total Segment Operating Income (Loss) 4,069 (2,968) 7,037 n/m General corporate expenses (1,458) (1,767) 309 17.5 Interest expense (2,021) (1,977) (44) (2.2) Investment income 412 409 3 0.7 Other (expense) income (61) 236 (297) n/m __________________________________ Income (Loss) Before Tax Provision and Minority Interest 941 (6,067) 7,008 n/m Tax provision 141 -- 141 n/m __________________________________ Income (Loss) Before Minority Interest 800 (6,067) 6,867 n/m Minority interest 135 90 45 50.0 __________________________________ Net Income (Loss) $ 665 $ (6,157) $ 6,822 n/m ================================== n/m: Not meaningful.
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Detailed Segment Operating Results:
(dollars in thousands) Three Months Ended March 31, 1996 _______________________________________________________________________________ ___________________________________ ICSSteck- LearningVaughn Total Systems Publishing NETG Other ______________________________________________________________ Net Revenues $ 59,369 $ 34,006 $ 15,461 $ 9,363 $ 539 Costs and Expenses: Contract course materials and service costs 16,210 13,532 - - - 2,396 282 Publishing costs and materials 5,157 -- 5,157 -- -- Product development 5,437 1,033 2,666 1,738 -- Selling and promotion 21,937 13,058 4,989 3,775 115 General and administrative 6,185 3,451 1,268 1,401 65 Amortization of acquired intangible assets 374 28 346 -- -- ______________________________________________________________ Segment Operating Income $ 4,069 $ 2,904 $ 1,035 $ 53 $ 77 ==============================================================
(dollars in thousands) Three Months Ended March 31, 1995 _______________________________________________________________________________ ___________________________________ ICSSteck- LearningVaughn Total Systems Publishing NETG Other ______________________________________________________________ Net Revenues $ 55,959 $ 33,944 $ 11,147 $ 10,016 $ 852 Costs and Expenses: Contract course materials and service costs 17,576 12,573 - - - 4,524 479 Publishing costs and materials 3,376 -- 3,376 -- -- Product development 5,055 608 2,306 2,141 -- Selling and promotion 23,500 15,561 3,420 4,377 142 General and administrative 7,549 2,635 1,215 3,634 65 Amortization of prior period deferred marketing 1,311 1,311 - - - -- -- Amortization of acquired intangible assets 560 42 184 334 -- ______________________________________________________________ Segment Operating Income (Loss) $ (2,968) $ 1,214 $ 646 $ (4,994) $ 166 ==============================================================
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 _______________________________________________________________________________ Revenues of $59,369,000 for the three months ended March 31, 1996 were $3,410,000, or 6.1% higher than revenues of $55,959,000 in the prior year. Net income was $665,000, or $.02 per share, compared to a net loss of ($6,157,000), or ($.21) per share, in 1995. All segments of the Company had increased operating income for the quarter compared to the same period in the prior year. The operating results for the first quarter of 1996 are significantly better than the comparable period in 1995 principally due to the turnaround of NETG which experienced operating income of $53,000 compared to an operating loss of ($4,994,000) for the quarters ended March 31, 1996 and 1995, respectively. The improvement in operating results at NETG was due in large part to the restructuring actions taken in the second quarter of 1995 as explained more fully in the discussion of the NETG operating results which follow. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ICS Learning Systems:
Three Months Ended March 31, _____________________ Percent (dollars in thousands) 1996 1995 Change ________________________________________________________________________________________ Revenues: Traditional Distance Education - Domestic $ 19,257 $ 20,145 (4.4)% Traditional Distance Education - International 10,992 10,497 4.7 Industrial and Business 2,443 2,048 19.3 MicroMash 1,314 1,254 4.8 ______________________ Total Revenues $ 34,006 $ 33,944 0.2 ====================== Traditional Business: New Enrollments: Domestic 80,847 79,726 1.4 International 31,149 36,632 (15.0) ______________________ Total New Enrollments 111,996 116,358 (3.7) ====================== Gross Enrollment Value (GEV): Domestic $ 46,760 $ 61,692 (24.2) International 23,704 22,527 5.2 ______________________ Total GEV $ 70,464 $ 84,219 (16.3) ====================== Selling and Promotion Spending: Domestic $ 13,411 $ 14,519 (7.6) International 5,871 6,658 (11.8) ______________________ Total Selling and Promotion Spending $ 19,282 $ 21,177 (8.9) ====================== Unearned Gross Future Tuition Revenue $ 157,048 $ 176,194 (10.9) ====================== Estimated realization of future tuition revenue 51% 44% 15.9
ICS revenues of $34,006,000 were $62,000, or 0.2%, more than the comparable period last year. Traditional domestic revenues were lower than the prior year by $888,000 or 4.4% due primarily to the elimination of the sale of computer hardware with PC courses for all enrollments after September 15, 1995. Traditional domestic enrollments were up 1.4%. Domestic telesales enrollments continued to increase while traditional enrollments declined. The conversion rate of domestic inquiries increased from 8.9% to 11.2% although inquiries were down 19.2%. Domestic gross enrollment value (GEV) decreased $14,932,000 or 24.2% partially because of the decrease in the average contract price as a result of eliminating the sale of hardware from PC courses and a 7.6% decrease in selling and promotion spending. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ICS Learning Systems (continued): International revenue increased $495,000 or 4.7% more than the comparable period last year. Revenues in Canada increased $855,000 or 21% over the prior year period due to an enrollment increase of 12.5% and a larger mix of higher priced courses. International Mail Sales revenue increased $134,000 or 10.7%. These increases were partially offset by lower revenue in Australia caused by telesales understaffing and lower revenue in the U.K. as a result of advertising underspending. New enrollments decreased by 15.0% primarily as a result of the lower performance in Australia and the U.K. Although new enrollments declined, the GEV increased 5.2% due to a 35.5% increase in Canada and a 23.3% increase at IMS, offset by lower performance in Australia and the U.K. The increase in GEV in Canada is a result of a 12.5% increase in enrollments, as well as higher average contract price due to a larger mix of higher priced courses. Course service costs increased $959,000 or 7.6% due to increased cost of better customer service initiatives, volume related increase in costs of the Business and Industrial segment, and increased cost of higher priced PC courses in Canada. The customer service initiatives are aimed at decreasing non-starts and increasing completions, thus increasing revenue realization. The cost increases were partially offset by lower PC shipments in the U.S. and volume related lower costs in the U.K. and Australia. Product development expense increased $425,000 or 69.9% due to more courses under development in the 1996 first quarter compared to 1995. As a result of the spending, ICS traditional business expects to introduce approximately nine courses in 1996 versus four courses in 1995. Selling and promotional expenses decreased $3,814,000 or 22.6% due to lower advertising spending on lower margin yielding media in the U.S., Canada and the U.K., as well as savings in the U.K. due to reduced telesales activity and overall underspending for advertising. Additionally, the 1995 expenses included $1,311,000 of amortization of prior period deferred marketing costs from 1994 which, under SOP 93-7, were required to be written-off in the first quarter of 1995. There were no such deferred costs written-off in 1996. General and administrative expense increased $816,000 or 31.0% as a result of higher information systems expenses related to system integration, increased costs related to the Business and Industrial segment and higher payroll in the U.K. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Steck-Vaughn Publishing:
Three Months Ended March 31, _____________________ Percent (dollars in thousands) 1996 1995 Change __________________________________________________________________________________________ Revenues: Elementary/High School $ 7,152 $ 5,820 22.9% Adult Education 2,821 2,865 (1.5) Library 3,719 2,462 51.1 Summit 1,769 -- n/m ===================== Total $ 15,461 $ 11,147 38.7 ===================== Operating Income: El/Hi, Adult Ed, Library $ 1,251 $ 646 93.7% Summit (216) -- n/m ===================== Total $ 1,035 $ 646 60.2 ===================== n/m: Not meaningful.
Steck-Vaughn revenues of $15,461,000 increased $4,314,000 or 38.7% over the same quarter of the previous year, as the Company continued to reflect increases in the Elementary and Library markets, while adding the Summit Learning catalog business to reach individual decision makers within school buildings. Revenues were also augmented by general price increases of 10.1% and 5.7% effective September 1, 1995 and 1994, respectively. El/Hi sales for the first quarter increased 22.9% over last year. As in the fourth quarter, El/Hi sales increased primarily in the Company's traditional skills products for the elementary school market in reading, spelling, and math. Testing and assessment products continued to sell well. The strength of both of these types of products is indicative of the return of schools to teaching basic skills using traditional approaches and the increased use of standardized tests as a means of assessing students' progress and measuring the success of individual schools. Sales of Adult education products were relatively flat compared to last year's first quarter, as the limited availability of federal funds continued to hamper sales. Library sales were up 51.1% for the first quarter compared to the first quarter of 1995. Much of the sales growth was from the Company's exclusive distribution agreements with Wayland Publishers (effective January 1, 1996), Abdo & Daughters, and Larousse Kingfisher Chambers, Inc. In addition, Library sales were boosted by the release of the revised 53-volume Portrait of America series. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Steck-Vaughn Publishing (continued): Summit Learning sales of $1,769,000 were all incremental as a result of the acquisition of Summit in December 1995. Product cost and fulfillment expense as a percentage of revenues increased for the three-month period ended March 31, 1996, as compared to 1995, primarily due to the inclusion of the Summit Learning business for the first time. Product cost and fulfillment for the Company's publishing operations for the three months ended March 31, 1996, represented 29.4% of publishing revenues as compared to 30.1% for the same period in the previous year. Increases in the cost of print products resulted from the increase in products acquired through distribution agreements (which carry a higher cost) rather than internal development, the increased use of wholesalers to sell library titles, and the full absorption of paper price increases incurred during the past eighteen months. These cost increases were offset in part by the increased sales of testing products, which carry higher gross margins, and the decline in royalty expense due to the increase in products acquired through distribution agreements. Summit Learning's cost of product and fulfillment costs, at 63.0% of its revenues, reflect the non-proprietary nature of the product line. Product development expense increased due to the addition of a development office, the expansion of the library development office and more staffing as more of the design work is done internally. Selling and marketing costs increased for the three months ended March 31, 1996, as compared to the prior year, due to higher commissions which resulted from increased revenues and higher catalog expense due in part to the acceleration of the recognition of catalog expenses in accordance with the Company's adoption of accounting standard SOP 93-7. Sales and marketing costs also increased as the Company circulated two new smaller catalogs targeted to specific audiences during the first quarter. In addition, $716,000 of the total costs represents catalog expense recognized by Summit Learning. General and administrative expense for the three months ended March 31, 1996, increased as compared to the prior year due to the new Summit Learning division, filling staff vacancies, and increased information systems costs. For the first quarter, Summit Learning reported an operating loss reflecting the seasonally lower sales in the first quarter, the high investment in catalogs, and $65,000 in amortization of acquisition expenditures. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) NETG:
Three Months Ended March 31, _____________________ Percent (dollars in thousands) 1996 1995 Change __________________________________________________________________________________________ Revenues: Domestic $ 4,807 $ 4,619 4.1% International 4,556 4,647 (2.0) Spectrum -- 750 n/m ===================== Total Revenues $ 9,363 $ 10,016 (6.5) =====================
Three Months Ended March 31, _______________________ 1996 1995 _______________________________________________________________________________________________ Number of Internally Developed Products Completed: Client/Server 9 1 Mainframe -- 2 Desktop 14 1 Business Skills -- -- ===================== Total 23 4 ===================== Number of Third Party Developed Products Completed: Client/Server 10 13 Mainframe 8 14 Desktop 18 1 Business Skills 41 7 ===================== Total 77 35 =====================
NETG revenues of $9,363,000 decreased $653,000, or 6.5% during the quarter due to Spectrum, which discontinued its operations in 1995. Excluding Spectrum, revenues increased 1.0%. Domestic revenues increased $188,000, or 4.1% principally due to increased revenue from client/server and desktop courses as the Company has increased its presence in these areas. These increases were partially offset by decreased Instructor Led Training (ILT) NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) NETG (continued): and mainframe courseware revenue. International revenue decreased $91,000, or 2.0%. This decrease was primarily due to an unfavorable exchange rate variance in the U.K. as the U.S. dollar strengthened. This decrease was partially offset by increased revenue in Germany, South Africa and Northern Asia. Consistent with domestic operations, international revenues for the client/server and desktop courses were up compared to the comparable period in the prior year. Operating income of $53,000 improved $5,047,000 over the operating loss of $4,994,000 reported in 1995. The turnaround of NETG is principally due to restructure actions undertaken in the second quarter of 1995 to reduce the cost structure and realign the business. These actions included discontinuing certain product lines, closing excess facilities, reducing headcount, writing-down inventory and fixed assets of certain product lines and cancelling of certain contracts and agreements. Course service costs decreased $2,128,000, or 47.0% principally as a result of restructuring related headcount reductions and the discontinuance of the Spectrum operation. Lower sales volume in the U.K., lower ILT volume, lower royalties and less overhead costs also contributed to the decrease. Product development expense decreased $403,000, or 18.8% due to the discontinuance of Spectrum and lower overhead costs as a result of the restructuring, partially offset by higher outside consulting costs. Selling and promotion expense decreased $602,000, or 13.8% due to the discontinuance of Spectrum, lower headcount and related expenses, and lower overhead due to the restructuring. General and administrative expenses decreased $2,233,000, or 61.4% due to restructure related reductions in headcount, depreciation, and facilities rent, as well as lower legal fees and the discontinuance of Spectrum. Operating results of the ICS and NETG foreign operations by geographic region are discussed above. The first quarter foreign currency exchange loss, recorded to other (expense) income, was $61,000 compared to gains of $236,000 in the prior year. Corporate and Other: General corporate expenses decreased $309,000 or 17.5% as a result of lower headcount and related expenses, as well as better cost control. The average total debt outstanding decreased compared to the first quarter of 1995 principally as a result of the conversion of the Company's 10% senior subordinated debentures into 5,021,000 shares of the Company's common stock in September 1995. Interest expense increased because of the additional interest on higher bank borrowings and amortization of financing fees incurred under the new bank credit agreement of January 19, 1996. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources The Company's primary sources of liquidity are cash, investment securities, cash provided from operations, and bank credit facilities. At March 31, 1996, the Company had $20,940,000 in cash and investment securities, of which $9,507,000 was held in the account of Steck-Vaughn. As of March 31, 1996, the Company had a revolving bank credit agreement in the amount of $20,000,000, of which $12,100,000 was outstanding. The revolving credit agreement expires January 19, 1998. The Company also has an intercompany credit agreement with Steck-Vaughn in the amount of $5,000,000 which expires June 30, 1996. At March 31, 1996, $3,000,000 was outstanding under the intercompany agreement and was eliminated in consolidation. Steck-Vaughn has a revolving bank credit agreement in the amount of $15,000,000 with a maturity of June 10, 1997. No amounts were outstanding under the bank credit facility in the first quarter of 1996 or the first quarter of 1995. In September 1995, the holders of $20,000,000 of the Company's 10% senior subordinated convertible debentures converted such debentures, including accrued interest, into 5,021,000 shares of the Company's common stock. Effective April 30, 1996, the Company, through Steck-Vaughn, acquired all of the stock of Edunetics, Ltd., an Israeli corporation engaged in the development of educational software, for cash consideration of $12,000,000. Approximately $9,000,000 of the purchase price was financed under Steck-Vaughn's bank credit agreement and the remaining $3,000,000 was provided by existing cash and marketable securities. The acquisition will be accounted for using the purchase method of accounting. Accordingly, in the second quarter of 1996 the purchase price will be allocated to assets and liabilities, including in-process research and development projects, based on their estimated fair values as of the date of acquisition. The estimated value of the in-process research and development projects will then be written-off in the second quarter of 1996 as required by generally accepted accounting principles. On April 24, 1996, ICS Learning Systems signed a definitive agreement to acquire California College of Health Sciences (CCHS). CCHS provides healthcare self-study courses and four-year and master degree distance learning programs. The Company expects that cash, marketable securities, the bank credit facilities, cash provided from operations, the intercompany credit agreement with Steck-Vaughn, and an expected IRS refund in the amount of approximately $10,000,000 will be sufficient to provide for planned working capital requirements, product development, capital expenditures, debt service and the pending acquisition of CCHS. Net cash outflow from operating activities of $3,585,000 declined $2,240,000 from the negative cash flow of $1,345,000 reported in 1995. Despite the improvement in operating results, cash flow was negatively impacted by: 1) payment of $3,500,000, which was expensed in December 1995, as part of the project to produce approximately 110 client/server products to be delivered in the last half of 1996, 2) proceeds of $3,252,000 in the first quarter of 1995 from the sale of a start-up partnership venture in December 1994, and 3) cash payments of $2,072,000 related primarily to the 1995 NETG restructuring. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) See Exhibit Index following this Form 10-Q. b) No reports on Form 8-K were filed for the period for which this report is filed. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 8, 1996 By /s/ Keith K. Ogata ___________________________ Keith K. Ogata Vice President, Chief Financial Officer and Treasurer NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (Item 6(a))
Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 3.1 Restated Certificate of Incorporation of National Education Corporation (1) * 3.2 By-Laws of National Education Corporation, as amended (2) * 10.1** National Education Corporation Retirement Plan (Restated as of January 1, 1989 and as Amended through January 1, 1992) (3) * 10.2** Advanced Systems, Incorporated 1984 Stock Option and Stock Appreciation Rights Plan (4) * 10.3** 1986 Stock Option and Incentive Plan, as amended (5) * 10.4** Amended and Restated 1990 Stock Option and Incentive Plan (6) * 10.5** Amended and Restated 1991 Directors' Stock Option and Award Plan (7) * 10.6 Rights Agreement, dated October 29, 1986, between National Education Corporation and Bank of America National Trust and Savings Association, Rights Agent (including exhibits thereto) (8) * 10.7 Addendum No. 1 to Rights Agreement, dated August 5, 1991 (9) * 10.8 Indenture, dated as of May 15, 1986, between National Education Corporation and Continental Illinois National Bank and Trust Company of Chicago, as Trustee (10) * 10.9 Tripartite Agreement, dated as of May 31, 1990, among National Education Corporation, Continental Bank as Resigning Trustee, and IBJ Schroeder Bank & Trust Company as Successor Trustee (11) * 10.10** National Education Corporation Supplemental Executive Retirement Plan, as amended (12) * 10.11** Supplemental Benefit Plan for Non-Employee Directors (13) * 10.12** Executive Employment Agreement between National Education Corporation and Sam Yau (14) * 10.13 Intercompany Agreement Between National Education Corporation and Steck-Vaughn Publishing Corporation dated June 30, 1993 (the "Intercompany Agreement") (15) * NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.14 First Amendment to Intercompany Agreement, dated June 10, 1994 (16) * 10.15 Tax Sharing Agreement between National Education Corporation and Its Direct and Indirect Corporate Subsidiaries, dated January 1, 1993 (17) * 10.16 $13,500,000 Amended and Restated Credit Agreement among National Education Corporation, the Banks named therein and Bankers Trust Company as Agent, dated February 28, 1995 (the "Credit Agreement") (Confidential treatment under Rule 24b-2 has been granted for portions of this exhibit) (18) * 10.17 First Amendment and Limited Waiver to Credit Agreement, dated July 31, 1995 (19) * 10.18 Second Amendment to Credit Agreement, dated December 21, 1995 (20) * 10.19 Revolving Line of Credit Note and Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated February 28, 1995 (21) * 10.20 Renewal and Extension Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, effective December 31, 1995 (22) * 10.21 First Amendment to Stock Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, effective December 31, 1995 (23) * 10.22 Letter Amendment to Stock Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated February 1, 1996 (24) * 10.23 Second Renewal and Extension Agreement and Second Amendment to Stock Option Agreement dated March 31, 1996 between National Education Corporation and Steck-Vaughn Publishing Corporation (27) 10.24 Debenture Conversion Agreement among National Education Corporation and the Holders identified therein, dated August 31, 1995 (25) * NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.25 Credit Agreement among National Education Corporation, certain banks and BZW Division of Barclays Bank PLC, as Agent, dated January 19, 1996 (the "BZW Credit Agreement") (Confidential treatment under Rule 24b-2 has been requested for portions of this exhibit) (26) * 10.26 Waiver and First Amendment to BZW Credit Agreement, dated April 9, 1996 (27) 10.27 Loan Agreement dated April 29, 1996, between Steck-Vaughn Company and NationsBank of Texas, N.A. (27) 11.1 Calculation of Primary Earnings Per Share (27) 11.2 Calculation of Fully Diluted Earnings Per Share (27) 27.1 Financial Data Schedule (27) _____________ * incorporated by reference from a previously filed document ** denotes management contract or compensatory plan or arrangement 1) Incorporated by reference to Exhibit 3.1 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed March 19, 1996. 2) Incorporated by reference to Exhibit 10 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. 3) Incorporated by reference to Exhibit 10.1 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, filed March 22, 1993. 4) Incorporated by reference to Exhibit 10.15 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1987, filed March 30, 1988. 5) Incorporated by reference to Exhibit 10.17 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991. 6) Incorporated by reference to Exhibit "B" filed with National Education Corporation's Proxy Statement, furnished in connection with the Annual Meeting of Stockholders held June 27, 1995, filed May 22, 1995. 7) Incorporated by reference to Exhibit "A" filed with National Education Corporation's Proxy Statement furnished in connection with the Annual Meeting of Stockholders held June 27, 1995, filed May 22, 1995. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES 8) Incorporated by reference to Exhibit 4.1 filed with National Education Corporation's Current Report on Form 8-K, dated October 29, 1986, filed October 30, 1986. 9) Incorporated by reference to Exhibit 10.19 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. 10) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to National Education Corporation's Registration Statement on Form S-3 (No. 33-5552), filed May 16, 1986. 11) Incorporated by reference to Exhibit 4 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. 12) Incorporated by reference to Exhibit 10.17 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. 13) Incorporated by reference to Exhibit 10.18 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. 14) Incorporated by reference to Exhibit 10.21 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 15) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1 to Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1, (No. 33-62334), filed June 17, 1993. 16) Incorporated by reference to Exhibit 10.23 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994. 17) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1 to Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1 (No. 33-62334), filed June 17, 1993. 18) Incorporated by reference to Exhibit 10.18 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 13, 1994, filed March 31, 1995. 19) Incorporated by reference to Exhibit 10.22 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed on November 9, 1995. 20) Incorporated by reference to Exhibit 10.18 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed March 19, 1996. 21) Incorporated by reference to Exhibit 10.12 filed with Steck-Vaughn Publishing Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 29, 1995. NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES 22) Incorporated by reference to Exhibit 10.22 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed March 19, 1996. 23) Incorporated by reference to Exhibit 10.23 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed March 19, 1996. 24) Incorporated by reference to Exhibit 10.24 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed March 19, 1996. 25) Incorporated by reference to Exhibit 10.23 filed with National Education Corporation's Quarterly Report on Form 10-Q for the first quarter ended September 30, 1995, filed November 9, 1995. 26) Incorporated by reference to Exhibit 10.26 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, filed March 19, 1996. 27) Filed herewith.
EX-10.23 2 EXHIBIT 10.23 SECOND RENEWAL AND EXTENSION AGREEMENT WHEREAS, National Education Corporation ("Borrower") executed a Revolving Line of Credit Note (the "Note") dated February 28, 1995, payable to the order of Steck-Vaughn Publishing Corporation ("Lender"), in the original principal sum of $10,000,000.00; WHEREAS, the indebtedness evidenced by the Note, as renewed, modified and extended, is secured by an Intercreditor Pledge Agreement Pledge and Security Agreement (the "Security Agreement") dated January 19, 1996 between Borrower, as Pledgor, and BZW Division of Barclays Bank PLC, as collateral agent, covering, among other collateral, all of the issued and outstanding shares of capital stock at any time owned by Borrower of Lender; WHEREAS, Borrower and Lender have heretofore renewed, modified and extended the Note pursuant to a Renewal and Extension Agreement (the "First Renewal") dated as of December 31, 1995 between Borrower and Lender; WHEREAS, Borrower has requested Lender to again renew and extend the term of the Note; NOW, THEREFORE, Borrower and Lender agree that: 1. Effective from and after February 1, 1996, the maximum principal amount that may be drawn by Borrower and that may be outstanding at any time under the Note, as renewed, modified and extended, is $5,000,000. 2. The Event of Default stated in paragraph number 5 on page 4 of the Note is hereby amended in its entirety to hereafter read as follows, to wit: Any "Event of Default" as defined in that certain Credit Agreement (the "Credit Agreement") dated January 19, 1996 among NEC, the several lenders from time to time parties thereto and BZW Division of Barclays Bank PLC, as Agent, has occurred and is continuing. The Events of Default stated in paragraphs 1, 2, 3, 4, 6, 7, and 8 on pages 3 and 4 of the Note shall remain as stated in the Note. 3. After the effective date hereof, the Note shall be due and payable as follows, to wit: Interest only shall be due and payable monthly as it accrues on the first day of each month beginning April 1, 1996 and continuing on the first day of each month thereafter until June 30, 1996 when the entire balance of unpaid principal and accrued, unpaid interest shall be due and payable in full. Each installment shall be applied first to the payment of accrued interest payable on the unpaid principal balance, with the remainder being applied to the reduction of principal. 4. The principal balance of the Note from time to time remaining unpaid shall continue to bear interest at the rate of interest applicable thereto as set forth in the Note, provided that the interest payable shall not exceed the maximum amount that may be lawfully charged. After default or maturity, principal and past-due interest shall bear interest at the rate of interest applicable thereto as set forth in the Note, provided that the interest payable shall not exceed the maximum amount that may be lawfully charged. 5. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand for payment or acceleration of the maturity of the Note, as renewed, modified and extended, or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Note, as renewed, modified and extended, and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Note, as renewed, modified and extended, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Note, as herein renewed, modified and extended, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread so that the interest thereon shall not exceed the maximum amount permitted by applicable law. This paragraph shall control all agreements between Borrower and Lender. 6. Borrower hereby renews the Note and promises to pay to the order of Lender at its offices at 1025 Northern Boulevard, Roslyn, New York (or such other place of payment as the Lender shall notify Borrower) the principal sum thereof as may be advanced and remains unpaid, with interest as specified in the Note, as renewed, modified and extended, and to perform all of Borrower's obligations under the Note, the Security Agreement, and any other documents pertaining thereto (the "Other Documents"). 7. Borrower covenants and warrants that the Note, the Security Agreement and the Other Documents are not in default after giving effect to the extension, modification and renewal herein granted; there are no defenses, counterclaims or offsets to the Note, the Security Agreement or the Other Documents; that the Note and Security Agreement, as renewed, modified and extended, are in full force and effect, and that the Security Agreement shall continue to secure payment of the indebtedness evidenced by the Note, as renewed, modified and extended. 8. Borrower further covenants and warrants to Lender that the execution and delivery of this Second Renewal and Extension Agreement by Borrower will not be in contravention of or cause a default under any agreement to which Borrower is a party. 9. The Note, as renewed, modified and extended, shall be construed in accordance with the laws of the State of New York and the laws of the United States applicable to transactions in the State of New York. 10. The Note, the Security Agreement and the Other Documents shall remain in full force and effect as renewed, modified and extended by the First Renewal and by this Second Renewal and Extension Agreement. 11. This Second Renewal and Extension Agreement may be executed in duplicate originals and each duplicate shall have the same force and effect as an original. EXECUTED to be effective as of March 31, 1996. "BORROWER" NATIONAL EDUCATION CORPORATION By:/s/ _______________________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer "LENDER" STECK-VAUGHN PUBLISHING CORPORATION By:/s/ ______________________________________ Name: Floyd D. Rogers Title: Vice President and Chief Financial Officer SECOND AMENDMENT TO STOCK OPTION AGREEMENT This Second Amendment to Stock Option Agreement is made and entered into by and between National Education Corporation, a Delaware Corporation ("Company") and Steck-Vaughn Publishing Corporation ("Optionee") as of March 31, 1996. Recitals 1. Company and Optionee entered into that certain Stock Option Agreement (the "Stock Option Agreement") dated as of February 28, 1995 pursuant to which the Company granted Optionee a stock option to purchase from the Company 290,000 shares of the stock of Optionee owned by the Company. 2. The Stock Option Agreement has heretofore been amended by that certain First Amendment to Stock Option Agreement (the "First Amendment") dated as of December 31, 1995. 3. Company and Optionee desire to again amend the Stock Option Agreement to extend certain dates and to amend certain other matters contained therein. Agreement Now, Therefore, for $10.00 and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged by the Company and Optionee hereby agree as follows, to wit: 1. Section 2 of the Stock Option Agreement is hereby amended in its entirety to hereafter read as follows, to wit: 2. Term of Option Unless earlier exercised pursuant to Section 3 of this Agreement, the Option shall terminate on, and shall not be exercisable after the earlier of (a) June 30, 1997, or (b) the date, if any, the Option is terminated pursuant to Section 8 below. 2. Subsection 3.1 of the Stock Option Agreement is hereby amended in its entirety to hereafter read as follows, to wit: 3.1 Exercisability This Option may only be exercised, in whole or in part, once at any time after the earlier of (i) August 31, 1996 or (ii) any time one or more Events of Default (which have not been cured within any applicable cure period) have occurred under and as defined in that certain Revolving Line of Credit Note dated February 28, 1995 in the original principal amount of $10,000,000.00 executed by the Company and payable to the order of Optionee as renewed, modified and extended by that certain Renewal and Extension Agreement (the "First Renewal") dated as of December 31, 1995 between the Company and Optionee and that Second Renewal and Extension Agreement (the "Second Renewal") dated as of March 31, 1996 between the Company and Optionee (said Revolving Line of Credit Note as so renewed, modified and extended by said First Renewal and Second Renewal being herein referred to as the "Note"), until the expiration of the term of the Option as provided in Section 2 hereof. For purposes hereof, a business day shall mean any day which is not a Saturday, Sunday or federal legal holiday. 3. Section 8 of the Stock Option Agreement is hereby amended in its entirety to hereafter read as follows, to wit: 8. Redemption At any time on or after the Credit Line Termination Date (hereafter defined) and provided that the Option has not theretofore been exercised, the Company may redeem the Option upon written notice of such redemption and payment of the Redemption Price (hereafter defined) by the Company to Optionee. Upon the written notice of such redemption and payment of the Redemption Price by the Company to Optionee on or after the Credit Line Termination Date, the Option, to the extent not theretofore exercised, shall terminate for all purposes and shall not be of any further force and effect; provided that such termination shall not impair or affect Optionee's rights with respect to Shares previously exercised pursuant to the Option or Shares previously acquired by Optionee pursuant to the Option. The "Redemption Price" shall mean the greater of (i) the Yield Amount (hereafter defined) plus the Adjustment Amount (hereafter defined) or (ii) $900,000 plus, if the Redemption Price is paid by the Company to Optionee after March 31, 1996, an amount equal to $1,250 per day for each day after March 31, 1996 until and including the earlier of (x) June 30, 1996 or (y) the date of payment of the Redemption Price by the Company to Optionee. The "Yield Amount" shall mean an amount equal to (i) twenty- five percent (25%) per annum on the principal balance from time to time outstanding under the Note from the Grant Date to and including the Credit Line Termination Date; less (ii) all interest which at any time has accrued under the Note from the Grant Date to and including the Credit Line Termination Date. The "Adjustment Amount" shall mean an amount equal to twenty-five percent (25%) per annum on the Yield Amount from the Credit Line Termination Date to and including the date of payment of the Redemption Price by the Company to Optionee. For purposes of this Section 8, the Credit Line Termination Date means (i) June 30, 1996, if the indebtedness evidenced by the Note is paid in full on such date and the Company has not prior to June 30, 1996 agreed by a written notice delivered to Optionee that the revolving line of credit available under and evidenced by the Note has been terminated, (ii) the date on which the indebtedness evidenced by the Note is fully paid, if the indebtedness evidenced by the Note is not fully paid on June 30, 1996, or (iii) the date on which both the indebtedness evidenced by the Note has been fully paid and the Company has agreed by a written notice delivered to Optionee that the revolving line of credit available under and evidenced by the Note has been terminated, if the Company has agreed by a written notice delivered to Optionee that the revolving line of credit available under and evidenced by the Note is terminated prior to June 30, 1996. The Redemption Price may be paid by the Company to Optionee, at the Company's option, in either or a combination of (i) cash, or (ii) shares of Optionee's common stock owned by the Company having a fair market value equal to the Redemption Price (or such balance thereof not otherwise paid in cash) based upon the close price for shares of Optionee's common stock on the NASDAQ National Market on the most recent day that Optionee's shares of common stock were traded on the NASDAQ National Market prior to the date of full payment of the Redemption Price by the Company to Optionee, provided that such shares of Optionee's common stock paid in payment of the Redemption Price are paid and delivered by the Company to Optionee free and clear of all liens and encumbrances. In the event Optionee's common stock is no longer traded on the NASDAQ National Market, then the fair market value of Optionee's common stock for purposes of determining payment of the Redemption Price shall be determined on such other basis as the Company and Optionee shall mutually agree. The Redemption Price may be prepaid by the Company to Optionee in such proportions and at such times as the Company may elect provided that the Option shall not be redeemed until the Redemption Price is fully paid and the other terms of this Section 8 are complied with by the Company. Notwithstanding anything contained in this Section 8 to the contrary, and unless Optionee otherwise agrees in writing, the Company shall have no right to redeem and terminate the Option pursuant to this Section 8 at anytime any one or more Events of Default (as defined in the Note) exists and is continuing. Nothing contained in this Agreement (i) shall be construed to extend or to commit to extend the revolving line of credit available under the Note or the maturity of the Note past June 30, 1996; or (ii) impair or affect Optionee's rights and remedies with respect to any collateral securing the indebtedness evidenced by the Note. The redemption of the Option pursuant to this Section 8 may be made after notice of exercise of the Option has been given by the Optionee to the Company provided that written notice of such redemption and payment of the Redemption Price is made by the Company to Optionee prior to the Exercise Date specified in Optionee's notice of exercise of the Option to be given to the Company pursuant to Section 3.2. 4. THIS SECOND AMENDMENT TO STOCK OPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 5. The Company covenants and warrants to Optionee that the execution and delivery of this Second Amendment to Stock Option Agreement by the Company is not in contravention of and will not cause a default under any agreement to which the Company is a party. 6. To the extent of any conflict between the terms of this Second Amendment to Stock Option Agreement and the First Amendment, the terms and provisions of this Second Amendment to Stock Option Agreement shall govern and control. 7. Except as amended hereby and by the First Amendment, the Stock Option Agreement shall remain in full force in effect in accordance with its terms. IN WITNESS WHEREOF, the parties have entered into this Second Amendment to Stock Option Agreement as of the date first above written. "COMPANY" "OPTIONEE" NATIONAL EDUCATION CORPORATION STECK-VAUGHN PUBLISHING CORPORATION By: /s/ By: /s/ _____________________________ ___________________________ Name: Keith K. Ogata Name: Floyd D. Rogers Title: Vice President, Chief Financial Title: Vice President and Chief Officer and Treasurer Financial Officer EX-10.26 3 EXHIBIT 10.26 WAIVER AND FIRST AMENDMENT, dated as of April 9, 1996, to the CREDIT AGREEMENT, dated as of January 19, 1996 (as the same may be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among NATIONAL EDUCATION CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions parties thereto (the "Lenders") and BZW Division of Barclays Bank PLC as agent for the Lenders (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Borrower has requested the Lenders to amend and waive certain provisions of the Credit Agreement upon the terms and conditions set forth herein; NOW THEREFORE, in consideration of the premises and mutual covenants contained herein, the undersigned hereby agree as follows: 1. Defined Terms. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. 2. Amendment to Credit Agreement. Schedule 8.2 of the Credit Agreement is hereby amended by (i) deleting items 1 and 2 of Schedule 8.2 and (ii) inserting the following in lieu thereof: "1. Revolving Credit Facility from Steck-Vaughn Publishing Corporation as Lender to National Education Corporation as Borrower dated March 1, 1995, in the maximum principal amount of $5 million secured by a pledge of the Steck-Vaughn Publishing Corporation common stock owned by National Education Corporation. 2. Revolving Credit Facility from NationsBank as Lender to Steck-Vaughn Publishing Corporation as Borrower dated February 28, 1995, in the maximum principal amount of $15,000,000 the first $5 million of which is unsecured but borrowings in excess of $5 million are secured by a pledge of the Steck-Vaughn accounts receivables and inventories." 3. Waivers to Credit Agreement. (a) The undersigned Lenders hereby waive the provisions of subsection 8.2(b) of the Credit Agreement to the extent and only to the extent that such subsection would be violated by the failure of ~e Borrower to repay the intercompany loan from SV to the Borrower by March 31, 1996; provided, however that such repayment is made by June 30, 1996. (b) The undersigned Lenders hereby waive the provisions of subsection 8.10(c) of the Credit Agreement to the extent and only to the extent that such subsection would be violated by the failure of the Borrower to have positive consolidated income for the two most recently completed fiscal quarters prior to making its acquisition of Edunetics. 7. Effective Date. This Waiver and First Amendment shall become effective on the date hereof (the "Effective Date"). 8. Representations and Warranties. The Borrower hereby represents and warrants to the Lenders that each of the representations and warranties made by the Borrower in the Loan Documents are true and correct on and as of the Effective Date, after giving effect to the effectiveness of this Waiver and First Amendment, as if made on and as of the Effective Date, except to the extent such representations and warranties expressly relate to an earlier date. 9. Payment of Expenses. The Borrower agrees to reimburse the Agent for all of its reasonable costs and expenses incurred in connection with the preparation, execution and delivery of this Waiver and First Amendment and any other documents prepared in connection herewith and the transactions contemplated hereby, including without limitation the reasonable fees and disbursements of counsel to the Agent. 10. No Other Amendments; Confirmation. Except as expressly amended hereby, the provisions of the Credit Agreement and each of the other Loan Documents are and shall remain in full force and effect. 11. Governing Law. This Waiver and First Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. 12. Counterparts. This Waiver and First Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Waiver and First Amendment may be delivered by facsimile transmission of the relevant signature pages hereof. 13. Guarantors' Consent. By signing below, each Guarantor party to the Global Security Agreement consents to the execution and delivery of this Waiver and First Amendment and reaffirms its respective obligations under the Global Security Agreement. IN WITNESS WHEREOF, the undersigned have caused this Waiver and First Amendment to be executed and delivered by their duly authorized officers as of the date first above written. NATIONAL EDUCATION CORPORATION By: /s/ _________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer BZW DIVISION OF BARCLAYS BANK PLC, as Agent and as a Lender By: /s/ ____________________________ Name: Title: ICS LEARNING SYSTEMS, INC. By: /s/ ______________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer INTERNATIONAL CORRESPONDENCE SCHOOLS, INC. By: /s/ ______________________________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer ICS INTANGIBLES HOLDING COMPANY By: /s/ _____________________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer NETG HOLDING, INC. By: /s/ ________________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer NATIONAL EDUCATION TRAINING GROUP, INC. By: /s/ _______________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer NATIONAL EDUCATION INTERNATIONAL CORP. By: /s/ ______________________________ Name: Keith K. Ogata Title: Vice President, Chief Financial Officer and Treasurer EX-10.27 4 EXHIBIT 10.27 LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made and entered into as of ___________, 1996, by and between STECK-VAUGHN COMPANY (the "Borrower"), a Delaware corporation, and NATIONSBANK OF TEXAS, N.A. ("Lender"), a national banking association, who agree as follows: 1. Definitions. Unless a particular word or phrase is otherwise defined or the context otherwise requires, each of the following-listed terms, as used in this Agreement, has the meaning indicated below (such meaning to be applicable to both the singular and plural forms of such term): Each of the terms Accounts, Account Debtor, Equipment, Inventory and General Intangibles shall have the respective meanings assigned to that term in the Texas Uniform Commercial Code - Secured Transactions in force on the date of this Agreement. Advance shall mean an advance of funds by Lender, pursuant to this Agreement or one of the other Loan Documents. Affiliate shall mean any Person controlling, controlled by or under common control with any other Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or otherwise. If any Person shall own, directly or indirectly, twenty percent (20%) or more of the indicia of equity rights (whether outstanding capital stock or otherwise) of another Person, such Person shall be deemed to be an Affiliate. Annual Audited Financial Statements shall mean the annual financial statements of a Person, including all notes thereto, which statements shall include a balance sheet as of the end of that Person's fiscal year and an income statement and a statement of cash flow for such fiscal year, all setting forth in comparative form the corresponding figures from the previous fiscal year, all prepared in conformity with Generally Accepted Accounting Principles and accompanied by a report and opinion of independent certified public accountants satisfactory to Lender, which shall state that such financial statements, in the opinion of such accountants, present fairly the financial position of such Person as of the date thereof, and the results of that Person's operations for the period covered thereby, in conformity with Generally Accepted Accounting Principles. Borrowing Base shall mean, as of any particular time, an amount equal to the sum of (i) 85.0% of the Eligible Accounts, plus (ii) 50.0% of the value (as carried on Borrower's books) of the Eligible Inventory. Borrowing Base Report shall mean a report, in substantially the form of Exhibit "A," attached hereto, duly completed and signed by the chief financial officer or treasurer of Borrower. Business Day shall mean a day when Lender is open for business in Austin, Texas. Business Entity shall mean corporations, partnerships, joint ventures, joint stock associations, business trusts and other business entities. Chapter One shall mean Chapter One of the Texas Credit Code, as in effect on the date of this Agreement. Code shall mean the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. Collateral shall mean all accounts, inventory and proceeds now or hereafter subject to the Security Agreement, or intended so to be. Commitments shall mean the commitments to lend funds under Article 2 of this Agreement. Contract Rate has the meaning designated in Section 3.1. Current Accounts Receivable shall mean all Accounts that, as of the date of any determination of Current Accounts Receivable: (a) are, or were, due and payable not more than ninety (90) days from the date of the invoice or agreement evidencing same; (b) have been billed within thirty (30) days after the shipment of the goods or the providing of services giving rise to such Accounts; (c) were billed not more than ninety-one (91) days before such date of determination; (d) arise from the performance of services by the obligee of the Account which have been fully performed, or from the absolute sale and delivery of goods, subject to normal return policies, by the obligee of the Account in which such obligee had the sole and complete ownership; (e) are not subject to set-off, counterclaim, defense, allowance or adjustment (other than discounts for prompt payment shown on the invoice) or to dispute, objection or complaint by the Account Debtor concerning its liability on the Account; (f) arose in the ordinary course of business of the obligee thereon; and (g) are owed by an Account Debtor that is not bankrupt or insolvent. Current Credit Limit has the meaning designated in Section 2.1.2. Debt to EBITDA Ratio shall mean, as of the end of any Person's fiscal year, the ratio of (i) such Person's EBITDA for that year, to (ii) the unpaid, principal balance of all Indebtedness (other than Subordinated Debt) for borrowed money, and all lease obligations, owed by such Person, at the end of such fiscal year. EBITDA shall mean Net Income, plus (a) depreciation, depletion, obsolescence and amortization of Property determined in accordance with Generally Accepted Accounting Principles, plus (b) changes in deferred taxes, reserves and other non-cash charges deducted from receipts in accordance with Generally Accepted Accounting Principles in determining Net Income, plus (c) interest, plus (d) income tax. Eligible Account Debtor shall mean an Account Debtor who is neither (i) an Affiliate of Borrower, nor (ii) an Account Debtor with whom Borrower has suspended doing business. Eligible Accounts shall mean all Current Accounts Receivable that are owed to Borrower, by an Eligible Account Debtor, and in which Lender either (i) holds a first-priority, perfected security interest, or (ii) would hold a first-priority, perfected security interest if the Security Effective Date had occurred and Lender had properly filed the Financing Statements. Eligible Inventory shall mean all Inventory that consists of finished goods produced by Borrower and owned and held by Borrower for sale, and all unused paper owned by Borrower and intended for use in producing such finished goods, in which Lender either (i) holds a first-priority, perfected security interest, or (ii) would hold a first-priority, perfected security interest if the Security Effective Date had occurred and Lender had properly filed the Financing Statements. ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations, rulings and interpretations adopted by the Internal Revenue Service or the Department of Labor thereunder. Event of Default shall mean any of the events specified as an Event of Default in Section 8 of this Loan Agreement; provided there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and Default shall mean any of such events, whether or not any such requirement has been satisfied. Financing Statements shall mean all such Uniform Commercial Code financing statements as Lender shall require, in Proper Form, duly executed by Borrower or others to give notice of and to perfect or continue perfection of Lender's security interest in all Collateral. Generally Accepted Accounting Principles shall mean, as to a particular Person, such accounting practice as, in the opinion of the independent accountants of recognized standing regularly retained by such Person and acceptable to Lender, conforms at the time to generally accepted accounting Principles, consistently applied. Generally accepted accounting principles means those principles and practices (a) which are recognized as such by the Financial Accounting Standards Board, (b) which are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the most recent financial statements of the relevant Person furnished to Lender, and (c) which are consistently applied for all periods after the date hereof so as to reflect properly the financial condition, and results of operations and changes in cash flow, of such Person. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board in order for such principle or practice to continue as a Generally Accepted Accounting Principle or practice, all reports and financial statements required hereunder may be prepared in accordance with such change only after written notice of such change is given to Lender. Governmental Authority shall mean the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any agency, department, commission, board, bureau, court, other tribunal having jurisdiction over Lender, or Borrower, or any of their respective Properties. Guaranty Agreement shall mean that certain Guaranty Agreement dated of even date with this Agreement and signed by Guarantor, by which Guarantor guarantees payment of all Indebtedness now or hereafter evidenced by any one (1) or more of the Notes. Guarantor shall mean Steck-Vaughn Publishing Corporation, a Delaware corporation that owns 100% of the equity interests in the Borrower. Hazardous Materials shall mean (i) any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et seq.), as amended from time to time, and regulations promulgated thereunder; (ii) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et seq.) ("CERCLA"), as amended from time to time, and regulations promulgated thereunder; (iii) asbestos; (iv) polychlorinated biphenyls; (v) any substance the presence of which on any of Borrower's Properties is prohibited by any Governmental Authority; and (vi) any other substance which by any governmental requirement requires special handling in its collection, storage, treatment or disposal. Hazardous Materials Contamination shall mean the contamination (whether presently existing or hereafter occurring) of the improvements, facilities, soil, ground water, air or other elements on, or of, any of Borrower's Properties by Hazardous Materials, or the contamination of the buildings, facilities, soil, ground water, air or other elements on, or of, any other property as a result of Hazardous Materials at any time (whether before or after the date of the Deed of Trust) emanating from any of Borrowers' Properties. Highest Lawful Rate shall mean the maximum nonusurious rate of interest permitted to be charged, contracted for, received or collected by applicable federal or Texas law (whichever shall permit the higher lawful rate) from time to time in effect. At all times, if any, as Chapter One shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Chapter One) from time to time in effect. Indebtedness shall mean and include all items which in accordance with Generally Accepted Accounting Principles would be included on the liability side of a balance sheet on the date as of which Indebtedness is to be determined (excluding capital stock, surplus, surplus reserves and deferred credits); provided, that such term shall not mean or include any Indebtedness in respect of which monies sufficient to pay and discharge the same in full (either on the expressed date of maturity thereof or on such earlier date as such Indebtedness may be duly called for redemption and payment) have been deposited with a depository, agency or trustee acceptable to Lender in trust for the payment thereof. Investment shall mean the purchase or other acquisition of any securities or Indebtedness of, or the making of any loan, advance, transfer of Property or capital contribution to, or the incurring of any liability, contingent or otherwise, in respect of the Indebtedness of, any Person. Legal Requirement shall mean any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority. Lending Limit shall mean the limit imposed by one or more Legal Requirements on the liability of Borrower to Lender. Lien shall mean any security interest, pledge, lien or restriction of any kind, whether based on common law, constitutional provision, statute or contract, to secure performance of any obligation. Loan Documents shall mean this Agreement, the Notes, the Guaranty Agreement, all Security Documents, all instruments, certificates and agreements now or hereafter executed or delivered to Lender pursuant to any of the foregoing, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. Loans shall mean the loans described in Article 2 of this Agreement. Loan shall mean any of the Loans. NEC means National Education Corporation, a Delaware corporation. Net Income shall mean gross revenues and other proper income credits, less all proper income charges (including taxes), all determined in accordance with Generally Accepted Accounting Principles; provided, that there shall not be included in such revenues (i) any income representing the excess of equity in any Subsidiary at the date of acquisition over the investment in such Subsidiary, (ii) any interest in the undistributed earnings of any Person which is not a Subsidiary, (iii) any earnings of any Subsidiary for any period prior to the date such Subsidiary was acquired, (iv) any gains resulting from the write-up of assets, (v) any proceeds of any life insurance policy, or (vi) any gain which is classified as "extraordinary" in accordance with Generally Accepted Accounting Principles. Notes shall mean the notes described in Article 2 of this Agreement, together with all renewals, amendments, modifications, extensions and rearrangements of, and substitutions for, any of such notes. Note shall mean any of the Notes. Officer's Certificate shall mean a certificate signed in the name of the relevant Business Entity by either its President, one of its Vice Presidents, its Treasurer, its Secretary or one of its Assistant Treasurers or Assistant Secretaries, or any of its General Partners. Opinion Letter shall mean the opinion letter of counsel for Borrower, in Proper Form. Organizational Documents shall mean, with respect to a corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a partnership, the partnership agreement establishing such partnership; and with respect to a trust, the written instrument establishing such trust; in each case including any and all modifications thereof. Parties shall mean all Persons other than Lender executing any Loan Document. Past Due Rate shall mean the lesser of (i) the Highest Lawful Rate, or (ii) the Prime Rate plus three percent (3.0%). Permitted Investments shall mean all investments allowed by the Borrower's current investment policy, a copy of which has been provided to Lender. Person shall mean any individual, Business Entity, trust, unincorporated organization, Governmental Authority or any other form of entity. Plan shall mean any plan subject to Title IV of ERISA and maintained for employees of Borrower or of any member of a "controlled group of corporations", as such term is defined in the Code, of which Borrower, or any of its Subsidiaries, is a part, or any such plan to which Borrower, or any of its Subsidiaries, is required to contribute on behalf of its employees. Pre-Tax Income shall mean Net Income plus federal income taxes, state income taxes and international income taxes. Prime Rate shall mean the varying rate so designated by Lender, and established by Lender, from time to time as one of Lender's general reference rates for calculating interest. The Prime Rate is a reference rate and is not necessarily the lowest rate actually charged to any customer. Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. Proper Form shall mean in form and substance reasonably satisfactory to Lender. Property shall mean any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible. Quarterly Unaudited Financial Statements shall mean the quarterly financial statements of a Person, including all notes thereto, which statements shall include a balance sheet as of the end of such quarter and an income statement and a statement of cash flow for such fiscal quarter, and for the fiscal year to date, subject to normal year-end adjustments, all setting forth in comparative form the corresponding figures for the corresponding fiscal quarter of the preceding year, prepared in accordance with Generally Accepted Accounting Principles and certified by the president, treasurer or chief financial officer of such Person as being true and correct and fairly reflecting the financial position of such Person as of the date thereof and the results of its operations for the period covered thereby, subject to said normal year-end adjustments. Security Agreement shall mean the Security Agreement dated of even date with this Agreement and signed by Borrower, covering Borrower's Accounts and Inventory. Security Documents shall mean this Agreement, the Security Agreement, and any and all Financing Statements now or hereafter executed and delivered by any Person (other than solely by Lender) in connection with, or as security for the payment or performance of, the Notes or any Indebtedness created under this Agreement. Security Effective Date has the meaning designated in the Security Agreement. Subsidiary shall mean, as to Borrower, any Business Entity of which forty percent (40%) or more of the indicia of equity rights (whether outstanding capital stock or otherwise) is at the time directly or indirectly owned by Borrower, or by one or more of its Subsidiaries. Subordinated Debt shall mean Indebtedness that has been, pursuant to a written agreement that is acceptable to Lender, subordinated by the owner, or obligee, thereof, to Indebtedness owed, or to become owing, to Lender. Tangible Net Worth shall mean total assets (valued at cost less normal depreciation) except Investments that are not Permitted Investments, less (1) all intangibles, (2) all liabilities, and (3) all Indebtedness and other amounts owed by NEC, all determined in accordance with Generally Accepted Accounting Principles. The term "intangibles" shall include, without limitation, (i) deferred charges (other than deferred marketing expense), (ii) the amount of any write-up in the book value of any assets contained in any balance sheet resulting from revaluation thereof or any write-up in excess of the cost of such assets acquired (other than any FASB 115 write-up of assets to market value), and (iii) the aggregate of all amounts appearing on the assets side of any such balance sheet for franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, goodwill, experimental or organizational expenses and other like intangibles; except that "intangibles" shall not include prepaid items. The term "liabilities" shall include, without limitation, (i) Indebtedness secured by Liens on Property of the Person with respect to which Tangible Net Worth is being computed whether or not such Person is liable for the payment thereof, (ii) deferred liabilities, and (iii) obligations under leases which have been capitalized. $15,000,000.00 Note has the meaning designated in Section 2.1. The following terms shall have the respective meanings ascribed to them in the Texas Business and Commerce Code as enacted and in force in the State of Texas on the date hereof: accessions, continuation statement, fixtures, proceeds, security interest and security agreement. 2. The Loans. 2.1 The $15,000,000.00 Revolving Loan. 2.1.1 Borrower has signed, and delivered to Lender, a Revolving Promissory Note (the "$15,000,000.00 Note") in the stated principal amount of $15,000,000.00 dated of even date herewith and made payable to the order of Lender. Lender shall, subject to the terms and conditions of this Agreement, make a Revolving Loan to Borrower that will create indebtedness evidenced by the $15,000,000.00 Note. That Revolving Loan will be made by the making of one or more Advances. Lender's agreement to make such Revolving Loan establishes a $15,000,000.00 line of credit (the "$15,000,000.00 Line of Credit"); and each Advance made under the $15,000,000.00 Line of Credit shall, at the time such Advance is made, create principal indebtedness evidenced by the $15,000,000.00 Note, in the amount of that Advance. 2.1.2 Lender shall have no obligation to make any Advance under the $15,000,000.00 Line of Credit on or after June 10, 1998. In addition, Lender shall have no obligation to make an Advance under the $15,000,000.00 Line of Credit if making that Advance would cause the unpaid principal balance of the $15,000,000.00 Note to exceed the Current Credit Limit. As of any particular date, and until June 10, 1997, the Current Credit Limit shall equal the lesser of (i) $15,000,000.00, or (ii) the Borrowing Base. As of any particular date beginning on June 10, 1997, and continuing until June 10, 1998, the Current Credit Limit shall equal the lesser of (i) the amount by which $15,000,000.00 exceeds the unpaid principal balance of the First Term Note, or (ii) the Borrowing Base. Borrower shall not, at any time, allow the unpaid principal balance of the $15,000,000.00 Note to exceed the Current Credit Limit. Borrower shall not at any time allow the sum of the unpaid principal balances of the First Term Note and the Second Term Note to exceed an amount equal to the Borrowing Base. 2.1.3 Within sixty (60) days after Lender receives Borrower's Annual Audited Financial Statements for Borrower's 1995 fiscal year, Lender will give Borrower notice of Lender's intentions regarding renewal and extension of the $15,000,000.00 Line of Credit. However, Lender shall not be obligated to renew or extend the $15,000,000.00 Line of Credit on the same terms or on any other terms. If Lender fails to give such notice, Borrower's sole remedy shall be to receive such a notice promptly after Borrower's request therefor. 2.1.4 Beginning on the date of this Agreement and continuing until June 10, 1998, a commitment fee shall accrue daily with respect to the unused portion of the $15,000,000.00 Line of Credit. The amount of that fee that shall accrue each day shall equal the product of (i) 1/360 times (ii) .0025 times (iii) the amount by which a certain difference exceeds the outstanding, unpaid principal balance of the $15,000,000.00 Note, on such day; such certain difference being the difference produced by subtracting the unpaid, principal balance of the First Term Note from $15,000,000.00. On each date when a payment is due under the $15,000,000.00 Note (or would be due if any accrued interest were owing thereunder), Borrower shall pay to Lender the accrued, unpaid portion of such commitment fee. 2.1.5 If Borrower has not previously paid an initial commitment fee of $18,750.00 to Lender, in consideration of Lender's agreement to make the Loans, then Borrower shall promptly pay such initial commitment fee, in cash, to Lender. 2.2 The Term Loans. 2.2.1 Subject to the terms and conditions hereof, Lender shall make, and Borrower shall accept, the First Term Loan on June 10, 1997. The First Term Loan shall be in an amount equal to the lesser of (i) the unpaid, principal balance of the $15,000,000.00 Note on June 10, 1997, or (ii) the Borrowing Base on June 10, 1997. The First Term Loan shall be made by Borrower's execution and delivery to Lender, and Lender's acceptance of, a Promissory Note (the "First Term Note") in the form attached hereto as Exhibit "B"; and, the delivery and acceptance of the First Term Note shall be in renewal and extension of unpaid principal indebtedness evidenced by the $15,000,000.00 Note immediately before the execution and delivery of the First Term Note. The stated principal amount of the First Term Note shall be the amount of the First Term Loan. 2.2.2 Subject to the terms and conditions hereof, Lender shall make, and Borrower shall accept, the Second Term Loan on June 10, 1998. The Second Term Loan shall be in an amount equal to the lesser of (i) the unpaid, principal balance of the $15,000,000.00 Note on June 10, 1998, or (ii) the amount by which the Borrowing Base exceeds the unpaid balance of the First Term Note on June 10, 1998. The Second Term Loan shall be made by Borrower's execution and delivery to Lender, and Lender's acceptance of, a Promissory Note (the "Second Term Note") in the form attached hereto as Exhibit "C"; and, the delivery and acceptance of the Second Term Note shall be in renewal and extension of unpaid principal indebtedness evidenced by the $15,000,000.00 Note immediately before the execution and delivery of the Second Term Note. The stated principal amount of the Second Term Note shall be the amount of the Second Term Loan. 2.3 Prepayments. Borrower may prepay any and all of the indebtedness evidenced by one or more of the Notes, in whole or in part, if: (i) Borrower simultaneously pays all interest that has accrued on any principal indebtedness that is prepaid; (ii) Borrower gives notice of the proposed prepayment, to Lender, in the manner specified in Section 9.2, at least three (3) Business Days before the Business Day of the proposed prepayment; (iii) each partial prepayment is to be applied to principal installments, if any, in the inverse order of maturity; and (iv) any prepayment is made within either a Prime Interest Period or the last three (3) Business Days of a LIBO Interest Period. 3. Pre-Maturity Interest Rate. 3.1 Rate Options. The Contract Rate during each Interest Period shall be determined in accordance with the provisions of this Article 3. At any time that is at least three (3) Business Days, but not more than five (5) Business Days, before the beginning of an Interest Period, Borrower may exercise an option (the "Rate Option") to designate a LIBO Rate for that Interest Period. Borrower may exercise the Rate Option by either (i) giving written notice of such exercise to Lender, which notice shall identify the first day of such Interest Period and the length of such Interest Period (which length must be either one month, two months, three months or six months), or (ii) giving notice to Lender in any other manner acceptable to Lender. If the Rate Option is so exercised, then a LIBO Interest Period of the length specified in that notice shall begin on the date specified in that notice. For each LIBO Interest Period (i.e., an Interest Period with respect to which a Rate Option has been exercised), the LIBO Rate shall be: (i) Lender's 30-Day LIBO Rate plus the Additional Percentage, if that LIBO Interest Period is one month; (ii) Lender's 60-Day LIBO Rate plus the Additional Percentage, if that LIBO Interest Period is two months; (iii) Lender's 90-Day LIBO Rate plus the Additional Percentage, if that LIBO Interest Period is three months; and (iv) Lender's 180-day LIBO Rate plus the Additional Percentage, if that LIBO Interest Period is six months. For each Prime Interest Period, the Contract Rate shall be the Prime-Based Rate. 3.2 Definitions. Each of the following-stated terms has the meaning indicated: (a) "Interest Period" means either a LIBO Interest Period or a Prime Interest Period. (b) "LIBO Interest Period" means a period beginning on the commencement date specified in a notice that is given to exercise a Rate Option and ending (i) immediately before the numerically corresponding day in the first, second, third or sixth calendar month after the month that includes such commencement date, or (ii) if such first, second, third or sixth calendar month has no such numerically corresponding day, then at the end of the last day of such month. (c) "Prime Interest Period" means any period of one day, or two or more consecutive days, for which no Rate Option has been exercised. (d) Each of the terms "30-Day LIBO Rate, "60-Day LIBO Rate," "90-Day LIBO Rate," and "180-Day LIBO Rate" means the rate so designated by Lender and established by Lender from time to time with reference to the rate(s) at which deposits in U.S. Dollars are offered to Lender in the interbank eurodollar market, for periods of 30 days, 60 days, 90 days and 180 days, respectively; and those rates may not be the lowest rates charged by Lender. (e) The Additional Percentage shall be 1.50% unless adjusted in accordance with this Paragraph (e). If, before Borrower's Annual Audited Financial Statements for 1996 are available, Borrower advises Lender that, in Borrower's opinion, Borrower's operating income (determined in accordance with Generally Accepted Accounting Principles) for 1996 will be at least $14,000,000.00, then the Additional Percentage shall be adjusted to 1.30% effective as of the first day of Borrower's 1997 fiscal year; provided, however, that if Borrower's Annual Audited Financial Statements for 1996 show that such operating income was not at least $14,000,000.00, then such adjustment in the Additional Percentage shall be of no effect, so that the Additional Percentage for 1997 shall be 1.50%. If, before Borrower's Annual Audited Financial Statements for 1997 are available, Borrower advises Lender that, in Borrower's opinion, Borrower's operating income for 1997 will be at least $17,000,000.00, then the Additional Percentage shall be adjusted to 1.25% effective as of the first day of Borrower's 1998 fiscal year; provided, however, that if Borrower's Annual Audited Financial Statements for 1997 show that such operating income was not at least $17,000,000.00, then such adjustment in the Additional Percentage shall be of no effect, so that the Additional Percentage for 1998 and each year thereafter shall be 1.50%. If Borrower's operating income for 1997 is at least $17,000,000.00, then the Additional Percentage shall be 1.25% thereafter until the date immediately following Borrower's first fiscal year, if any, in which its operating income is less than $17,000,000.00; and, on such date, the Additional Percentage shall return to 1.50% and remain at 1.50% at all times thereafter. Any calculation of accrued interest based on an Additional Percentage that is less than 1.50% shall be provisional unless and until a determination is made from Borrower's Annual Audited Financial Statements that the Additional Percentage was appropriately adjusted. (f) The "Prime-Based Rate" shall be the Prime Rate, except that at any time when the Additional Percentage is less than 1.50%, the Prime- Based Rate shall be the difference produced by subtracting 0.25% from the Prime Rate. 3.3 Special Provisions Regarding the Contract Rate. If Lender determines (which determination shall be presumed correct absent evidence of error): (i) Unavailability. At the beginning of any LIBO Interest Period, that by reason of any one (1) or more circumstances arising on or after the date of this Agreement, dollar deposits in an amount substantially equal to the unpaid balance of the Loans (and for a period substantially equal to the LIBO Interest Period) are not generally available in the interbank eurodollar market, or adequate and fair means do not exist for ascertaining the LIBO-Based Rate, then the Contract Rate during that Interest Period shall equal the Prime-Based Rate until Lender notifies Borrower that such circumstances no longer exist. (ii) Illegality. At any time, that the initiation, or continued use, of the LIBO-Based Rate as a basis for determining the Contract Rate has become unlawful under Lender's good faith interpretation of any law, governmental rule, regulation, guideline or order (or would conflict with any such rule, regulation, guideline or order not having the force of law), or has become impractical as a result of a contingency occurring on or after the date of this Agreement which materially and adversely affects the interbank eurodollar market, then the Contract Rate shall thereafter equal the Prime-Based Rate. 4. Conditions. 4.1 All Advances. Lender's obligation to make any Advance is subject to the accuracy of all Borrower's representations and warranties when made and on the date of such Advance, to Borrower's performance of its obligations under the Loan Documents, and to satisfaction of the following additional conditions: (a) Lender shall have received the following, all of which shall be duly executed and in Proper Form: (1) the signed Note that will evidence indebtedness created by such Advance; (2) the Guaranty Agreement and such other documents as Lender may reasonably require; and (3) if the Security Effective Date has occurred, evidence satisfactory to Lender as to the perfection and first-priority of the security interests granted by the Security Documents; (b) no Default or Event of Default shall have occurred and be continuing; (c) making such Advance shall not be prohibited by, or subject Lender to any penalty or onerous condition under, any Legal Requirement, including but not limited to, any Lending Limit; and (d) Borrower shall have paid all expenses of the type described in Section 9.8 hereof through the date of such Advance. 4.2 First Advance. In addition to the matters described in Section 4.1 hereof, Lender's obligation to make the first Advance is subject to Lender's receipt of each of the following, in Proper Form: (a) the signed $15,000,000.00 Note; (b) a Certificate of Corporate Resolution executed by the Secretary and the President of Borrower dated as of the date hereof; (c) a certificate from the Secretary of State or other appropriate public official of Delaware as to Borrower's continued existence and good standing; (d) a certificate from the appropriate public official of the State of Texas as to Borrower's due qualification and good standing; (e) the Security Documents; (f) the Opinion Letter; and (g) policies or certificates of insurance addressed to Lender reflecting the insurance required by Section 6.9 hereof; and to the further condition that, at the time of the first Advance, all legal matters incident to the transactions herein contemplated shall be satisfactory to counsel for Lender. 4.3 Term Loans. In addition to the matters described in Sections 4.1 and 4.2 hereof, Lender's obligation to make each of the First Term Loan and the Second Term Loan is subject to Lender's receipt, in Proper Form, of the signed First Term Note and the signed Second Term Note, respectively. 5. Representations and Warranties. To induce Lender to enter into this Agreement and to make the Loans, Borrower represents and warrants to Lender, as of the date hereof, as follows: 5.1 Organization. Borrower is duly organized, validly existing and in good standing under the laws of the State of Delaware; has all power and authority to conduct its business as presently conducted; and is duly qualified to do business, and in good standing, in the State of Texas. 5.2 Financial Statements. Borrower's financial statements and Guarantor's financial statements that have been delivered to Lender fairly present, in accordance with Generally Accepted Accounting Principles, the financial condition and the results of operations of Borrower as at the dates and for the periods indicated. Since the date of the most-recent of such financial statements, (i) no material adverse change has occurred in the assets, liabilities, financial condition, business or affairs of Borrower, (ii) Borrower has not become subject to any instrument or agreement materially and adversely affecting its financial condition, business or affairs, and (iii) Borrower has not engaged in any transaction outside the ordinary course of Borrower's business, as that business was conducted before such date, that materially and adversely affected its financial condition, business or affairs. 5.3 Enforceable Obligations; Authorization. The Loan Documents are legal, valid and binding obligations of the Parties, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency and other similar laws affecting creditors' rights generally and by general equitable principles. The execution, delivery and performance of the Loan Documents have been duly authorized by all necessary action of each of the Parties; are within the power and authority of each of the Parties; do not and will not contravene or violate any Legal Requirement or the Organizational Documents of any Party; to the best of Borrower's knowledge do not and will not result in the breach of, or constitute a default under, any agreement or instrument by which any Party or any of its Property may be bound or affected; and do not and will not result in the creation of any Lien upon any Property of any Party except as expressly contemplated therein. All necessary permits, registrations and consents for such making and performance have been obtained. Except as otherwise expressly stated in the Security Documents, the Liens of the Security Documents will constitute valid, perfected, first-priority Liens in the Property described therein. 5.4 Other Debt. Borrower is not in default in the payment of any Indebtedness or under any mortgage, deed of trust, security agreement, lease or other agreement to which it is a party. Except as set forth in Borrower's financial statements delivered to Lender, or as otherwise previously disclosed in writing to Lender, Borrower has no Indebtedness for borrowed money. 5.5 Litigation. Except as heretofore disclosed to Lender in writing, there is no litigation or administrative proceeding pending or, to the knowledge of Borrower, threatened against, nor any outstanding judgment, order or decree affecting, Borrower or any of its Properties before or by any Governmental Authority. Borrower is not is in default with respect to any judgment, order or decree of any Governmental Authority in any manner, or to any extent, that materially and adversely affects its financial condition, business or affairs. 5.6 Title. Borrower has good and marketable title to the Collateral, free and clear of all Liens other than those permitted by Section 7.1. 5.7 Taxes. Borrower has filed all tax returns required to have been filed and paid all taxes due, except those for which extensions have been obtained and those which are being contested in good faith and reserves deemed adequate by Lender have been established therefor. Borrower is not aware of any pending investigation by any taxing authority which in the event of an adverse determination would have a material, adverse impact on Borrower's financial condition or business prospects. 5.8 Subsidiaries. Borrower has no Subsidiaries. 5.9 Representations by Others. All written statements made by or on behalf of Borrower, in connection with any Loan Document shall not be untrue or incorrect in any material respect. 5.10 Investment Company Act Not Applicable. Neither Borrower or any of its Subsidiaries is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.11 Public Utility Holding Company Act Not Applicable. Neither Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," or an affiliate of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 5.12 Regulations G, T, U and X. None of the proceeds of any Loan will be used for the purpose of purchasing or carrying, directly or indirectly, any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System ("margin stock") or to extend credit to others for the purpose of purchasing or carrying any margin stock or for any other purpose which would constitute this transaction a "purpose credit" within the meaning of said Regulation U, as now in effect or as the same may hereafter be in effect. Neither Borrower nor any of its Subsidiaries will take or permit any action which would involve Lender in a violation of Regulation G, Regulation T, Regulation U, Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or a violation of the Securities Exchange Act of 1934, in each case as now or hereafter in effect. 5.13 ERISA. No Reportable Event (as defined in Section 4043(b) of ERISA) has occurred with respect to any Plan. Each Plan complies with all applicable provisions of ERISA, and Borrower and each of its Subsidiaries have filed all reports required by ERISA and the Code to be filed with respect to each Plan. Borrower has no knowledge of any event which could result in a liability of Borrower or any of its Subsidiaries to the Pension Benefit Guaranty Corporation. Borrower and its Subsidiaries have met all requirements with respect to funding the Plans imposed by ERISA or the Code. Since the effective date of Title IV of ERISA there have not been any nor are there now existing any events or conditions that would permit any Plan to be terminated under circumstances which would cause the lien provided under Section 4068 of ERISA to attach to any Property of Borrower or any of its Subsidiaries. The value of the Plans' benefits guaranteed under Title IV of ERISA on the date hereof does not exceed the value of such Plans' assets allocable to such benefits as of the date of this Agreement and shall not be permitted to do so hereafter. 5.14 No Financing of Corporate Takeovers. None of the proceeds of any Loan will be used to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. 5.15 Franchises, Co-licenses, etc. To the best of Borrower's knowledge, Borrower owns or has obtained all the material governmental permits, certificates of authority, leases, patents, trademarks, service marks, trade names, copyrights, franchises and licenses, and rights with respect thereto, required or necessary in connection with the conduct of its business as presently conducted. 5.16 Survival of Representations, Etc. All representations and warranties made by Borrower hereunder shall survive the delivery of the Notes to Lender and the making of the Loans hereunder, and no investigation at any time made by or on behalf of Lender shall diminish Lender's rights to rely thereon. All statements contained in any certificate or other written instrument delivered by Borrower or by any Person authorized by Borrower under or pursuant to this Agreement or in connection with the transactions contemplated hereby shall not be untrue or incorrect in any material respect. 6. Affirmative Covenants. Until (i) the termination of this Agreement, (ii) payment in full of the Notes, and (iii) performance of all obligations of Borrower under the Loan Documents, Borrower shall do, and if necessary cause to be done, each and all of the following: 6.1 Taxes, Existence, Regulations, Property, Etc. At all times (a) pay before delinquency all taxes and governmental charges of every kind upon it or against its income, profits or Property, unless and only to the extent that the same are contested in good faith, with reserves deemed adequate by Lender established therefor; (b) do all things necessary to preserve its corporate existence, qualifications, rights and franchises in all states where such qualification is necessary; (c) comply with all applicable Legal Requirements in respect of the conduct of its business and the ownership of its Property; (d) cause its Property to be protected, maintained and kept in good repair; and (e) make such replacements and additions to its Property as are reasonably necessary to conduct its business. 6.2 Financial Statements and Information. Furnish to Lender: (a) as soon as available and in any event within 120 days after the end of each fiscal year of Borrower, consolidated Annual Audited Financial Statements of Guarantor and Borrower, for such fiscal year; (b) as soon as available and in any event within 45 days after the end of each of the first three (3) quarters of each fiscal year of Borrower, consolidated Quarterly Unaudited Financial Statements of Guarantor and Borrower for such quarter; (c) concurrently with the financial statements provided for in Subsections (a) and (b) hereof, such schedules, computations and other information, in reasonable detail, as may be requested by Lender to demonstrate compliance with the covenants set forth herein or reflecting any non-compliance therewith as of the applicable date, all certified as true, correct and complete by the President or principal financial officer of Borrower, and an Officer's Certificate, in the form of Exhibit "D," signed by the President or principal financial officer of Borrower; (d) as soon as available, and in any event within 21 days after the end of each month, a Borrowing Base Report, a report showing a detailed aging of the Borrower's Accounts, and a report showing an accounting and valuation of Borrower's Inventory, all dated as of the end of such month and signed by Borrower in Proper Form; (e) as soon as available and in any event within 120 days after the end of each of NEC's fiscal years, Annual Audited Financial Statements of NEC for such fiscal year; and (f) such other information relating to the financial condition and affairs of Guarantor and Borrower as from time to time may be requested by Lender. 6.3 Debt to EBITDA Ratio. Cause Guarantor to maintain a Debt to EBITDA Ratio that does not exceed 2.0 at and as of the end of each of Guarantor's fiscal years. 6.4 Tangible Net Worth. Cause Guarantor to maintain a Tangible Net Worth in an amount of $30,000,000.00, or more, at and as of the end of each of Guarantor's quarter-annual accounting periods, beginning with such accounting period that ends on December 31, 1996. 6.5 Inspection. Permit Lender to inspect its Property, examine its files, books and records, make and keep copies thereof, and discuss its affairs with its officers and accountants, all at such times and intervals, and to such extent, as Lender reasonably desires. 6.6 Further Assurances. Promptly execute and deliver any and all other and further instruments which may be requested by Lender to cure any defect in the execution and delivery of any Loan Document or more fully to describe particular aspects of Borrower's agreements set forth in the Loan Documents or so intended to be. 6.7 Books and Records. Maintain its books of record and account in accordance with Generally Accepted Accounting Principles. 6.8 Insurance. Maintain insurance with such insurers, on such of its Properties, in such amounts and against such risks as is reasonably satisfactory to Lender, and furnish Lender satisfactory evidence thereof promptly upon request. These insurance provisions are cumulative of the insurance provisions of the Security Documents. Upon request, Borrower shall cause Lender to be named as a beneficiary, loss payee as to hazard insurance and/or additional insured as to liability insurance (as required by Lender) of such insurance and shall provide Lender with copies of the policies of insurance and a certificate of the insurer that the insurance required by this Section 6.9 may not be canceled, reduced or affected in any manner without thirty (30) days' prior written notice to Lender. 6.9 Notice of Certain Matters. Notify Lender immediately upon acquiring knowledge of the occurrence of any of the following: the institution or threatened institution of any lawsuit or administrative proceeding that could reasonably be expected to materially and adversely affect Borrower's financial condition, business or affairs; the occurrence of any material adverse change in the assets, liabilities, financial condition, business or affairs of Borrower; or the occurrence of any Event of Default or any Default. Borrower will notify Lender in writing at least thirty (30) Business Days before the date that Borrower changes its name, the location of its chief executive office or principal place of business, or the place where it keeps its books and records. 6.10 ERISA. At all times: (a) Maintain and keep in full force and effect each Plan; (b) Make contributions to each Plan in a timely manner and in an amount sufficient to comply with the minimum funding standards requirements of ERISA; (c) Immediately upon acquiring knowledge of any Reportable Event or of any "prohibited transaction," as such term is defined in the Code, in connection with any Plan, furnish Lender a statement executed by the president or chief financial officer of Borrower setting forth the details thereof and the action which Borrower proposes to take with respect thereto and, when known, any action taken by the Internal Revenue Service with respect thereto; (d) Notify Lender promptly upon receipt by Borrower or any of its Subsidiaries of any notice of the institution of any proceedings or other actions which may result in the termination of any Plan and furnish to Lender copies of such notice; (e) Acquire and maintain in amounts satisfactory to Lender from either the Pension Benefit Guaranty Corporation or authorized private insurers, when available, the contingent employer liability coverage insurance required under ERISA; (f) If requested by Lender, furnish Lender with copies of the annual report for each Plan filed with the Internal Revenue Service not later than ten (10) days after such report has been filed; and (g) If requested by Lender, furnish Lender with copies of any request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted to the Secretary of the Treasury, the Department of Labor or the Internal Revenue Service, as the case may be. 6.11 Indebtedness. Pay timely all Indebtedness incurred by it and perform all covenants, and satisfy all conditions, connected therewith. 6. (a) If to Borrower: Steck-Vaughn Company 8701 North MoPac, Suite 200 Austin, Texas 78759 Attention: Vice President, Finance; with a copy to: National Education Corporation 2601 Main Street Irvine, California 92714 Attention: General Counsel (b) If to Lender: NationsBank of Texas, N.A. P.O. Box 908 Austin, Texas 78781-0908 (Attention: Ms. Sylvia H. Maggio); or to such other address of a party hereto as that party may designate by notice hereunder. Notices shall be deemed to have been given when personally delivered or, if mailed, on the next Business Day after mailing. 9.3 Governing Law. Each Loan Document shall be governed by and construed in accordance with the laws of the State of Texas and the United States of America. Any legal proceeding against Lender arising out of, or in connection with, any of the Loan Documents shall be brought in the District Courts of Travis County, Texas, or in the United States District Court for the Western District of Texas, Austin Division. 9.4 Survival; Parties Bound. All representations, warranties, covenants and agreements made by or on behalf of Borrower in connection herewith shall survive the execution and delivery of the Loan Documents, shall not be affected by any investigation made by any Person, shall bind Borrower and its successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. Lender's agreement to make Loans to Borrower shall not inure to the benefit of any successor or assign of Borrower. The term of this Agreement shall be until the final maturity of all the Notes and the payment of all amounts due under the Loan Documents, whereupon it shall terminate; provided, however, that if Borrower pays all amounts owing under the Loan Documents and agrees in writing that Lender has no further obligations under the Loan Documents, then this Agreement shall terminate. 9.5 Counterparts. This Agreement may be executed in several identical counterparts, and by the parties hereto on separate counterparts; and each counterpart, when so executed and delivered, shall constitute an original instrument. All such separate counterparts shall constitute but one and the same instrument. 9.6 Usury Not Intended; Refund of Any Excess Payments. It is the intent of the parties in the execution and performance of this Agreement to contract in strict compliance with the usury laws of the State of Texas and the United States of America from time to time in effect. In furtherance thereof, Lender and Borrower stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the Highest Lawful Rate, and that for purposes hereof "interest" shall include the aggregate of all charges which constitute interest under such laws and are contracted for, reserved, taken, charged or received under the Loan Documents. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (a) treat all Loans as but a single extension of credit (and Borrower and Lender agree that such is the case and that provision herein for multiple Loans and Notes is for convenience only), (b) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (c) exclude voluntary prepayments and the effects thereof, and (d) "spread" the total amount of interest throughout the entire contemplated term of the Loans. The provisions of this paragraph shall control over all other provisions of the Loan Documents which may be in apparent conflict herewith. 9.7 Captions. The headings and captions appearing in the Loan Documents have been included solely for convenience and shall not be considered in construing the Loan Documents. 9.8 Expenses. Any provision to the contrary notwithstanding, and whether or not the transactions contemplated by this Agreement shall be consummated, Borrower shall pay on demand all out-of-pocket expenses (including, without limitation, the fees and expenses of counsel for Lender) in connection with the negotiation, preparation, execution, filing, recording, refiling, re-recording, modification, supplementing and waiver of the Loan Documents and the making, servicing and collection of the Loans. Borrower's obligations under this and the following section shall survive the termination of this Agreement and the payment of the Notes. 9.9 Indemnification. Borrower shall indemnify, defend and hold Lender harmless from and against any and all loss, liability, obligation, damage, penalty, judgment, claim, deficiency and expense (including interest, penalties, attorneys' fees and amounts paid in settlement) to which Lender may become subject arising out of or based upon the Loan Documents or any Loan, except for Lender's failure to perform its obligations under the Loan Documents or any Legal Requirements. 9.10 Entire Agreement. The Loan Documents embody the entire agreement between Borrower and Lender and supersede all prior proposals, agreements and understandings relating to the subject matter hereof. Each of Lender and Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Documents. 9.11 Severability. If any provision of any Loan Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. 9.12 Sale or Assignment. Lender reserves the right, in its sole discretion, without notice to Borrower, to sell participations in all or any part of any Loan as long as Lender remains the "lead bank." 9.13 Loan Agreement Controls. If there are any conflicts or inconsistencies among this Agreement and any of the other Loan Documents, this Agreement shall prevail and control. 9.14 Commitment. Lender has no commitment to lend sums to Borrower other than as specifically set forth herein. 9.15 Arbitration. (a) Basic Requirements. Any controversy or claim between or among any of the Parties and Lender, including, but not limited to, any claim arising out of or relating to this Agreement or any related agreements or instruments and any claim based on or arising from any alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and Mediation Services, Inc. (J.A.M.S.) and the "Special Rules" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any one or more of the Parties, and/or Lender, may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this Agreement applies, in any court having jurisdiction over such action. (b) Special Rules. The arbitration shall be (i) conducted in the city of Borrower's domicile at the time of this Agreement's execution, and (ii) administered by J.A.M.S., who will appoint an arbitrator. If J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) days of the demand for arbitration; and, the arbitrator shall, only upon a showing of cause, be permitted to extend the commencement of such hearing for no more than an additional sixty (60) days. (c) Reservation of Rights. Nothing in this Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or any waivers contained in this Agreement; or (ii) be a waiver by Lender of the protection afforded to it by 12 U.S.C Paragraph 91 or any substantially equivalent state law; or (iii) limit the right of Lender (a) to exercise self help remedies as permitted by the Texas Uniform Commercial Code - Secured Transactions, or (b) to foreclosure of any lien or security interest against the Collateral, or (c) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief, writ of possession, or the appointment of a receiver. Lender may exercise such self help rights, cause a foreclosure of any such lien or security interest, or obtain any such provisional or ancillary remedies before, during, or after the pendency of any arbitration proceeding brought pursuant to this Agreement. Neither Lender's exercise of self help remedies, nor Lender's institution or maintenance of an action for foreclosure or any such provisional or ancillary remedies, shall constitute a waiver of the right of any of the Parties, or Lender, to compel arbitration of the merits of the controversy or claim occasioning resort to such exercise, institution or maintenance. 9.16 Waiver of Offset Rights. Lender shall have no right to offset any of Borrower's funds or moneys on deposit with Lender against any of Borrower's liabilities or obligations under the Loan Documents; provided, however that this Section 9.16 shall not impair or diminish any security interest granted by Borrower or Lender's rights to enforce any such security interest. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. BORROWER: LENDER: STECK-VAUGHN COMPANY NATIONSBANK OF TEXAS, N.A. (a Delaware corporation) (a national banking association) By: /s/ By: /s/ _____________________ ________________________ Print Name: Floyd D. Rogers Print Name: Sylvia H. Maggio Title: Vice President, Finance Title: Vice President and Treasurer **EXHIBITS INTENTIONALLY OMITTED; FURNISHED UPON REQUEST. EX-11.1 5 EXHIBIT 11.1 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF PRIMARY EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Three Months Ended March 31, ______________________ 1996 1995 ______________________ NET INCOME (LOSS) $ 665 $ (6,157) ====================== COMMON STOCK: Shares outstanding from beginning of period 35,137 29,578 Pro rata shares: Stock options exercised 24 -- Assumed exercise of stock options, using treasury stock method 1,104 54 ______________________ Weighted average number of shares outstanding 36,265 29,632 ====================== EARNINGS (LOSS) PER SHARE $ .02 $ (.21) ======================
EX-11.2 6 EXHIBIT 11.2 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF FULLY DILUTED EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Three Months Ended March 31, ______________________ 1996 1995 ______________________ NET INCOME (LOSS) $ 665 $ (6,157) Add back senior debenture interest, net of applicable taxes -- 300 Add back junior debenture interest, net of applicable taxes 570 570 ______________________ NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $ 1,235 $ (5,287) ====================== COMMON STOCK: Shares outstanding from beginning of period 35,137 29,578 Stock options exercised 24 -- Assumed exercise of stock options, using treasury stock method 1,236 54 Assumed conversion of senior subordinated debentures, from the beginning of the period -- 5,000 Assumed conversion of junior subordinated debentures, from the beginning of the period 2,300 2,300 ______________________ Weighted average number of shares outstanding 38,697 36,932 ====================== FULLY DILUTED EARNINGS (LOSS) PER SHARE $ .02 $ (.21) ======================
EX-27 7
5 This schedule contains summary financial information extracted from the Company's unaudited consolidated financial statements included in the Company's quarterly report on From 10-Q for the quarter ended March 31, 1996, and is qualified in its entirety by reference to such unaudited consolidated financial statements. 1,000 3-MOS DEC-31-1995 JAN-01-1996 MAR-31-1996 19,437 1,503 34,528 2,481 33,771 120,354 55,797 31,166 188,871 77,129 73,925 2,166 0 0 6,951 188,871 59,369 59,369 21,367 56,758 1,670 (50) 2,021 941 141 665 0 0 0 665 .02 .02
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