-----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, VIhBYd4fIj3MGnrHCcnLR1HQGuoqM36lDjWovukgqYImn6GtGFH63kVAoe1b4wx6 o2qu8EWmjHGZAryYD3rzZw== 0000892569-96-000251.txt : 19960320 0000892569-96-000251.hdr.sgml : 19960320 ACCESSION NUMBER: 0000892569-96-000251 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960319 SROS: NYSE SROS: PSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06981 FILM NUMBER: 96536024 BUSINESS ADDRESS: STREET 1: 18400 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 7144749400 MAIL ADDRESS: STREET 1: 18400 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92715 10-K405 1 NATIONAL EDUCATION CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ------------------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to __________________ Commission file number 1-6981 NATIONAL EDUCATION CORPORATION ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2774428 - ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 18400 VON KARMAN AVENUE IRVINE, CALIFORNIA 92715 - ---------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 474-9400 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, New York Stock Exchange $.01 par value Pacific Stock Exchange 6 1/2% Convertible Subordinated New York Stock ExchangE Debentures Due 2011 Pacific Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None ================================================================================ 2 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's voting stock held by nonaffiliates of the registrant as of February 29, 1996, based on the closing price for such Common Stock on the New York Stock Exchange on such date, was $323,042,522. The number of shares of registrant's Common Stock outstanding as of February 29, 1996, was 35,166,818. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from material that will be filed with the Securities and Exchange Commission within 120 days of registrant's fiscal year end (December 31, 1995), as part of a Proxy Statement for the registrant's Annual Meeting of Stockholders. Cover Page 2 3 PART I ITEM 1. BUSINESS. National Education Corporation (the "Company") provides training and educational services and products to individuals, educational institutions, businesses and governments. The Company was originally incorporated in California in 1954 and reincorporated in Delaware in 1972. The Company's business is conducted primarily through three operating entities: ICS Learning Systems, Inc. ("ICS"), which offers distance education in vocational, academic and professional studies to consumers and companies throughout the world; Steck-Vaughn Publishing Corporation ("Steck-Vaughn"), one of the largest publishers of supplemental educational materials; and National Education Training Group, Inc. ("NETG"), one of the largest providers of interactive multimedia products to train information technology professionals and end users of technology. COMPANY RESULTS AND DEVELOPMENTS IN 1995 The following provides a brief discussion of the Company's significant developments in 1995. A more detailed discussion of each of the Company's primary operating entities appears later in this Item 1; a more detailed description of the Company's results of operations appears in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," starting on page 15 below. Year End 1995. For 1995, the Company reported revenues of $258.6 million, which were 7.0% higher than revenues of $241.6 million in 1994. The revenue increase is due to revenue growth at ICS and Steck-Vaughn, partially offset by a reduction in revenue at NETG. For 1995, the Company recorded a net loss of $87.2 million, principally due to $81.7 million of unusual items related to restructure charges, write-downs of intangible assets at NETG, write-off of computer course hardware and related costs at ICS, settlement of litigation at Steck-Vaughn and severance payment to the Company's former Chief Executive Officer. These unusual charges were partially offset by an unusual credit for payment received to settle litigation at NETG. Excluding the unusual items, the net loss for 1995 would have been $5.5 million, compared with a net loss from continuing operations of $14.1 million for 1994. Overall, the Company recorded a net loss of $63.5 million in 1994, which included charges related to the adoption in 1994 by the Company of AICPA Statement of Position 93-7 (discussed in the next paragraph), and a $40.0 million charge recorded in the second quarter of 1994 to write-down the assets of National Education Centers, Inc. ("Education Centers") and provide for estimated costs of closing and teaching-out certain Education Centers' schools in connection with discontinuance of the Company's Education Centers operations. Please see "Discussion of Additional Business Factors--Discontinued Operations: Education Centers" on page 10 below for more information. In December 1993, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 93-7, "Reporting on Advertising Costs" (the "SOP"). The SOP generally requires advertising costs, other than direct response advertising, to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1994, but may be adopted early. In the fourth quarter of 1994, the Company adopted the SOP, effective January 1, 1994. Adoption of the SOP caused the Company to expense all of ICS' advertising, selling and promotion costs as they were incurred in 1994, rather than deferring and amortizing all such costs as in prior periods. In addition, SOP transition rules required amortization during 1994 of $19.8 million worth of advertising, selling and promotion costs that had been deferred from periods prior to December 31, 1993. For more information on adoption by ICS of the SOP, please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," beginning on page 15 below, and Note 1 to the Company's Consolidated Financial Statements, beginning on page F-6 below. Adoption of the SOP did not have a material effect on the Company's other operations. ICS Learning Systems, Inc. In 1995, ICS achieved a 16.4% increase in revenues, from $122.8 million to $143.0 million in 1995. These results were directly related to a 19,064, or 5.1%, increase in enrollments worldwide, revenue recognition from the 19.6% growth in enrollments in 1994 and a 15.4% growth in revenue from ICS' MicroMash subsidiary, which markets Computer Based Training ("CBT") products to the professional market. The average total contract price for an ICS student increased during 1995 as a result of more enrollments in the higher - 1 - 4 priced Personal Computer ("PC") courses and other related courses. Revenue per enrollment also increased as a result of the higher average contract price. Operating income increased from a loss in 1994 of $3.9 million to income of $7.6 million. The 1994 loss included $19.8 million amortization of prior period deferred marketing costs pursuant to SOP 93-7 and the 1995 results included $1.5 million of this amortization. Also, the 1995 results included a $4.5 million unusual item write-off of course computer hardware and related costs. Excluding the amortization impact and the unusual item, the operating income was $13.6 million (9.5% operating income margin) and $15.9 million (13.0% operating income margin) for 1995 and 1994, respectively. In 1995, ICS' U.S. operation saw PC courses and related training courses continue as the fastest growing product line with a 17.4% increase over 1994, while enrollments in ICS' High School equivalency course were up 15.2% and enrollments in ICS' Center for Degree Studies were up 9.2%. All other courses generating an 8.1% increase in enrollments over 1994. On a worldwide basis, more than 65,000 students enrolled in ICS High school Diploma programs, and more than 44,000 students enrolled in ICS Associate Degree Programs. In 1995, ICS introduced the following new products: Dental Assistant, Drafting with Auto CAD, Electronic Bookkeeping, Home Schooling Teaching Guide, and print and on-line versions of an Internet Guide. Based on statistics compiled by the Distance Education and Training Council ("DETC"), the accrediting body of independent study schools recognized by the U.S. Department of Education, ICS continues as the industry leader in generating enrollments. A consulting firm retained by ICS has analyzed the Adult Education market in the U.S. and concludes that ICS has a 48% market share of the self-study vocational market. Worldwide, ICS enrolled over 390,000 new students in 1995. Steck-Vaughn Publishing Corporation. Revenues increased in 1995, led by strong performances from its elementary and high school ("El/Hi") and library product lines. Revenues from the El/Hi market, which were up 10.7% over 1994, were bolstered by strong sales from basic skills products in spelling, math, and reading. Steck- Vaughn's testing and assessment products also boosted sales, enhanced by the Berrent Publications product line purchased in November 1994. Library revenues, which were up 16.3% over 1994, were enhanced by sales of new titles, as well as sales from Steck-Vaughn's exclusive distribution agreements with Larousse Kingfisher Chambers, Inc. and Abdo & Daughters. Revenues from the adult market were down 2.0% with funding in this market segment continuing to experience federal budget constraints, reducing the funding for adult education. Steck-Vaughn's operating income for 1995 was $9.5 million compared to operating income of $10.5 million in 1994. The decrease in operating income is due entirely to the unusual item charge of $970,000 for settlement of litigation. In addition, in 1995 Steck-Vaughn changed its method of accounting for inventories from the last-in, first-out method to the first-in, first-out method, to provide a better means of matching current costs with current revenues, as Steck-Vaughn aggressively pursues its plan to reduce its current operating inventory levels while increasing inventory turnover. The Company's financial statements of all prior years have been restated to apply this method retroactively, which increased Steck-Vaughn's operating income by $1.3 million and $754,000 for 1995 and 1994, respectively. Excluding the unusual item, operating income was flat compared to 1994 as income from increased revenues was offset by higher product development costs and amortization of intangibles and increased general and administrative costs. In 1995, Steck-Vaughn augmented its product lines and marketing channels with a number of acquisitions and distribution agreements through the following transaction: (i) in September, Steck-Vaughn entered into an agreement to be the exclusive distributor for Abdo & Daughters, a small publisher of a variety of high interest/low reading ability books for grades K-8, adding 300 titles complementing and enhancing Steck-Vaughn's current Raintree/Steck-Vaughn collection of titles; (ii) in October, Steck-Vaughn acquired substantially all of the assets of Educational Development Laboratories, Inc. ("EDL"), expanding Steck-Vaughn's breadth of product for the adult market; and (iii) in December, Steck-Vaughn acquired substantially all of the assets of Summit Learning, Inc. ("Summit"), a well-established direct response marketing company aimed at classroom teachers and other key site- based decision makers, and focused on sales of math and science manipulative and kit-based products. National Education Training Group, Inc. NETG's operating loss for 1995 reflects a $30.6 million write- off of excess facility costs, severance payments for workforce reductions, balance sheet writedown of inventory and - 2 - 5 fixed assets, and other related restructuring charges. In addition, NETG wrote off $47.5 million of goodwill, based on the Company's determination as to the recoverability of such goodwill. These adjustments to cost structure enabled NETG to show significant improvement in operating results for the third and fourth quarters of 1995. NETG's revenue for the year 1995 was $54.3 million compared to $61.9 million for the previous year. Eliminating the operating results of Spectrum, a division of NETG that was discontinued in 1995, NETG's 1995 revenue decreased $4.0 million from 1994 or 7.0%. NETG domestic revenues declined $10.4 million to $26.1 million, due to a decrease in customer renewals and the absence of significant new customers in the domestic operations. Such decrease is attributable in part to the absence of a full line of client/server training products that is now in such demand in the multimedia training market; NETG is addressing that absence in 1996 by introducing over 100 new client/server training products. Revenue in 1995 from NETG's international operations grew by $6.5 million. In December 1995, NETG received net proceeds of $3.5 million on the resolution of a dispute with a third party author; NETG used the proceeds of the resolution to undertake additional investment in product development. The settlement proceeds are recorded as an unusual item of income, while the additional product development investment is recorded as product development expense. FINANCIAL INFORMATION FOR INDUSTRY SEGMENTS Revenues and operating income (loss) by industry segment for the Company's continuing operations for the past three years are as follows (for more detailed information, please see Note 15 to Consolidated Financial Statements, beginning on page F-22 below):
NET REVENUES: (dollars in thousands) 1995 1994 1993 --------- --------- --------- ICS $ 143,021 $ 122,815 $ 101,319 Steck-Vaughn 58,226 53,608 53,156 NETG 54,350 61,937 68,259 Other 3,001 3,254 1,438 ----- --------- --------- --------- TOTAL NET REVENUES $ 258,598 $ 241,614 $ 224,172 ================== ========= ========= ========= OPERATING INCOME (LOSS): ICS operating income before amortization of prior period deferred marketing and unusual items $ 13,628 $ 15,909 $ 21,368 Amortization of prior period deferred marketing (1,470) (19,836) -- Unusual Items (4,549) -- -- ------------- --------- --------- --------- ICS 7,609 (3,927) 21,368 Steck-Vaughn before unusual items 10,469 10,459 13,074 Unusual Items (970) -- -- ------------- --------- --------- --------- Steck-Vaughn 9,499 10,459 13,074 NETG operating loss before unusual items (15,375) (13,993) (25,950) Unusual items (74,567) -- (9,232) ------------- --------- --------- --------- NETG (89,942) (13,993) (35,182) Other 764 (50) (657) ----- --------- --------- --------- TOTAL SEGMENT OPERATING LOSS $ (72,070) $ (7,511) $ (1,397) ============================ ========= ========= =========
- 3 - 6 DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENTS ICS LEARNING SYSTEMS, INC. ICS Learning Systems, Inc. provides distance education in vocational, academic and professional studies to consumers and companies under the following names: ICS Learning Systems, English Language Institute, International Correspondence Schools, North American Correspondence Schools, and the ICS Center for Degree Studies (collectively referred to as "ICS"). ICS offers more than 50 independent study courses in the U.S. and more than 100 courses abroad in disciplines ranging from high school completion requirements to occupational training. In addition, ICS offers associate technology degree programs in business and engineering. All of ICS' independent study courses in the U.S. are accredited by the Distance Education and Training Council ("DETC"), the accrediting body for independent study schools recognized by the U.S. Department of Education. ICS also offers over 1,000 training products and 10,000 hours of training to industrial clients under the name "ICS Business and Industrial Training". In addition, with the acquisition of MicroMash in 1994, ICS established a presence in the large and diverse field of professional and continuing education. MicroMash offers over 70 professional exam and continuing professional education products to the financial and accounting industries, and currently is expanding its product offerings to the legal and other professional fields. Curricula and Product Development. Curricula are carefully designed to reflect the most important trends in employment opportunities, consumer interest, professional development and industrial training needs. New courses introduced during 1995 include Dental Assistant, Electronic Bookkeeping, Drafting with Auto CAD, Home Schooling Teachers Guide, and print and on-line versions of an Internet Guide. Accreditation and Course Recognition. Most ICS courses are approved for veterans benefits and for DANTES (Defense Activity for Non-Traditional Education Support). Programs offered through the ICS Center for Degree Studies are approved for college credit by PONSI (Program on Non-Collegiate Sponsored Instruction), which is administered by the American Council on Education. ICS is accredited by the Accrediting Commission of the DETC. The DETC is listed by the U.S. Department of Education as a nationally recognized accrediting agency and is a recognized member of the Commission on Recognition of Postsecondary Accreditation. ICS recognizes the value of utilizing technology to deliver products and services to its students. In June 1995, ICS launched its WorldWide Web site on the Internet at: "http://www.icslearn.com". Prospective and current ICS students can visit the ICS electronic campus for course descriptions and information, faculty profiles and a free ICS "Learning Styles Assessment." Through the Internet site, customers can contact ICS' international locations, E-mail for customer service, participate in student-to-instructor discussions, enroll on-line and download product demonstrations. In September 1995, ICS' U.S. operations decided to cease offering computer hardware as part of its PC courses and other related courses. ICS based this decision on factors including the lack of profitability on these courses as a result of including PC hardware with the courses. ICS will continue to develop and market an aggressive product line for PC skills training, but will do so without supplying the personal computer as part of the course. Traditionally, ICS distance education courses have been structured around "graded lessons" in which the student receives one section of instructional material at a time, which must be completed before proceeding to the next section. Courses are designed to be completed by the typical student in periods ranging from six to twenty-four months, depending on the course selected. A computerized student information/testing system permits students, through touch-tone telephones or voice response, to obtain immediate testing and feedback on test results. Over 95% of the 2 million exams graded by ICS during 1995 were graded electronically by either the information/testing system via telephone or by electronic scanner. With improved technology, the cost of grading an exam is at an all-time low while the speed of correcting an exam and turnaround to the student have never been faster. ICS utilizes a voice-activated computer record access system that allows students to obtain key information from their - 4 - 7 records, twenty-four hours a day, without operator assistance. Tuition for ICS' distance education courses currently ranges from approximately $400 to $1,000 per course, which, in many cases, includes auxiliary equipment for the courses. Certain ICS programs, including those leading to associates' degrees, require the student to enroll in and complete more than one course. Students generally pay a portion of the tuition upon enrollment and the balance on a monthly basis. Although many ICS students complete their entire distance education course, students have certain rights to cancel courses in progress and, in some cases, may be entitled to refunds of tuition paid for future lessons or for cancellation of amounts that have not yet been paid for future lessons. ICS' accounting treatment recognizes independent study contract revenues when cash is received, but only to the extent that such cash can be retained under existing refund policies of the DETC or applicable law. ICS is working to enhance its customer service and reduce its attrition rates so that a high percentage of its students will complete their courses. ICS is not dependent on student financial aid under federal government programs. ICS has established telesales departments for its U.S. operations and in its major foreign operations, by which in-bound telephone inquiries are answered by ICS telesales representatives. These telesales professionals seek to enroll students over the telephone without needing to send the customer ICS' traditional sales literature. During 1995, ICS' U.S. operations expanded its telemarketing center, which provides current and prospective students the opportunity to dial directly to ICS for more information or to enroll. As a result, conversion of inquiries to sales improved by 14.4%, and contributed to the 11.0% increase in enrollments from 1994 to 1995. In 1995, ICS' Business and Industrial Training Division expanded its marketing efforts by creating an in-house telesales organization. The Division's catalog of 1,200 products resides on a computer data base, giving each sales representative the ability to create quickly custom curricula for ICS clients. In addition, in 1995, the Division dramatically increased the revenue it generates from corporate tuition assistance programs ("TAP") through development of new marketing materials and expansion of the sales force committed to the TAP market. ICS' subsidiary, MicroMash, develops and markets educational and training products and exam preparatory courses for professionals. Prior to 1995, MicroMash primarily served the needs of accounting and financial professionals (CPAs, CMAs, CIAs, CFPs) in both business and government. MicroMash expanded its product line in 1995 through the following activities: (i) MicroMash launched nineteen new continuing professional education ("CPE") products; (ii) MicroMash created and marketed a computer-based review for the Special Examination for Enrolled Agents for practice in front of the U.S. Internal Revenue Service; and (iii) MicroMash entered the legal field with the introduction of the computer-based MicroMash/Nord Bar Review for the Multistate Bar Examination and various print-based review packages for fifteen state bar examinations. In addition, MicroMash received continuing legal education ("CLE") approval for several of its computer-based products. MicroMash CPE products are recognized by the National Association of State Boards of Accountancy, The Institute of Certified Management Accountants, The Institute of Internal Auditors, The International Board of Standards and Practices for Certified Financial Planners, Inc., and the Internal Revenue Service, among others. MicroMash CLE is recognized by various state legal professional licensing boards. Advertising and Marketing. ICS markets its independent study courses throughout its U.S. and international operations utilizing direct response advertising through print, television media and direct mail marketing. ICS also offers courses in many English speaking countries throughout the world; in 1995, ICS enrolled students from more than 150 different countries. Telemarketing also is used in the U.S., Canada, the United Kingdom and Australia. ICS has over 200 telesales representatives who speak directly to prospective students about enrolling in courses. Competition. The distance education and training industry is highly competitive. ICS faces direct competition from U.S.-based and foreign independent study providers and indirect competition from community colleges, vocational and technical schools, two-year colleges and universities, and, to a lesser extent, governmental entities and other "distance learning" companies and schools, including electronic universities. In recent years, - 5 - 8 technological changes have increased the variety of choices available to students in selecting the type of education and the manner in which it is delivered, thereby increasing the entities with which ICS competes for student enrollments. ICS believes that the principal competitive factors in its industry are breadth and quality of course offerings, price and quality of customer services. Overall, the Company believes that ICS competes favorably on the basis of these factors. STECK-VAUGHN PUBLISHING CORPORATION Steck-Vaughn is one of the country's largest publishers of supplemental educational materials, offering educators a broad range of quality products that address educational needs from early childhood through adulthood. The term "supplemental materials" generally refers to softcover, curriculum-based books, workbooks and other support materials that are used in conjunction with or instead of traditional hardcover "basal" textbooks. Steck- Vaughn also publishes reference and nonfiction products for acquisition by school and public libraries, as well for purchase by the general public through bookstores. In July 1993, Steck-Vaughn completed an initial public offering of 2,668,000 shares of its common stock, which represented approximately 18.3% of Steck-Vaughn's stock, the remainder of which is held by the Company. During 1994, Steck-Vaughn announced a program to repurchase from the public market up to 500,000 shares of its common stock; through 1995, Steck-Vaughn has repurchased 255,200 shares, effectively raising the Company's ownership of Steck-Vaughn's common stock from 81.7% as of the public offering to 83.1%. Product Development and Acquisition. Steck-Vaughn continually evaluates, updates and adds to its product lines through internal development of new educational materials, performance of development contracts by outside authors, production of revised and supplementary materials based on existing products, and acquisitions of educational materials from authors and publishers. In 1994, Steck-Vaughn produced and released more than 250 new and revised products. In 1995, Steck-Vaughn augmented its product lines with a number of acquisitions and distribution agreements. In September, Steck-Vaughn entered into an agreement to be the exclusive distributor for Abdo & Daughters, a small publisher of a variety of high interest/low reading ability books for grades K-8. Abdo & Daughters' collection of approximately 300 titles complements and enhances the current Raintree/Steck-Vaughn collection of titles. The titles include a 54-book animal series as well as many biographies and social studies topics, including a series on the Holocaust and a complete series on environmental studies. In addition, in October, Steck- Vaughn acquired substantially all of the assets of Educational Development Laboratories, Inc. ("EDL"), which further expands Steck-Vaughn's breadth of product for the adult market. The EDL product line combines time-tested highly researched instructional techniques with computer technology in order to deliver developmental reading programs in an easy-to-administer and user-friendly format. The electronic media segment of the school market is one of the most rapidly expanding segments. To gain entrance to this market, Steck-Vaughn entered into a letter of intent in December 1995, and definitive stock purchase agreement in March 1996, to acquire Edunetics, Ltd. ("Edunetics"), which develops, markets and sells computer-based (including multimedia) products for teaching curriculum in the kindergarten through grade 12 market. Edunetics' offerings include instructional management products that allow teachers, parents and students to monitor progress as the computer-based products are accessed and utilized. While consummation of the acquisition depends on satisfaction of a number of conditions by both parties, Steck-Vaughn and Edunetics hope to complete the transaction by the end of second quarter 1996. Sales and Marketing. Steck-Vaughn markets its products through multiple distribution channels, including its national sales and telesales organization. Additionally, Steck-Vaughn markets and sells its products through a distributor organization that services public libraries, trade outlets and other nontraditional school markets. Steck- Vaughn has begun to establish a presence in foreign markets where English language curriculum and library products are in demand. Steck-Vaughn's customer service group emphasizes prompt and accurate delivery of published materials. - 6 - 9 During 1995, the instructional materials marketplace continued its trend toward site-based selling, as more personnel at the school and faculty level participated in the buying decisions for educational materials. While site- based selling is a relative strength of Steck-Vaughn, site-based selling requires a greater number of sales calls per revenue dollar, resulting in increased selling costs. In response to the increased participation of teachers in buying decisions, Steck-Vaughn acquired substantially all of the assets of Summit Learning, Inc. ("Summit") in December 1995. Summit is a well established direct response marketing company aimed at classroom teachers and other key site-based decision makers. Summit's products, historically, have been focused on math and science manipulative and kit-based products. Additionally, Summit mails its Young Explorers catalog to the home market which provides Steck-Vaughn access to parents. Competition. Many companies, large and small, compete with Steck-Vaughn in the educational publishing field. No single company is dominant in the industry segments for which Steck-Vaughn publishes. Steck-Vaughn believes that the principal competitive factors in its industry are breadth and quality of product offerings, price, channels of distribution, quality of support services and market responsiveness. Overall, the Company believes that Steck-Vaughn competes favorably on the basis of these factors, and that growth has occurred due to new products and increased sales and market penetration. NATIONAL EDUCATION TRAINING GROUP, INC. Established in the late 1960s, the Company's NETG subsidiary develops, markets and distributes interactive multimedia products to train information technology professionals and end users of technology. Headquartered in Naperville, Illinois, NETG offers multimedia training solutions to help organizations worldwide maximize their performance and their investments in people and technology. Under the leadership of its new President and Chief Executive Officer, Chuck Moran, who joined NETG in May 1995, NETG underwent substantial change in 1995. NETG initiatives in 1995 included, among others, the following: (i) the restructure of its operations by downsizing office and warehouse space in the U.S. and in Europe and reducing its worldwide workforce; (ii) the development of new products through an agreement with a third-party to develop exclusively for NETG, with over 100 new client/server training products to be released in 1996; and (iii) the development of new relationships with computer software and hardware companies, including Microsoft and, in early 1996, Novell, which allows NETG to provide courses for and participate in those companies' certification programs. Products. NETG's current line of over 600 training products addresses all audience levels, providing an analytical perspective as well as practical skills and knowledge in information technology (client/server and mainframe), desktop computing, and management and professional development. NETG's products are delivered on various forms of technology-based media, including video, diskette and CD-ROM, and NETG's computer-based products may be run in various operating environments, including personal computer, mainframe computer and local area networks. Many of NETG's products provide multimedia training that combines data, text, audio, video, animation and graphics with computer technology. In addition, many NETG products use NETG's proprietary SKILL BUILDER(R) technology, which provides interactive courseware aimed at making the learning experience acceptable and relevant, focusing the user on what he or she needs to learn, and not what he or she already knows. The NETG course library is divided into four primary areas: Desktop Computing, Client/Server, Enterprise Systems (Mainframe) and Management and Professional Development. Desktop Computing courses including courses on personal computer operating systems (such as DOS, Microsoft Windows 3.x and 95, and Apple Macintosh), word processing applications (such as WordPerfect and Microsoft Word) and spreadsheet applications (such as Microsoft Excel and Lotus 1-2-3). Client/Server courses cover such areas as networking and communications, Novell NetWare, and Microsoft Windows development and support. Enterprise Systems (Mainframe) courses focus on mainframe operating environments and software. Management and Professional Development courses cover such topics as total quality management, interpersonal skills and customer service. In 1995, NETG introduced a number of courses to train individuals in new and updated technologies. For - 7 - 10 example, through NETG's relationship with Microsoft, NETG introduced a number of courses in Microsoft Windows 95 curriculum simultaneously with the release by Microsoft of Windows 95. Product Development. Historically, NETG has offered courses developed internally or acquired or licensed from various third-party product developers who were experts in their respective fields. Although the courses acquired through these methods were of high-quality, the many different developers created courses with different structures and styles. NETG strives to provide total training solutions to its customers; accordingly, a customer who licensed a number of NETG offerings may have received courses developed by a number of different developers (including NETG and its outside developers). In order to provide consistent course structure and style to customers who depend on NETG for training, NETG has refocused its development efforts so that, for 1996, over 200 NETG courses to be introduced during the year will have been developed internally or by one principal third-party course developer under the direction of NETG's internal product development organization, as compared to 1995 when NETG introduced only 32 courses that were developed internally. This will allow NETG to maintain high-quality products, but with a consistent structure and style to facilitate each user's ability to train in multiple subjects supported by NETG. In addition, to address the 1995 decline in customer renewals and significant new customers, NETG is focusing its 1996 development efforts on increasing its offerings in certification-focused, client/server computing, with over 100 client/server courses scheduled for introduction in 1996. New products include courses for client/server training for high demand products developed by such companies as Microsoft, Novell, Oracle and SAP. Also, throughout 1995, and again in 1996, in the ordinary course of business, NETG has removed and will remove from its product offerings courses that no longer reflect current technology or training methods. In 1995, NETG entered into an agreement with Microsoft Corporation to develop interactive technology- based training products for computer professionals seeking to become certified specialists for a variety of Microsoft products. The courses support the Microsoft Certified Systems Engineer and Microsoft Certified Solution Developer credentials. Also, in early 1996, NETG entered into an arrangement with Novell to develop multimedia training curriculum for Novell's Certified NetWare Engineer certification programs. NETG will design, develop and market self-study training courseware for Novell's NetWare network operating system and GroupWise messaging software, which courses will be certified by Novell as Novell Authorized Education products. NETG's relationships with companies such as Microsoft and Novell allow NETG to better access the large market of consumers and entities who use products produced by those companies, and allow NETG to introduce training courses concurrently with the release of new products. In 1995, NETG discontinued the operations of its Spectrum subsidiary, which developed custom training courses for businesses. Without Spectrum, NETG can focus development efforts on courses that may be marketed, licensed and distributed to a broad range of individuals and businesses, rather than incurring development expense for custom courses licensed and used by only one business. International Operations. NETG maintains its international headquarters in London, England. NETG's direct sales and marketing operations employ 150 persons, with 110 of those in England and the remainder in other European countries. NETG has product development centers in Germany, South Africa, India and Japan. In addition, NETG maintains an international network of distributors and agents in many other countries, including in a majority of the countries in the Middle East, each of the Scandinavian countries, many countries in Asia and Africa, Australia and New Zealand. NETG Sales Organization and Distribution Channels. NETG's revenues are generated primarily by its field sales force that focuses on large business and government organizations. Customers license NETG's products and libraries under agreements that, depending on the customer's needs, provide access to all or part of NETG's product lines on a limited or unlimited basis. In 1995, NETG initiated a distribution strategy focused on the channel of Microsoft-authorized education centers; in 1996, that channel will be expanded to include Novell-authorized education centers. NETG's customers are supported by NETG's Customer Assistance, located in Naperville, Illinois, which - 8 - 11 provides customers with toll-free order processing during business hours, and twenty-four hour, seven day per week technical assistance. Support analysts provide answers to software and hardware questions and assistance in the installation and ongoing use of courseware products. In addition, NETG has established a LAN-based call tracking and reporting system that allows support analysts to electronically track customer inquiries, problems and solutions for faster response time to customers. Also in 1995, NETG launched its worldwide web storefront, located at "http://www.netg.com," which includes a catalog of over 600 training products and multimedia course demonstrations. The catalog includes course descriptions, objectives, learning times, prerequisites, media choices and pricing. Competition. According to International Data Corp., in 1995 the total information technology training market worldwide was $12.8 billion. Eighty percent of that (more than $10 billion) is spent on overhead and internal training staff salaries. The remaining 20% ($2.8 billion) is divided into five outside expenditures categories of which approximately $.5 billion is computer based and multimedia materials, where NETG directly competes. NETG is one of the largest interactive multimedia training companies in this highly fragmented and competitive market. NETG competes in the training market on the factors of timeliness of new courses, instructional effectiveness, development alliances with key technology vendors (e.g. Microsoft, Novell), breadth of subject matter and delivery media, price and solution-oriented customer support. Overall, the Company believes that NETG is competitive on the basis of these factors. Other suppliers of media-based training with which NETG competes include CBT Systems, J3 Learning, DPEC, SRA (a division of McGraw Hill, Inc.) and, to a limited extent, hardware and software manufacturers. FINANCIAL INFORMATION ON THE COMPANY'S FOREIGN OPERATIONS The following table shows consolidated net revenues of the Company in foreign countries for 1995, 1994 and 1993 (for more detailed information, please see Note 15 to Consolidated Financial Statements beginning on page F-22 below). These revenues are derived principally from the foreign operations of ICS and NETG:
(Dollars in thousands) 1995 1994 1993 ---- ---- ---- Net revenues outside the United States $65,231 $55,990 $58,642 Percent of consolidated net revenues 25.2% 23.2% 26.2%
Consolidated operating results are reported in U.S. dollars. Because the foreign subsidiaries of the Company conduct operations in the currencies of the countries in which they are based, all financial statements of the foreign subsidiaries must be translated into U.S. dollars. As the value of the U.S. dollar increases or decreases relative to these foreign currencies, the U.S. dollar value of items on the financial statements of the foreign subsidiaries is reduced or increased, respectively. Therefore, changes in dollar sales of the foreign subsidiaries from year to year are not necessarily indicative of changes in actual revenues recorded in local currency. The Company's ability to continue operations outside of the Unites States or maintain the profitability of such operations is to some extent subject to control and regulation by the U.S. government and foreign governments. The Company's foreign operations are primarily located in the United Kingdom, Canada, Australia and Germany, which historically have controlled and regulated businesses in the same manner as the U.S.. - 9 - 12 DISCUSSION OF ADDITIONAL BUSINESS FACTORS RESEARCH AND DEVELOPMENT The amount spent during 1995, 1994 and 1993 on Company-sponsored research and development activities was approximately $23 million, $20 million and $22 million, respectively. In 1995, the Company continued to invest in research and development to ensure new product availability for future revenue generation. The Company spends substantial sums primarily in the development of new products at NETG and Steck-Vaughn, and curricula for ICS. SEASONALITY OF THE BUSINESS Steck-Vaughn's sales are higher in the third quarter of the year due to its customers purchasing products in anticipation of classes commencing in the fall. ICS' business is moderately seasonal with more students studying during the latter part of the year. NETG's business is seasonal due to the sales cycle from a disproportionate number of long-term, large contracts for NETG's products and services that are renewed in the fourth quarter of the year. There is no customer to whom sales are made in an amount that exceeds two percent or more of the Company's consolidated annual net revenues. ADDITIONAL INFORMATION Unearned future tuition revenue for ICS, which represents amounts estimated to be recognized as revenue in subsequent years as services and courseware are provided, is described in Note 12 to Consolidated Financial Statements on page F-19 below. Financial information for industry segments is described in Note 15 to Consolidated Financial Statements on page F-22 below. Compliance with federal, state or local provisions concerning the discharge of materials into the environment or otherwise relating to the protection of the environment had no material effect in 1995 on the Company's capital expenditures, earnings or competitive position. The Company employed approximately 2,000 persons worldwide as of February 29, 1996. DISCONTINUED OPERATIONS: EDUCATION CENTERS Historically, in addition to ICS, Steck-Vaughn and NETG, the Company has conducted business through Education Centers. Education Centers had been one of the largest operators of private postsecondary schools in the U.S.; however, in 1993, it became more difficult for students at a number of locations, especially in urban areas, to obtain access to federally guaranteed student loans. Certain provisions of the Higher Education Act of 1992, as well as the Omnibus Budget Reconciliation Act, caused some lenders to terminate participation in federally guaranteed student loan programs. These difficulties prompted Education Centers to restructure its operations. Anticipating that decreased access to funding would result in further operating losses in some of its schools for the year ending December 31, 1993 and future years, in 1993 Education Centers elected to cease new student enrollments at 15 of its 48 schools (two of which later began again taking new enrollments). In 1994 Education Centers elected to cease new student enrollments at an additional 6 schools. Thereafter, in 1994, the Company determined to discontinue Education Centers' operations, and immediately pursue a strategy to sell off or otherwise dispose of Education Centers' operations. The Company's consolidated statement of operations for 1994 included a second quarter $40.0 million charge to write-down Education Centers' assets, to provide for estimated gains/losses on the sale of certain Education Centers' schools, and to provide for the estimated costs of closing and teaching-out certain Education Centers' schools. In addition, in 1994, the Company recorded a $9.4 million operating loss from Education Centers' discontinued operations. In 1995, Education Centers consummated seven separate transactions, ranging - 10 - 13 from the sale of one school to the sale of sixteen schools, such that, as of December 31, 1995, Education Centers had disposed of substantially all of its operations. For further information, please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," starting on page 15 below. EXECUTIVE OFFICERS OF THE COMPANY The following table provides information regarding executive officers of the Company, including their ages as of February 29, 1996: Name, Age and Title: Five-Year Business Experience: David C. Jones (74) Chairman of the Board since July 1989. Acting Chairman of the Board Chief Executive Officer from July 1989 to April 1990. Consultant and lecturer since July 1982. Chairman of the Joint Chiefs of Staff from June 1978 through June 1982. Member of the Board of Advisors for SRA International, Inc., an information technology company. Chairman of the Board of Advisors of the National Civilian Community Corps. Sam Yau (47) President, Chief Executive Officer and a President and Chief Director of the Company since May 1995. Chief Executive Officer Operating Officer of Advacare, Inc., a medical management company, from May 1993 to November 1994. Senior Vice President of Finance and Administration for Archive Corporation (now part of Seagate Technologies, Inc.), a computer storage (tape) company, from May 1987 to May 1993. Director of Steck-Vaughn Publishing Corporation and Milcom International, Inc. Philip C. Maynard (41) Vice President, Secretary and General Counsel Vice President, Secretary and since February 1994. General Counsel of General Counsel Orchids Paper Products Company from February 1993 through January 1994. Chief Executive Officer and Director of McClellan Development from April 1989 to May 1992; Principal and Director until February 1993. General Partner of Urland, Morello, Dunn & Maynard law practice from February 1985 to April 1989. Keith K. Ogata (41) Vice President, Chief Financial Officer and Vice President, Chief Treasurer since April 1991. Vice President Financial Officer and and Treasurer from April 1989 to April 1991. Treasurer Treasurer since January 1987. ITEM 2. PROPERTIES. (a) The Company's corporate headquarters are located in leased facilities aggregating 40,000 square feet in Irvine, California, which lease expires in May 1996; the Company is relocating to 18,000 square feet of leased facilities also in Irvine, California, effective April 1996. (b) The Company owns real property in Scranton, Pennsylvania, for the principal offices of ICS. This building consists of 120,000 square feet of space on 14.3 acres of land. (c) The Company owns an 82,000 square foot building on approximately 31 acres of land in Ransom, Pennsylvania for an ICS warehouse. (d) The Company owns the land and building serving as the warehouse for Steck-Vaughn Company. The building, located in Austin, Texas on approximately 13 acres of land, contains 101,000 square feet of space. - 11 - 14 (e) The Company has approximately 34 leases for its operating units and offices, including the following: NETG's headquarters in Naperville, Illinois - approximately 72,000 square feet; and Steck-Vaughn's headquarters in Austin, Texas - approximately 31,000 square feet. Overall, the Company's properties are suitable and adequate for the Company's needs. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of business, the Company is generally subject to claims, complaints and legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the financial position of the Company. However, in the opinion of management, such matters are not expected to have a material adverse effect on the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. The high and low market prices for the Company's stock during each quarter for the last two years are as follows:
1995 1994 ---- ---- High Low High Low ---- --- ---- --- First Quarter $ 4 5/8 $ 2 1/2 $ 7 3/8 $ 6 Second Quarter 5 3/4 3 1/8 6 5/8 4 7/8 Third Quarter 8 3/8 4 7/8 5 3/4 4 7/8 Fourth Quarter 8 3/4 6 3/8 5 1/8 3 3/4
The number of stockholders of record of the Company's Common Stock as of February 29, 1996 was 2,552. The number of record holders is based upon the actual number of holders registered on the stock transfer books for the Company at such date and does not include holders of shares in "street names" or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies. No cash or stock dividends have been declared or paid on the Company's Common Stock during 1995 or 1994. The Company has no present intent to pay cash dividends; in addition, the Company's Credit Agreement with its lending institutions restricts the payment of cash dividends. - 12 - 15 Item 6. Selected Financial Data National Education Corporation and Subsidiaries FIVE YEAR FINANCIAL HIGHLIGHTS
(amounts in thousands, except per share amounts) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------------------- NET REVENUES $ 258,598 $ 241,614 $ 224,172 $ 218,269 $ 233,670 -------------------------------------------------------------- Income (loss) before amortization of acquired intangible assets, amortization of prior period deferred marketing, unusual items, nonoperating items, gain on sale of stock, income tax provision (benefit) and minority interest $ 4,456 $ 7,567 $ 1,544 $ 4,190 $ 16,797 Amortization of acquired intangible assets 1,602 1,824 4,605 5,936 6,253 Amortization of prior period deferred marketing 1,470 19,836 -- -- -- Unusual items, net* 81,730 -- 9,232 2,506 -- Other nonoperating expenses, net 5,722 2,610 3,025 5,141 8,627 Gain on sale of stock -- (3,247) (21,120) -- -- Income tax provision (benefit) -- (555) (4,889) (3,109) 2,415 Minority interest 1,155 1,192 599 -- -- -------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (87,223) (14,093) 10,092 (6,284) (498) Income (loss) from discontinued operations -- (9,420) (19,757) 6,799 5,988 Loss on disposal of discontinued operations -- (40,032) -- -- -- -------------------------------------------------------------- NET INCOME (LOSS) $ (87,223) $ (63,545) $ (9,665) $ 515 $ 5,490 -------------------------------------------------------------- EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS: Primary earnings (loss) per share $ (2.73) $ (.48) $ .34 $ (.21) $ (.02) -------------------------------------------------------------- Fully diluted earnings (loss) per share $ (2.73) $ (.48) $ .32 $ (.21) $ (.02) -------------------------------------------------------------- EARNINGS (LOSS) PER SHARE $ (2.73) $ (2.14) $ (.32) $ .02 $ .18 -------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Primary 31,893 29,640 29,855 30,296 30,116 Fully diluted 38,025 36,940 34,855 37,596 36,818 SELECTED FINANCIAL INFORMATION Cash and investment securities $ 23,868 $ 28,130 $ 54,846 $ 59,464 $ 23,250 Total assets 185,262 270,245 325,005 334,881 331,612 Capital expenditures, including capital leases 7,781 8,442 8,503 6,784 3,419 Total debt 78,671 90,290 80,657 82,128 80,839 Stockholders' equity 7,481 73,016 136,233 151,930 153,456 Total debt-equity ratio 10.5-1 1.2-1 .6-1 .5-1 .5-1 --------------------------------------------------------------
*See Notes to Consolidated Financial Statements for discussion of the unusual items, acquisitions and discontinued operations. Effective January 1, 1994, the Company changed its method of accounting for advertising and other deferred marketing costs. See Note 1 to Consolidated Financial Statements for further discussion. No cash dividends were declared in any of the above periods. - 13 - 16 Item 6. Selected Financial Data National Education Corporation and Subsidiaries Effective in the fourth quarter of 1995, the Company changed its method of accounting for inventory at Steck-Vaughn from LIFO to FIFO. The effect of the accounting change for 1995 was to decrease net loss by $1,102,000 or $.03 per share. The effects of this change, which was accounted for by retroactively restating prior period financial statements, were as follows:
Year Ended December 31, ----------------------------- (amounts in thousands, except per share amounts) 1994 1993 1992 1991 - --------------------------------------------------------------------------------- Adjustment to net income $380 $(46) $-- $131 Adjustment to earnings (loss) per share .01 -- -- --
The net income effect for 1993 includes a reduction of the gain on sale of Steck-Vaughn stock of $140,000. - 14 - 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations National Education Corporation and Subsidiaries This Management's Discussion and Analysis contains condensed consolidated statements of operations followed by financial data on the operating results of the major segments of business. Following a summary discussion of the consolidated results of operations are financial data by operating segment and a discussion of the results of each operating segment.
Year Ended December 31, ------------------------------------- (dollars in thousands) 1995 1994 1993 ------------------------------------------------------------------------------------------------ NET REVENUES: ICS Learning Systems $ 143,021 $ 122,815 $ 101,319 Steck-Vaughn Publishing 58,226 53,608 53,156 NETG 54,350 61,937 68,259 Other 3,001 3,254 1,438 ------------------------------------- TOTAL NET REVENUES $ 258,598 $ 241,614 $ 224,172 ------------------------------------- OPERATING INCOME (LOSS): ICS Learning Systems before amortization and unusual items $ 13,628 $ 15,909 $ 21,368 Amortization of prior period deferred marketing (1,470) (19,836) -- ------------------------------------- ICS Learning Systems before unusual items 12,158 (3,927) 21,368 Unusual items (4,549) -- -- ------------------------------------- ICS Learning Systems 7,609 (3,927) 21,368 Steck-Vaughn Publishing before unusual items 10,469 10,459 13,074 Unusual items (970) -- -- ------------------------------------- Steck-Vaughn Publishing 9,499 10,459 13,074 ------------------------------------- NETG before unusual items (15,375) (13,993) (25,950) Unusual items (74,567) -- (9,232) ------------------------------------- NETG (89,942) (13,993) (35,182) Other 764 (50) (657) ------------------------------------- TOTAL SEGMENT OPERATING LOSS (72,070) (7,511) (1,397) General corporate expenses (6,632) (6,582) (10,896) Interest expense (8,650) (6,336) (5,723) Investment income 2,621 3,234 2,560 Unusual items (1,644) -- -- Other income, net 307 3,739 21,258 ------------------------------------- INCOME (LOSS) BEFORE TAX BENEFIT, MINORITY INTEREST AND DISCONTINUED OPERATIONS (86,068) (13,456) 5,802 Tax benefit -- (555) (4,889) ------------------------------------- INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS (86,068) (12,901) 10,691 Minority interest 1,155 1,192 599 ------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (87,223) (14,093) 10,092 Discontinued operations -- (49,452) (19,757) ------------------------------------- NET LOSS $ (87,223) $ (63,545) $ (9,665) -------------------------------------
- 15 - 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries DETAILED SEGMENT OPERATING RESULTS:
(dollars in thousands) Year Ended December 31, 1995 - ----------------------------------------------------------------------------------------------------------------- ICS Steck- Learning Vaughn Total Systems Publishing NETG Other --------------------------------------------------------------- NET REVENUES $ 258,598 $ 143,021 $ 58,226 $ 54,350 $ 3,001 COSTS AND EXPENSES: Contract course materials and service costs 73,003 51,667 -- 19,691 1,645 Publishing costs and materials 14,867 -- 14,867 -- -- Product development 23,026 3,632 8,901 10,493 -- Selling and promotion 111,112 63,770 18,738 28,165 439 General and administrative 25,502 10,210 4,451 10,707 134 Amortization of prior period deferred marketing 1,470 1,470 -- -- -- Amortization of acquired intangible assets 1,602 114 800 669 19 Unusual items 80,086 4,549 970 74,567 -- --------- --------- --------- --------- --------- SEGMENT OPERATING INCOME (LOSS) $ (72,070) $ 7,609 $ 9,499 $ (89,942) $ 764 --------- --------- --------- --------- ---------
(dollars in thousands) Year Ended December 31, 1994 - ------------------------------------------------------------------------------------------------------------------ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other ---------------------------------------------------------------- NET REVENUES $ 241,614 $ 122,815 $ 53,608 $ 61,937 $ 3,254 COSTS AND EXPENSES: Contract course materials and service costs 60,428 36,708 -- 21,429 2,291 Publishing costs and materials 13,595 -- 13,595 -- -- Product development 19,934 3,556 7,627 8,751 -- Selling and promotion 111,058 59,592 17,472 33,627 367 General and administrative 22,450 6,962 4,069 10,786 633 Amortization of prior period deferred marketing 19,836 19,836 -- -- -- Amortization of acquired intangible assets 1,824 88 386 1,337 13 ---------------------------------------------------------------- SEGMENT OPERATING INCOME (LOSS) $ (7,511) $ (3,927) $ 10,459 $ (13,993) $ (50) ----------------------------------------------------------------
- 16 - 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries
(dollars in thousands) Year Ended December 31, 1993 - ----------------------------------------------------------------------------------------------------------------- ICS Steck- Learning Vaughn Total Systems Publishing NETG Other --------------------------------------------------------------- NET REVENUES $ 224,172 $ 101,319 $ 53,156 $ 68,259 $ 1,438 COSTS AND EXPENSES: Contract course materials and service costs 57,332 29,675 -- 26,895 762 Publishing costs and materials 12,721 -- 12,721 -- -- Product development 22,328 2,006 6,723 13,599 -- Selling and promotion 93,046 41,989 16,279 34,250 528 General and administrative 26,305 6,248 4,144 15,121 792 Amortization of acquired intangible assets 4,605 33 215 4,344 13 Unusual items 9,232 -- -- 9,232 -- --------------------------------------------------------------- SEGMENT OPERATING INCOME (LOSS) $ (1,397) $ 21,368 $ 13,074 $ (35,182) $ (657) ---------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: Revenues of $258,598,000 for the year ended December 31, 1995 were $16,984,000 or 7.0% higher than revenues of $241,614,000 in the prior year. The increase is due to revenue growth at the ICS Learning Systems and Steck-Vaughn segments partially offset by a reduction in the NETG segment. For the year ended December 31, 1995, the Company recorded a net loss of $87,223,000 or $2.73 per share principally due to $81,730,000 of unusual items related to restructure charges and write-downs of intangible assets at NETG; severance payment to the former CEO at Corporate; write-off of computer course hardware and related costs at ICS; and settlement of litigation at Steck-Vaughn. These unusual charges were partially offset by an unusual credit for payment received to settle litigation at NETG. This compares with a loss from continuing operations of $14,093,000 or $.48 per share for the year ended December 31, 1994. The 1994 results of operations were restated to reflect a change at Steck-Vaughn from the LIFO to the FIFO method of accounting for inventories. This change decreased the net loss by $1,102,000 or $.03 per share and $380,000 or $.01 per share for 1995 and 1994, respectively. Excluding the impact of unusual items in 1995 and the amortization of prior period deferred marketing as a result of the adoption of the SOP in 1994 as discussed below results in net loss of $5,493,000 ($.17 per share) and income from continuing operations of $5,743,000 ($.16 per share on a fully diluted basis) for the years ended December 31, 1995 and 1994, respectively. The 1994 results were unfavorably impacted by the adoption of AICPA Statement of Position No. 93-7 ("SOP"), "Reporting on Advertising Costs". The SOP generally requires advertising costs, other than direct-response advertising, to be expensed as incurred. In the fourth quarter of 1994, the Company adopted the SOP at its ICS Learning Systems subsidiary effective January 1, 1994. In adopting the SOP in 1994, ICS' total advertising, selling and promotion costs were expensed as incurred rather than deferred and amortized as in prior periods. Furthermore, the transition rules of the SOP required amortization of the deferred balances existing as of the beginning of the year in accordance with the Company's previous accounting policy. The SOP does not permit restatement of prior periods. The effect of the transition rules is to reflect as an expense in the year of adoption (1994) both the current year's advertising, selling and promotion costs, and the amortization of balances deferred as of the beginning of the year. Adoption of the SOP in 1994 resulted in a charge of $27,410,000 ($21,181,000 after tax or $.72 per share). The charge consists of two components. First, a charge of $19,836,000 resulted from the amortization of the deferred marketing balance as of December 31, 1993 into 1994. Second, a charge of $7,574,000 resulted from increased - 17 - 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED:) selling and promotion spending above the amortization that would have been expensed in accordance with the Company's previous accounting policy. For comparative purposes only, assuming the Company had adopted the SOP effective January 1, 1993, income before taxes would have decreased $3,411,000 ($2,251,000 after tax or $.08 per share) in 1993. The Company's advertising and promotion expenses, excluding the amortization of prior period deferred marketing, were $59,073,000, $56,301,000 and $44,032,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The 1994 results were also negatively impacted by a $40,032,000 charge ($1.35 per share) related to the planned disposition of the Education Centers subsidiary. Effective June 30, 1994, the Company adopted a plan to dispose of the Education Centers subsidiary. The charge was to write-down assets, provide for estimated gains/losses on the sale of certain schools and to provide for the estimated costs of closing and teaching-out certain schools. The revenues and expenses of the Education Centers have been netted out and segregated as discontinued operations in the statements of operations for 1994 and prior. In 1995, the Company substantially completed the sale, closure and teach-out of the schools within the estimated loss amount previously provided in the financial statements. General corporate expenses of $6,632,000 were essentially flat with the prior year. Investment income decreased $613,000 and interest expense increased $2,314,000 as the Company sold investments and increased borrowings to meet cash needs. Effective September 11, 1995, the holders of $20,000,000 of the Company's 10% senior subordinated convertible debentures converted such debentures, including accrued interest, into 5,021,000 shares of the Company's common stock. As a result of this conversion, interest expense will be lower in future periods by $2,000,000 on an annual basis; however, the additional shares outstanding will have a potential dilutive impact on earnings per share. The conversion was actually anti-dilutive for the fourth quarter of 1995. If the conversion had not occurred loss per share for the fourth quarter would have been $.11 compared to the reported loss per share of $.08, and the loss per share for the full year would have been $2.89 compared to the $2.73 reported. The Company's businesses tend to be seasonal in nature with most of the revenue historically being recognized in the latter half of the year. Accordingly, commencing in 1995, a portion of the selling and marketing costs incurred during interim periods is capitalized and fully amortized within the calendar year to better match the expenses with when the revenue is recognized. The quarterly results of operations for 1995 presented in Note 16 of the Notes to Consolidated Financial Statements were restated to reflect the interim deferral of these costs. Accounting principles, however, do not permit restated quarterly results of operations for 1994. - 18 - 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries ICS LEARNING SYSTEMS: Set forth below are key indices which aid in understanding the results of operations of ICS Learning Systems.
Year Ended December 31, -------------------------------- (dollars in thousands) 1995 1994 1993 ---------------------------------------------------------------------------------- REVENUES: Traditional Distance Education - Domestic $ 85,224 $ 69,464 $ 55,455 Traditional Distance Education - International 43,983 40,868 39,523 Industrial and Business 7,963 7,414 6,341 MicroMash 5,851 5,069 -- -------------------------------- Total Revenues $143,021 $122,815 $101,319 -------------------------------- Traditional Business: New Enrollments: Domestic 276,727 249,273 187,780 International 115,226 123,616 124,003 -------------------------------- Total New Enrollments 391,953 372,889 311,783 -------------------------------- Gross Enrollment Value (GEV): Domestic $180,102 $143,959 $130,240 International 75,707 68,981 68,272 -------------------------------- Total GEV $255,809 $212,940 $198,512 -------------------------------- Selling and Promotion Spending: Domestic $ 41,001 $ 36,287 $ 26,735 International 17,312 15,860 14,027 -------------------------------- Total Selling and Promotion Spending $ 58,313 $ 52,147 $ 40,762 -------------------------------- Unearned Gross Future Tuition Revenue $153,489 $163,050 $126,167 --------------------------------
ICS - 1995 COMPARED TO 1994: Revenue for 1995 of $143,021,000 increased $20,206,000 or 16.5% compared to $122,815,000 in the prior year. Revenue increased in all areas with most of the increase in the traditional domestic operations. Traditional domestic revenue increased $15,760,000 or 22.7%. This increase in traditional domestic revenue was due to approximately 61,000 more students carried in from the prior year plus a domestic enrollment increase of 27,454 students (an 11.0% increase). The increased revenue is due to more enrollments through increased telesales efforts, as well as higher selling and promotion expense which yielded more enrollments. Telesales have proven to be a very cost effective marketing method resulting in a higher conversion rate of inquiries to enrollments and typically resulting in more tuition down payment than other marketing methods. Industrial and Business revenue increased $549,000 or 7.4%. MicroMash revenues grew $782,000 or 15.4% due to overall business growth. International revenue of $43,983,000 increased $3,115,000 or 7.6%. The increase in international revenue was due primarily to stronger enrollments in Canada (4.2% increase) and International Mail Sales (IMS - 7.7% increase), better collections in Australia/New Zealand and higher per unit course revenue as a result of a higher mix of PC based course sales. Overall international enrollments were down 6.8% due primarily to 14.8% fewer enrollments in the U.K. - 19 - 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries ICS - 1995 COMPARED TO 1994 (CONTINUED:) Operating income increased from a loss in 1994 of $3,927,000 to income of $7,609,000. The 1994 loss included $19,836,000 amortization of prior period deferred marketing costs pursuant to SOP 93-7 and the 1995 results included $1,470,000 of this amortization. Also, the 1995 results included a $4,549,000 unusual item write-off of course computer hardware and related costs. Excluding the amortization impact and the unusual item, the operating income was $13,628,000 (9.5% operating income margin) and $15,909,000 (13.0% operating income margin) for 1995 and 1994, respectively. This decrease in operating income and margin is due primarily to higher contract course materials and service costs of $14,959,000 (representing an erosion in operating margin of 6.2 percentage points) and increased general and administrative expenses of $3,248,000 (representing an erosion in operating margin of 1.4 percentage points). Despite the increase in selling and promotion expenses of $4,178,000, these expenses as a percentage of revenues improved 3.9 percentage points. The increase in course service costs is due to increased enrollments and a higher mix of computer training courses which included computer hardware. Course service costs also increased due to higher servicing/distribution costs in an effort to provide better customer service. The increase in selling and promotional expense is principally due to increased telesales and advertising and promotional spending, which resulted in 19,064 more enrollments, $42,869,000 increase in gross enrollment value and $20,206,000 more revenue. The increase in general and administrative expense is mostly due to higher outside service charges for the mainframe computer usage, increased computer programming costs to convert and integrate new information systems and lower 1994 expenses resulting from favorable insurance loss experience. Prior to September 15, 1995, ICS offered computer courses which included the sale to the student of a computer which, after shipment, was recorded as an asset and amortized over the projected twelve month period of the remaining course payments. Subsequent to September 15, 1995, the Company changed the manner in which computer training courses were marketed, no longer including the computer hardware with such courses. In the fourth quarter of 1995, the Company reviewed the realizability of the carrying value of the computer and related assets and determined that a portion of the capitalized balance for computers related to enrollments for which there was no further revenue to be recognized. As a result, the Company recorded a write-down of the unamortized balance of computers and other related costs of $4,549,000 ($.14 per share), which is reflected as an unusual item. In addition, the Company reduced the period over which the computers are amortized to six months. Domestic gross enrollment value increased $36,143,000 or 25.1% due to the increase in new enrollments and a higher value per course due to the higher priced computer courses prior to September 15, 1995. International gross enrollment value increased $6,726,000 or 9.8% due to the increased enrollments in Canada and IMS and the change in mix to higher priced PC courses. Unearned future tuition revenue decreased $9,561,000 or 5.9% principally because effective September 15, 1995, the Company unbundled sales of computer hardware from the computer courses and lowered the price of the course to reflect the elimination of the computer from the course. Following this unbundling, enrollments in computer courses dropped in the fourth quarter. Based upon previous experience, approximately 45% of the unearned future tuition revenue was ultimately recognized into revenue. - 20 - 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries STECK-VAUGHN PUBLISHING - 1995 COMPARED TO 1994:
Year Ended December 31, ------------------------- (dollars in thousands) 1995 1994 1993 -------------------------------------------------------- REVENUES: Elementary/High School $34,971 $31,578 $29,377 Adult Education 12,677 12,934 13,817 Library 10,578 9,096 9,962 ------- ------- ------- Total Revenues $58,226 $53,608 $53,156 ------- ------- -------
Revenues of $58,226,000 increased $4,618,000 or 8.6% from revenues of $53,608,000 in the prior year. Revenue growth was supported by general price increases of 10.1% and 5.7% effective September 1, 1995 and 1994, respectively. Operating income for 1995 was $9,499,000 compared to operating income of $10,459,000 in 1994. The decrease in operating income is due entirely to the unusual item charge of $970,000 or $.03 per share for settlement of litigation. Excluding this unusual item, operating income for 1995 would have been $10,469,000 (18.0% operating income margin) as compared to $10,459,000 (19.5% operating income margin) in 1994. Revenue growth stemmed from the elementary and library markets. The elementary/high school market, up $3,393,000 or 10.7% was bolstered by strong sales from basic skills products in spelling, math and reading. The Company's testing and assessment products also boosted sales, enhanced by the Berrent Publications product line purchased in November 1994. Library sales of $10,578,000, up 16.3%, were stimulated by the Company's strong list of new titles, as well as new exclusive distribution agreements with Larouse Kingfisher Chambers, Inc. and Abdo & Daughters. Adult sales were down $257,000 or 2.0% due to continued federal budget constraints reducing the funding for adult education. The Company purchased the product line of Educational Development Laboratories, Inc. (EDL) in October 1995 to strengthen its adult product offerings. Publishing costs and materials of $14,867,000 increased $1,272,000 or 9.4%, but remained relatively constant as a percentage of revenues. Manufacturing costs rose due to the increased cost of paper and the increased sales of library titles to wholesalers at their typical discounted prices. The Company's price increase offset much of the increase in paper cost. Royalty expense declined as a percentage of revenues due to the acquisition of product lines with lower royalty costs and the addition of the new library lines through distribution arrangements rather than internal development. In 1995, Steck-Vaughn changed its method of accounting for inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The new method was adopted to provide a better means of matching current costs with current revenues, as the company aggressively pursues its plan to reduce its current operating inventory levels while increasing inventory turnover. In addition, commencing in late 1995 and continuing into 1996, paper prices declined. Management expects this trend to continue. The financial statements of all prior years have been restated to apply the method retroactively. The effect of this change was to increase Steck-Vaughn's 1994 operating income by $1,326,000 and $754,000 for 1995 and 1994, respectively. Product development expense of $8,901,000 increased $1,274,000 or 16.7% as the Company continued to augment its product offerings with new and revised titles. Of particular interest is the revision of two major series scheduled for release in 1996: the 53-volume Portrait of America series and the 24-volume Raintree Illustrated Science Encyclopedia. The acquisitions of Berrent Publications and EDL, whose separate development offices were retained, also contributed to the increase. - 21 - 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries STECK-VAUGHN PUBLISHING - 1995 COMPARED TO 1994 (CONTINUED:) Selling and promotion expense of $18,738,000 increased $1,266,000 or 7.2%, but as a percentage of revenues was down slightly. In nominal terms, expenses rose due to increased commissions on the higher sales volume. Partially offsetting the increased costs were some cost reductions achieved through a slight reduction in the field sales force and an 18% reduction in the telemarketing sales force. General and administrative costs were higher due to increased headcount, enhancement of MIS capabilities and nonrecurring insurance credits in 1994. Amortization of acquired intangible assets increased as a result of the three acquisitions made in the last fourteen months. NETG:
Year Ended December 31, ----------------------------- (dollars in thousands) 1995 1994 1993 ------------------------------------------------------- REVENUES: Domestic $26,129 $36,564 $39,144 Spectrum 1,618 5,247 5,266 International 26,603 20,126 23,849 ----------------------------- Total Revenues $54,350 $61,937 $68,259 -----------------------------
NETG - 1995 COMPARED TO 1994: Revenues for NETG were $54,350,000, a decrease of $7,587,000 or 12.2% from the $61,937,000 in 1994. Domestic revenues of $26,129,000 decreased $10,435,000 or 28.5% from the prior year due to decrease in customer renewals and the absence of significant new customers. The decrease in customer renewals and significant new customers in the domestic operation is due in part to the absence of a full line of client/server training products that is now in such demand in the multimedia training marketplace. During 1995, NETG introduced 32 internally developed products in the marketplace, most of which were in the desktop computer training area. In order to stem the revenue decline and grow the business in the future, NETG will introduce approximately 200 internally developed training courses in 1996, of which approximately 110 will be in the client/server training area. Spectrum revenue for 1995 was $1,618,000, or $3,629,000 lower than in 1994 because the Company began the process to discontinue Spectrum's product line in June 1995. International revenue of $26,603,000 increased $6,477,000 or 32.2% from the prior year primarily in the U.K. and Germany. The increase in the U.K. was due to increased renewals and new business in 1995. The improved results were attributable to an experienced management team together with effective sales and marketing strategies implemented in 1994, particularly in Product License and Consulting/Multimedia products. The increase in revenues in Germany is mostly due to increased training revenue in SAP R/3 products, as well as increased revenue due to a program whereby the government subsidizes certain private sector training. Operating loss of NETG increased from $13,993,000 in 1994 to $89,942,000 in 1995 due primarily to net unusual items of $74,567,000 related to the restructuring of NETG ($30,604,000), write-off of goodwill ($47,509,000) and an unusual credit ($3,546,000) which resulted from a favorable legal arbitration award. - 22 - 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries NETG - 1995 COMPARED TO 1994 (CONTINUED:) Course service costs of $19,691,000 were $1,738,000 or 8.1% lower than the prior year. This is due to the lower volume of domestic business, as well as the savings from the reorganization of the business, offset partially by an increase in instructor led training costs as a result of the revenue growth in that area and an increase in material costs and royalty costs due to revenue growth in the International market. Also the provision for doubtful accounts increased by $1,300,000 in International operations. Product development costs of $10,493,000 increased $1,742,000 or 19.9% due to an increase in product development of client/server training courses, of which $3,500,000 was expensed in December of 1995 as part of the project to produce approximately 110 client/server products to be delivered in the last half of 1996. This increase was partially offset by headcount and related savings due to the restructuring, as well as discontinuance of the Spectrum products. Selling and promotion expense of $28,165,000 decreased $5,462,000 or 16.2% due to lower headcount, fewer sales offices, reduced promotional spending and lower commission expense due to the lower revenue and the restructuring in June 1995. The decrease was partially offset by increased costs in international and distributor channels due to the higher revenue levels. General and administrative expenses of $10,707,000 were $79,000 or 0.7% lower than in 1994. Amortization of acquired intangible assets was $668,000 or 50.0% lower than the prior year as the intangible assets were written-off in June 1995 as further explained below. In 1995, NETG recorded $74,567,000 of net unusual item charges which are explained below. NETG experienced significant operating losses over the past several years in an environment of substantial changes in training related to information systems and technology. As a result of continuing losses through the second quarter of 1995, management concluded that NETG could not return to profitability in the foreseeable future without significant changes in its operating structure and business direction. Consequently, the Company resolved to significantly lower the overall cost structure while focusing on specific training areas to permit NETG to return to profitability. Accordingly, the Company approved a restructuring plan for NETG in June 1995 to discontinue certain product lines and to reorganize its sales and marketing efforts to enhance its channels of distribution. This restructure plan resulted in a nonrecurring charge of $28,652,000 ($.90 per share). In the fourth quarter of 1995, NETG further reduced its organization in Germany and recorded a restructure charge of $1,952,000 ($.06 per share). No tax benefits were provided on these charges. The charges include severance related payments, excess facilities costs, the write-down of inventory and fixed assets of certain discontinued products and other restructuring related items such as charges related to canceled contracts and agreements. These restructure actions are expected to reduce annual operating expenses by $15,000,000. In the second quarter of 1995, as a result of the changes at NETG, the Company revised NETG's financial projections. Based upon this estimate of the future results of operations, the estimated net cash flows over the remaining life of NETG's intangible assets (goodwill) are less than the net book value of the goodwill at June 30, 1995 and under the provisions of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets", the Company estimated the fair value of its investment in NETG by discounting estimated future net cash flows at a rate commensurate with the related risk. Based upon this analysis, management believes NETG to have only a nominal fair value such that the goodwill balance of $42,719,000 ($1.34 per share) related to the Company's 1986 acquisition of what is now NETG was written-off during the second quarter. - 23 - 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries NETG - 1995 COMPARED TO 1994 (CONTINUED:) Additionally, in the second quarter, the Company discontinued the operations of Spectrum, a subsidiary of NETG which provided primarily custom developed training to businesses. As a result, the Company recorded the assets and liabilities of Spectrum at their fair value and recorded a write-off of goodwill in the amount of $4,790,000 ($.15 per share) during the second quarter. Spectrum's operating losses before amortization of intangibles and unusual items, were $1,433,000 and $1,125,000 for 1995 and 1994, respectively. During the fourth quarter of 1995, a legal dispute with a third-party author for NETG was settled in the Company's favor. The Company recorded a gain to the extent payment was received. A portion of the settlement in the amount of $1,343,000 is held in escrow pending the outcome of various legal issues. The gain was partially offset with other minor legal settlements which involved parties related to the third party author resulting in a net unusual credit of $3,546,000. OTHER: Revenues from National Education International (NEI) which provides training services to foreign governments primarily in the Middle East, of $3,001,000 were up slightly from the prior year. This increase was more than offset by a $327,000 decrease in other revenue from 1994 due to revenues from the investment in an entity which was sold in 1994. During the second quarter of 1995, an unusual charge was recorded in the amount of $1,644,000 ($.05 per share) at NEC Corporate primarily for severance related payments to the former chief executive officer and corporate expenses related to the restructuring of NETG. Operating results of ICS and NETG foreign operations by geographic region experienced similar changes in revenues and income as previously discussed. Foreign currency gains of $307,000 were recorded during 1995 compared to gains of $492,000 in 1994. The current year currency gains primarily resulted from the rise in the exchange rates of the British pound and the German mark and their effect on the U.S. dollar denominated current intercompany balances at NETG-U.K. and NETG-Germany payable to the U.S. operations. 1994 COMPARED TO 1993: CONSOLIDATED RESULTS OF OPERATIONS: Revenues of $241,614,000 for the year ended December 31, 1994 were $17,442,000 or 7.8% higher than revenues of $224,172,000 in the prior year. Loss from continuing operations was $14,093,000 or $.48 loss per fully diluted share compared to income from continuing operations of $10,092,000 or $.32 per fully diluted share in 1993. Net loss of $63,545,000 or $2.14 loss per share compared to net loss of $9,665,000 or $.32 loss per share in 1993. The 1994 results were restated to reflect Steck-Vaughn changing from the LIFO to the FIFO basis of accounting for inventories. This change decreased net loss by $380,000 ($.01 per share) in 1994 and increased net loss by $46,000 ($.00 per share) in 1993. The 1994 results were negatively impacted by the adoption of the SOP discussed earlier. The SOP did not allow the restatement of the 1993 results. The 1994 results were also unfavorably impacted by the $40,032,000 charge ($1.35 per share) related to the discontinuance of the Education Centers subsidiary referred to earlier. - 24 - 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED:) Increased revenues from continuing operations related to ICS, Steck-Vaughn and National Education International were partially offset by reduced revenues at NETG. The decline in income from continuing operations of $24,185,000 was due to the 1994 adoption of the SOP discussed above, and a nonrecurring 1993 after tax gain of $21,120,000 ($.71 per share) resulting from an initial public offering of 2,668,000 shares of Steck-Vaughn Publishing Corporation common stock partially offset by the 1993 unusual charge of $9,232,000 ($6,558,000 after tax or $.22 loss per share) recorded at NETG for the write-down of certain acquired intangible assets. Excluding the effects of the net unusual items, income from continuing operations in 1994 was favorably impacted by reduced operating losses at NETG and a gain on sale of a partnership interest of a start-up operation in the amount of $3,247,000 ($2,143,000 after tax or $.07 per share). The net loss was primarily related to the loss from discontinued operations and the loss on disposal of discontinued operations of the Education Centers totaling $49,452,000 in 1994. The loss from discontinued operations decreased from the prior year due to the nonrecurring unusual charge of $23,626,000 ($16,363,000 after tax or $.55 loss per share) resulting from a restructuring charge for the write-down of certain assets and the estimated costs of closing the 14 schools announced in the third quarter of 1993. ICS LEARNING SYSTEMS: ICS Learning Systems revenues of $122,815,000 increased $21,496,000 or 21.2% from revenues of $101,319,000 in 1993. Operating loss of $3,927,000 decreased $25,295,000 from operating income of $21,368,000 in the prior year solely due to the change in accounting for advertising, selling and promotion costs required by the SOP as discussed earlier. The revenues at ICS increased primarily due to strong revenue performance at the domestic operation. The international operations experienced a slight increase in revenues. Domestic revenues grew significantly due to a 32.7% increase in enrollments, revenues from MicroMash, and increases in Business and Industrial Division revenues. The significant domestic enrollment increase primarily resulted from the success of the expanded telesales efforts, which have produced a higher conversion of leads to enrollments and tuition down payments upon enrollment than that experienced in the prior year. In addition, a shift in product mix towards higher priced computer related courses contributed to the revenue growth. During the first quarter, ICS acquired MicroMash, a leading provider of computer based interactive courses for accounting professionals and students. Through this acquisition, which contributed $5,069,000 to revenue in 1994, ICS is strategically positioned to aggressively pursue the continuing professional education marketplace. Business and Industrial Division revenues grew during the year as a result of further selling penetration of the existing marketplace. The revenue increase at the international operation primarily resulted from higher revenues at the Australia/New Zealand, Canada and International Mail Sales (IMS) operations. The combined Australia/New Zealand operation experienced strong enrollment growth of 17.9% as a result of the successful telesales efforts which increased conversion of leads to enrollments. The higher revenues at Canada and IMS primarily resulted from increased student payments partially reduced by a decrease in Canada's enrollments. The United Kingdom experienced lower revenues due to lower student payments despite flat enrollments as compared to the prior year. As a result of the increased traditional business selling and promotion spending of $11,385,000 in 1994 over 1993, revenues increased $21,496,000 and unearned future tuition revenue on student contracts at ICS increased $36,883,000 or 29.2% to $163,050,000. As required by the SOP, expensing these costs as incurred fully burdens the current year with expenses that benefit future years with the related revenue stream. Higher course service costs at the domestic operation were primarily related to the significant volume increases and changes in product mix towards a higher percentage of lower margin computer related courses. General and administrative costs were higher during the year primarily due to costs associated with MicroMash and the initial costs to convert and integrate new information systems. These costs were partially offset by lower insurance costs related to favorable loss experience. - 25 - 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries STECK VAUGHN PUBLISHING: Steck-Vaughn Publishing Corporation revenues of $53,608,000 were $452,000 or .9% higher than revenues of $53,156,000 in the prior year. Operating income of $10,459,000 decreased $2,615,000 or 20.0% as compared to operating income of $13,074,000 in 1993. The 1994 and 1993 results were restated to reflect a change from the LIFO to the FIFO method of accounting for inventories. This change increased operating income by $754,000 and $144,000 in 1994 and 1993, respectively. The slight increase in revenue was attributable to a general price increase of 6.7% and a modest increase in sales of the elementary school product line which benefited from growth primarily in the Math, Reading, and Science products and a full year of Magnetic Way product sales. The adult education product line experienced a decrease in revenues due to a reduction in software sales of GED products, new competition for GED products and tight funding in the adult education sector. In addition, a decline in sales of mature library products was not entirely offset by sales of newer products, resulting in lower library revenues. Several factors contributed to these results. Selling conditions in early 1994 were hampered by adverse winter weather conditions which affected the midwest, mid-Atlantic and northeast regions of the United States. Additionally, the sales force expansion and related reorganization effective January 1994, resulted in longer than anticipated assimilation and reduced sales productivity. Finally, a continuing trend towards site-based selling, which is a competitive strength of Steck-Vaughn, is driving the decision making process down to the faculty level requiring a greater number of sales calls per revenue dollar, resulting in an increase in selling costs. Operating income decreased significantly during 1994 primarily due to an increase in publishing costs, product development expenses, and selling and promotion costs. Higher publishing costs primarily resulted from the higher distributor and Magnetic Way sales which have lower profit margins and resulted in a slight increase in publishing costs as a percentage of revenues. Publishing costs and materials, which include product development and product acquisition expenses, increased over the prior year due to Steck-Vaughn's commitment to develop new and revised products and to acquire certain library products to position Steck-Vaughn for growth in the supplemental educational marketplace. By continuing to expand its product offerings, Steck-Vaughn expects to continue to capitalize on the anticipated increasing demand for supplemental educational, library and adult education products despite severe budgetary pressure on schools located in certain geographic areas of the country. Selling and promotion costs increased during the year due to the expansion of the sales organization during January 1994. The expansion and related reorganization resulted in the segmentation of the sales force into two groups. One group focuses on the elementary, junior high and library marketplaces while the other group focuses on the high school and adult education marketplaces. This segmentation positions Steck-Vaughn to maximize the opportunities of their rapidly expanding product offerings and to respond to additional requirements resulting from the trend towards site-based selling. General and administrative expenses decreased in 1994 primarily due to lower insurance expenses caused by favorable loss experience and reduced management incentive compensation expenses. NETG: NETG revenues of $61,937,000 decreased $6,322,000 or 9.3% from revenues of $68,259,000 in the prior year. Operating losses of $13,993,000 decreased $11,957,000 from losses before unusual items of $25,950,000 in the prior year. During the third quarter of 1993, NETG recorded an unusual charge of $9,232,000 which resulted from the write-down of certain acquired intangible assets. The decrease in revenues at the domestic and international operations primarily resulted from lower contract backlog at the beginning of 1994 as compared to 1993 and slightly - 26 - 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries NETG (CONTINUED:) lower volume of new orders in the domestic operation. In addition, the decrease in revenues was partially attributable to the introduction in the third quarter of a new product licensing agreement, called Multimedia Licensing Agreement (MLA), which simplifies the customers' ability to acquire NETG products; however, unlike sales contracts used in prior years, the MLA does not require upfront commitments to acquire product upon the signing of a contract. As the number of customers signing MLAs increases, new orders will become less meaningful as a key indicator of future revenue activity. New orders increased in the international operation due to increased new business activity in the United Kingdom operation; however, decreasing contract backlog, which more than offset the new orders business, and the sale of NETG-Canada in 1993 resulted in reduced revenues in the international operation. During December 1993, NETG sold certain assets and liabilities of NETG-Canada to SHL Systemhouse, Inc. at approximately book value. Operating losses before unusual items decreased significantly in the domestic operation during 1994 primarily due to reductions in product development costs, general and administrative expenses and amortization of acquired intangible assets. Reengineering the processes in product development and focusing the 1994 development efforts to concentrate in areas such as multimedia end user desktop computing and client/server computing resulted in a 35.6% reduction in product development expenses. The decrease in general and administrative expenses primarily resulted from lower employee headcount and favorable loss experience which resulted in lower insurance expenses partially offset by higher consulting costs. Amortization of acquired intangible assets decreased in 1994 due to the write-down of certain acquired intangible assets in 1993 which was recorded as an unusual charge of $9,232,000. Despite slightly lower selling and promotion expenses, these expenses increased as a percentage of revenue during 1994 primarily as a result of the revenue decline. CORPORATE AND OTHER: National Education International (NEI) revenues of $2,927,000 increased $1,675,000 or 133.8% above the prior year revenues of $1,252,000. Operating income of $958,000 increased $742,000 over the prior year income of $216,000. The higher revenue and operating income levels are attributable to multi-year training contracts with Egypt and Kuwait, which span from one to four years in duration. In December 1994, the Company sold its interest in a start-up partnership venture previously entered into for the development of an automated enrollment and financial aid application process. As a result of the sale, which was accounted for as a sale of stock, the Company recorded a gain on sale of $3,247,000 ($2,143,000 after tax or $.07 per share). General corporate expenses of $6,582,000 decreased $4,314,000 or 39.6% from expenses of $10,896,000 in the prior year. The decrease in corporate expenses primarily resulted from a one-time contract settlement charge in 1993, favorable loss experience which resulted in lower insurance expenses, reduced outside consulting costs primarily from the company-wide financial reengineering effort and other cost reductions. Operating results of ICS and NETG foreign operations by geographic region experienced similar changes in revenues and income as previously discussed. Foreign currency gains of $492,000 were recorded during 1994 compared to losses of $243,000 in 1993. The current year currency gains primarily resulted from the rise in the exchange rates of the British pound and the German mark and their effect on the U.S. dollar denominated current intercompany balances at NETG-U.K. and NETG-Germany payable to the U.S. operations. - 27 - 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash, investment securities and cash provided from operations. At December 31, 1995, the Company had $23,868,000 in cash and investment securities, of which $11,790,000 was held in the account of Steck-Vaughn. As of December 31, 1995, the Company had a revolving bank credit agreement in the amount of $10,000,000, all of which was outstanding. In January 1996, the Company terminated the bank credit agreement in the amount of $10,000,000 and entered into a two-year, $20,000,000 revolving credit agreement with a bank. The revolving credit, which is secured by stock of certain principal subsidiaries and certain assets, will initially provide for borrowing at the bank's base rate plus 1.75% or, at the Company's option, at LIBOR plus 3%, with borrowing rate decreases subject to certain financial performance measures. The revolving credit agreement provides for the intercompany agreement between the Company and Steck-Vaughn in the amount of $10,000,000 which expires March 31, 1996. Effective February 1, 1996, the Company reduced the amount of the intercompany agreement to $5,000,000. The agreement provides that any borrowing by the Company will bear interest at LIBOR plus 2%, and will be secured by the Company's holdings of Steck-Vaughn stock. Steck-Vaughn also received an option to repurchase from the Company up to 290,000 shares of Steck-Vaughn stock held by the Company, at $6.50 per share. The option becomes exercisable one year after grant, expires March 31, 1997, and may be redeemed by the Company prior to exercise or expiration for the greater of $75,000 per month ($37,500 effective February 1, 1996) or the amount necessary to increase to 25% the annualized yield to Steck-Vaughn on all amounts borrowed by the Company under the intercompany loan agreement. At December 31, 1995, $4,000,000 was outstanding under the intercompany agreement and was eliminated in consolidation. Steck-Vaughn has a revolving bank credit agreement in the amount of $10,000,000 with a maturity of June 10, 1997. The agreement provides for borrowings at prime or, at Steck-Vaughn's option, LIBOR plus 1.5%. The bank credit agreement replaced Steck-Vaughn's borrowing ability from the Company pursuant to an intercompany agreement. No amounts were outstanding under the bank credit facility in 1994 or 1995. Annual commitment fees of .25% are paid on the unused line of credit. In September 1995, the holders of $20,000,000 of the Company's 10% senior subordinated convertible debentures converted such debentures, including accrued interest, into 5,021,000 shares of the Company's common stock. During 1994, the Company adopted a plan to dispose of its Education Centers subsidiary. As a result, the Company recorded a charge of $40,032,000 to write-down assets to estimated net realizable value and provide for estimated costs of disposing of the operation. As of December 31, 1995, substantially all of the operations and schools were sold, closed or terminated. Subsequent to December 31, 1995, the Company entered into a definitive agreement to acquire all of the stock of Edunetics, Ltd., an Israeli corporation engaged in the development of educational software, for cash consideration of $12,000,000. The closing remains subject to certain conditions including approval by the shareholders of Edunetics and receipt of certain regulatory approvals under Israeli law. The Company expects that cash, marketable securities, the bank credit facilities, cash provided from operations, the intercompany credit agreement with Steck-Vaughn, which under certain conditions may be extended, and an expected IRS refund in the amount of approximately $10,000,000 will be sufficient to provide for planned working capital requirements, product development, capital expenditures, debt service and the pending acquisition of Edunetics, Ltd. At closing, the purchase price for Edunetics, Ltd. will be funded by cash on hand and advances under the Steck-Vaughn revolving bank credit agreement. - 28 - 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) National Education Corporation and Subsidiaries LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Net cash outflow from operating activities of $11,000 in 1995 improved $1,418,000 from the negative cash outflow of $1,429,000 reported in 1994. The improvements in working capital items such as receivables, accounts payable, accrued expenses, and accrued and deferred income taxes were partially offset by increases of inventories, primarily at Steck-Vaughn and decreases of deferred contract revenues, primarily at NETG due to the reduced level of contract and revenue activity. In addition, net cash flows for 1995 were further impacted by acquisitions of Summit Learning, Inc. and EDL in the amount of $3,260,000. The cash outflow of $2,337,000 at the Education Centers improved $18,748,000 from the cash outflow of $21,085,000 in 1994. The improved cash flow at these discontinued operations resulted from the proceeds from the sale of schools of $10,647,000 and the significant reductions in Education Centers' headquarters expenses. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. As of December 31, 1995, the Company had a gross deferred tax asset of $84,488,000 (see Notes to Consolidated Financial Statements). A significant portion of the deferred tax asset is comprised of U.S. federal and international net operating loss carryforwards. At December 31, 1995, the Company had available federal consolidated net operating loss carryforwards of $108,000,000 (exclusive of certain "SRLY" losses) expiring through 2010. In addition, the Company had federal SRLY loss carryforwards totaling $17,400,000 ($5,918,000 deferred tax asset) expiring in years 1998 through 2010 that may only be used to offset income generated by the particular entities that generated the losses. FAS 109 requires that the Company record a valuation allowance when it is "more likely than not that some portion of the deferred tax asset will not be realized". As a result of the Company's significant losses in recent years, the Company has recorded a valuation allowance of $50,952,000, including full allowance against the 1995 losses and the SRLY loss carryforwards. The ultimate realization of deferred tax assets, net of the valuation allowance, of $33,536,000 depends on the Company's ability to generate sufficient taxable income in the future. A portion of this asset will be realized through the reversal of taxable temporary differences totaling $11,661,000 reflected as deferred tax liabilities in the financial statements. The improving operating income throughout the last two quarters in 1995 and into 1996, together with the reversal of taxable temporary differences, provides the basis for management's conclusion that it is more likely than not that the Company will generate sufficient taxable income to realize the net deferred tax asset. The effect of inflation had little impact on the Company in 1995. - 29 - 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and the Report of Price Waterhouse LLP, Independent Accountants, are included in this Annual Report on Form 10-K on pages F-1 through F-26 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has no information to report in response to this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. (a) The information required by Item 10 with respect to the directors of the Company is incorporated herein by reference from material that will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end (December 31, 1995) as part of a Proxy Statement for the Company's Annual Meeting of Stockholders. (b) The information required by Item 10 with respect to executive officers of the Company is furnished in a separate item captioned "Executive Officers of the Company" and included in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is incorporated herein by reference from material that will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end (December 31, 1995) as part of a Proxy Statement for the Company's Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is incorporated herein by reference from material that will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end (December 31, 1995) as part of a Proxy Statement for the Company's Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is incorporated herein by reference from material that will be filed with the Securities and Exchange Commission within 120 days of the Company's fiscal year end (December 31, 1995) as part of a Proxy Statement for the Company's Annual Meeting of Stockholders. - 30 - 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report:
Page Number ----------- (1) Financial Statements: Report of Independent Accountants........................... F-1 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1995......... F-2 Consolidated Balance Sheets at December 31, 1995 and 1994... F-3 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995......... F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1995.. F-5 Notes to Consolidated Financial Statements.................. F-6 (2) Financial Statement Schedules: ** II Valuation and Qualifying Accounts............. F-26
** Schedules numbered in accordance with Rule 5.04 of Regulation S-X. All other financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits: Management contracts and compensatory plans and arrangements required to be filed as an exhibit to this Annual Report on Form 10-K are denoted with an "**" after the Exhibit number.
Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 3.1 Restated Certificate of Incorporation of the National Education Corporation (23)............................................................. 3.2 By-Laws of National Education Corporation, as amended (1).................... * 10.1 ** National Education Corporation Retirement Plan (Restated as of January 1, 1989 and as Amended through January 1, 1992) (2).................. * 10.2 ** Advanced Systems, Incorporated 1984 Stock Option and Stock Appreciation Rights Plan (3)................................................. * 10.3 ** 1986 Stock Option and Incentive Plan, as amended (4)......................... * 10.4 ** Amended and Restated 1990 Stock Option and Incentive Plan (5)................ * 10.5 ** Amended and Restated 1991 Directors' Stock Option and Award Plan (6)......... *
- 31 - 34
Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 10.6 Rights Agreement, dated October 29, 1986, between National Education Corporation and Bank of America National Trust and Savings Association, Rights Agent (including exhibits thereto) (7)................... * 10.7 Addendum No. 1 to Rights Agreement, dated August 5, 1991 (8)................. * 10.8 Indenture, dated as of May 15, 1986, between National Education Corporation and Continental Illinois National Bank and Trust Company of Chicago, as Trustee (9)................................................... * 10.9 Tripartite Agreement Dated as of May 31, 1990, among National Education Corporation, Continental Bank as Resigning Trustee, and IBJ Schroder Bank & Trust Company as Successor Trustee (10)...................... * 10.10 ** National Education Corporation Supplemental Executive Retirement Plan, as amended (11).............................................................. * 10.11 ** Supplemental Benefit Plan for Non-Employee Directors (12) ................... * 10.12 ** Executive Employment Agreement between National Education Corporation and Sam Yau (13)............................................................. * 10.13 Intercompany Agreement Between National Education Corporation and Steck-Vaughn Publishing Corporation dated June 30, 1993 (the "Intercompany Agreement") (14)............................................................. * 10.14 First Amendment to Intercompany Agreement, dated June 10, 1994 (15).......... * 10.15 Tax Sharing Agreement Between National Education Corporation and Its Direct and Indirect Corporate Subsidiaries dated January 1, 1993 (16)........ * 10.16 $13,500,000 Amended and Restated Credit Agreement among National Education Corporation, the Banks named therein and Bankers Trust Company as Agent, dated February 28, 1995 (the "Credit Agreement") (Confidential treatment under Rule 24b-2 has been granted for portions of this exhibit) (17) ....................................................... * 10.17 First Amendment and Limited Waiver to Credit Agreement, dated July 31, 1995 (18)........................................................... * 10.18 Second Amendment to Credit Agreement, dated December 21, 1995 (23)........... 10.19 $10,000,000 Credit Agreement between Steck-Vaughn Company and NationsBank of Texas, dated as of June 10, 1994 (19)......................... * 10.20 Amendment of Loan Agreement between NationsBank of Texas, N.A. and Steck-Vaughn Company, dated September 29, 1995 (20).......................... * 10.21 Revolving Line of Credit Note and Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated February 28, 1995 (21)....................................................... *
- 32 - 35
Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 10.22 Renewal and Extension Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, effective December 31, 1995 (23)........ 10.23 First Amendment to Stock Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, effective December 31, 1995 (23).................................................................... 10.24 Letter Amendment to Stock Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated February 1, 1996 (23).................................................................... 10.25 Debenture Conversion Agreement among National Education Corporation and the Holders identified therein, dated August 31, 1995 (22)............... * 10.26 Credit Agreement among National Education Corporation, certain banks and BZW Division of Barclays Bank PLC, as Agent, dated January 19, 1996 (Confidential treatment under Rule 24b-2 has been requested for portions of this exhibit) (23)........................................................ 11.1 Calculation of Primary Earnings Per Share (23)............................... 11.2 Calculation of Fully Diluted Earnings Per Share (23)......................... 18 Letter from Price Waterhouse LLP regarding change in accounting principles (23) ............................................................. 21 Subsidiaries of National Education Corporation (23).......................... 23 Consent of Price Waterhouse LLP (23)......................................... 27.1 Financial Data Schedule (23)
- ------------------ * incorporated by reference from a previously filed document ** denotes management contract or compensatory plan or arrangement (1) Incorporated by reference to Exhibit 10 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. (2) Incorporated by reference to Exhibit 10.1 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, filed March 22, 1993. (3) Incorporated by reference to Exhibit 10.15 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1987, filed March 30, 1988. (4) Incorporated by reference to Exhibit 10.17 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991. (5) Incorporated by reference to Exhibit "B" filed with National Education Corporation's Proxy Statement furnished in connection with the Annual Meeting of Stockholders held June 27, 1995, filed May 22, 1995. - 33 - 36 (6) Incorporated by reference to Exhibit "A" filed with National Education Corporation's Proxy Statement furnished in connection with the Annual Meeting of Stockholders held June 27, 1995, filed May 22, 1995. (7) Incorporated by reference to Exhibit 4.1 filed with National Education Corporation's Current Report on Form 8-K, dated October 29, 1986, filed October 30, 1986. (8) Incorporated by reference to Exhibit 10.19 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. (9) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to National Education Corporation's Registration Statement on Form S-3 (No. 33-5552), filed May 16, 1986. (10) Incorporated by reference to Exhibit 4 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. (11) Incorporated by reference to Exhibit 10.17 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. (12) Incorporated by reference to Exhibit 10.18 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. (13) Incorporated by reference to Exhibit 10.21 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (14) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1 to Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1, (No. 33-62334), filed June 17, 1993. (15) Incorporated by reference to Exhibit 10.23 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994. (16) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1 to Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1, (No. 33-62334), filed June 17, 1993. (17) Incorporated by reference to Exhibit 10.18 filed with National Education Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 31, 1995. (18) Incorporated by reference to Exhibit 10.22 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed November 9, 1995. (19) Incorporated by reference to Exhibit 10.14 filed with Steck-Vaughn Publishing Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994. (20) Incorporated by reference to Exhibit 10.24 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed November 9, 1995. (21) Incorporated by reference to Exhibit 10.12 filed with Steck-Vaughn Publishing Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 29, 1995. (22) Incorporated by reference to Exhibit 10.23 filed with National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, filed November 9, 1995. (23) Filed herewith. (b) No reports on Form 8-K were filed during the fourth quarter of 1995. - 34 - 37 (c) The exhibits required by this Item are listed under Item 14(a)(3) above. (d) The consolidated financial statements required by this Item are listed\ under Item 14(a)(2). - 35 - 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL EDUCATION CORPORATION Date By /s/ SAM YAU March 14, 1996 --------------- Sam Yau President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Date By /s/ SAM YAU March 14, 1996 --------------- Sam Yau Director, President and Chief Executive Officer (Principal Executive Officer) By /s/ KEITH K. OGATA March 14, 1996 --------------------------- Keith K. Ogata, Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ GLEN E. MEDWID March 14, 1996 -------------------- Glen E. Medwid, Corporate Controller (Principal Accounting Officer) - 36 - 39 Date By: /s/ RICHARD C. BLUM March 11, 1996 ---------------------------- Richard C. Blum, Director By: /s/ DAVID BONDERMAN March 11, 1996 ---------------------------- David Bonderman, Director By: /s/ DAVID R. DUKES March 13, 1996 --------------------------- David R. Dukes, Director By: /s/ LEONARD W. JAFFE March 11, 1996 ---------------------------- Leonard W. Jaffe, Director By: /s/ DAVID C. JONES March 11, 1996 ----------------------------- David C. Jones, Director By: /s/ MICHAEL R. KLEIN March 12, 1996 ---------------------------- Michael R. Klein, Director By: /s/ PAUL B. MACCREADY March 9, 1996 ---------------------------- Paul B. MacCready, Director By: /s/ FREDERIC V. MALEK March 9, 1996 --------------------------- Frederic V. Malek, Director By: /s/ JOHN J. MCNAUGHTON March 11, 1996 ---------------------------- John J. McNaughton, Director By: /s/ WILLIAM D. WALSH March 9, 1996 ---------------------------- William D. Walsh, Director - 37 - 40 NATIONAL EDUCATION CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of National Education Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 31 present fairly, in all material respects, the financial position of National Education Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for advertising costs in 1994, changed its method of accounting for inventory cost in 1995 and changed its method of accounting for the impairment of long-lived and intangible assets in 1995. Price Waterhouse LLP Costa Mesa, California February 5, 1996, except as to Note 4, which is as of March 1, 1996 F-1 41 National Education Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ---------------------------------- As As Restated Restated (Note 1) (Note 1) (amounts in thousands, except per share amounts) 1995 1994 1993 - ------------------------------------------------------------------------------------------------- TUITION AND CONTRACT REVENUES $200,372 $188,006 $171,016 PUBLISHING REVENUES 58,226 53,608 53,156 ------------------------------- NET REVENUES 258,598 241,614 224,172 COSTS AND EXPENSES: Contract course materials and service costs 73,003 60,428 57,332 Publishing costs and materials 14,867 13,595 12,721 Product development 23,026 19,934 22,328 Selling and promotion 111,112 111,058 93,046 General and administrative 32,134 29,032 37,201 Amortization of acquired intangible assets 1,602 1,824 4,605 Amortization of prior period deferred marketing 1,470 19,836 -- Unusual items, net 81,730 -- 9,232 Interest expense 8,650 6,336 5,723 Investment income (2,621) (3,234) (2,560) Other income (307) (492) (138) Gain on sale of stock -- (3,247) (21,120) ------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT), MINORITY INTEREST AND DISCONTINUED OPERATIONS (86,068) (13,456) 5,802 Income tax benefit -- (555) (4,889) ------------------------------- INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS (86,068) (12,901) 10,691 Minority interest in consolidated subsidiary 1,155 1,192 599 ------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (87,223) (14,093) 10,092 Loss from discontinued operations -- (9,420) (19,757) Loss on disposal of discontinued operations -- (40,032) -- ------------------------------- NET LOSS $(87,223) $(63,545) $ (9,665) ------------------------------- EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS: Primary earnings (loss) per share $ (2.73) $ (.48) $ .34 ------------------------------- Fully diluted earnings (loss) per share $ (2.73) $ (.48) $ .32 ------------------------------- EARNINGS (LOSS) PER SHARE $ (2.73) $ (2.14) $ (.32) ------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Primary shares 31,893 29,640 29,855 Fully diluted shares 38,025 36,940 34,855 -------------------------------
See Notes to Consolidated Financial Statements. F-2 42 National Education Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- (dollars in thousands) 1995 1994 - ----------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 22,120 $ 17,297 Investment securities 1,748 10,833 Receivables, net of allowance of $2,742 and $2,787 36,397 45,438 Inventories and supplies 31,847 25,695 Net assets held for disposition -- 25,867 Income tax receivable 9,313 9,313 Other current assets 13,440 17,695 --------------------- Total current assets 114,865 152,138 Land, buildings, and equipment, net 24,028 25,404 Acquired intangible assets, net 13,428 52,691 Deferred income taxes 24,768 28,482 Other assets 8,173 11,530 --------------------- $ 185,262 $270,245 --------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 6,072 $ 7,771 Accrued expenses 29,022 29,328 Accrued short-term restructuring charges 8,246 -- Accrued salaries and wages 5,627 5,448 Accrued disposition costs -- 25,116 Deferred contract revenues 7,421 11,905 Current portion of long-term debt and short-term borrowings 12,338 6,407 Accrued and deferred income taxes 14,446 11,281 --------------------- Total current liabilities 83,172 97,256 --------------------- LIABILITIES PAYABLE AFTER ONE YEAR Long-term debt, less current portion 8,839 6,389 Senior subordinated convertible debentures -- 20,000 Convertible subordinated debentures 57,494 57,494 Accrued long-term restructuring charges 10,089 -- Other noncurrent liabilities 8,683 7,667 --------------------- 85,105 91,550 --------------------- MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 9,504 8,423 --------------------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 35,820,468 and 30,275,381 shares issued 2,166 2,110 Additional paid-in capital 155,100 133,043 Accumulated deficit (136,484) (49,261) Unrealized gain (loss) on available-for-sale securities, net of tax 10 (21) Cumulative foreign exchange translation adjustment (7,005) (7,947) Notes receivable under stock option plans (1,398) -- --------------------- 12,389 77,924 Less common stock in treasury (4,908) (4,908) --------------------- Total stockholders' equity 7,481 73,016 --------------------- $ 185,262 $270,245 ---------------------
See Notes to Consolidated Financial Statements. F-3 43 National Education Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------ (dollars in thousands) 1995 1994 1993 ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(87,223) $(63,545) $ (9,665) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Loss from discontinued operations -- 9,420 19,757 Income tax benefits on discontinued operations -- 1,008 8,769 Loss on disposal of discontinued operations -- 40,032 -- Depreciation and amortization 5,587 5,610 7,390 Amortization of acquired intangible assets 1,602 1,824 4,605 Amortization of prior period deferred marketing 1,470 19,836 -- Provision for doubtful accounts 1,642 250 1,777 Gain on sale of stock -- (3,247) (21,120) Gain on sale of land, buildings and equipment -- -- (381) Write-off of acquired intangible assets 47,509 -- 9,232 Write-off of course computer hardware costs 4,549 -- -- (Gain) loss on foreign currency exchange (299) (492) 243 Change in assets and liabilities: Receivables, net 8,142 (187) 13,669 Inventories and supplies (4,586) (353) 281 Deferred marketing expenses 287 270 (3,605) Accounts payable and accrued expenses (520) (10,840) 4,121 Accrued restructuring reserve 25,695 -- -- Accrued and deferred income taxes 802 (4,457) (16,746) Deferred contract revenues (4,534) 1,170 (5,469) Other (134) 2,272 (4,535) --------------------------------- Net cash from operating activities (11) (1,429) 8,323 --------------------------------- CASH FLOWS FOR INVESTING ACTIVITIES: Additions to land, buildings and equipment (4,527) (6,788) (8,503) Dispositions of land, buildings and equipment (63) (171) 260 Proceeds from sales of investment securities 9,327 10,680 3,310 Purchases of investment securities (189) (5,249) (8,615) Acquisition of business, net of cash acquired (3,260) (6,430) (5,417) Discontinued operations (2,337) (21,085) (22,815) --------------------------------- Net cash for investing activities (1,049) (29,043) (41,780) --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long-term debt -- 4,036 -- Reductions in long-term debt (1,709) (703) (654) Net proceeds from Steck-Vaughn Publishing Corporation public stock offering -- -- 28,701 Changes in short-term borrowings 4,961 5,305 -- Minority interest in equity of consolidated subsidiary 1,081 242 599 Common stock, stock options and related tax benefits 573 783 360 Payments received on notes receivable under stock option plans -- -- 107 Purchase of common stock for treasury -- (53) (4,685) --------------------------------- Net cash from financing activities 4,906 9,610 24,428 --------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 977 (387) (894) --------------------------------- NET CHANGE IN CASH AND EQUIVALENTS 4,823 (21,249) (9,923) CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 17,297 38,546 48,469 --------------------------------- CASH AND EQUIVALENTS AT THE END OF THE YEAR $ 22,120 $ 17,297 $ 38,546 ---------------------------------
See Notes to Consolidated Financial Statements. F-4 44 National Education Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
1995 1994 1993 -------------------------------------------------------------------- (amounts in thousands) Shares Amount Shares Amount Shares Amount - ----------------------------------------------------------------------------------------------------------- COMMON STOCK AND PAID-IN CAPITAL Balance at beginning of year 30,275 $ 135,153 30,093 $134,370 30,018 $134,010 Stock options and related tax benefits 95 423 182 783 75 360 Restricted stock 444 1,548 -- -- -- -- Conversion of debentures 5,021 20,142 -- -- -- -- -------------------------------------------------------------------- Balance at end of year 35,835 $ 157,266 30,275 $135,153 30,093 $134,370 -------------------------------------------------------------------- RETAINED EARNINGS (DEFICIT) Balance at beginning of year as reported $ -- $ -- $ 23,300 Adjustment for change in valuation of inventories -- -- 649 Balance at beginning of year as restated (49,261) 14,284 23,949 Net loss, as restated (87,223) (63,545) (9,665) -------------------------------------------------------------------- Balance at end of year $(136,484) $(49,261) $ 14,284 -------------------------------------------------------------------- TREASURY STOCK Balance at beginning of year 697 $ (4,908) 689 $ (4,855) 50 $ (170) Purchase of common stock for treasury -- -- 8 (53) 639 (4,685) -------------------------------------------------------------------- Balance at end of year 697 $ (4,908) 697 $ (4,908) 689 $ (4,855) --------------------------------------------------------------------
See Notes to Consolidated Financial Statements. F-5 45 National Education Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS National Education Corporation (the "Company", a Delaware Corporation) provides training and educational services and products to individuals, businesses and governments. The Company's current business is conducted primarily through three operating entities. ICS Learning Systems, Inc. ("ICS") offers to individuals distance education opportunities such as, associate degree programs, training in paraprofessional and occupational fields, high school diploma programs and courses for personal achievement, as well as, computer-based, interactive courses for accounting and legal professionals and students. ICS also offers training opportunities to business and government. Steck-Vaughn Publishing Corporation ("Steck-Vaughn") is one of the largest publishers of printed and multimedia supplemental educational materials sold to individuals, elementary and secondary schools, and libraries. National Education Training Group, Inc. ("NETG") is a provider of multimedia products to educate and train corporate and government employees, with specific emphasis on information systems training. See Note 15 for a summary of industry segment data and locations where the company conducts business. Historically, the Company also conducted business through a fourth operating entity, National Education Centers, Inc. ("Education Centers"); however, in 1994 those operations were reclassified as discontinued operations as the Company pursued a strategy to sell off or otherwise dispose of Education Centers' operations as further explained in Note 3. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. Certain prior year amounts have been reclassified to conform with 1995 presentation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. ACCOUNTING CHANGE In the fourth quarter of 1995, the Company changed its method of accounting for inventory at Steck-Vaughn from last-in, first out (LIFO), to first-in, first-out (FIFO). This change reduced net loss by $1,102,000 or $.03 per share in 1995. This change has been applied to prior years by retroactively restating the financial statements and, accordingly, the amounts for 1994 and 1993, and the interim periods presented in Note 16, were restated. The effect of the change in accounting principle was to reduce the net loss by $380,000 ($754,000 pretax) or $.01 earnings per share and to increase the net loss by $46,000 ($144,000 pretax) or $.00 earnings per share for 1994 and 1993, respectively. The effect of this restatement was to increase retained earnings as of January 1, 1993 by $649,000. This accounting change also reduced goodwill in 1994 by $12,000 and, in 1993, reduced the gain on sale of Steck-Vaughn stock by $140,000 and increased minority interest by this amount. This change was made because management believes the FIFO method better reflects the matching of current costs with the related revenue due to continued aggressive steps to reduce inventories and anticipated declines in paper prices at Steck-Vaughn. F-6 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REVENUE RECOGNITION ICS tuition revenues are recognized when cash is received, but only to the extent such cash is earned and can be retained by the Company. Cash received in excess of revenue recognized is recorded as deferred contract revenues. Generally, the Company follows the guidelines of the Distance Education Training Council in determining retention rights. Steck-Vaughn revenues are recognized upon shipment of product. NETG revenues are recognized upon shipment of courseware. SELLING AND PROMOTION COSTS The Company accounts for its advertising costs pursuant to Statement of Position No. 93-7 ("SOP"), "Reporting on Advertising Costs" issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA). The SOP generally requires advertising costs, other than direct-response advertising, to be expensed as incurred. In the fourth quarter of 1994, the Company adopted the SOP effective January 1, 1994. In adopting the SOP in 1994, ICS' total advertising, selling and promotion costs were expensed as incurred in 1994 rather than deferred and amortized as in prior periods. Adoption of the SOP in 1994 resulted in a charge of $27,410,000 ($21,181,000 after tax or $.72 per share). The charge consists of two components. First, a charge of $19,836,000 results from the amortization of the deferred marketing balance as of December 31, 1993 into 1994. Second, a charge of $7,574,000 results from increased selling and promotion spending above the amortization that would have been expensed in accordance with the Company's previous accounting policy. The remaining deferred marketing balance of $1,470,000 at December 31, 1994 was amortized in the first and second quarters of 1995. Adoption of the SOP did not have a material impact on the Company's other operations. The Company's advertising and promotion expenses, excluding the amortization of prior period deferred marketing, were $59,073,000, $56,301,000 and $44,032,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Selling and marketing expenses are expensed within the calendar year except for sales commissions on training contracts sold at NETG and development of product catalogs at Steck-Vaughn. Sales commissions on training contracts sold are deferred and amortized to expense as contract revenues are recognized. The costs of product catalogs are capitalized and expensed when the catalogs are distributed. In interim periods, a portion of selling and marketing expenses is deferred and fully amortized in subsequent interim periods within the calendar year to better match the expenses with revenues due to the seasonal nature of the revenue and spending. COURSE SERVICE AND PRODUCT DEVELOPMENT COSTS Course service costs and product development costs are expensed as incurred. INCOME TAXES Income taxes are accounted for using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. F-7 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS (LOSS) PER SHARE Primary earnings (loss) per share are computed based on the weighted average number of common shares outstanding during the respective periods, including dilutive stock options. Fully diluted earnings per share for 1993 are computed based on the assumption that the senior convertible debentures had been converted to common stock, with a corresponding increase in net income to reflect a reduction in related interest expense, less applicable taxes. For 1995 and 1994 fully diluted and primary earnings per share are the same as inclusion of the debentures would be anti-dilutive. Effective September 11, 1995, the holders of $20,000,000 of the Company's senior subordinated convertible debentures converted such debentures, including interest at 10%, into 5,021,000 shares of the Company's common stock. The conversion had an anti-dilutive effect on loss per share for the fourth quarter of 1995. If the conversion had not occurred, loss per share for the fourth quarter would have been $.11 compared to the reported loss per share of $.08, and the loss per share for the full year would have been $2.89 compared to the $2.73 reported. APB 15 requires the presentation of supplementary earnings per share data to reflect the conversion as if it had occurred at the beginning of each period presented below. The following supplementary presentation reflects the reduction of interest expense, less applicable taxes, and an increase in the number of shares outstanding.
(amounts in thousands, except per share amounts) 1995 1994 1993 - --------------------------------------------------------------------------------------------- Earnings (loss) per share from continuing operations $ (2.44) $ (.38) $ .32 Loss per share (2.44) (1.80) (.25) -------------------------------------- Weighted average number of shares outstanding 35,373 34,640 34,855
INVESTMENT SECURITIES The Company's debt and equity securities are considered as either held-to-maturity or available-for-sale. Held-to-maturity securities represent those securities that the Company has both the intent and ability to hold to maturity and are carried at amortized cost. Available-for-sale securities represent those securities that do not meet the classification of held-to-maturity, are not actively traded and are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of stockholders' equity, net of applicable taxes, until realized. INVENTORIES AND SUPPLIES Inventories, primarily consisting of course materials and supplies, are stated at the lower of first-in, first-out cost or market. LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment are stated at cost and are depreciated principally using the straight-line method over the estimated useful lives of the various classes of property. ACQUIRED INTANGIBLE ASSETS Acquired intangible assets representing the excess of cost over the fair value of acquired net assets purchased by the Company in conjunction with various acquisitions are amortized ratably over lives which do not exceed forty years. All other acquired intangible assets are amortized ratably over various useful lives which do not exceed ten years. F-8 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPAIRMENT OF LONG LIVED ASSETS The Company has adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" (FAS 121). Prior to January 1, 1995, the Company reviewed the recoverability of its long-lived assets and intangible assets by comparing projected related cash flows on an undiscounted basis to the net book value of the assets. In the event the recoverability of the assets was impaired, the Company would have measured the impairment by comparing projected operating income and related cash flows on an undiscounted basis to the net book value of the assets. Under the provisions of FAS 121, the Company will continue to review the recoverability of long-lived assets and intangible assets by comparing cash flows on an undiscounted basis to the net book value of the assets. In the event the projected undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written-down to their fair value, less cost to sell. In addition, FAS 121 requires that assets to be disposed of be measured at the lower of cost or fair value, less cost to sell. Adopting FAS 121 had no effect on the Company's financial statements except for the write-off of goodwill as described further in Note 4. DEFERRED CONTRACT REVENUES Deferred contract revenues represent the portion of training contract payments and student tuition received in advance of services being performed. MINORITY INTEREST Minority interest in equity of consolidated subsidiary represents the minority stockholders' proportionate share of the equity of Steck-Vaughn. During 1994 and 1995, Steck-Vaughn repurchased 230,200 and 25,000 shares, respectively, of its outstanding common stock which effectively increased the Company's ownership interest to 83.0% and 83.1%, respectively. FOREIGN CURRENCY TRANSLATION Assets and liabilities of international subsidiaries have been translated at current exchange rates. Revenues, expenses and cash flows have been translated at average rates of exchange in effect during the year. Resulting cumulative foreign exchange translation adjustments have been recorded as a separate component of stockholders' equity. Also included in this component of stockholders' equity are exchange gains and losses on hedges of foreign intercompany accounts of a long-term nature. Gains and losses on foreign currency transactions are recorded to other income and expense. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", which establishes a fair value based method of accounting for stock-based compensation plans. The statement allows companies to continue to use the intrinsic value based approach, supplemented by footnote disclosure of the pro forma net income and earnings per share of the fair value based approach. The Company intends to follow this latter method and, as a result, adoption of this pronouncement in 1996 will have no effect on the Company's financial statements. NOTE 2 - BUSINESS COMBINATIONS The Company, through Steck-Vaughn, purchased substantially all of the assets of the following entities on the dates set forth as follows: Summit Learning, Inc. (Summit), a direct response marketer of educational products (December 1995), Educational Development Laboratories, Inc. (EDL) a developer and publisher of reading and writing instructional material based in both software and print products (October 1995) and Berrent Publications, F-9 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - BUSINESS COMBINATIONS (CONTINUED:) Inc. (Berrent) a publisher of test preparation and assessment materials (November 1994). During the first quarter of 1994, the Company, through ICS, purchased the stock of M-Mash, Inc. (MicroMash), a leading provider of computer-based, interactive courses for accounting professionals and students. In April 1993, Steck-Vaughn purchased certain assets of Creative Edge, Inc. (Magnetic Way product line), a provider of educational products and materials for the elementary and secondary school marketplace. All five transactions were accounted for as purchases and the operating results were included in the Company's consolidated financial statements since the dates of acquisition. The net assets and operating results of the purchased entities were not material to the consolidated financial statements of the Company. NOTE 3 - BUSINESS DISPOSITIONS In June 1994, the Company adopted a plan to discontinue the operation of its Education Centers subsidiary. As a result, the Company recorded a second quarter charge of $40,032,000 ($1.35 per share) to write-down assets to estimated net realizable value and provide for estimated costs of disposing of the operation. No tax benefits were provided on this charge. Of the 29 remaining Education Centers schools as of December 31, 1994, the Company in 1995 transferred students at one of its schools to a nearby competitor for the purposes of completing their courses, and substantially completed the disposition of the remaining schools as of December 31, 1995. As of December 31, 1995, the remaining assets and liabilities include accrued expenses for outstanding litigation and regulatory matters, and obligations to maintain and service future financial aid and accounting matters as required by the Department of Education. These outstanding obligations are offset by certain notes receivable from buyers in connection with the sale of schools. The net amount of these assets and liabilities is not material to the consolidated financial statements of the Company. The Education Centers' negative cash flow of $2,337,000 in 1995 improved $18,748,000 from the prior year due primarily to proceeds from the sale of schools of $10,647,000 and significant reductions of Education Centers' headquarters expenses. Results of operations for the Education Centers which are being accounted for as discontinued operations in the results of operations were as follows:
(dollars in thousands) 1994 1993 - -------------------------------------------------------------------------------- Net Revenues $ 97,138 $131,713 Loss before income tax benefit (10,428) (28,526) Income tax benefit (1,008) (8,769) Loss from discontinued operations (9,420) (19,757) Primary loss per share (.32) (.66) Loss on disposal of discontinued operations (40,032) - Loss per share (1.35) -
In December 1994, the Company sold its interest in a partnership venture whose purpose was to develop an automated enrollment and financial aid application process. As a result of the sale, the Company recorded a gain on sale of $3,247,000 ($2,143,000 after tax or $.07 per share). F-10 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - UNUSUAL ITEMS Unusual items, net, consist of the following items:
(dollars in thousands) 1995 1993 - ----------------------------------------------------------------------------- Write-off of intangible assets $47,509 $ 9,232 Restructuring charges 32,248 -- Write-off of course computer hardware costs 4,549 -- Litigation settlements, net (2,576) -- ---------------------- $81,730 $ 9,232 ----------------------
No tax benefits were reflected for the 1995 unusual items. WRITE-OFF OF INTANGIBLE ASSETS NETG experienced significant operating losses over the past several years in an environment of substantial changes in training related to information systems and technology. Due to the many outstanding opportunities in the training marketplace, especially in information technology, the Company remained optimistic over the past periods about future sales and earnings, such that through the first quarter of 1995, management's best estimates of the future results of NETG's operations supported the recoverability of recorded goodwill balances. However, given continuing losses through the second quarter of 1995, management concluded that NETG could not return to profitability in the foreseeable future without significant changes in its operating structure and business direction. As a result, the Company implemented a reorganization and downsizing of NETG's operations in the second quarter of 1995. In addition, certain product lines were discontinued and the subsidiary reorganized its sales and marketing effort to enhance its channels of distribution which, among other things, resulted in the restructuring described below. As a result of these changes, in the second quarter of 1995 the Company revised NETG's financial projections, consistent with management's best estimate of future results of operations. Based upon this estimate of the future results of operations, the estimated net cash flows over the remaining life of NETG's intangible assets (goodwill) were less than the net book value of the goodwill at June 30, 1995. Under the provisions of FAS 121, the Company estimated the fair value of its investment in NETG by discounting estimated future net cash flows at a rate commensurate with the related risk. Based upon this analysis, management believes NETG to have only a nominal fair value such that the goodwill balance of $42,719,000 related to the Company's 1986 acquisition of what is now NETG was written-off (resulting in a loss of $1.34 per share) during the second quarter of 1995. Additionally, in connection with the above restructuring of NETG during the second quarter of 1995, the Company discontinued the operations of Spectrum, a subsidiary of NETG which provided primarily custom developed training to businesses. As a result, the Company recorded the assets and liabilities of Spectrum at their fair value and recorded a write-off of goodwill in the amount of $4,790,000 ($.15 per share) during the second quarter. The goodwill was related to an acquisition made by Spectrum prior to 1988. Spectrum's revenue and operating loss before amortization of intangibles and unusual items were as follows:
(dollars in thousands) 1995 1994 - ----------------------------------------------------------------------------- Revenues $ 1,618 $ 5,247 Operating loss before amortization of intangibles and unusual items $ (1,433) $ (1,125)
F-11 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WRITE-OFF OF INTANGIBLE ASSETS (continued:) The 1993 unusual item represented a third quarter charge of $9,232,000 ($6,558,000 after tax or $.22 per share) related to the write-down of certain acquired intangible assets of NETG. RESTRUCTURING CHARGES As a result of continued losses at NETG, the Company resolved to significantly lower the overall cost structure while focusing on specific training areas to permit NETG to return to profitability. Accordingly, the Company approved a restructuring plan for NETG in June 1995 which resulted in a nonrecurring charge of $28,652,000 ($.90 per share). Additionally, in December 1995, NETG recorded a restructure charge of $1,952,000 ($.06 per share) to reorganize its operations in Germany. These charges include severance related payments, excess facilities costs, the write-down of inventory and fixed assets of certain discontinued products, and other restructuring related items such as charges related to canceled contracts and agreements. The following summarizes these charges, the related write-offs and cash paid in connection with the restructuring.
Severance Excess Fixed Assets (dollars in thousands) Payments Facilities and Inventory Other Total - ---------------------- --------- ---------- -------------- ----- ----- 1995 restructuring $ 4,706 $ 16,480 $ 4,020 $ 5,398 $ 30,604 charges Noncash write-off -- -- (3,758) (3,521) (7,279) Cash (paid) received (2,095) (1,923) 13 (1,606) (5,611) --------- --------- ---------- --------- --------- Accrued restructuring at December 31, 1995 $ 2,611 $ 14,557 $ 275 $ 271 $ 17,714 ========= ========= ========== ========= =========
Amounts related to severance covered approximately 110 employees involved primarily in sales and marketing, distribution and other administrative functions at NETG's domestic and European locations. Amounts related to facilities reflect the cost of leases for excess space arising from the consolidation of space within the subsidiary's U.S. headquarters and the subsidiary's European offices. The noncurrent portion of the restructuring charges relates primarily to leases on unutilized space which will require payments through 2004. Additionally, during the second quarter, an unusual charge was recorded in the amount of $1,644,000 ($.05 per share) at NEC Corporate primarily for severance related payments to the former chief executive officer and corporate expenses related to the restructuring of NETG. The cumulative cash paid in connection with this charge was $911,000 and noncash write-offs were $112,000. WRITE-OFF OF COURSE COMPUTER HARDWARE AND RELATED COSTS Prior to September 15, 1995, ICS offered computer courses which included the sale of computers to students which, after shipment, were recorded as assets and amortized over the projected twelve month period of the remaining course payments. Subsequent to September 15, 1995, the Company changed the manner in which computers were marketed, no longer including the computer hardware with such courses. In the fourth quarter of 1995, the Company reviewed the realizability of the carrying value of the computer and related assets and determined that a portion of the capitalized balance for computers related to enrollments for which there was no further revenue to be recognized. As a result, the Company recorded a write-down of the unamortized balance of computers and other related costs of $4,549,000 ($.14 per share). In addition, the Company reduced the period over which the computers are amortized to six months. F-12 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LITIGATION SETTLEMENTS, NET During the fourth quarter of 1995, a legal dispute with a third-party author for NETG was settled in the Company's favor. The Company recorded a gain to the extent payment was received. A portion of the settlement in the amount of $1,343,000 is held in escrow pending the outcome of various legal issues. The gain was partially offset with other minor legal settlements which involved parties related to the third party author resulting in a net unusual credit of approximately $3,546,000 or $.11 per share. In March 1996, the Company settled a lawsuit at Steck-Vaughn brought by a product development company in 1995. Settlement costs and legal expenses associated with the lawsuit totaled $970,000 or $.03 per share and were included in the results of operations for the year ended December 31, 1995. NOTE 5 - PUBLIC OFFERING OF SUBSIDIARY COMMON STOCK During the third quarter of 1993, Steck-Vaughn Publishing Corporation completed an initial public offering of 2,668,000 shares of its common stock at $12.00 per share. The offering resulted in proceeds of $29,775,000 of which $20,000,000 were remitted to the Company as payment for a previously declared dividend. The proceeds were reduced by expenses of $1,074,000 which were incurred in connection with the offering, of which $393,000 was paid to Richard C. Blum and Associates (RCBA). The Chairman of the Board of RCBA is Richard C. Blum, a director of the Company. The completion of the offering decreased the Company's ownership of Steck-Vaughn from 100% to 81.7% at the date of the offering. As a result of the offering, the Company recorded a gain of $21,120,000 or $.71 per share (after restatement for the inventory accounting change at Steck-Vaughn) which is included in the results of operations for the year ended December 31, 1993. The gain was nontaxable and deferred tax expense was not provided for on this gain given the Company's ability and intent to indefinitely postpone the payment of tax in the future. NOTE 6 - INCOME TAXES Income (loss) before tax from continuing operations was taxed under the following jurisdictions:
(dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------- Domestic $(75,881) $ (5,307) $ 4,339 Foreign (10,187) (8,149) 1,463 --------------------------------- Total $(86,068) $(13,456) $ 5,802 ---------------------------------
Taxes (benefits) on income from continuing operations were provided as follows:
(dollars in thousands) 1995 1994 1993 - ---------------------------------------------------------------------------------------- CURRENT: State $ 500 $ 1,110 $ 1,999 Foreign 1,837 1,457 1,883 -------------------------------- Total current provision 2,337 2,567 3,882 -------------------------------- DEFERRED: Federal (2,469) 220 (6,184) Foreign 132 (3,498) (2,680) -------------------------------- Total deferred provision (benefit) (2,337) (3,278) (8,864) -------------------------------- CURRENT TAX BENEFITS NOT TREATED AS A REDUCTION OF INCOME TAX EXPENSE RESULTING FROM: Exercise of stock options -- 156 93 -------------------------------- Total income tax provision (benefit) $ -- $ (555) $ (4,889) --------------------------------
F-13 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES (CONTINUED) Deferred tax liabilities and assets reflected in the balance sheet as of December 31, 1995 and December 31, 1994 are comprised of the following:
(dollars in thousands) 1995 1994 - ----------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Revenue recognition differences $ 1,416 $ 3,948 Advertising/commissions 2,393 3,244 Prepaid expenses 6,351 6,386 Other 1,501 3,720 ---------------------- Gross Deferred Tax Liabilities $ 11,661 $ 17,298 ---------------------- DEFERRED TAX ASSETS: Property, plant and equipment $ 5,590 $ 3,269 Inventories 5,804 6,374 Revenue recognition differences 3,001 4,007 Allowance for doubtful accounts 1,449 3,532 Restructuring reserve 6,478 889 Loss carryforwards 48,607 35,939 Credit carryforwards 4,276 4,673 Loss on discontinued operations 106 8,500 Other 9,177 5,702 ---------------------- Gross Deferred Tax Assets 84,488 72,885 Deferred tax assets valuation allowance (50,952) (30,613) ---------------------- Deferred Tax Assets, Net of Valuation Allowance $ 33,536 $ 42,272 ----------------------
The Company has recorded a valuation allowance in the amount set forth in the above table for certain deductible temporary differences for which it is likely, at this time, that the Company will not receive future tax benefit. The 1995 income tax provision includes an increase in the valuation allowance for deferred tax assets of $20,339,000. The valuation reserve increase primarily relates to current year losses and restructuring reserves for which no tax benefits have been provided. Realization of the remaining deferred tax assets is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that the remaining deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. At December 31, 1995, the Company had federal net operating loss carryforwards of approximately $108,000,000 expiring through 2010. In addition, the Company had available $1,275,000 of alternative minimum tax credit carryforwards, with no expiration date, which may be utilized to offset future regular tax liabilities. If certain substantial changes in the Company's ownership should occur, there could be an annual limitation on the amount of carryforwards available for utilization. The Company also has available federal net operating loss carryforwards of approximately $13,200,000 at Spectrum, a subsidiary of NETG, expiring through 2003. This amount may be utilized to offset Spectrum's future taxable income. During 1995, the Company tentatively agreed to a settlement with the Internal Revenue Service regarding its 1985 through 1988 income tax audits. As a result of this settlement, the Company will receive approximately $9,313,000, in tax refunds and interest. The benefit for this refund, and the related receivable, were recorded in a prior year. F-14 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES (CONTINUED) A reconciliation of the income tax provision (benefit) with the amount computed by applying the federal statutory tax rate to pretax income from continuing operations is as follows:
(dollars in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------- Tax (benefit) computed at statutory rate $(29,263) $(4,575) $ 1,973 State taxes, net of federal benefit 330 733 1,319 Effect of foreign operations 5,432 354 (1,580) Dividend income and municipal interest exclusion (89) (332) (436) Losses not benefited 5,742 -- -- Amortization of excess of costs over acquired net assets 121 218 164 Write-off of certain intangibles 16,153 -- -- Gain on public stock offering of subsidiary -- -- (7,228) Other, net 1,574 3,047 899 ------------------------------------ Total income tax provision (benefit) $ -- $ (555) $ (4,889) ------------------------------------
Provision has not been made for U.S. or additional foreign taxes on the undistributed earnings of the Company's foreign subsidiaries. Those earnings are expected to be reinvested in the foreign operations. Such earnings would become subject to additional U.S. and foreign taxes if remitted as dividends. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings; however, the Company believes that U.S. foreign tax credits would for the most part eliminate any additional U.S. tax. NOTE 7 - INVESTMENT SECURITIES The amortized cost and estimated fair value of the investment securities are as follows:
December 31, 1995 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying (dollars in thousands) Cost Gain Loss Value -------------------------------------------------------------------------------------------- Held-to-maturity: Taxable municipal funds $ 1,000 $ -- $ -- $ 1,000 -------------------------------------- ------------ Total held-to-maturity 1,000 -- -- 1,000 -------------------------------------- ------------ Available-for-sale: Corporate income funds 1,042 52 -- 1,094 Preferred stock 689 -- (35) 654 -------------------------------------- ------------ Total available-for-sale 1,731 52 (35) 1,748 -------------------------------------- ------------ 2,731 52 (35) 2,748 Less cash equivalents (1,000) -- -- (1,000) -------------------------------------- ------------ Total investment securities $ 1,731 $ 52 $ (35) $ 1,748 -------------------------------------- ------------
F-15 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INVESTMENT SECURITIES (CONTINUED)
December 31, 1994 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying (dollars in thousands) Cost Gain Loss Value -------------------------------------------------------------------------------------------- Held-to-maturity: Banking certificates $ 3,236 $ - $ - $ 3,236 Tax exempt municipal bond funds 12,700 - - 12,700 --------------------------------------------------- Total held-to-maturity 15,936 - - 15,936 --------------------------------------------------- Available-for-sale: Corporate income funds 1,170 6 - 1,176 Preferred stock 1,262 52 (93) 1,221 --------------------------------------------------- Total available-for-sale 2,432 58 (93) 2,397 --------------------------------------------------- 18,368 58 (93) 18,333 Less cash equivalents (7,500) - - (7,500) --------------------------------------------------- Total investment securities $ 10,868 $ 58 $ (93) $ 10,833 ---------------------------------------------------
Investments in debt securities classified as held-to-maturity at December 31, 1995, have various maturity dates which do not exceed one year. Using the specific identification method, realized gains and losses on the available-for-sale investment securities are as follows:
(dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------- Realized gains $ 18 $ 1,616 $ 135 Realized losses 5 387 226
NOTE 8 - LAND, BUILDINGS AND EQUIPMENT
(dollars in thousands) Depreciable Lives 1995 1994 - -------------------------------------------------------------------------------------------------- Land -- $ 1,289 $ 1,289 Buildings and improvements Not to exceed 40 years 10,414 8,910 Leaseholds and improvements Life of lease 3,327 7,852 Machinery and equipment Not to exceed 10 years 28,636 52,321 Furniture and fixtures Not to exceed 10 years 12,354 18,272 ------------------------- 56,020 88,644 Less accumulated depreciation and (31,992) (63,240) amortization ------------------------- Total $ 24,028 $ 25,404 -------------------------
Machinery and equipment and furniture and fixtures under capital leases were $4,908,000 and $2,460,000 with related accumulated depreciation and amortization of $201,000 and $593,000 at December 31, 1995 and 1994, respectively. F-16 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - ACQUIRED INTANGIBLE ASSETS
(dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------------------------- Product and text materials, courseware, etc. $ 13,758 $ 55,898 Rental contracts -- 20,559 Excess of cost over net assets of businesses 6,560 59,268 acquired Other acquired intangible assets 6,443 5,971 ------------------------- 26,761 141,696 Less accumulated amortization (13,333) (89,005) ------------------------- Total $ 13,428 $ 52,691 =========================
See Note 4 for a discussion of the write-offs of certain intangible assets in 1995. NOTE 10 - DEBT
(dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------------------------- Short-term bank borrowings $10,000 $ 5,000 -------------------------- Long-term debt: Mortgage and installment notes, maturing on various dates through 2004, with interest from 6.0% to 8.9% $ 7,144 $ 5,946 Capital lease obligations 4,033 1,850 -------------------------- 11,177 7,796 Less current portion of long-term debt (2,338) (1,407) -------------------------- Total long-term debt $ 8,839 $ 6,389 -------------------------- Senior subordinated convertible debentures $ -- $20,000 -------------------------- Convertible subordinated debentures $57,494 $57,494 --------------------------
As of December 31, 1995, the Company had a revolving bank credit agreement in the amount of $10,000,000, of which $10,000,000 was outstanding. The credit agreement initially provided borrowings at prime plus 1 percent or, at the Company's option, at LIBOR plus 2 percent, with incremental borrowing rate increases at June 30 and September 30, 1995. Commitment fees were paid on the unused line of credit. The weighted average interest rates for the short-term bank borrowings were 8.7% and 6.3% for 1995 and 1994, respectively. The average borrowings were $9,510,000 and $3,956,000 during the years ended December 31, 1995 and 1994, respectively. Effective January 19, 1995, the Company entered into a $20 million revolving credit agreement with another bank and repaid the aforementioned $10 million revolving credit borrowings. Under the new agreement, which expires January 19, 1998, the Company can borrow at the bank's base rate plus 1.75%, or at the LIBOR rate plus 3.0%. The base rate is the higher of the bank's prime rate and .5% above the Federal Funds Rate. This credit facility is secured by stock of certain principal subsidiaries and certain assets of NEC. This revolving credit is subject to certain restrictions on dividend payments, indebtedness and other covenants including financial performance and condition. Steck-Vaughn has a revolving bank credit agreement in the amount of $10,000,000 with a maturity of June 10, 1997. The agreement provides for borrowings at prime or, at Steck-Vaughn's option, LIBOR plus 1.5%. The bank credit agreement replaced Steck-Vaughn's borrowing ability from the Company pursuant to an intercompany agreement. No amounts were outstanding under the bank credit facility in 1994 or 1995. Annual commitment fees of .25% are paid on the unused line of credit. F-17 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - DEBT (CONTINUED) Effective February 28, 1995, the Company and Steck-Vaughn entered into an intercompany revolving loan agreement under which the Company could borrow up to $10,000,000 through December 31, 1995. At December 31, 1995, $4,000,000 was outstanding and was eliminated in consolidation in the accompanying balance sheet. Subsequent to year end this credit facility was reduced to $5,000,000 with an expiration date of March 31, 1996. This agreement provides that any borrowing by the Company will bear interest at LIBOR plus 2 percent, and will be secured by the Company's holdings of Steck-Vaughn stock. Steck-Vaughn also received an option to repurchase from the Company up to 290,000 shares of Steck-Vaughn stock held by the Company, at $6.50 per share. This option becomes exercisable one year after grant, expires March 31, 1997, and may be redeemed by the Company prior to exercise or expiration for the greater of $75,000 per month ($37,500 per month effective February 1, 1996) or the amount necessary to increase to 25 percent the annualized yield to Steck-Vaughn on all amounts borrowed by the Company under the revolving loan agreement. The Company has paid the redemption price through December 31, 1995. Effective September 11, 1995, the holders of $20,000,000 of the Company's 10% senior subordinated convertible debentures converted such debentures, including accrued interest, into 5,021,000 shares of the Company's common stock. The debentures had been issued to certain entities affiliated with Richard C. Blum & Associates, L.P. (RCBA), who maintained discretionary investment control over these entities. The Chairman of the Board of RCBA is Richard C. Blum, a director of the Company. At December 31, 1995, the Company had outstanding $57,494,000 of 6.5% convertible subordinated debentures due May 14, 2011, which are convertible at any time prior to maturity into common stock at $25.00 per share. The debentures are redeemable at the option of the Company, in whole or in part, at 100.65% of the principal amount through May 14, 1996, and thereafter at 100%. The debentures are subject to an annual sinking fund requirement beginning May 15, 1997 sufficient to retire 70% of the aggregate principal amount of the debentures prior to maturity. Based on the December 31, 1995 closing price of the Company's convertible subordinated debentures as traded on the New York Stock Exchange of $70.00, the fair value of the convertible subordinated debentures is $40,246,000. Mortgage notes aggregating $5,141,000 at December 31, 1995 were collateralized by certain real and personal property having a net book value of $8,378,000. At December 31, 1995, the fair value of the mortgage notes approximated their carrying value. Aggregate maturities of long-term debt, including the annual sinking fund principal requirement of $2,875,000 for the subordinated debentures, in each of the following years are: 1997 - $7,072,000, 1998 - $4,243,000, 1999 - $3,497,000 and 2000 - $3,154,000. NOTE 11 - COMMITMENTS AND CONTINGENCIES Aggregate commitments at December 31, 1995 under noncancelable operating leases for land, buildings and equipment are as follows:
(dollars in thousands) - --------------------------------------------------------------------- FISCAL YEAR: 1996 $ 6,342 1997 5,454 1998 4,811 1999 3,747 2000 2,932 2001 and thereafter 23,889 ----------- Total $47,175 -----------
F-18 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Some of the leases contain renewal options, escalation clauses and requirements that the Company pay taxes, insurance and maintenance costs. Total rent expense aggregated $7,820,000, $10,841,000 and $11,695,000 for years ended December 31, 1995, 1994, and 1993, respectively. At December 31, 1995, there were no material commitments outstanding for capital expenditures. In the ordinary course of business, the Company is generally subject to claims, complaints and legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the financial position of the Company. However, in the opinion of management, such matters are not expected to have a material adverse effect on the financial position of the Company. NOTE 12 - UNEARNED FUTURE TUITION REVENUE Unearned future tuition revenue on student contracts at ICS Learning Systems totaled $153,489,000 and $163,050,000 at December 31, 1995 and 1994, respectively. Based upon previous experience, approximately 45% of the unearned future tuition revenue was ultimately recognized into revenue. Unearned future tuition revenue will be included in revenues in future years when services and courseware are provided as described in Note 1. NOTE 13 - STOCKHOLDERS' EQUITY The Company has stock option plans that authorize the granting of options to key employees and directors to purchase common stock subject to certain conditions, such as continued employment. Options are generally granted at the fair market value of the Company's common stock at the date of grant, vest and become exercisable prorata over the four years following the date of grant, and expire in ten years. Changes during the years ended December 31, 1995, 1994 and 1993 under the plans were as follows:
Average Number Exercise Total (amounts in thousands, except per share amounts) of Price Option Shares Per Share Value - ----------------------------------------------------------------------------------------- Balance, December 31, 1992 1,281 $ 5.69 $7,286 Granted 392 5.86 2,296 Canceled (306) 6.68 (2,044) Exercised (75) 3.55 (266) -------------------------------- Balance, December 31, 1993 1,292 5.63 7,272 Granted 407 6.28 2,557 Canceled (163) 7.29 (1,188) Exercised (182) 3.44 (627) -------------------------------- Balance, December 31, 1994 1,354 5.92 8,014 Granted 2,800 3.62 10,132 Canceled (395) 6.55 (2,587) Exercised (538) 3.66 (1,972) -------------------------------- Balance, December 31, 1995 3,221 $ 4.22 $13,587 --------------------------------
F-19 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED) During 1995, the Company made loans to three executive officers and two subsidiary presidents to enable them to purchase 410,000 shares of stock pursuant to the 1990 stock option plan, as amended. These loans bear interest at rates from 6.8% to 7.1% and are payable in full upon the earlier of 90 days following the date of termination or May 1, 2001. These loans are with recourse and are secured by the shares of stock purchased by the officers. These loans are reflected as a reduction in equity in the accompanying balance sheet. In 1995, the Company granted to the new CEO options to purchase 500,000 shares of stock at $3.00 per share, the fair value at date of grant. The option vests monthly in pro rata increments over 36 months beginning June 1995, and remains exercisable through March 17, 2005. The new CEO was also granted options to purchase another 600,000 shares of stock at $3.00 per share, the fair value at date of grant. These options vest on an accelerated basis if the price of the Company's stock reaches and maintains certain price levels; otherwise, these options fully vest no later than November 2004 and remain exercisable for six months thereafter. Common shares reserved for future grants under the above option plans totaled 737,000 and 1,018,000 at December 31, 1995 and 1994, respectively. Of the 3,221,000 shares previously granted and outstanding at December 31, 1995, 1,123,000 shares were vested and exercisable at prices ranging from $3.00 to $12.92 per share. There are no charges to income in connection with the issuance of options. Upon exercise, proceeds from the sale of shares under the stock options plans are credited to common stock and additional paid-in capital. In October 1986, the Company declared a dividend of one preferred stock purchase right for each share of common stock. Under certain conditions, each right may be exercised to purchase one-hundredth of a share of a new series of participating junior preferred stock at a purchase price of $75.00, subject to adjustment. The rights may be exercised only after a public announcement that a person has acquired or obtained the right to acquire 20% or more of the Company's outstanding common stock, or after commencement or public announcement of an offer for 30% or more of the Company's outstanding common stock. The rights, which do not have voting rights, may be redeemed by the Company at a price of $.05 per right within ten days after the announcement that a person has acquired 20% or more of the outstanding common stock of the Company and the redemption period may be extended under certain circumstances. In the event that the Company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a right shall have the right to receive that number of shares of common stock of the surviving company which at the time of the transaction would have a market value of two times the exercise price of the right. NOTE 14 - STATEMENTS OF CASH FLOWS For purposes of presenting the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt securities to be cash equivalents. F-20 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - STATEMENTS OF CASH FLOWS (CONTINUED) Supplementary information excluding Education Centers:
(dollars in thousands) 1995 1994 1993 - ---------------------------------------------------------------------------------------------- CASH PAID DURING THE YEAR FOR: Interest expense $ 9,304 $ 6,531 $ 5,806 Income taxes, net of refunds (75) 2,634 2,489 DETAIL OF NONCASH INVESTING AND FINANCING ACTIVITIES: Sale of land, building and equipment in exchange for note receivable -- 583 -- Assets acquired through capital leases 3,254 1,654 -- Acquisition of businesses: Working capital, other than cash (1,999) (1,291) (1,327) Property, plant and equipment (161) (373) (152) Other assets (4,311) (5,833) (3,938) Liabilities assumed in acquisition 3,211 1,067 -- ---------------------------------- Net cash used to acquire businesses (3,260) (6,430) (5,417) Conversion of senior subordinated debentures and related interest 20,142 -- -- into shares of common stock Notes receivable under stock option plans 1,398 -- --
F-21 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - INDUSTRY SEGMENT DATA Information about the Company's operations (excluding Education Centers except for identifiable assets balances) in different industries is as follows:
Restated ------------------------- (dollars in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- NET REVENUES: ICS Learning Systems $143,021 $122,815 $101,319 Steck-Vaughn Publishing Corporation 58,226 53,608 53,156 National Education Training Group 54,350 61,937 68,259 Other 3,001 3,254 1,438 --------------------------------------- Total Net Revenues $258,598 $241,614 $224,172 --------------------------------------- OPERATING INCOME (LOSS): ICS Learning Systems operating income before amortization of prior period deferred marketing and unusual items $ 13,628 $ 15,909 $ 21,368 Amortization of prior period deferred marketing (1,470) (19,836) -- Unusual items (4,549) -- -- --------------------------------------- ICS Learning Systems 7,609 (3,927) 21,368 --------------------------------------- Steck-Vaughn Publishing Corporation operating income before unusual items 10,469 10,459 13,074 Unusual items (970) -- -- --------------------------------------- Steck-Vaughn Publishing Corporation 9,499 10,459 13,074 --------------------------------------- National Education Training Group operating loss before unusual items (15,375) (13,993) (25,950) Unusual items (74,567) -- (9,232) --------------------------------------- National Education Training Group (89,942) (13,993) (35,182) --------------------------------------- Other 764 (50) (657) --------------------------------------- Total segment operating loss (72,070) (7,511) (1,397) General corporate expenses (6,632) (6,582) (10,896) Interest (expense) and investment income, net (6,029) (3,102) (3,163) Other income 307 492 138 Unusual items (1,644) -- -- Gain on sale of stock -- 3,247 21,120 --------------------------------------- Income (Loss) Before Income Taxes (Benefit) and Minority Interest $(86,068) $(13,456) $ 5,802 --------------------------------------- IDENTIFIABLE ASSETS: ICS Learning Systems $ 44,180 $ 48,194 $ 60,576 Steck-Vaughn Publishing Corporation 65,529 58,922 56,394 National Education Training Group 27,748 84,918 93,592 Education Centers -- -- 58,525 Other 1,298 1,756 795 --------------------------------------- Segments subtotal 138,755 193,790 269,882 Corporate assets 46,507 50,588 55,123 Education Centers assets held for disposition -- 25,867 -- --------------------------------------- Total Assets $185,262 $270,245 $325,005 --------------------------------------- TOTAL DEPRECIATION AND AMORTIZATION (INCLUDING AMORTIZATION OF PRIOR PERIOD DEFERRED MARKETING): ICS Learning Systems $ 3,196 $ 21,055 $ 920 Steck-Vaughn Publishing Corporation 2,001 1,564 1,157 National Education Training Group 2,857 3,999 9,315 Other 11 63 33 --------------------------------------- Total Segments $ 8,065 $ 26,681 $ 11,425 --------------------------------------- CAPITAL EXPENDITURES, INCLUDING CAPITAL LEASES: ICS Learning Systems $ 5,510 $ 4,887 $ 2,209 Steck-Vaughn Publishing Corporation 939 890 2,804 National Education Training Group 1,118 1,929 2,591 Other 13 249 76 --------------------------------------- Total Segments $ 7,580 $ 7,955 $ 7,680 ---------------------------------------
F-22 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - INDUSTRY SEGMENT DATA (CONTINUED) The following table sets out the amount of consolidated net revenues, operating income (loss) and identifiable assets by geographic area:
Restated ------------------------- (dollars in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------- NET REVENUES: United States $193,367 $185,624 $165,530 Europe 34,324 26,815 28,000 Canada 18,115 16,579 19,547 Other foreign 12,792 12,596 11,095 --------------------------------------- Total Net Revenues $258,598 $241,614 $224,172 --------------------------------------- OPERATING INCOME(LOSS): United States operating income before amortization of prior period deferred marketing and unusual items $ 11,678 $ 13,016 $ 4,582 Amortization of prior period deferred marketing (1,164) (14,949) -- Unusual items (72,723) -- (9,232) --------------------------------------- United States (62,209) (1,933) (4,650) --------------------------------------- European operating loss before amortization of prior period deferred marketing and unusual items (3,617) (4,029) (1,902) Amortization of prior period deferred marketing -- (822) -- Unusual items (8,692) -- -- --------------------------------------- Europe (12,309) (4,851) (1,902) --------------------------------------- Canada operating income before amortization of prior period deferred marketing 99 258 2,032 Amortization of prior period deferred marketing (306) (3,456) -- --------------------------------------- Canada (207) (3,198) 2,032 --------------------------------------- Other foreign operating income before amortization of prior period deferred marketing and unusual items 2,970 3,080 3,123 Amortization of prior period deferred marketing -- (609) -- Unusual items (315) -- -- --------------------------------------- Other foreign 2,655 2,471 3,123 --------------------------------------- Total Segment Operating Loss $(72,070) $ (7,511) $ (1,397) --------------------------------------- IDENTIFIABLE ASSETS: United States $110,481 $163,640 $223,305 Europe 17,546 18,968 26,964 Canada 6,452 7,422 14,417 Other foreign 4,276 3,760 5,196 --------------------------------------- Total Segment Assets $138,755 $193,790 $269,882 ---------------------------------------
The Company's operations are conducted in the United States, Canada, United Kingdom, Germany, Australia, New Zealand and Singapore. Operating income by segment and geographic area includes net revenues less operating expenses. The operating income (loss) by segment and geographic area excludes general corporate expenses, net interest expense and income taxes. Unusual items are more fully described in the Notes to the Consolidated Financial Statements. Intersegment sales were immaterial for all years presented. Identifiable assets are those assets used in the Company's operations in each segment and geographic area and exclude corporate assets and Education Centers assets held for disposition. F-23 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes quarterly financial data for 1995 and 1994. The 1995 periods presented were restated to reflect deferring certain selling and marketing costs incurred during interim periods and fully amortizing them within the calendar year when the related revenue is recognized. SOP 93-7 does not permit restatement of the periods for 1994. The 1994 results were restated to reflect the change at Steck-Vaughn from the LIFO to the FIFO method of accounting for inventory. The restated results together with a reconciliation to the previously reported amounts are as follows:
First Second Third Fourth (amounts in thousands, except per share amounts) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- 1995 NET REVENUES $ 55,959 $ 62,264 $ 72,029 $ 68,346 Income (loss) before amortization of acquired intangible assets, amortization of prior period deferred marketing, unusual items, nonoperating items, income taxes (benefit) and minority interest (2,859) (3,599) 8,167 2,747 Amortization of acquired intangible assets 565 545 219 273 Amortization of prior period deferred marketing 1,311 159 -- -- Unusual items, net -- 77,805 -- 3,925 Other nonoperating expenses 1,332 1,567 1,496 1,327 Income taxes (benefit) -- -- -- -- Minority interest 90 350 625 90 --------------------------------------------- NET INCOME (LOSS) $ (6,157) $(84,025) $ 5,827 $ (2,868) --------------------------------------------- Earnings (loss) per share $ (.21) $ (2.79) $ .18 $ (.08) --------------------------------------------- Net income (loss) as previously reported $ (8,508) $(81,970) $ 2,395 $ 860 Adjustment for interim deferral of selling and promotion 6,884 (2,055) 1,502 (6,331) expense Tax impact of accounting change (4,533) -- 1,930 2,603 --------------------------------------------- Net Income (loss) as restated $ (6,157) $(84,025) $ 5,827 $ (2,868) ---------------------------------------------
F-24 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
First Second Third Fourth (amounts in thousands, except per share amounts) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- 1994 NET REVENUES $ 49,472 $ 58,337 $ 63,339 $ 70,466 Income (loss) before amortization of acquired intangible assets, amortization of prior period deferred marketing, nonoperating items, gain on sale of stock, income taxes (benefit) and minority interest (6,199) 2,826 1,805 9,135 Amortization of acquired intangible assets 426 427 530 441 Amortization of prior period deferred marketing 7,369 5,837 4,007 2,623 Other nonoperating (income) expenses 844 (87) 892 961 Gain on sale of stock -- -- -- (3,247) Income taxes (benefit) (3,626) (299) (111) 3,481 Minority interest 129 384 601 78 --------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (11,341) (3,436) (4,114) 4,798 Loss from discontinued operations (2,008) (7,412) -- -- Loss on disposal of discontinued operations -- (40,032) -- -- --------------------------------------------- NET INCOME (LOSS) $(13,349) $(50,880) $ (4,114) $ 4,798 --------------------------------------------- EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $ (.38) $ (.12) $ (.14) $ .16 --------------------------------------------- EARNINGS (LOSS) PER SHARE $ (.45) $ (1.72) $ (.14) $ .16 --------------------------------------------- Net income (loss) as previously reported $(13,382) $(50,923) $ (4,148) $ 4,528 Adjustment to publishing costs and materials for inventory accounting change 65 85 75 529 Impact of accounting change on minority interest (7) (9) (12) (52) Tax impact of accounting change (25) (33) (29) (207) --------------------------------------------- Net income (loss) as restated $(13,349) $(50,880) $ (4,114) $ 4,798 ---------------------------------------------
F-25 65 National Education Corporation and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands)
Balance at Charge/(Credit) Balance at Beginning of to Costs and Deductions/ End of Classification Period Expenses Other Period - ---------------------------------------------------------------------------------------------------- YEAR END 1995: Allowance for doubtful receivables $ 2,787 $ 1,642 $ (1,687) $ 2,742 Reserve for inventories 2,145 1,626 85 3,856 Accumulated amortization of acquired intangible assets 89,005 1,602 (77,274) (A) 13,333 YEAR END 1994: Allowance for doubtful receivables $10,437 $(1,304) $ (6,346) $ 2,787 Reserve for inventories 2,437 (98) (194) 2,145 Accumulated amortization of acquired intangible assets 95,635 1,824 (8,454) (B) 89,005 YEAR END 1993: (C) Allowance for doubtful receivables $10,119 $ 4,664 $ (4,346) $10,437 Reserve for inventories 1,982 391 64 2,437 Accumulated amortization of acquired intangible assets 78,865 4,775 11,995 (D) 95,635
A) This amount represents the write-off of intangible assets of NETG and Spectrum, a subsidiary of NETG. B) This amount primarily represents the Education Centers reclassification to net assets held for disposition. C) Balances have not been restated to exclude the discontinued Education Centers. D) This amount primarily represents the write-off of intangible assets for NETG of $9,232,000 and the Education Centers of $2,766,000. F-26 66 EXHIBITS FILED HEREIN
Sequentially Exhibit Numbered Number Description Page - ------ ----------- ---- 3.1 Restated Certificate of Incorporation of the National Education Corporation . . . . . . . . . . . . . . . . . . . . 10.18 Second Amendment to Credit Agreement, dated December 21, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.22 Renewal and Extension Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, effective December 31, 1995 . . . . . . . . . . . . . . . 10.23 First Amendment to Stock Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, effective December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.24 Letter Amendment to Stock Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated February 1, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.26 Credit Agreement among National Education Corporation, certain banks and BZW Division of Barclays Bank PLC, as Agent, dated January 19, 1996 (Confidential treatment under Rule 24b-2 has been requested for portions of this exhibit) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Calculation of Primary Earnings Per Share . . . . . . . . . . . . . . . 11.2 Calculation of Fully Diluted Earnings Per Share . . . . . . . . . . . . 18 Letter from Price Waterhouse LLP regarding change in accounting principles (23) . . . . . . . . . . . . . . . . . . . . . 21 Subsidiaries of National Education Corporation . . . . . . . . . . . . 23 Consent of Price Waterhouse LLP . . . . . . . . . . . . . . . . . . . . 27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . .
EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF NATIONAL EDUCATION CORPORATION NATIONAL EDUCATION CORPORATION, a corporation organized and existing under the laws of the State of Delaware, originally incorporated on March 6, 1972 under the name of National Systems Corporation, hereby certifies that the following sets forth the complete Restated Certificate of Incorporation. 1. The name of the Corporation is NATIONAL EDUCATION CORPORATION. 2. The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle. The name of the registered agent of the Corporation at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The total number of shares of stock which the Corporation shall have authority to issue is Fifty-Five Million (55,000,000) consisting of two classes of shares designated respectively "Common Stock" and "Preferred Stock", and referred to herein either as Common stock or Common shares and Preferred stock or Preferred shares, respectively. The number of shares of Common stock shall be Fifty Million (50,000,000) and shall have a par 1. 2 value of $.01 per share, and the number of shares of Preferred stock shall be Five Million (5,000,000) and shall have a par value of $.10 per share. The Preferred shares may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred shares and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred shares and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. 5. The names of the incorporators are omitted pursuant to Section 245(c) of the Delaware General Corporation Law. 6. The Corporation is to have perpetual existence. 7. The properties, business and affairs of the Corporation shall be managed and controlled by a Board of Directors of not less than three (3) members. The number of directors which shall constitute the whole Board shall be determined in the manner provided in the By-laws of the Corporation. The incorporators of this Corporation shall elect the first Board of Directors and shall divide the Board into three classes as nearly equal in number as possible, designated Class 1, Class 2 and Class 3. The term of office of Class 1 directors shall expire at the next annual meeting of stockholders; of Class 2 directors one (1) year thereafter; of Class 3 directors two (2) years thereafter. At each annual meeting of stockholders, successors to the class of directors 2. 3 whose terms of office expire in that year shall be elected to hold office for a term of three (3) years. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or until his removal in the manner provided in the By-laws of the Corporation. 8. A majority of the whole Board of Directors is empowered to make, alter or repeal the By-laws of the Corporation. The stockholders of the Corporation may adopt, amend or repeal By-laws of the Corporation only by the affirmative vote of the holders of not less than two-thirds of the issued and outstanding shares of stock of the Corporation. 9. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code, or on the application of trustees in dissolution, or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation, as consequence of such compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the 3. 4 creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. 10. Meetings of stockholders may be held within or without the State of Delaware, as the By-laws may provide. The books of the Corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designed from time to time by the Board of Directors or in the By-laws of the Corporation. Elections of directors need not be by written ballot unless the By-laws of the Corporation shall so provide. Any action required or permitted to be taken by the stockholders of the Corporation must be taken at an annual or special meeting of stockholders and may not be taken by consent in writing. 11. 1. In addition to any voting and any other requirements under Delaware law, this Certificate or the By-laws, the affirmative vote of the holders of shares of capital stock of the Corporation representing at least a majority of the Non-Affiliated Shares (as hereinafter defined), shall be required for the adoption or authorization of a Business Combination (as hereinafter defined) with any Dominant Stockholder (as hereinafter defined). Such affirmative vote shall be required notwithstanding the fact that no vote, or different voting classification, or a lesser percentage, may be required by law or otherwise. The voting requirement set forth above shall not be applicable if the definitive agreement or other arrangements to effectuate a Business Combination with a Dominant Stockholder are approved by a majority of the directors of the Corporation who were directors prior to the time when such Dominant Stockholder became a Dominant Stockholder and continue to be directors at the time the determination is made (the "Continuing Directors"). Such determination shall be made by 4. 5 a majority of the Continuing Directors even if such majority does not constitute a quorum of the members of the Board of Directors then in office. In addition, the voting requirement specified above shall not be applicable if the cash, or fair market value of other consideration, to be received per share by the holders of each class or series of capital stock of the Corporation in a Business Combination with a Dominant Stockholder is not less than the highest per share price (including brokerage commissions and/or soliciting dealers' fees) paid by such Dominant Stockholder in acquiring any shares of such class or series, respectively. For purposes of the foregoing, the fair market value of "other consideration" and/or the highest per share price (unless all shares were acquired by the Dominant Stockholder for cash) shall be conclusively determined by an investment banking firm selected by a majority of the Continuing Directors, if any. If there are no Continuing Directors at such time, or if the Continuing Directors have not selected an investment banking firm to make such determination, any determination of such fair market value or highest price by the then existing Board of Directors or an investment banking firm selected by them shall not give rise to any presumption that such determination is correct and any stockholder wishing to do so may contest the same. The provisions of this Paragraph 11 shall also apply to a Business Combination with any person (as hereinafter defined) which at any time has been a Dominant Stockholder, notwithstanding the fact that such person is no longer a Dominant Stockholder, if, at the time the definitive agreement or other arrangements relating to a Business Combination with such person was entered into, it was a Dominant Stockholder or if, as of the record date for the determination of stockholders entitled to notice of and to vote on the Business Combination, such person is an "affiliate" (as hereinafter defined) of the Corporation or of a Dominant Stockholder. 5. 6 2. For the purposes of this Paragraph 11, the term "Dominant Stockholder" shall mean any corporation, person or other entity (a "person") which beneficially owns, directly or indirectly, shares of capital stock of the Corporation representing ten percent (10%) or more of all votes entitled to be cast in elections of directors (considered for this purpose as one class); (b) a person shall be deemed to "beneficially own" any shares of capital stock of the Corporation (i) which it has the right to acquire, hold or vote pursuant to any agreement, arrangement or undertaking or upon exercise of conversion rights, warrants, options or otherwise, or (ii) which are beneficially owned, directly or indirectly (including shares deemed owned through application of the foregoing clause (i)), by any other person (A) with which it or its "affiliate" or "associate" (as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on March 1, 1983) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of shares of capital stock of the Corporation or (B) which is its "affiliate" or "associate"; (c) the term "outstanding shares of any class of capital stock of the Corporation" shall include shares deemed owned through the application of the foregoing clauses (i) and (ii) but shall not include any other shares which may be issuable pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants, options or otherwise; (d) the term "Business Combination" shall include any merger or consolidation of the Corporation with or into any other person, or the sale or lease (or series of sales or leases) of all or a substantial portion of the assets (except assets having a fair market value of less than $10,000,000) of the Corporation to any other person, or any sale or lease (or series of sales or leases) by any person to the Corporation or any subsidiary thereof, in exchange for securities of the Corporation, of any assets (except assets having an aggregate fair market value of less 6. 7 than $10,000,000), or any reclassification or recapitalization of the outstanding shares or issuance of additional shares of any class of capital stock of the Corporation if the effect of such transaction is to increase the relative voting power of any Dominant Stockholder; (e) the term "other consideration to be received" shall mean, in the event of a Business Combination in which the Corporation is the surviving corporation, capital stock of the Corporation retained by its existing public stockholders and (f) the term "Non-Affiliated Shares" shall mean all shares of capital stock of the Corporation entitled to be cast in election of directors, considered for purposes hereof as one class, which are not beneficially owned by the Dominant Stockholder. 3. A majority of the Continuing Directors shall have the power and duty, consistent with their fiduciary obligations, to determine for the purposes of this Paragraph 11 on the basis of information known to them whether (a) a person is a Dominant Stockholder, (b) any person is an "affiliate" or "associate" (as defined above) of another, (c) any person has an agreement, arrangement or understanding with another, or (d) the assets being disposed of or acquired by the Corporation, or any subsidiary thereof, either alone or in a related series of transactions, have an aggregate fair market value of less then $10,000,000. 4. No amendment to the Certificate of Incorporation of the Corporation shall amend, alter, change or repeal any of the provisions of this Paragraph 11, unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote of the holders of shares of capital stock of the Corporation representing seventy-five percent (75%) of all votes entitled to be cast in elections of directors, considered for the purposes of this Paragraph 11 as one class. 12. To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended, a director of the Corporation shall 7. 8 not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this Article shall not result in any liability for a director with respect to any action or omission occurring prior to such repeal or modification. This Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 245 of the Delaware General Corporation Law by approval of the Board of Directors of the Corporation. IN WITNESS WHEREOF, NATIONAL EDUCATION CORPORATION has caused this Restated Certificate of Incorporation to be signed by its Vice President and attested to by its Assistant Secretary as of the 30th day of April, 1987. NATIONAL EDUCATION CORPORATION BY: ---------------------------- Jeffrey A. Brill Vice President ATTEST: - ------------------------------ Judy Bayersdorfer Assistant Secretary 8. EX-10.18 3 2ND AMENDMENT TO CREDIT AGREEMENT 12-21-96 1 EXHIBIT 10.18 NATIONAL EDUCATION CORPORATION SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of December 21, 1995 and entered into by and among National Education Corporation, a Delaware corporation (the "Borrower"), the Bank listed on the signature pages hereof (the "Bank"), and Bankers Trust Company, as agent for the Bank (the "Agent") and, for purposes of Sections 3 and 4 hereof, the Subsidiaries of the Borrower listed on the signature pages hereof, and is made with reference to that certain Amended and Restated Credit Agreement dated as of February 28, 1995 by and among the Borrower, the Bank and the Agent, as amended by that certain First Amendment and Limited Waiver to Credit Agreement dated as of August 4, 1995 (as so amended, the "Credit Agreement"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Borrower and the Bank have agreed, upon the terms and conditions set forth herein, that the term of the Credit Agreement should be extended from December 21, 1995 to January 16, 1996; and WHEREAS, each of the Subsidiaries of the Borrower party to the Subsidiary Guaranty ("Subsidiary Guarantors") or the Subordination Agreement ("Subordinated Subsidiaries") desires to acknowledge and consent to this Amendment and to reaffirm the continuing effectiveness of the Subsidiary Guaranty or the Subordination Agreement, as the case may be; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 AMENDMENT TO SECTION 1.01: DEFINED TERMS. Section 1.01 of the Credit Agreement is hereby amended by amending and restating the definition of "Termination Date" as follows: 1 2 "'Termination Date' shall mean the earlier of (a) January 16, 1996 and (b) the date upon which the Revolving Loan Commitments are terminated pursuant to subsection 4.06 or Section 9." SECTION 2. CONDITIONS TO EFFECTIVENESS The amendment to the Credit Agreement set forth in Section 1 hereof shall become effective as of the date hereof upon the Borrower's, the Bank's, each Subsidiary Guarantor's and each Subordinated Subsidiary's execution and delivery of counterparts hereof provided the Agent shall have received the following, in each case in form and substance satisfactory to the Agent: (i) copies of resolutions of the Borrower, each Subsidiary Guarantor and each Subordinated Subsidiary approving and authorizing the execution and delivery of this Amendment by such Person and the Borrower's performance of the Credit Agreement, as amended by this Amendment, in each case certified by such Person's secretary or assistant secretary as being in full force and effect and as constituting all action by such Person with respect to this Amendment and the extension of the term of the Credit Agreement contemplated hereunder. (ii) An allonge to the Note, substantially in the form of Annex 1 to this Amendment, executed by the Borrower. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Amendment and to amend the provisions of the Credit Agreement in the manner provided herein, the Borrower, and each Subsidiary party to the Subsidiary Guaranty and/or the Subordination Agreement with respect to itself only, represents and warrants to the Bank that the following statements are true, correct and complete: A. CORPORATE POWER AND AUTHORITY. The Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "Amended Agreement"). Each such Subsidiary has all requisite corporate power and authority to enter into this Amendment and to be bound hereby. B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment by the Borrower and each such Subsidiary and the performance of the Amended Agreement by the Borrower have been duly authorized by all necessary corporate 2 3 action by the Borrower and each such Subsidiary, as the case may be. C. NO CONFLICT. The execution and delivery by the Borrower and each such Subsidiary of this Amendment and the performance by the Borrower of the Amended Agreement do not and will not (i) violate any provision of any law, rule or regulation applicable to the Borrower or any of its Subsidiaries, the Certificate of Incorporation or Bylaws of the Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on the Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, or require the consent of any Person under, any mortgage, deed of trust, credit agreement, loan agreement or any other agreement contract or instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) result in or require the creation or imposition of any Lien upon any of their properties or assets. D. GOVERNMENTAL CONSENTS. The execution and delivery by the Borrower and each such Subsidiary of this Amendment and the performance by the Borrower of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Federal, state or other governmental authority or regulatory body or other Person. E. BINDING OBLIGATION. This Amendment and, in the case of the Borrower, the Amended Agreement, are the legally valid and binding obligation(s) of the Borrower and each such Subsidiary, enforceable against the Borrower or such Subsidiary in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 6 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. G. ABSENCE OF DEFAULT. Upon giving effect to this Amendment, no event has occurred and is continuing or will result from the consummation of the transactions contemplated by this 3 4 Amendment which would constitute an Event of Default or a Default. SECTION 4. ACKNOWLEDGEMENT AND CONSENT Each of the undersigned Subsidiaries of the Borrower acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. Each of the undersigned Subsidiary Guarantors hereby confirms that the Subsidiary Guaranty will continue to guaranty to the fullest extent possible the payment and performance of all Guarantied Obligations (as defined in~-the Subsidiary Guaranty), including, without limitation, the payment and performance of all Obligations of the Borrower now or hereafter existing under or in respect of the Amended Agreement. Each of the undersigned Subordinated Subsidiaries hereby confirms that the Subordination Agreement will continue to subordinate the Subordinated Debt (as defined in the Subordination Agreement) to Senior Obligations (as defined in the Subordination Agreement), including, without limitation, all obligations of the Borrower now or hereafter existing to make payments under or in respect of the Amended Agreement. Each Subsidiary Guarantor acknowledges and agrees that the Subsidiary Guaranty shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or affected by the execution or effectiveness of this Amendment. Each Subsidiary Guarantor represents and warrants that all representations and warranties contained in the Subsidiary Guaranty are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. Each Subordinated Subsidiary acknowledges and agrees that the Subordination Agreement shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or affected by the execution or effectiveness of this Amendment. Each Subordinated Subsidiary represents and warrants that all representations and warranties contained in the Subordination Agreement are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date except to the extent that such representations and warranties specifically relate to an earlier date, in which case 4 5 they are true, correct and complete in all material respects as of such earlier date. Each of the undersigned Subsidiaries of the Borrower acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Subsidiary is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of any such Subsidiary to any future amendments to the Credit Agreement. SECTION 5. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS. (i) On and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment. (ii) Except as specifically amended or modified by this Amendment, the Credit Agreement and the other Credit Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Agent or any Bank under, the Credit Agreement or any of the other Credit Documents. B. FEES AND EXPENSES. The Borrower acknowledges that all costs, fees and expenses as described in subsection 11.01 of the Credit Agreement incurred by the Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower. C. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such 5 6 counterparts taken together shall constitute but one and the same instrument. D. EFFECTIVENESS. This Amendment shall become effective as of the date hereof upon the execution of a counterpart hereof by the Borrower, each Subsidiary of the Borrower party to the Subsidiary Guaranty or the Subordination Agreement and the Bank and the delivery of such counterparts to the Agent; provided, however, that the amendment to the Credit Agreement set forth in Section 1 this Amendment shall not be effective until the conditions set forth in Section 2 of this Amendment are satisfied. E. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. F. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER, SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. [Remainder of Page Intentionally Left Blank] 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written by their respective officers "hereunto duly authorized. NATIONAL EDUCATION CORPORATION By: -------------------------------- Title: ------------------------------- NETG HOLDING, INC. NATIONAL EDUCATION TRAINING GROUP, INC., SPECTRUM INTERACTIVE INCORPORATED NATIONAL EDUCATION CENTERS, INC. ICS LEARNING SYSTEMS, INC. INTERNATIONAL CORRESPONDENCE SCHOOLS, INC., AS THE SUBSIDIARY GUARANTORS By: -------------------------------- Title: ------------------------------- NATIONAL EDUCATION INTERNATIONAL CORP. NATIONAL EDUCATION CREDIT CORPORATION NATIONAL EDUCATION FOREIGN SALES CORP. NATIONAL EDUCATION PAYROLL CORP. NATIONAL EDUCATION CENTERS, INC. ICS LEARNING SYSTEMS, INC. NETG HOLDING, INC., AS THE SUBORDINATED SUBSIDIARIES By: -------------------------------- Title: ------------------------------- S-1 8 BANKERS TRUST COMPANY, AS THE BANK AND AS THE AGENT By: -------------------------------- Title: ------------------------------- 9 ALLONGE DATED DECEMBER 21, 1995 TO PROMISSORY NOTE DATED FEBRUARY 28, 1995 This Allonge amends, and is to be affixed to so as to become part of, that certain Promissory Note dated February 28, 1995, in the principal amount of $13,500,000, by the undersigned National Education Corporation, as the Borrower, to Bankers Trust Company, as the Payee (the "Note"). The Note is hereby amended by deleting the date December 21, 1995, from the first paragraph thereof and substituting therefor the date January 16, 1996. In witness whereof, the Borrower and the Payee have caused this Allonge to be executed and delivered by their duly authorized officers. Dated: December 21, 1995 NATIONAL EDUCATION CORPORATION By: ------------------------------ Title: ----------------------------- BANKERS TRUST COMPANY By: ------------------------------ Title: ----------------------------- EX-10.22 4 RENEWAL AND EXTENSION AGREEMENT 2-28-96 1 EXHIBIT 10.22 RENEWAL AND EXTENSION AGREEMENT WHEREAS, National Education Corporation ("Borrower") executed a Revolving Line of Credit Note (the "Note") dated February 28, 1996, payable to the order of Steck-Vaughn Publishing Corporation ("Lender"), in the original principal sum of $10,000,000.00, secured by a Pledge and Security Agreement (the "Security Agreement") of even date between Borrower, as pledger, and Bankers Trust Company, as collateral agent, covering, among other collateral, all of the issued and outstanding shares of capital stock at any time owned by Borrower of Lender; WHEREAS, Borrower has requested Lender to extend the term of the Note; NOW, THEREFORE, Borrower and Lender agree that: 1. After the effective date hereof, the Note shall be due and payable as follows, to wit: Interest only shall be due and payable monthly as it accrues on the first day of each month beginning January 1, 1996 and continuing on the first day of each month thereafter until March 31, 1996 when the entire balance of unpaid principal and accrued, unpaid interest shall be due and payable in full. Each installment shall be applied first to the payment of accrued interest payable on the unpaid principal balance, with the remainder being applied to the reduction of principal. 2. The principal balance of the Note from time to time remaining unpaid shall continue to bear interest at the rate of interest applicable thereto as set forth in the Note, provided that the interest payable shall not exceed the maximum amount that may be lawfully charged. After default or maturity, principal and past-due interest shall bear interest at the rate of interest applicable thereto as set forth in the Note, provided that the interest payable shall not exceed the maximum amount that may be lawfully charged. 3. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no 2 contingency, whether by reason of demand for payment or acceleration of the maturity of the Note or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Note and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Note such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Note shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread so that the interest thereon shall not exceed the maximum amount permitted by applicable law. This paragraph shall control all agreements between Borrower and Lender. 4. Borrower hereby renews the Note and promises to pay to the order of Lender at its offices at 1025 Northern Boulevard, Roslyn, New York (or such other place of payment as the Lender shall notify Borrower) the stated principal sum of the Note, or so much thereof as may be advanced and remains unpaid, with interest as specified in the Note, as renewed and extended by this Renewal and Extension Agreement, and to perform all of Borrower's obligations under the Note, the Security Agreement, and any other documents pertaining thereto (the "Other Documents"). 5. Borrower covenants and warrants that the Note, the Security Agreement and the Other Documents are not in default after giving effect to the extension and renewal herein granted; there are no defenses, counterclaims or offsets to the Note, the Security Agreement or the Other Documents; that the Note and Security Agreement, as renewed and extended hereby, are in full force and effect, and that the Security Agreement shall continue to secure payment of the indebtedness evidenced by the Note as herein and hereafter renewed and extended. -2- 3 6. Borrower further covenants and warrants to Lender that the execution and delivery of this Renewal and Extension Agreement by Borrower will not be in contravention of or cause a default under any agreement to which Borrower is a party. 7. The Note, as renewed and extended by this Renewal and Extension Agreement, shall be construed in accordance with the laws of the State of New York and the laws of the United States applicable to transactions in the State of New York. 8. The Note, the Security Agreement and the Other Documents shall remain in full force and effect as renewed and extended by this Renewal and Extension Agreement. 9. This Renewal and Extension Agreement may be executed in duplicate originals and each duplicate shall have the same force and effect as an original. EXECUTED to be effective as of December 31, 1996. "BORROWER" NATIONAL EDUCATION CORPORATION By: ------------------------------ Name: ------------------------ Title: ----------------------- "LENDER" STECK-VAUGHN PUBLISHING CORPORATION By: ------------------------------ Name: ------------------------ Title: ----------------------- -3- EX-10.23 5 1ST AMENDMENT TO STOCK OPTION AGREEMENT 1 EXHIBIT 10.23 FIRST AMENDMENT TO STOCK OPTION AGREEMENT This First Amendment to Stock Option Agreement is made and entered into by and between National Education Corporation, a Delaware Corporation ("Company") and Steck-Vaughn Publishing Corporation ("Optionee") as of December 31, 1995. Recitals 1. Company and Optionee entered into that certain Stock Option Agreement (the "Stock Option Agreement") dated as of February 28, 1995 pursuant to which the Company granted Optionee a stock option to purchase from the Company 290,000 shares of the stock of Optionee owned by the Company. 2. Company and Optionee desire to amend the Stock Option Agreement to extend certain dates contained therein. Agreement Now, Therefore, for $10.00 and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged by the Company and Optionee hereby agree as follows, to wit: 1. Section 2 of the Stock Option Agreement is hereby amended in its entirety to hereafter read as follows, to wit: 2. Term of Option Unless earlier exercised pursuant to Section 3 of this Agreement, the Option shall terminate on, and shall not be exercisable after the earlier of (a) March 31, 1997, or (b) the date, if any, the Option is terminated pursuant to Section 8 below. 2. Subsection 3.1 of the Stock Option Agreement is hereby amended in its entirety to hereafter read as follows, to wit: 3.1 Exercisability This Option may only be exercised, in whole or in part, once at any time after the earlier of (i) May 31, 1996 or (ii) any time one or more Events of Default (which have not been cured within any applicable cure 2 period) have occurred under and as defined in that certain Revolving Line of Credit Note dated February 28, 1995 in the original principal amount of $10,000,000.00 executed by the Company and payable to the order of Optionee as renewed, modified and extended by that certain Renewal and Extension Agreement dated as of December 31, 1995 between the Company and Optionee (said Resolving Line of Credit Note as so renewed modified and extended by said Renewal and Extension Agreement being herein referred to as the "Note"), until the expiration of the term of the Option as provided in Section 2 hereof. For purposes hereof, a business day shall mean any day which is not a Saturday, Sunday or federal legal holiday. 3. Section 8 of the Stock Option Agreement is hereby amended in its entirety to hereafter read as follows, to wit: 8. Redemption At any time on or after the Credit Line Termination Date (hereafter defined) and provided that the Option has not theretofore been exercised, the Company may redeem the Option upon written notice of such redemption and payment of the Redemption Price (hereafter defined) by the Company to Optionee. Upon the written notice of such redemption and payment of the Redemption Price by the Company to Optionee on or after the Credit Line Termination Date, the Option, to the extent not theretofore exercised, shall terminate for all purposes and shall not be of any further force and effect; provided that such termination shall not impair or affect Optionee's rights with respect to Shares previously exercised pursuant to the Option or Shares previously acquired by Optionee pursuant to the Option. The "Redemption Price" shall mean the greater of (i) the Yield Amount (hereafter defined) plus the Adjustment Amount (hereafter defined) or (ii) $750,000 plus, if the Redemption Price is paid by the Company to Optionee after December 31, 1995, an amount equal to $2,500 per day for each day after December 31, 1995 until and including the earlier of (x) March 31, 1996 or (y) the date of payment of the Redemption Price by the Company to Optionee. The "Yield Amount" shall mean an amount equal to (i) twenty-five percent (25%) per annum on the principal balance from time to time outstanding from the Grant Date to and including the Credit Line Termination Date; less (ii) all interest which at any time has accrued under the Note from the Grant Date to and including the Credit Line Termination Date. The "Adjustment Amount" shall mean an amount equal to twenty-five percent (25%) per annum on -2- 3 the Yield Amount from the Credit Line Termination Date to and including the date of payment of the Redemption Price by the Company to Optionee. For purposes of this Section 8, the Credit Line Termination Date means (i) March 31, 1996, if the indebtedness evidenced by the Note is paid in full on such date and the Company has not prior to March 31, 1996 agreed by a written notice delivered to Optionee that the revolving line of credit available under and evidenced by the Note has been terminated, (ii) the date on which the indebtedness evidenced by the Note is fully pai, if the indebtedness evidenced by the Note is not fully paid on March 31, 1996, or (iii) the date on which both the indebtedness evidenced by the Note has been fully paid and the Company has agreed by a written notice delivered to Optionee that the revolving line of credit available under and evidenced by the Note has been terminated, if the Company has agreed by a written notice delivered to Optionee that the revolving line of credit available under and evidenced by the Note is terminated prior to March 31, 1996. The Redemption Price may be paid by the Company to Optionee, at the Company's option, in either or a combination of (i) cash, or (ii) shares of Optionee's common stock owned by the Company having a fair market value equal to the Redemption Price (or such balance thereof not otherwise paid in cash) based upon the close price for shares of Optionee's common stock on the NASDAQ National Market on the most recent day that Optionee's shares of common stock were traded on the NASDAQ National Market prior to the date of full payment of the Redemption Price by the Company to Optionee, provided that such shares of Optionee's common stock paid in payment of the Redemption Price are paid and delivered by the Company to Optionee free and clear of all liens and encumbrances. In the event Optionee's common stock is no longer traded on the NASDAQ National Market, then the fair market value of Optionee's common stock for purposes of determining payment of the Redemption Price shall be determined on such other basis as the Company and Optionee shall mutually agree. Notwithstanding anything contained in this Section 8 to the contrary, and unless Optionee otherwise agrees in writing, the Company shall have no right to redeem and terminate the Option pursuant to this Section 8 at anytime any one or more Events of Default (as defined in the Note) exists and is continuing. Nothing contained in this Agreement (i) shall be construed to extend or to commit to extend the revolving line of credit available under the Note or the maturity of the Note past March 31, 1996; or (ii) impair or affect Optionee's rights and remedies with respect to any collateral securing the indebtedness evidenced by the Note. The redemption of the Option pursuant to this -3- 4 Section 8 may be made after notice of exercise of the Option has been given by the Optionee to the Company provided that written notice of such redemption and payment of the Redemption Price is made by the Company to Optionee prior to the Exercise Date specified in Optionee's notice of exercise of the Option to be given to the Company pursuant to Section 3.2. 4. THIS FIRST AMENDMENT TO STOCK OPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 5. The Company covenants and warrants to Optionee that the execution and delivery of this First Amendment to Stock Option Agreement by the Company is not in contravention of and will not cause a default under any agreement to which the Company is a party. 6. Except as amended hereby, the Stock Option Agreement shall remain in full force in effect in accordance with its terms. IN WITNESS WHEREOF, the parties have entered into this First Amendment to Stock Option Agreement as of the date first above written. "COMPANY" "OPTIONEE" NATIONAL EDUCATION CORPORATION STECK-VAUGHN PUBLISHING CORPORATION By: By: --------------------------- -------------------------- Name: Name: -------------------- --------------------- Title: Title: -------------------- -------------------- -4- EX-10.24 6 LETTER AMENDMENT TO STOCK OPTION AGREEMENT 1 February 1, 1996 EXHIBIT 10.24 Steck-Vaughn Publishing Corporation 8701 North MoPac Expressway, Suite 200 Austin, Texas 78759 Attention: Mr. Floyd Rogers Re: Revolving Line of Credit Note and Stock Option Agreement between Steck-Vaughn Publishing Corporation and National Education Corporation Dear Floyd: This letter is to confirm that, effective February 1, 1996, the maximum principal sum available under that certain Revolving Line of Credit Note dated February 28, 1995, made by National Education Corporation ("NEC") in favor of Steck-Vaughn Publishing Corporation ("SVPC"), as renewed and extended by that certain Renewal and Extension Agreement effective December 31, 1995, between NEC and SVPC, is hereby reduced to Five Million Dollars ($5,000,000). In consideration of the foregoing reduction, NEC and SVPC also confirm and agree that, from and after February 1, 1996, the "per day" amount set forth in Section 8 of that certain Stock Option Agreement dated February 28, 1995, between NEC and SVPC, as amended by that certain First Amendment to Stock Option Agreement dated December 31, 1995, between NEC and SVPC, shall be reduced to One Thousand Two Hundred Fifty Dollars ($1,250) per day (from the amount of $2,500 per day, which amount shall remain applicable for each day in the one month period from and including January 1, 1996 through January 31, 1996). Please confirm SVPC's agreement to the foregoing by countersigning the enclosed copy of this letter, and returning such countersigned copy to my attention. Very truly yours, Keith K. Ogata Vice President, Chief Financial Officer and Treasurer AGREED EFFECTIVE FEBRUARY 1, 1996 STECK-VAUGHN PUBLISHING CORPORATION By: ------------------------------ Floyd Rogers Vice President and Chief Financial Officer EX-10.26 7 CREDIT AGREEMENT DATED 1-19-96 1 * PORTIONS OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT. SEE PAGES 44-49. EXHIBIT 10.26 CREDIT AGREEMENT, dated as of January 19, 1996, among NATIONAL EDUCATION CORPORATION, a Delaware corporation (the "Borrower"), the several banks and other financial institutions from time to time parties to this Agreement (the "Lenders") and the Agent, as agent for the Lenders hereunder. The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Affiliate": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agent": BZW Division of Barclays Bank PLC, together with its affiliates, as the arranger of the Commitments and as the agent for the Lenders under this Agreement and the other Loan Documents. "Aggregate Outstanding Extensions of Credit": at any time of determination thereof, the sum of (a) the unpaid principal amount of Loans at such time, (b) the aggregate amount available to be drawn under all Letters of Credit outstanding at such time and (c) the aggregate unreimbursed amount at such time of all drawings under Letters of Credit. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": for each Type of Loan, the rate per annum set forth under the relevant column heading below:
Base Rate Eurodollar Loans Loans --------- ---------- 1.75% 3.0%;
2 2 provided, that commencing with the fiscal quarter ending June 30, 1996, the Applicable Margin shall be adjusted from time to time as described below to the rate per annum set forth under the relevant column heading below opposite the then applicable Coverage Ratio:
Base Rate Eurodollar Coverage Ratio Loans Loans -------------- --------- ---------- Greater than or equal to 7.0:1.0 .75% 2.0% Greater than or equal 1.0% 2.25% to 6.0:1.0 but less than 7.0:1.0 Greater than or equal 1.25% 2.50% to 5.0:1.0 but less than 6.0:1.0 Greater than or equal 1.50% 2.75% to 4.0 to 1.0 but less than 5.0 to 1.0 Less than 4.0 to 1.0 1.75% 3.0%
Any change in the Applicable Margin required hereunder shall be deemed to occur on the earlier of (x) the later of (1) the date the Borrower delivers to the Lenders its preliminary financial statements for the fiscal quarter then most recently ended and (2) the date which is ten days after the end of such fiscal quarter and (y) the date of delivery by the Borrower of the financial statements for such quarter required pursuant to subsection 7.1(a) or (b), provided, however, that if the Applicable Margin shall have been adjusted based on the preliminary financial statements, and the financial statements for such fiscal quarter delivered pursuant to subsection 7.1(a) or (b) show: (A) a Coverage Ratio corresponding to an Applicable Margin higher than the Applicable Margin as so adjusted, the Applicable Margin shall be retroactively readjusted to the date of delivery of such preliminary financial statements for such fiscal quarter, and the Borrower shall pay the increased interest resulting from such readjustment, with interest on such increment at the Federal Funds Effective 3 3 Rate, plus a charge (payable on the date of such readjustment) of $150 for effecting such adjustment, or (B) a Coverage Ratio corresponding to an Applicable Margin lower than the Applicable Margin as so adjusted, the Applicable Margin shall, on the date of delivery of such financial statements, be adjusted prospectively to such lower Applicable Margin. "Assignee": as defined in subsection 11.6(c). "Assignment of Life Insurance": the Assignment of Life Insurance to be executed and delivered by the Borrower, substantially in the form of Exhibit B, as the same may be amended, supplemented or otherwise modified from time to time. "Available Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) such Lender's Aggregate Outstanding Extensions of Credit. "Barclays": BZW Division of Barclays Bank PLC. "Base Rate": for any day, the higher of (i) the rate of interest publicly announced by Barclays in New York, New York from time to time as its prime rate (the prime rate not being intended to be the lowest rate of interest charged by Barclays in connection with extensions of credit to debtors) and (ii) 1/2 of 1% above the Federal Funds Rate for such day. "Base Rate Loans": Loans the rate of interest applicable to which is based upon the Base Rate. "Borrowing Date": any Business Day specified in a notice pursuant to subsection 2.2 as a date on which the Borrower requests the Lenders to make Loans hereunder. "Business": as defined in subsection 5.17(b). "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. 4 4 "Cash Equivalents": (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-2 by Standard and Poor's Ratings Group ("S&P") or P-2 by Moody's Investors Service, Inc. ("Moody's"), (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's, (f) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition. "Closing Date": the date on which the conditions precedent set forth in subsection 6.1 shall be satisfied. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Collateral": all assets of the Loan Parties, now owned or hereinafter acquired, upon which a Lien is purported to be created by any Security Document. "Collateral Agent": BZW Division of Barclays Bank PLC acting in the capacity of the Collateral Agent on behalf of the Lenders and SV pursuant to the Intercreditor Agreements and shall include any successor Collateral Agent appointed pursuant to this Agreement and the Intercreditor Agreement. "Commercial L/C's": a commercial documentary Letter of Credit under which the Issuing Bank agrees to make payments in Dollars for the account of the Borrower, in respect of obligations of the Borrower in connection with the purchase of goods in the ordinary course of business. 5 5 "Commitment": as to any Lender, the obligation of such Lender to make Extensions of Credit to the Borrower hereunder in an aggregate outstanding principal amount and/or face amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule I, as such amount may be reduced from time to time in accordance with the provisions of this Agreement. Commitment. "Commitment Percentage": as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any time after the Commitments shall have expired or terminated, the percentage which the aggregate outstanding amount of such Lender's Extensions of Credit constitutes of the aggregate outstanding amount of all Extensions of Credit). "Commitment Period": the period from and including the Closing Date to but not including the Termination Date or such earlier date on which the Commitments shall terminate as provided herein. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Consolidated Current Assets": at a particular date, all amounts which would, in conformity with GAAP, be included under current assets on a consolidated balance sheet of the Borrower and its Subsidiaries as at such date. "Consolidated Current Liabilities": at a particular date, all amounts which would, in conformity with GAAP, be included under current liabilities on a consolidated balance sheet of the Borrower and its Subsidiaries as at such date. "Consolidated EBITDA": for any period, Consolidated Net Income of the Borrower and its Subsidiaries for such period plus, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income, the sum of (a) income tax expense, (b) Consolidated Interest Expense, (c) depreciation and amortization expense, (d) any extraordinary, unusual or non-recurring losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income, losses on the sales of assets outside of the ordinary course of business) and (e) other non-cash charges to Consolidated Net Income, minus, without duplication and to the extent reflected as income in the statement of such Consolidated Net Income, any extraordinary, unusual or non-recurring gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income, gains on the sales of assets outside of the ordinary course of business). 6 6 "Consolidated Interest Expense": for any period, interest expense of the Borrower and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Lease Expense": for any period, the aggregate amount of fixed and contingent rentals payable by the Borrower and its Subsidiaries for such period with respect to leases of real and personal property, determined in accordance with GAAP on a consolidated basis. "Consolidated Net Income": for any period, net after-tax income of the Borrower and its Subsidiaries for such period determined in accordance with GAAP on a consolidated basis. "Consolidated Net Worth": at a particular date, all amounts which would be included under shareholders' equity on a consolidated balance sheet of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP as at such date. "Consolidated Total Indebtedness": at a particular date, all Indebtedness of the Borrower and its Subsidiaries as at such date on a consolidated basis. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Coverage Ratio": as of any date of determination, the ratio of Consolidated EBITDA for the 12-month period then ended minus Net Capital Expenditures during such period to Consolidated Interest Expense for such period. "Default": any of the events specified in Section 9, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollars" and "$": dollars in lawful currency of the United States of America. "Domestic Subsidiary": any Subsidiary of the Borrower other than a Foreign Subsidiary. "Environmental Laws": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) 7 7 regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. "Eurodollar Base Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum equal to the rate at which Barclays is offered Dollar deposits at or about 10:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. "Eurodollar Loans": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Eurodollar Tranche": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Eurodollar Loans shall originally have been made on the same day). 8 8 "Event of Default": any of the events specified in Section 9, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Extension of Credit": the making of any Loan by any Lender and the issuance of any Letter of Credit by the Issuing Bank. "Federal Funds Effective Rate": for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average quotations, for the day, of such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Financing Lease": any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "Foreign Subsidiary": any Subsidiary of the Borrower which is organized under the laws of any jurisdiction outside of the United States of America. "GAAP": generally accepted accounting principles in the United States of America consistent with those utilized in preparing the audited financial statements referred to in subsection 5.1. "Global Security Agreement": the Guarantee and Collateral Agreement to be executed and delivered by the Borrower and each Loan Party, substantially in the form of Exhibit D, as the same may be amended, supplemented or otherwise modified from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary 9 9 obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof;provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Indebtedness": of any Person at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of such Person under Financing Leases, (d) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (e) all obligations of such Person in respect of letters of credit issued for the account of such Person and (f) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Intercreditor Agreement": the Intercreditor Agreement, dated as of January 19, 1996, by and among the Agent, SV and BZW Division of Barclays Bank PLC, as Collateral Agent, substantially in the form of Exhibit D. 10 10 "Intercreditor Agreements": the collective reference to (i) the Intercreditor Agreement and (ii) the Intercreditor Pledge Agreement. "Intercreditor Pledge Agreement": the Pledge and Security Agreement, dated as of January 19, 1996 made by the Borrower in favor of the Agent substantially in the form of Exhibit E. "Interest Payment Date": (a) as to any Base Rate Loan, the last day of each calendar month, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. "Interest Period": with respect to any Eurodollar Loan: (i) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period pertaining to a Eurodollar Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; 11 11 (3) any Interest Period pertaining to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (4) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. "Issuing Bank": Barclays Bank PLC. "L/C Application": as defined in Section 3.1. "L/C Commitment": $3,000,000. "L/C Obligations": the obligations of the Borrower to reimburse the Issuing Bank for any payments made by the Issuing Bank under any Letter of Credit. "L/C Participating Interest": an undivided participating interest in the face amount of each issued and outstanding Letter of Credit and the L/C Application relating thereto. "Letters of Credit": the collective reference to Commercial L/C's and Standby L/C's issued pursuant to Section 3.1. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Financing Lease having substantially the same economic effect as any of the foregoing). "Loan": any loan made by any Lender pursuant to this Agreement. "Loan Documents": this Agreement, any Notes, any L/C Applications, the Intercreditor Agreement and the Security Documents. "Loan Parties": the Borrower and each Subsidiary of the Borrower which is a party to a Loan Document. 12 12 "Majority Lenders": at any time, Lenders the Commitment Percentages of which aggregate more than 50%. "Material Adverse Effect": a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this or any of the other Loan Documents or the rights or remedies of the Agent or the Lenders hereunder or thereunder. "Material Environmental Amount": an amount payable by the Borrower and/or its Subsidiaries in excess of $1,000,000 for remedial costs, compliance costs, compensatory damages, punitive damages, fines, penalties or any combination thereof. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Material Subsidiary": at any time, any Subsidiary (other than SV) (a) the consolidated assets of which and its Subsidiaries constitute at least 5% of the consolidated total assets of the Borrower and its Subsidiaries as at the most recent fiscal-period-end date for which financial statements shall have been delivered to the Lenders pursuant to subsection 7.1 or (b) the consolidated total revenues of which and its Subsidiaries constitute at least 5% of the consolidated total revenues of the Borrower and its Subsidiaries for the most recently ended period of four consecutive fiscal quarters for which financial statements shall have been delivered to the Lenders pursuant to subsection 7.1; in the case of any Person which becomes a Subsidiary after the date hereof, the calculations described in this definition shall be made on the assumption that such Person shall have been a Subsidiary for all periods relevant to such calculations. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Capital Expenditures": for any period of four consecutive fiscal quarters, the excess, if any, of (a) the sum of capital expenditures by the Borrower and its Subsidiaries during such period over (b) the aggregate Net Cash Proceeds from the sale by the Borrower and its Subsidiaries of capital assets during such period. "Net Cash Proceeds": with respect to any sale of assets or issuance of securities or incurrence by the Borrower or any of its Subsidiaries of any Indebtedness for 13 13 borrowed money of the Borrower, an amount equal to the gross cash proceeds of such sale, issuance or incurrence, net of the following amounts: (i) reasonable attorneys' fees, accountants' fees, brokerage, consultant and other customary fees, underwriting commissions and other fees and expenses actually incurred in connection with such sale, issuance or incurrence, (ii) taxes paid or reasonably estimated to be payable as a result thereof, after taking into account all available deductions and credits in connection with such sale, (iii) appropriate amounts to be provided by the Borrower or any of its Subsidiaries as a reserve in accordance with GAAP as in effect from time to time, against any liabilities associated with such sale and retained by the Borrower or such Subsidiary, as the case may be, after such sale, and (iv) in the case of a sale or sale and leaseback of or involving an asset subject to a Lien securing (a) any Indebtedness, payments made and installment payments required to be made to repay such Indebtedness, including payments in respect of principal, interest and prepayment premiums and penalties to the extent such amounts are not paid to the Borrower with respect to such sale. "Non-Excluded Taxes": as defined in subsection 4.10(a). "Notes": the Revolving Credit Notes. "Participant": as defined in subsection 11.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Properties": as defined in subsection 5.17(a). "Reimbursement Obligation": the obligation of the Borrower to reimburse the Issuing Bank pursuant to subsection 3.5(a) for amounts drawn under Letters of Credit. "Register": as defined in subsection 11.6(d). 14 14 "Regulation U": Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section 2615. "Required Lenders": at any time, Lenders the Commitment Percentages of which aggregate at least 66-2/3%. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": any of the chief executive officer and the president of the Borrower or, with respect to financial matters, the chief financial officer of the Borrower. "Revolving Credit Loans": as defined in subsection 2.1(a). "Revolving Credit Note": as defined in subsection 4.3(e). "Security Documents": the collective reference to the Global Security Agreement, the Assignment of Life Insurance, the Intercreditor Pledge Agreement and all other security documents hereafter delivered to the Agent granting a Lien on any asset or assets of any Person to secure the obligations and liabilities of the Borrower hereunder and under any of the other Loan Documents or to secure any guarantee of any such obligations and liabilities. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Solvent" and "Solvency": with respect to any Person on a particular date, that on such date, (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount 15 15 that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. "Standby L/C": an irrevocable letter of credit under which the Issuing Bank agrees to make payments in Dollars for the account of the Borrower, in respect of obligations of the Borrower incurred pursuant to contracts made or performances undertaken or to be undertaken by the Borrower or any of its Subsidiaries. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "SV": Steck-Vaughn Publishing Corporation, a Delaware corporation. "SV Stock Option": the option granted by the Borrower to SV to purchase 290,000 shares of SV's outstanding common stock from the Borrower for an exercise price $6.50 per share, which option expires on March 31, 1997. "Termination Date": January 19, 1998. "Transferee": as defined in subsection 11.6(f). "Type": as to any Loan, its nature as a Base Rate Loan or a Eurodollar Loan. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in any Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrower and its Subsidiaries not 16 16 defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provisionof this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Revolving Credit Commitments. (a) Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to the Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Commitment Percentage of the then outstanding L/C Obligations, does not exceed the amount of such Lender's Commitment. During the Commitment Period the Borrower may use the Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be (i) Eurodollar Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Agent in accordance with subsections 2.2 and 2.4, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month or 30 days, respectively, prior to the Termination Date. 2.2 Procedure for Revolving Credit Borrowing. The Borrower may borrow under the Commitments during the Commitment Period on any Business Day, provided that the Borrower shall give the Agent irrevocable notice (which notice must be received by the Agent prior to 12:00 P.M., New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Periods therefor; provided, further, that any borrowing made on the Closing Date shall be of Base Rate Loans only and shall require only same day notice to the Agent. Each borrowing of Eurodollar Loans under the 17 17 Commitments shall be in an amountequal to $500,000 or a whole multiple of $100,000 in excess thereof. Each borrowing of Base Rate Loans under the Commitments shall be in an amount equal to $100,000 or a whole multiple thereof. Upon receipt of any such notice from the Borrower, the Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Agent for the account of the Borrower at the office of the Agent specified in subsection 11.2 prior to 11:00 A.M., New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Agent. Such borrowing will then be made available to the Borrower by the Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Agent by the Lenders and in like funds as received by the Agent. 2.3 Optional Prepayments. The Borrower may on the last day of any Interest Period with respect thereto, in the case of Eurodollar Loans, or at any time and from time to time, in the case of Base Rate Loans, prepay the Loans, in whole or in part, without premium or penalty, upon at least one Business Days' irrevocable notice to the Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, Base Rate Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of any such notice the Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any amounts payable pursuant to subsection 4.11. 2.4 Mandatory Prepayments. If SV shall exercise its rights under the SV Stock Option, the Borrower shall cause SV to make payment of the purchase price directly to the Agent, which shall apply the amount so received to prepay the Loans, and the Commitments shall be reduced by an amount equal to the amount so prepaid. Any such prepayment shall be accompanied by payment of accrued interest on the amount prepaid and any amounts payable pursuant to subsection 4.11. 2.5 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert Eurodollar Loans to Base Rate Loans by giving the Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans to Eurodollar Loans by giving the Agent at least three Business Days' prior irrevocable notice of such election. Any such noticeof conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans or Base Rate Loans may be converted as provided herein, provided that (i) no Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Agent has or the Required Lenders have determined that such a conversion is not appropriate and (ii) no 18 18 Loan may be converted into a Eurodollar Loan after the date that is one month prior to the Termination Date. (b) Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, of the length of the next Interest Period to be applicable to such Loans, provided that no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Agent has or the Required Lenders have determined that such a continuation is not appropriate or (ii) after the date that is one month prior to, the Termination Date and provided, further, that if the Borrower shall fail to give such notice or if such continuation is not permitted such Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. 2.6 Minimum Amounts and Maximum Number of Eurodollar Tranches. All borrowings, conversions and continuations of Eurodollar Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising each Eurodollar Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof and in no event shall there be more than ten Eurodollar Tranches outstanding at any time. SECTION 3. LETTERS OF CREDIT 3.1 L/C Commitment. (a) Subject to the terms and conditions hereof, the Issuing Bank, in reliance on the agreements of the other Lenders set forth in subsection 3.3, agrees to issue Letters of Credit for the account of the Borrower on any Business Day during the Commitment Period in such form as may be approved from time to time by the Issuing Bank; provided that the Issuing Bank shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (1)the L/C Obligations would exceed the L/C Commitment or (2) the Available Commitment would be less than zero. 3.2 Issuance of Letters of Credit. (a) The Borrower may from time to time request the Issuing Bank to issue a Standby L/C or a Commercial L/C for the account of the Borrower by delivering to the Issuing Bank, with a copy to the Agent at its address specified in subsection 11.2, a letter of credit application in the Issuing Bank's then customary form (an "L/C Application") completed to the satisfaction of the Issuing Bank, together with the proposed form of such Letter of Credit (which shall comply with the applicable requirements of paragraph (b) below) and such other certificates, documents and other papers and information as the Issuing Bank may reasonably request. 19 19 (b) Each Standby L/C and Commercial L/C issued hereunder shall, among other things, (i) be denominated in Dollars, (ii) be in such form requested by the Borrower from the Issuing Bank as shall be acceptable to the Issuing Bank in its sole reasonable discretion, (iii) be subject to the Uniform Customs and to the extent not inconsistent therewith, the laws of the State of New York, and (iv) have an expiry date occurring not later than the earlier of (A) one year after the date of issuance of such Letter of Credit and (B) the Termination Date. 3.3 Participating Interests in Letters of Credit. The Issuing Bank agrees to allot and does allot, to itself and each other Lender, and each Lender severally and irrevocably agrees to take and does take in each Standby L/C and Commercial L/C and the related L/C Application, an L/C Participating Interest in a percentage equal to such Lender's Commitment Percentage. 3.4 Procedure for Opening Letters of Credit. To the extent the Agent has not previously notified the Banks, the Agent will notify each Bank after the end of each calendar month of any L/C Applications received by the Issuing Bank (and copied to the Agent) during such month. Upon receipt of any L/C Application from the Borrower, the Issuing Bank will process such L/C Application, and the other certificates, documents and other papers delivered to it in connection therewith, in accordance with its customary procedures and, subject to the terms and conditions hereof, shall promptly open such Letter of Credit by issuing the original of such Letter of Credit to the beneficiary thereof and by furnishing a copy thereof to the Borrower and, after the end of the calendar month in which such Letter of Credit was opened, to the other Banks, provided that no such Letter of Credit shall be issued if the proviso to subsection 2.1(a) would be violated thereby or if after giving effect to theissuance of any Letters of Credit the aggregate L/C Obligations would exceed the L/C Commitment. 3.5 Payment in Respect of Letters of Credit. (a) The Borrower agrees forthwith upon demand by the Issuing Bank and otherwise in accordance with the terms of the L/C Application executed by the Borrower relating thereto, (i) to reimburse the Issuing Bank for any payment made by the Issuing Bank under any Letter of Credit issued for the Borrower's account (which reimbursement may be made with the proceeds of Loans made in accordance with the provisions of this Agreement) and (ii) to pay interest on any unreimbursed portion of any such payment from the date of such payment until reimbursement in full thereof at a rate per annum equal to (A) prior to the date which is one Business Day after the day on which the Issuing Bank demands reimbursement from the Borrower for such payment, the rate of interest that would be in effect for Base Rate Loans at such time and (B) on such date and thereafter, the rate of interest that would be in effect for overdue Base Rate Loans at such time pursuant to subsection 4.4(c). (b) In the event that the Issuing Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor, forthwith upon demand of the Issuing Bank, and otherwise 20 20 in accordance with the terms of the L/C Application relating to such Letter of Credit, the Issuing Bank will promptly notify each other Lender. Forthwith upon its receipt of any such notice, each other Lender will transfer to the Issuing Bank, in immediately available funds, an amount equal to such other Lender's Commitment Percentage of the L/C Obligation arising from such unreimbursed payment. (c) Whenever, at any time after the Issuing Bank has made a payment under any Letter of Credit and has received from any other Lender such other Lender's Commitment Percentage of the L/C Obligation arising therefrom, the Issuing Bank receives any reimbursement on account of such L/C Obligation or any payment of interest on account thereof, the Issuing Bank will distribute to such other Lender its pro rata share thereof in like funds as received; provided, however, that in the event that the receipt by the Issuing Bank of such reimbursement or such payment of interest (as the case may be) is required to be returned, such other Lender will return to the Issuing Bank any portion thereof previously distributed by the Issuing Bank to it in like funds as such reimbursement or payment is required to be returned by the Issuing Bank. 3.6 Letter of Credit Fees. (a) In lieu of any letter of credit commissions and fees provided for in any L/C Application relating to Letters of Credit (other than amendment and negotiation fees), the Borrower agrees to pay to the Agent, (i) for the account of the Participating Banks (including the Issuing Bank with respect to its own L/C Participating Interest in any Letter of Credit issued by it), with respect to the undrawn face amount of each Letter of Credit, a fee of 2.75% per annum from time to time; provided that, when the Applicable Margin for Eurodollar Loans is equal to or less than 2.50%, the Letter of Credit Fee shall be equal to the Applicable Margin and (ii) for the account of the Issuing Bank in respect thereof, a fee of 1/4 of 1% per annum based on the undrawn face amount thereof from time to time, each such fee to be payable quarterly in arrears, on the last day of March, June, September and December. Fees will be based on the actual number of days elapsed in a 360-day year. 3.7 Further Assurances. The Borrower hereby agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments reasonably requested by the Issuing Bank more fully to effect the purposes of this Agreement with respect to the issuance of Letters of Credit hereunder. 3.8 Obligations Absolute. The payment obligations of the Borrower under this Agreement with respect to the Letters of Credit shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) the existence of any claim, set-off, defense or other right which the Borrower or any of its Subsidiaries may have at any time against any beneficiary, or any transferee, of any 21 21 Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Bank in respect thereof, the Agent or any Lender, or any other Person, whether in connection with this Agreement, the Loan Documents, the transactions contemplated herein, or any unrelated transaction; (b) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent or invalid or any statement therein being untrue or inaccurate in any respect; (c) payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit or is insufficient in any respect, except where such payment constitutes gross negligence or wilful misconduct on the part of the Issuing Bank; or (d) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing, except for any such circumstances or happening constituting gross negligence or wilful misconduct on the part of the Issuing Bank. 3.9 Assignments. No Lender's participation in any Letter of Credit or any of its rights or duties hereunder shall be subdivided, assigned or transferred (other than in connection with a transfer of part or all of such Lender's Commitment in accordance with Section 11.6(c)) without the prior written consent of the Issuing Bank. Such consent may be given or withheld without the consent or agreement of any other Lenders. Notwithstanding the foregoing, a Lender may subparticipate its L/C Participating Interest pursuant to Section 11.6(b) without obtaining the prior written consent of the Issuing Bank. 3.10 Participations. Each Lender's obligation to purchase participating interests pursuant to Section 3.2 shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Issuing Bank, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of an Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Borrower; (iv) any breach of this Agreement by the Borrower or any other Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 4. GENERAL PROVISIONS 4.1 Fees. (a) The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee for the period from and including the first day of the Commitment Period to the Termination Date, computed at the rate of 3/8ths of 1% per annum on the average 22 22 daily amount of the Available Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the Termination Date or such earlier date as the Commitments shall terminate as providedherein, commencing on the first of such dates to occur after the date hereof. (b) The Borrower shall pay to the Agent the fees set forth in the fee letter dated December 18, 1995 from the Agent to the Borrower. 4.2 Termination or Reduction of Commitments. The Borrower shall have the right, upon not less than five Business Days' notice to the Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments. Any such reduction shall be in an amount equal to $1,000,000 or a whole multiple of $500,000 thereof and shall reduce permanently the Commitments then in effect. If, as a consequence of it having available proceeds from the issuance subsequent to the date hereof of any Indebtedness to a Lender other than Barclays Bank PLC, the Borrower terminates the Commitments or reduces the Commitments by 66% or more, the Borrower shall pay to the Agent for the account of each Lender a termination fee of (i) if such termination or reduction occurs during the period from the Closing Date until the first anniversary of the Closing Date, 2%, or (ii) if such termination or reduction occurs during the period from the first anniversary of the Closing Date until the Termination Date, 1%, of the aggregate amount of the Commitments terminated or reduced. 4.3 Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Agent for the account of each Lender the then unpaid principal amount of each Revolving Credit Loan of such Lender on the Termination Date (or such earlier date on which the Revolving Credit Loans become due and payable pursuant to Section 9). The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date thereof until payment in full thereof at the rates per annum, and on the dates, set forth in subsection 4.4. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Agent shall maintain the Register pursuant to subsection 11.6(d), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Revolving Credit Loan and Letter of Credit made hereunder, the Type thereof andeach Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof. 23 23 (d) The entries made in the Register and the accounts of each Lender maintained pursuant to subsections 4.3(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to such Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that, upon the request to the Agent by any Lender, the Borrower will execute and deliver to such Lender a promissory note of the Borrower evidencing the Revolving Credit Loans of such Lender, substantially in the form of Exhibit A with appropriate insertions as to date and principal amount (a "Revolving Credit Note"). 4.4 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin. (c) If all or a portion of (i) any principal of any Loan, (ii) any interest payable thereon, (iii) any commitment fee or (iv) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the principal of the Loans and any such overdue interest, commitment fee or other amount shall bear interest at a rate per annum which is (x) in the case of principal, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% or (y) in the case of any such overdue interest, commitment fee or other amount, the rate described in paragraph (b) of this subsection plus 2%, in each case from the date of such non-payment until such overdue principal, interest, commitment fee or other amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this subsection shall be payable from time to time on demand. 4.5 Computation of Interest and Fees. (a) Commitment fees and, whenever it is calculated on the basis of the Base Rate, interest shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and, otherwise, interest shall be calculated on the basis of a 360-day year for the actual days elapsed. The Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the 24 24 Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Agent in determining any interest rate pursuant to subsection 4.4(a) or (c). 4.6 Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Agent shall have received notice from the Majority Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to bemade on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be converted to or continued as Base Rate Loans and (z) any outstanding Eurodollar Loans, shall be converted, on the first day of such Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans. 4.7 Pro Rata Treatment and Payments. (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set off or 25 25 counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Agent, for the account of the Lenders, at the Agent's office specified in subsection 11.2, in Dollars and in immediately available funds. The Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its Commitment Percentage of such borrowing available to the Agent, the Agent may assume that such Lender is making such amount available to the Agent, and the Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Agent. A certificate of the Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender'sCommitment Percentage of such borrowing is not made available to the Agent by such Lender within three Business Days of such Borrowing Date, the Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Base Rate Loans hereunder, on demand, from the Borrower. Nothing in this paragraph shall be deemed to relieve any Lender from its obligations to make Loans to the Borrower pursuant to the terms of this Agreement or to prejudice any rights that the Borrower may have against any Lender in connection with any default by such Lender in its obligations hereunder. 4.8 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert Base Rate Loans to Eurodollar Loans shall forthwith be cancelled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to subsection 4.11. 26 26 4.9 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, any L/C Application or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by subsection 4.10 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduced amount receivable. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder or under any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower (with a copy to the Agent) of the event by reason of which it has become so entitled, provided that such Lender shall not be entitled to 27 27 claim any such additional amount that is due and payable in respect of any date which is more than ninety days prior to the date upon which such Lender shall so notify the Borrower thereof. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Lender to the Borrower (with a copy to the Agent) shall be conclusive in the absence of manifest error. The agreements in this subsection shall survive the termination of this Agreementand the payment of the Loans and all other amounts payable hereunder. 4.10 Taxes. (a) All payments made by the Borrower under this Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Agent or any Lender as a result of a present or former connection between the Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any Note). If any such non- excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Agent or any Lender hereunder or under any Note, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this subsection. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non- Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Agent or any Lender as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: 28 28 (i) deliver to the Borrower and the Agent (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Borrower and the Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Agent. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Lender or a Participant pursuant to subsection 11.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. 4.11 Indemnity. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess,if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included 29 29 therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 4.12 Change of Lending Office. Each Lender agrees that if it makes any demand for payment under subsection 4.9 or 4.10(a), or if any adoption or change of the type described in subsection 4.8 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrower to make payments under subsection 4.9 or 4.10(a), or would eliminate or reduce the effect of any adoption or change described in subsection 4.8. SECTION 5. REPRESENTATIONS AND WARRANTIES To induce the Agent and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Borrower hereby represents and warrants to the Agent and each Lender that: 5.1 Financial Condition. (a) The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1994 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by Price Waterhouse LLP, copies of which have heretofore been furnished to each Lender, present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended; (b) the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiariesas at September 30, 1995 and the related unaudited consolidated statements of income and of cash flows for the three-month and nine-month periods ending on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the three month period then ended (subject to normal year-end adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual 30 30 forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto. During the period from September 30, 1995 to and including the date hereof there has been no sale, transfer or other disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or property (other than any of the foregoing relating to any part of its business or property reflected as discontinued operations on the Borrower's September 30, 1995 consolidated balance sheet referenced to above) and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at September 30, 1995. 5.2 No Change. (a) Since September 30, 1995 there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect, and (b) during the period from September 30, 1995 to and including the date hereof no dividends or other distributions have been declared, paid or made upon the Capital Stock of the Borrower nor has any of the Capital Stock of the Borrower been redeemed, retired, purchased or otherwise acquired for value by the Borrower or any of its Subsidiaries. 5.3 Corporate Existence; Compliance with Law. Each of the Borrower and its Subsidiaries and each Loan Party (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporatepower and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower and each Loan Party has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize, in the case of the Borrower, the borrowings on the terms and conditions of this Agreement and any Notes and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. Except for any filing or notice necessary to perfect any Lien executed by the Security Documents, no consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents to which the Borrower or any Loan Party is a party. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Borrower and each Loan Party. This Agreement constitutes, and each other Loan Document to which it is a party when 31 31 executed and delivered will constitute, a legal, valid and binding obligation of the Borrower and each Loan Party enforceable against it in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 5.5 No Legal Bar. The execution, delivery and performance of the Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 5.6 No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 5.7 No Default. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 5.8 Ownership of Property; Liens. Each of the Borrower and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such property is subject to any Lien except as permitted by subsection 8.3. 5.9 Intellectual Property. The Borrower and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of such Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 32 32 5.10 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 5.11 Taxes. Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all othertaxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 5.12 Federal Regulations. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. If requested by any Lender or the Agent, the Borrower will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-1 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 5.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. 5.14 Investment Company Act; Other Regulations. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the 33 33 meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board of Governors of the Federal Reserve System) which limits its ability to incur Indebtedness. 5.15 Subsidiaries. The Subsidiaries of the Borrower listed on Schedule 5.15 constitute all the Material Subsidiaries of the Borrower on the date hereof. 5.16 Purpose of Loans. The proceeds of the Loans shall be used by the Borrower for general corporate purposes in the ordinary course of business and to refinance existing Indebtedness. 5.17 Environmental Matters. (a) To the best knowledge of the Borrower, the facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "Properties") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law except in either case insofar as such violation or liability, or any aggregation thereof, is not reasonably likely to result in the payment of a Material Environmental Amount. (b) To the best knowledge of the Borrower, the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties or materially impair the fair saleable value thereof. (c) Neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does notinvolve a matter or matters that is or are reasonably likely to result in the payment of a Material Environmental Amount. (d) To the best knowledge of the Borrower, Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, 34 34 stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to result in the payment of a Material Environmental Amount. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, is not reasonably likely to result in the payment of a Material Environmental Amount. (f) To the best knowledge of the Borrower, there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Borrower or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably give rise to liability under Environmental Laws except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to result in the payment of a Material Environmental Amount. (g) To the best knowledge of the Borrower, each of the representations and warranties set forth in subsections 5.17(a) through (f) is true and correct with respect to each parcel of real property owned or operated by the Borrower or any of its Subsidiaries (other than the Properties) except to the extent that the facts and circumstances giving rise to any such failureto be so true and correct is not reasonably likely to result in the payment of a Material Environmental Amount. 5.18 Solvency. The Borrower is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be, Solvent. 5.19 Material Leases. Set forth on Schedule 5.19 attached hereto is a complete and correct list of all material leases to which the Borrower or any of its Subsidiaries is a party. 5.20 Real Property. Set forth on Schedule 5.20 attached hereto is a complete and correct list of all real property owned by the Borrower or any of its Subsidiaries. 35 35 SECTION 6. CONDITIONS PRECEDENT 6.1 Conditions to Initial Extension of Credit. The agreement of each Lender to make the initial Extension of Credit requested to be made by it is subject to the satisfaction, immediately prior to or concurrently with the making of such Extension of Credit on the Closing Date, of the following conditions precedent: (a) Loan Documents. The Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart for each Lender and (ii) the Global Security Agreement, executed and delivered by a duly authorized officer of each Material Subsidiary (other than any Foreign Subsidiary), with a counterpart or a conformed copy for each Lender. (b) Related Agreements. The Agent shall have received the Revolving Line of Credit Note of the Borrower dated February 28, 1995 and the SV Stock Option documentation and all such documents or instruments as may be reasonably requested by the Agent, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which the Borrower, or its Subsidiaries may be a party. (c) Corporate Proceedings of the Borrower. The Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party, (ii) the borrowings contemplated hereunder and (iii) the granting by it of the Liens created pursuant to the Security Documents, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate shall be in form and substance satisfactory to the Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (d) Borrower Incumbency Certificate. The Agent shall have received, with a counterpart for each Lender, a Certificate of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of the Borrower executing any Loan Document satisfactory in form and substance to the Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (e) Corporate Proceedings of Subsidiaries. The Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors of each Subsidiary of the Borrower which is a party to a Loan Document authorizing (i) the execution, delivery and performance of the Loan Documents to which it is a party and (ii) the granting by it of 36 36 the Liens created pursuant to the Security Documents to which it is a party, certified by the Secretary or an Assistant Secretary of each such Subsidiary as of the Closing Date, which certificate shall be in form and substance satisfactory to the Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (f) Subsidiary Incumbency Certificates. The Agent shall have received, with a counterpart for each Lender, a certificate of each Subsidiary of the Borrower which is a Loan Party, dated the Closing Date, as to the incumbency and signature of the officers of such Subsidiaries executing any Loan Document, satisfactory in form and substance to the Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of each such Subsidiary. (g) Corporate Documents. The Agent shall have received, with a counterpart for each Lender, true and complete copies of the certificate of incorporation and by-laws of each Loan Party, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of such Loan Party. (h) Fees. The Agent shall have received the fees to be received on the Closing Date referred to in subsection 4.1. (i) Legal Opinions. The Agent shall have received, with a counterpart for each Lender, the following executed legal opinions: (i) the executed legal opinion of Irell & Manella, counsel to the Borrower and the other Loan Parties, substantially in the form of Exhibit F; (ii) the executed legal opinion of Philip C. Maynard, general counsel of the Borrower, substantially in the form of Exhibit G; (iii) the executed legal opinion of Amster, Rothstein & Ebenstein, intellectual property counsel, substantially in the form of Exhibit H. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Agent may reasonably require. (j) Pledged Stock; Stock Powers. The Agent shall have received the certificates representing the shares pledged pursuant to the Global Security Agreement and the Intercreditor Pledge Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof, each endorsed in blank by a duly authorized officer of the pledgor thereof. 37 37 (k) Actions to Perfect Liens. The Agent shall have received such duly executed financing statements on form UCC-1 as are necessary or, in the opinion of the Agent, desirable to perfect the Liens created by the Security Documents. (l) Lien Searches. The Agent shall have received the results of a recent search by a Person satisfactory to the Agent, of the Uniform Commercial Code, judgment and tax lien filings which may have been filed with respect to personal property of the Borrower and each Material Subsidiary (other than Foreign Subsidiaries), and the results of such search shall be satisfactory to the Agent. (m) Insurance. The Agent shall have received evidence in form and substance satisfactory to it that all of the requirements of subsection 7.5 hereof and Section 5.2 of the Global Security Agreement shall have been satisfied. (n) Intercreditor Agreements. The Agent shall have received the Intercreditor Agreements, each executed and delivered by duly authorized officers of each party thereto. (o) Acknowledgements and Consents. The Agent shall have received an acknowledgement and consent, in the form attached to the Global Security Agreement, executed and delivered by a duly authorized officer of each issuer of stock pledged pursuant to the Global Security Agreement. 6.2 Conditions to Each Extension of Credit. The agreement of each Lender to make any Extension of Credit requested to be made by it on any date (including, without limitation, its initial Extension of Credit) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Borrower and each Loan party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit requested to be made on such date. (c) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Agent, and the Agent shall have received such other documents and legal opinions 38 38 in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date thereof that the conditions contained in this subsection have been satisfied. SECTION 7. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Agent hereunder or under any other Loan Document, the Borrower shall and (except in the case of delivery of financial information, reports and notices) shall cause each of its Subsidiaries to: 7.1 Financial Statements. Furnish to each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Price Waterhouse LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows of the Borrower and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 39 39 7.2 Certificates; Other Information. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 7.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and (b), a certificate of a Responsible Officer (i) stating that, to the best of such Officer's knowledge, the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) showing in detail the figures and calculations supporting such statement in respect of subsection 8.1 as of the end of each fiscal quarter and fiscal year and in respect of subsections 8.7 and 8.9 as of the end of each fiscal year; (c) not later than thirty days prior to the end of each fiscal year of the Borrower, a copy of the projections by the Borrower of the operating budget and cash flow budget of the Borrower and its Subsidiaries for the succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer to the effect that such projections have been prepared on the basis of sound financial planning practice and that such Officer has no reason to believe they are incorrect or misleading in any material respect; (d) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to its stockholders, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (e) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 7.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 40 40 7.4 Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 8.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 7.5 Maintenance of Property; Insurance. Keep all property useful and necessary in its business in good working order and condition; maintain the insurance required pursuant to the Global Security Agreement on the assets covered thereby and maintain with financially sound and reputable insurance companies insurance on all its other property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to each Lender at least annually, full information as to the insurance carried. 7.6 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time upon reasonable prior notice and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants. 7.7 Notices. Promptly give notice to the Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries in which the amount involved is $1,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; 41 41 (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; and (e) any material adverse change in the business, operations, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 7.8 Environmental Laws. (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects withand maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not be reasonably expected to have a Material Adverse Effect. 7.9 Key Man Insurance. Within 90 days following the date hereof (i) obtain key man life insurance on the life of Mr. Sam Yau in an aggregate amount of $5,000,000 on terms satisfactory to the Agent and (ii) deliver to the Agent, with a counterpart for each Lender, a duly executed copy of the Assignment of Life Insurance, together with a satisfactory acknowledgement by the relevant insurer of the Lien created thereby; and at all times thereafter maintain such life insurance in full force and effect. 7.10 Further Assurances. Upon the request of the Agent, promptly perform or cause to be performed any and all acts and execute or cause to be executed any and all 42 42 documents (including, without limitation, financing statements and continuation statements) for filing under the provisions of the Uniform Commercial Code or any other Requirement of Law which are necessary or advisable to maintain in favor of the Agent, for the benefit of the Lenders, Liens on the Collateral that are duly perfected in accordance with all applicable Requirements of Law. Without limiting the generality of the foregoing, the Borrower shall, within 60 days following the Closing Date, take or cause to be taken all actions necessary to cause a Lien on 65% of the Capital Stock of each of Intertext Group Ltd. (England) and NETG Applied Learning, Ltd. (United Kingdom) to be duly created and perfected in accordance with all applicable laws and a legal opinion with respect thereto (in form and substance and from a firm, satisfactory to the Agent) to be delivered to the Agent. 7.11 Additional Collateral. (a) With respect to any assets acquired after the Closing Date by the Borrower or any of its Domestic Subsidiaries which is a Material Subsidiary that are intended to be subject to the Lien created by any of the Security Documents but which are not so subject (other than (x) any assetsdescribed in paragraph (b) or (c) of this subsection and (z) immaterial assets a Lien on which cannot be perfected by filing UCC-1 financing statements), promptly (and in any event within 30 days after the acquisition thereof): (i) execute and deliver to the Agent such amendments to the relevant Security Documents or such other documents as the Agent shall deem necessary or advisable to grant to the Agent, for the benefit of the Lenders, a Lien on such assets, (ii) take all actions deemed necessary or advisable by the Agent to cause such Lien to be duly perfected in accordance with all applicable Requirements of Law, including, without limitation, the filing of financing statements in such jurisdictions as may be requested by the Agent, and (iii) if reasonably requested by the Agent, deliver to the Agent legal opinions relating to the matters described in clauses (i) and (ii) immediately preceding, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. Without limiting the generality of the foregoing, the Borrower shall take or cause to be taken all actions necessary to cause the representation set forth in Section 4.8(b) of the Global Security Agreement to be true and correct at all times. (b) With respect to any Person that, subsequent to the Closing Date, becomes a Material Subsidiary (other than a Foreign Subsidiary), promptly upon the request of the Agent: (i) become a party to the Global Security Agreement to grant to the Agent, for the benefit of the Lenders, a Lien on the Capital Stock of such Material Subsidiary which is owned by the Borrower or any of its Subsidiaries, (ii) deliver to the Agent the certificates representing such Capital Stock, together with undated stock powers executed and delivered in blank by a duly authorized officer of the Borrower or such Material Subsidiary, as the case may be, (iii) cause such new Material Subsidiary (A) to become a party to the Global Security Agreement and (B) to take all actions deemed necessary or advisable by the Agent to cause the Lien created by the Global Security Agreement to be duly perfected in accordance with all applicable Requirements of Law, including, without limitation, the filing of financing statements in such jurisdictions as may be requested by the Agent and (iv) if reasonably requested by the Agent, deliver to the 43 43 Agent legal opinions relating to the matters described in clauses (i), (ii) and (iii) immediately preceding, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. (c) With respect to any Person that, subsequent to the Closing Date, becomes a Foreign Subsidiary which is a Material Subsidiary, promptly upon the request of the Agent: (i) execute and deliver to the Agent a new pledge agreement or suchamendments to the Global Security Agreement to grant to the Agent, for the benefit of the Lenders, a Lien on the Capital Stock of such Material Subsidiary which is owned by the Borrower or any of its Subsidiaries (provided that in no event shall more than 65% of the Capital Stock of any such Material Subsidiary be required to be so pledged), (ii) deliver to the Agent any certificates representing such Capital Stock, together with undated stock powers executed and delivered in blank by a duly authorized officer of the Borrower or such Material Subsidiary, as the case may be, and take or cause to be taken all such other actions under local law as may be deemed necessary or advisable by Agent to perfect such Lien on such Capital Stock and (iii) if reasonably requested by the Agent, deliver to the Agent legal opinions relating to the matters described in clauses (i) and (ii) immediately preceding, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. SECTION 8. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Agent hereunder or under any other Loan Document, the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 8.1 Financial Condition Covenants. (a) Maintenance of Current Ratio. Permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities as at the end of any fiscal quarter to be less than 1.5:1.0. 44 44 (b) Maintenance of Net Worth. Permit Consolidated Net Worth at any time during any period set forth below to be less than the amount set forth opposite such fiscal quarter below:
Period Amount ------ ------ First Quarter 1996 $ * Second Quarter 1996 $ * Third Quarter 1996 $ * Fourth Quarter 1996 $ * First Quarter 1997 $ * Second Quarter 1997 $ * Third Quarter 1997 $ * Fourth Quarter 1997 $ * ;
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT provided, that in determining compliance with this covenant, the Consolidated Net Worth of the Borrower and its Subsidiaries at any date shall be (a) increased by an amount (not to exceed $500,000 in any fiscal year) equal to the aggregate amount of translation losses from the beginning of such fiscal year reflected on the consolidated balance sheet of the Borrower and its Subsidiaries at such date and (b) decreased by an amount (not to exceed $500,000 in any fiscal year) equal to the aggregate amount of translation gains from the beginning of such fiscal year reflected on such consolidated balance sheet. (c) Consolidated Total Indebtedness to Consolidated EBITDA Ratio. Permit the ratio of Consolidated Total Indebtedness at the end of any fiscal quarter set forth below to Consolidated EBITDA for the period of four consecutive fiscal quarters then ending to be greater than the ratio set forth opposite such fiscal quarter below:
Fiscal Quarter Ratio -------------- ----- First Quarter 1996 * Second Quarter 1996 * Third Quarter 1996 * Fourth Quarter 1996 * First Quarter 1997 * Second Quarter 1997 *
45 45 Third Quarter 1997 * Fourth Quarter 1997 *
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT provided, that for purposes of determining compliance with this covenant for the end of the first fiscal quarter of 1996 only, Consolidated EBITDA for the fourth fiscal quarter of 1995 shall be increased by $3,500,000 provided further that all subsequent covenant calculations shall use consolidated EBITDA for the fourth fiscal quarter of 1995 without such increase. (d) Interest Coverage. Permit for any period of four consecutive fiscal quarters ending at the end of any fiscal quarter set forth below the ratio of (i) Consolidated EBITDA for such period minus Net Capital Expenditures for such period to (ii) Consolidated Interest Expense for such period to be less than the ratio set forth opposite such fiscal quarter below:
Fiscal Quarter Ratio -------------- ----- First Quarter 1996 * Second Quarter 1996 * Third Quarter 1996 * Fourth Quarter 1996 * First Quarter 1997 * Second Quarter 1997 * Third Quarter 1997 * Fourth Quarter 1997 *
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT 46 46 provided, that for purposes of determining compliance with this covenant for the end of the first fiscal quarter of 1996 only, Consolidated EBITDA for the fourth fiscal quarter of 1995 shall be increased by $3,500,000 provided further that all subsequent covenant calculations shall use consolidated EBITDA for the fourth fiscal quarter of 1995 without such increase. 8.2 Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower under this Agreement; (b) Indebtedness of the Borrower to any Subsidiary (excluding SV) and of any Subsidiary to the Borrower or any other Subsidiary (excluding SV); provided, however, that the intercompany loan from SV to the Borrower outstanding as of the Closing Date in the aggregate principal amount of $10,000,000 shall be permitted on the condition that it will be repaid in full by the Borrower and the commitment thereunder will be terminated on or before March 31, 1996. (c) Indebtedness outstanding on the date hereof and listed on Schedule 8.2 and any refinancings refundings, renewals or extensions thereof; (d) Indebtedness of a corporation which becomes a Subsidiary after the date hereof, provided that (i) such indebtedness existed at the time such corporation became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such corporation by the Borrower no Default or Event of Default shall have occurred and be continuing; and (e) Indebtedness of the Borrower and any of its Subsidiaries incurred to finance the acquisition of fixed or capital assets (whether pursuant to a loan, a Financing Lease or otherwise) in the ordinary course of business. 8.3 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP (or, in the case of Foreign Subsidiaries, generally accepted accounting principles in effect from time to time in their respective jurisdictions of incorporation); 47 47 (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or such Subsidiary; (f) Liens in existence on the date hereof listed on Schedule 8.3, securing Indebtedness permitted by the proviso to subsection 8.2(b) and by subsection 8.2(c), provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens created pursuant to the Security Documents; and (h) Liens securing Indebtedness of the Borrower and its Subsidiaries permitted by subsection 8.2(e) incurred to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 100% of the fair value (as determined in good faith by the board of directors of the Borrower) of such property at the time it was acquired. 8.4 Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any Guarantee Obligation except: (a) the Letters of Credit 48 48 (b) Guarantee Obligations in existence on the date hereof and listed on Schedule 8.4; 8.5 Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or with or into any one or more wholly owned Subsidiaries of the Borrower (provided that the wholly owned Subsidiary or Subsidiaries shall be the continuing or surviving corporation); and (b) any wholly owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any other wholly owned Subsidiary of the Borrower. 8.6 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person other than the Borrower or any wholly owned Subsidiary, except: (a) the sale or other disposition of any property in the ordinary course of business; (b) the sale or discount without recourse of accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; and (c) issuances of options and/or shares pursuant to employee stock option and incentive award plans; and (d) as permitted by subsection 8.5(b). 8.7 Limitation on Leases. Permit Consolidated Lease Expense for any fiscal year of the Borrower to exceed $12,000,000. 8.8 Limitation on Dividends. Declare or pay any dividend (other than dividends payable solely in common stock of the Borrower) on, or make any payment on account of, or 49 49 set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary. 8.9 Limitation on Capital Expenditures. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any expenditure in respect of the purchase or other acquisition of fixed or capital assets (excluding any such asset acquired in connection with normal replacement and maintenance programs properly charged to current operations) except for expenditures in the ordinary course of business not exceeding (a) $14,000,000 in the aggregate during the Commitment Period for the Borrower and its Subsidiaries or (b) $10,000,000 in the aggregate for the Borrower and its Subsidiaries during any fiscal year of the Borrower. 8.10 Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) acquisitions of Capital Stock or business units of other Persons the aggregate consideration for which does not exceed $ * provided that each such acquisition shall be subject to: (a) Consolidated Net Income having been positive for the two most recently completed fiscal quarters of the Borrower for which financial statements shall have been delivered pursuant to subsection 7.1; (b) delivery by the Borrower to each Lender of a certificate showing compliance with the provisions of subsections 8.1, 8.7 and 8.9 after giving pro-forma effect to such acquisition as of the date of the Borrower's most recently available quarterly consolidated financial statements; (c) the acquired Person or business unit are engaged in the same general line of business as the Borrower and its Subsidiaries as of the Closing Date; (d) the Agent having received at least 15 Business Days notice of Borrower's intention to make such acquisition; (e) the Required Lenders having granted their approval thereof (which approval shall not be unreasonably withheld) and (f) any Loans to finance such acquisition being in compliance with Regulation U; * OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND FILED 50 50 SEPARATELY WITH THE COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT (d) loans to employees, officers and directors in connection with and within the scope of stock option or incentive award plans; and (e) loans and advances to employees of the Borrower or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for the Borrower and its Subsidiaries not to exceed $125,000 at any one time outstanding; (f) loans and investments by the Borrower to and in its Subsidiaries (other than SV) and loans and investments by any Subsidiary in the Borrower and any other Subsidiaries (other than SV); (g) investments in preferred stock in accordance with the investment policy guidelines attached hereto on Schedule 8.10, the aggregate cost of which does not at any time exceed $3,000,000;and (h) the intercompany loans from SV to the Borrower outstanding at any time the aggregate principal amount of $10,000,000; provided, that such loan will be repaid in full by the Borrower and the commitment thereunder will be terminated on or before March 31, 1996. 8.11 Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of the Borrower's or such Subsidiary's business and (c) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 8.12 Limitation on Changes in Fiscal Year. Permit the fiscal year of the Borrower to end on a day other than December 31. 8.13 Limitation on Negative Pledge Clauses. Enter into with any Person any agreement, other than (a) this Agreement, and (b) any industrial revenue bonds, purchase money mortgages or Financing Leases permitted by this Agreement (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby), which prohibits or limits 51 51 the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. 8.14 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the date of this Agreement or which are directly related thereto. SECTION 9. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due in accordance with the terms thereof or hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Borrower or any other Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower or any other Loan Party shall default in the observance or performance of any agreement contained in Section 8, Section 5 of the Assignment of Life Insurance and Sections 5.6, 5.8(b) and 5.9(a) of the Global Security Agreement; or (d) The Borrower or any other Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days; or (e) The Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest of any Indebtedness (other than the Loans) or in the payment of any Guarantee Obligation, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created, if the aggregate amount of the Indebtedness and/or Guarantee Obligations in respect of which such default or defaults shall have occurred is at least $500,000; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any 52 52 instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (f) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single 53 53 Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $500,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (i) (i) Any of the Security Documents shall cease, for any reason, to be in full force and effect, or the Borrower or any other Loan Party which is a party to any of the Security Documents shall so assert or (ii) the Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; or (j) (i) Any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of the Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Borrower representing 20% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors, other than securities having such power only by reason of the happening of a contingency (other than Richard C. Blum Associates, Inc. and its Affiliates); or (ii) during any period of up to 12 consecutive months, commencing before or after the date of this Agreement, individuals who at the beginning of such 12-month period were directors of the Borrower shall cease for any reason to constitute a majority of the Board of Directors; or (iii) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement which upon consummation shall result in its or their acquisition of or control over, securities of the Borrower representing 20% or more of the combined voting power or all securities of the Borrower entitled to vote in the election of the directors, other than securities having such power only by reason of the happening of a contingency; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have 54 54 presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Agent may, or upon the request of the Required Lenders, the Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Agent may, or upon the request of the Required Lenders, the Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. The Borrower hereby grants to the Agent, for the benefit of the Issuing Bank and the L/C Participants, a security interest in such cash collateral to secure all obligations of the Borrower under this Agreement and the other Loan Documents. Amounts held in such cash collateral account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the Notes. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower. The Borrower shall execute and deliver to the Agent, for the account of the Issuing Bank and the L/C Participants, such further documents and instruments as the Agentmay request to evidence the creation and perfection of the within security interest in such cash collateral account. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 10. THE AGENT 10.1 Appointment. Each Lender hereby irrevocably designates and appoints the Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this 55 55 Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 10.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 10.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document or for the value,validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 10.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected 56 56 in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 10.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking suchaction, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 10.6 Non-Reliance on Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 10.7 Indemnification. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages in effect 57 57 on the date on which indemnification is sought (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with their Commitment Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the paymentof the Loans) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Loans and all other amounts payable hereunder. 10.8 Agent in Its Individual Capacity. The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Agent were not the Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 10.9 Successor Agent. The Agent may resign as Agent upon 10 days' notice to the Lenders. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be approved by the Borrower, whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon such appointment and approval, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Agent's resignation as Agent, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. 10.10 Intercreditor Agreement, Intercreditor Pledge and Collateral Agent. Each Lender hereby authorizes the Agent to enter into the Intercreditor Agreement on behalf of and for the benefit of that Lender. Each Lender hereby acknowledges and consents to and agrees to be bound by the terms of the Intercreditor Agreement and hereby authorizes and empowers the Agent to take all actions under, and to act on behalf of and forthe benefit of that Lender for all purposes under, the Intercreditor Agreement. Each Lender hereby authorizes the Collateral 58 58 Agent to enter into the Intercreditor Pledge Agreement and acknowledges and consents to the Intercreditor Pledge Agreement and agrees to be bound thereby and hereby authorizes and empowers the Collateral Agent to act on behalf of and for the benefit of that Lender for all purposes under the Intercreditor Pledge Agreement; provided, however that the Agent shall not enter into or consent to any amendment, modification, or waiver of any provisions contained in the Intercreditor Agreement without the prior consent of the Lenders. Each Lender agrees that no Lender shall have any right individually to realize on the security granted by the Intercreditor Pledge Agreement, it being understood and agreed that such rights and remedies may be exercised by the Collateral Agent for the benefit of the Banks and Agent and the parties to the Intercreditor agreement upon the terms of the Intercreditor Pledge Agreement and the Intercreditor Agreement. SECTION 11. MISCELLANEOUS 11.1 Amendments and Waivers. Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. The Required Lenders may, or, with the written consent of the Required Lenders, the Agent may, from time to time, (a) enter into with the Borrower written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) reduce the amount or extend the scheduled date of maturity of any Loan or of any installment thereof, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitment, in each case without the consent of each Lender affected thereby, or (ii) amend, modify or waive any provision of this subsection or reduce the percentage specified in the definition of Required Lenders or Majority Lenders, or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents or release all or substantially all of theCollateral, in each case without the written consent of all the Lenders, or (iii) amend, modify or waive any provision of Section 10 without the written consent of the then Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Agent and all future holders of the Loans. In the case of any waiver, the Borrower, the Lenders and the Agent shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 59 59 11.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three days after being deposited in the mails, postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been confirmed, addressed as follows in the case of the Borrower and the Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: National Education Corporation 18400 Von Karman Avenue Irvine, California 92715-1594 Attention: Keith Ogata, Vice President, CFO & Treasurer Fax: (714) 474-9488 The Agent: BZW Division of Barclays Bank PLC 222 Broadway New York, New York 10038 Attention: John Giannone, Director Fax: (212) 412-7511 provided that any notice, request or demand to or upon the Agent or the Lenders pursuant to subsection 2.2, 2.3, 2.5, 4.2 or 4.6 shall not be effective until received. 11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof;nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 11.4 Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 11.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection 60 60 herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent, (b) to pay or reimburse each Lender and the Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Lender and of counsel to the Agent, (c) to pay, indemnify, and hold each Lender and the Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Agent harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the violation of, noncompliance with or liability under, anyEnvironmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided, that the Borrower shall have no obligation hereunder to the Agent or any Lender with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of the Agent or any such Lender or (ii) legal proceedings commenced against the Agent or any such Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such. The agreements in this subsection shall survive repayment of the Loans and all other amounts payable hereunder. 11.6 Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Agent shall continue to deal solely and 61 61 directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in subsection 11.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall been titled to the benefits of subsections 4.9, 4.10, 4.11 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided that, in the case of subsection 4.10, such Participant shall have complied with the requirements of said subsection and provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such subsection than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Borrower and the Agent (which in each case shall not be unreasonably withheld), to an additional bank or financial institution ("an Assignee") all or any part of its rights and obligations under this Agreement and the other Loan Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit J, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Agent) and delivered to the Agent for its acceptance and recording in the Register, provided that, in the case of any such assignment to an additional bank or financial institution, the sum of the aggregate principal amount of the Loans, the aggregate amount of the L/C Obligations and the aggregate amount of the Available Commitment being assigned and, if such assignment is of less than all of the rights and obligations of the assigning Lender, the sum of the aggregate principal amount of the Loans, the aggregate amount of the L/C Obligations and the aggregate amount of the Available Commitment remaining with the assigning Lender are each not less than 10% of the aggregate principal amount of the Loans, the aggregate amount of the L/C Obligations and the aggregate amount of the Available Commitment of all the Lenders then outstanding (or such lesser amount as may be agreed to by the Borrower and the Agent). Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such 62 62 assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (e) of this subsection, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the assigning Lender, new Notes shall not be required to be executed and delivered by the Borrower, for any assignment which occurs at any time when any of the events described in Section 9(f) shall have occurred and be continuing. (d) The Agent, on behalf of the Borrower, shall maintain at the address of the Agent referred to in subsection 11.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may (and, in the case of any Loan or other obligation hereunder not evidenced by a Note, shall) treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Agent) together with payment to the Agent of a registration and processing fee of $3,000, the Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. (f) The Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Borrower and its Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Agreement. (g) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this subsection concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. 63 63 11.7 Adjustments; Set-off. (a) If any Lender (a "benefitted Lender") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 9(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans or the Reimbursement Obligations owing to it, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan or the Reimbursement Obligations owing to it, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 11.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Agent. 11.9 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Borrower, the Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any 64 64 Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 11.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 11.12 Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in subsection 11.2 or at such other address of which the Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 11.13 Acknowledgements. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; 65 65 (b) neither the Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 11.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 66 66 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. NATIONAL EDUCATION CORPORATION By: --------------------------------- Title: BZW DIVISION OF BARCLAYS BANK PLC as Agent and as a Lender By: --------------------------------- Title: EX-11.1 8 CALCULATION OF PRIMARY EARNING PER SHARE 1 EXHIBIT 11.1 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF PRIMARY EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Year Ended ---------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- INCOME (LOSS) FROM CONTINUING OPERATIONS $(87,223) $(14,093) $10,092 $(6,284) $ (498) ======== ======== ======= ======= ======== NET INCOME (LOSS) $(87,223) $(63,545) $(9,665) $ 515 $ 5,490 ======== ======== ======= ======= ======== COMMON STOCK: Shares outstanding from beginning of period 29,578 29,405 29,968 29,822 29,718 Pro rata shares: Stock options exercised 31 134 41 136 12 Shares purchased for treasury, from date of purchase -- (7) (380) (6) -- Assumed exercise of stock options using treasury stock method 465 108 226 344 386 Shares issued for restricted stock 292 -- -- -- -- Conversion of Sub. Debentures 1,527 -- -- -- -- -------- -------- ------- ------- -------- Weighted average number of shares outstanding 31,893 29,640 29,855 30,296 30,116 ======== ======== ======= ======= ======== PRIMARY EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $ (2.73) $ (.48) $ .34 $ (.21) $ (.02) ======== ======== ======= ======= ======== PRIMARY EARNINGS (LOSS) PER SHARE $ (2.73) $ (2.14) $ (.32) $.02 $ .18 ======== ======== ======= ======= ========
EX-11.2 9 CALCULATION OF FULLY DILUTED EARNINGS PER SHARE 1 EXHIBIT 11.2 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF FULLY DILUTED EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Year Ended ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- INCOME (LOSS) FROM CONTINUING OPERATIONS $(87,223) $(14,093) $10,092 $(6,284) $ (498) Add back debenture interest, debt discount and expense amortization, less applicable taxes 3,116 3,325 964 3,111 3,394 -------- -------- ------- ------- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS FOR FULLY DILUTED COMPUTATION $(84,107) $(10,768) $11,056 $(3,173) $2,896 ========= ========= ======= ======== ====== NET INCOME (LOSS) $(87,223) $(63,545) $(9,665) $ 515 $5,490 Add back debenture interest, debt discount and expense amortization, less applicable taxes 3,116 3,325 964 3,111 3,394 -------- -------- ------- ------- ------ NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $(84,107) $(60,220) $(8,701) $ 3,626 $8,884 ========= ========= ======== ======= ====== COMMON STOCK: Shares outstanding from beginning of period 29,578 29,405 29,968 29,822 29,718 Stock options exercised 31 134 41 136 12 Shares purchased for treasury, from date of purchase -- (7) (380) (6) -- Assumed exercise of stock options, using treasury stock method 803 108 226 344 500 Shares issued for restricted stock 292 -- -- -- -- Conversion of Senior Sub. Debentures 5,021 -- -- -- -- Assumed conversion of subordinated debentures, from the latter of the beginning of the period or the date of issue 2,300 7,300 5,000 7,300 6,588 ------ ----- ------ ------- ------ Weighted average number of shares outstanding 38,025 36,940 34,855 37,596 36,818 ====== ====== ====== ======= ====== FULLY DILUTED EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $(2.73) $(.48) $.32 $(.21) $(.02) ====== ===== ==== ===== ===== FULLY DILUTED EARNINGS (LOSS) PER SHARE $(2.73) $(2.14) $(.32) $.02 $.18 ====== ====== ===== ==== ====
Fully diluted earnings (loss) per share is the same as primary earnings (loss) per share for all periods except 1993 because inclusion of the convertible debentures is antidilutive. The above calculations reflect inclusion of both the senior convertible debentures and the subordinated convertible debentures for all periods except 1993. In 1993, inclusion of the senior convertible debentures is dilutive, however, inclusion of the subordinated convertible debentures would be antidilutive and, accordingly, they are not included in the 1993 calculation. EX-18 10 LETTER FROM PRICE WATERHOUSE LLP 1 EXHIBIT 18 February 5, 1996 To the Board of Directors of National Education Corporation Dear Directors: We have audited the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and issued our report thereon dated February 5, 1996. Note 1 to the consolidated financial statements describes a change in the Company's method of determining the cost of inventories from the last-in, first-out to the first-in, first-out method. It should be understood that the preferability of one acceptable method of inventory accounting over another has not been addressed in any authoritative accounting literature and in arriving at our opinion expressed below, we have relied on management's business planning and judgment. Based upon our discussions with management and the stated reasons for the change, we believe that such change represents, in your circumstances, the adoption of a preferable alternative accounting principle for inventories in conformity with Accounting Principles Board Opinion No. 20. Very truly yours, Price Waterhouse LLP EX-21 11 SUBSIDIARIES OF NATIONAL EDUCATION CORPORATION 1 EXHIBIT 21 ACTIVE SUBSIDIARIES OF NATIONAL EDUCATION CORPORATION
Country or State Subsidiaries: of Incorporation - ------------ ---------------- NATIONAL EDUCATION CORPORATION DELAWARE NETG Holding, Inc. Delaware Its Subsidiaries: National Education Training Group, Inc. Nevada Its Subsidiary: James Martin Insight, Inc. Illinois NETG Limited United Kingdom NETG Applied Learning GmbH Germany Its Subsidiary: NETG Direct GmbH Germany NETG Direct, Inc. Delaware Applied Learning Lernsysteme GesmbH Austria A.S.I. (Computer Training) Netherlands B.V. Netherlands A.S.I. (UK) Limited United Kingdom Spectrum Interactive Incorporated Delaware ICS Learning Systems, Inc. Delaware Its Subsidiaries: International Correspondence Schools Canadian, Limited Canada International Correspondence Schools, Inc. Pennsylvania Its Subsidiary: ICS Intangibles Holding Company California Intertext Group Limited England Its Subsidiaries: The School of Accountancy Limited Scotland International Correspondence Schools Limited England International Correspondence Schools (Overseas) Limited England International Correspondence Schools (Australasia) Limited Australia Its Subsidiary: International Correspondence Schools (New Zealand) Limited New Zealand M-Mash, Inc. Colorado National Learning Systems, Inc. Delaware NBD Incorporated Delaware National Education Centers, Inc. California National Education Credit Corporation California National Education Enterprises, Inc. California National Education International Corp. California National Education Payroll Corp. California Steck-Vaughn Publishing Corporation Delaware Its Subsidiaries: SV Distribution Company Delaware Steck-Vaughn Company Delaware
EX-23 12 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23 NATIONAL EDUCATION CORPORATION CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-67273, 2-71650, 2-83454, 2-86904, 33-18086, 33-5658, 33-25056, 33-43850 and 33-62977) of National Education Corporation of our report dated February 5, 1996, except as to Note 4, which is as of March 1, 1996, appearing on page F-1 of this Form 10-K. Price Waterhouse LLP Costa Mesa, California March 18, 1996 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 22,120 1,748 39,139 2,742 31,847 114,865 56,020 31,992 185,262 83,172 66,333 0 0 2,166 5,315 185,262 258,598 258,598 87,870 338,944 5,722 1,642 8,650 (86,068) 0 (87,223) 0 0 0 (87,223) (2.73) (2.73)
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