<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ---------------------
Commission file number 1-6981
------
NATIONAL EDUCATION CORPORATION
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 95-2774428
- - -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
18400 Von Karman Avenue, Irvine, California 92715-1594
- - -------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
714/474-9400
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - -------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 29,560,776 common
stock shares outstanding at July 31, 1994
- - -------------------------------------------------------------------------------
<PAGE> 2
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(dollars in thousands, except per share amounts) 1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Tuition and Contract Revenues $ 43,171 $ 41,584 $ 83,168 $ 78,726
Publishing Revenues 15,166 14,096 24,641 24,279
-------- -------- -------- --------
Net Revenues 58,337 55,680 107,809 103,005
Costs and Expenses:
Contract course materials and service costs 16,937 18,774 33,898 36,095
Publishing costs and materials 6,131 4,912 10,571 9,364
Selling and promotion 25,042 21,663 44,336 41,084
General and administrative 7,523 9,246 16,425 18,597
Amortization of acquired intangible assets 427 1,529 853 3,003
Interest expense 1,511 1,436 2,963 2,872
Investment income (1,386) (647) (1,899) (1,316)
Other (income) and expense (212) 438 (307) 81
-------- -------- -------- --------
Income (Loss) Before Income Tax Benefit, Minority
Interest and Discontinued Operations 2,364 (1671) 969 (6,775)
Income Tax (benefit) 986 (689) 405 (2,768)
-------- -------- -------- --------
Income (Loss) Before Minority Interest and
Discontinued Operations 1,378 (982) 564 (4,007)
Minority interest in consolidated subsidiary 375 -- 497 --
-------- -------- -------- --------
Income (Loss) from Continuing Operations 1,003 (982) 67 (4,007)
Loss from discontinued operations (7,412) (2,564) (9,420) (3,888)
Loss on disposal of discontinued operations (40,032) -- (40,032) --
-------- -------- -------- --------
Net Loss $(46,441) $ (3,546) $(49,385) $ (7,895)
======== ======== ======== ========
Earnings (Loss) Per Share From Continuing $ .03 $ (.03) $ -- $ (.13)
Operations ======== ======== ======== ========
Loss Per Share $ (1.57) $ (.12) $ (1.67) $ (.26)
======== ======== ======== ========
Weighted Average Number of Shares Outstanding 29,626 30,072 29,641 30,097
</TABLE>
Unaudited.
See accompanying notes and management's discussion and analysis.
2
<PAGE> 3
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
(dollars in thousands) June 30, December 31, June 30,
- - --------------------- 1994 1993 1993
-------- ------------ --------
<S> <C> <C> <C>
Assets
Current Assets
Cash, including time deposits of $21,706, $32,855 and $22,610 $ 28,330 $ 38,546 $ 30,539
Investment securities:
Held to maturity and available-for-sale securities 15,217 -- --
At lower of cost or market (market value of --, $17,964 and $13,225) -- 16,300 11,855
Receivables, net of allowance of $3,721, $10,437 and $9,658 27,894 54,012 42,832
Inventories and supplies 23,355 25,594 26,212
Prepaid and deferred marketing expenses 35,916 37,187 43,765
Assets held for disposition 19,485 -- --
Other current assets 15,002 19,038 15,927
-------- -------- --------
Total current assets 165,199 190,677 171,130
Contracts Receivable 620 2,212 4,698
Land, Buildings and Equipment, less accumulated
depreciation of $60,830, $118,997 and $119,963 23,169 46,056 44,842
Acquired Intangible Assets, less accumulated amortization
of $87,988, $95,635 and $81,993 50,910 48,497 62,108
Deferred Income Taxes 25,793 25,793 12,384
Other Assets 10,302 10,656 11,623
-------- -------- --------
$275,993 $323,891 $306,785
======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 6,029 $ 8,635 $ 7,245
Accrued expenses 32,260 42,351 39,772
Accrued salaries and wages 5,327 8,726 10,400
Accrued disposition costs 27,100 12,282 --
Deferred contract revenues 10,030 16,425 18,880
Current portion of long-term debt 7,880 607 625
Accrued and deferred income taxes 932 3,149 --
-------- -------- --------
Total current liabilities 89,558 92,175 76,922
Liabilities Payable After One Year -------- -------- --------
Long-term debt, less current portion 5,578 2,556 3,003
Senior subordinated convertible debentures 20,000 20,000 20,000
Convertible subordinated debentures 57,494 57,494 57,494
Other noncurrent liabilities 8,147 7,989 10,279
-------- -------- --------
91,219 88,039 90,776
-------- -------- --------
Minority Interest in Equity of Consolidated Subsidiary 8,187 8,046 --
-------- -------- --------
Stockholder's Equity
Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued -- -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
30,260,858 shares, 30,092,810 shares and 30,066,436 shares issued 2,109 2,108 2,108
Additional paid-in capital 132,830 132,262 132,068
Retained (deficit) earnings (35,704) 13,681 15,405
Unrealized gain on available-for-sale securities, net of tax 166 -- --
Cumulative foreign exchange translation adjustment (7,464) (7,565) (6,646)
Notes receivable under stock option plans -- -- (107)
-------- -------- --------
91,937 140,486 142,828
Less common stock in treasury 697,461, 689,315 and 542,815 (4,908) (4,855) (3,741)
-------- -------- --------
Total stockholders' equity 87,029 135,631 139,087
-------- -------- --------
$275,993 $323,891 $306,785
======== ========= ========
</TABLE>
Unaudited.
See accompanying notes and management's discussion and analysis.
3
<PAGE> 4
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
(dollars in thousands) 1994 1993 1994 1993
- - ---------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(46,441) $(3,546) $(49,385) $(7,895)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Loss on discontinued operations 7,412 2,564 9,420 3,888
Loss on disposal of discontinued operations 40,032 -- 40,032 --
Depreciation and amortization 1,382 1,916 2,729 3,848
Amortization of acquired intangible assets 427 1,529 853 3,003
Provision for doubtful accounts 157 359 301 735
(Gain)/loss on foreign currency exchange (212) 438 (307) 81
Change in assets and liabilities:
Receivables, net (1,905) 434 12,577 20,519
Inventories and supplies 905 202 527 513
Prepaid and deferred marketing expenses 420 (233) (11,030) (8,431)
Accounts payable and accrued expenses (9,891) (674) (12,167) 2,054
Accrued and deferred income taxes (455) (8,380) (2,403) (10,796)
Deferred contract revenues (845) (2,892) (661) (3,343)
Other 3,675 4,128 2,122 (1,034)
------- ------- ------- -------
Net Cash From Operating Activities (5,339) (4,155) (7,392) 3,142
------- ------- ------- -------
Cash Flows For Investing Activities:
Additions to land, building and equipment (2,102) (3,343) (3,635) (4,857)
Dispositions of land, buildings and equipment 215 27 260 27
Changes in marketable securities 4,176 592 1,335 (860)
Acquisition of business, net of cash acquired -- (5,417) (3,870) (5,417)
Discontinued operations (6,846) (7,964) (8,739) (5,833)
------- ------- ------- -------
Net Cash for Investing Activities (4,557) (16,105) (14,649) (16,940)
------- ------- ------- -------
Cash Flows From Financing Activities:
Additions to long term debt 3,906 -- 3,906 --
Reductions in long-term debt (177) (57) (262) (203)
Changes in short term borrowings 7,310 -- 7,310 --
Minority interest in earnings of consolidated subsidiary 19 -- 141 --
Common stock, stock options and related tax benefits 215 111 569 166
Purchase of common stock for treasury -- (3,191) (53) (3,571)
------- ------- ------- -------
Net Cash From Financing Activities 11,273 (3,137) 11,611 (3,608)
------- ------- ------- -------
Effect of exchange rate changes on cash 127 (720) 214 (524)
------- ------- ------- -------
Net Change In Cash and Equivalents 1,504 (24,117) (10,216) (17,930)
Cash and equivalents at the beginning of the period 26,826 54,656 38,546 48,469
------- ------- ------- -------
Cash and Equivalents at the End of the Period $28,330 $30,539 $28,330 $30,539
======= ======= ======= =======
</TABLE>
Unaudited.
See accompanying notes and management's discussion and analysis.
4
<PAGE> 5
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 1 - Summary of Accounting Policies
- - ---------------------------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position, results of operations and cash flows. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. It is suggested that these financial statements be read in
conjunction with the financial statements, accounting policies, and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993. The results of operations for interim periods are not
necessarily indicative of the results of operations to be expected for the
year.
A substantial portion of selling and promotion costs at National Education
Training Group (NETG) and Steck-Vaughn are deferred and fully amortized within
the calendar year to properly match the costs with revenues due to the seasonal
nature of revenue realization. Due to the seasonal nature of NETG's and
Steck-Vaughn's traditional selling cycle, selling and promotion costs are
typically deferred in the first half of the year and amortized in the latter
half of the year. Certain prior year amounts have been reclassified to conform
with the 1994 presentation (see Note 3).
NOTE 2 - Business Combination
- - -----------------------------
During the first quarter of 1994, the Company, through ICS Learning Systems,
purchased the stock of M-Mash, Inc. (MicroMash) for approximately $3,870,000,
net of cash received. The transaction was accounted for as a purchase and the
operating results of MicroMash have been included in the Company's consolidated
financial statements since the effective date of acquisition.
The net assets and operating results of MicroMash are not material to the
consolidated financial statements of the Company.
NOTE 3 - Business Disposition
- - -----------------------------
In June 1994, the Company adopted a plan to dispose of its Education
Centers subsidiary. As a result, the Company recorded a second quarter charge
of $40,032,000 to write-down assets to estimated net realizable value, provide
for estimated gains/losses on the sale of certain schools, and to provide for
the estimated costs of closing and teaching-out the remaining schools. No tax
benefits were provided on this charge and proceeds from the sale of certain
schools will be used to offset expenses incurred to teach-out students at the
schools to be closed. The Education Centers are being accounted for as
discontinued operations and prior period statements of operations have been
reclassified to reflect this treatment. Revenues for the Education Centers
were $23,923,000 and $33,500,000 for the three months ended June 30, 1994 and
1993, respectively, and revenues for the six months ended June 30, 1994 and
1993 were $51,453,000 and $69,210,000, respectively. No tax benefits were
recorded on Education Centers losses for the three months ended June 30, 1994,
while a tax benefit of $1,138,000 was provided for the prior year period. Tax
benefits of $1,008,000 and $1,725,000 were provided for Education Centers
losses for the six months ended June 30, 1994 and 1993, respectively.
5
<PAGE> 6
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 3 - Business Disposition (continued)
- - ----------------------------------------
The estimated net realizable value of the Education Centers assets have been
segregated on the June 30, 1994 balance sheet as net assets held for
disposition. The assets held for disposition also include the estimated
amounts recoverable during the teach-out process. Liabilities associated with
the cost of closing and teaching-out certain schools have been segregated as
accrued disposition costs. Prior period balance sheet information has not been
restated to reflect the discontinuance of the Education Centers.
For purposes of presenting the statement of cash flows, prior year periods have
been reclassified to reflect the discontinued operations.
NOTE 4 - Earnings (Loss) Per Share
- - ----------------------------------
Earnings (loss) per share are computed based on the weighted average number of
common shares outstanding during the respective periods, including dilutive
stock options.
NOTE 5 - Investment Securities
- - ------------------------------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115), which resulted in a change in the accounting for
debt and equity securities held for investment purposes. Prior to January 1,
1994, the Company carried debt and equity securities at the lower of aggregate
cost or market value. In accordance with SFAS 115, the Company's debt and
equity securities are now considered as either held-to-maturity or
available-for-sale. Held-to-maturity securities represent those securities
that the Company has both the positive 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 and
are not actively traded. 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. Since the
adoption of this standard, the Company recorded increases in available-for-sale
securities of $251,000 and a related deferred tax liability of $85,000,
resulting in a net increase of $166,000 in stockholders' equity.
6
<PAGE> 7
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 5 - Investment Securities (continued)
- - ------------------------------------------
The amortized cost and estimated fair value of the securities are as follows:
<TABLE>
<CAPTION>
June 30, 1994
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gain Loss Value
- - ---------------------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Tax exempt municipal bond funds
held-to-maturity $ 7,050 $ -- $ -- $ 7,050
------- ---------- ---------- --------
Available -for-sale:
Corporate income funds 5,098 290 (195) 5,193
Preferred stock 2,818 227 (71) 2,974
-------- ---------- ---------- --------
Total available-for-sale 7,916 517 (266) 8,167
-------- ---------- ---------- --------
Total securities $ 14,966 $ 517 $ (266) $ 15,217
======== ========== ========== ========
December 31, 1993
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gain Loss Value
- - ---------------------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Tax exempt municipal bond funds
held-to-maturity $ 5,500 $ -- $ -- $ 5,500
--------- ---------- --------- -------
Available -for-sale:
Corporate income funds 6,678 503 (123) 7,058
Preferred stock 3,797 581 (54) 4,324
Other 325 757 -- 1,082
--------- ---------- --------- -------
Total available-for-sale 10,800 1,841 (177) 12,464
--------- ---------- --------- -------
Total securities $ 16,300 $ 1,841 $ (177) $17,964
========= ========== ========= =======
NOTE 6 - Statements of Cash Flows Supplementary Information
- - -----------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(dollars in thousands) 1994 1993 1994 1993
- - ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Paid During the Period For:
Interest expense $ 2,028 $ 2,033 $ 3,129 $ 2,834
Income taxes, net of income tax
refunds $ 1,162 $ 2,250 $ 1,972 $ 5,791
7
</TABLE>
<PAGE> 8
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------- Percent
(dollars in thousands) 1994 1993 Variance Change
- - ---------------------- ---- ---- -------- -------
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 29,492 $25,759 $ 3,733 14.5
Steck-Vaughn Publishing 15,166 14,096 1,070 7.6
NETG 12,992 15,544 (2,552) (16.4)
Other 687 281 406 144.5
Total Net Revenues -------- ------- --------
$ 58,337 $55,680 $ 2,657 4.8
======== ======= ========
Operating Income (Loss):
ICS Learning Systems $ 5,093 5,086 $ 7 0.1
Steck-Vaughn Publishing 3,468 4,116 (648) (15.7)
NETG (4,018) (6,462) 2,444 37.8
Other (303) (206) (97) (47.1)
-------- ------- --------
Total Segment Operating Income 4,240 2,534 1,706 67.3
General corporate expenses (1,963) (2,978) 1,015 34.1
Interest expense (1,511) (1,436) (75) (5.2)
Investment income 1,386 647 739 114.2
Other income and (expense) 212 (438) 650 --
-------- ------- --------
Income (Loss) Before Income Taxes
(Benefit), Minority Interest and
Discontinued Operations 2,364 (1,671) 4,035 --
Income taxes (benefit) 986 (689) 1,675 --
-------- ------- --------
Income (Loss) Before Minority
Interest and Discontinued
Operations 1,378 (982) 2,360 --
Minority interest 375 -- 375 --
-------- ------- --------
Income (Loss) From Continuing
Operations 1,003 (982) 1,985 --
Discontinued operations (47,444) (2,564) (44,880) --
-------- ------- --------
Net Loss $(46,441) $(3,546) $(42,895) --
======== ======= ========
</TABLE>
Three Months Ended June 30, 1994 Compared to Three Months Ended June 30, 1993
- - -----------------------------------------------------------------------------
Revenues of $58,337,000 for the three months ended June 30, 1994, were
$2,657,000 or 4.8% higher than revenues of $55,680,000 in the prior year.
Income from continuing operations was $1,003,000 or $.03 per share compared to
a loss of $982,000 or $.03 per share. Net loss for the period was $46,441,000
or $1.57 per share compared to a loss of $3,546,000 or $.12 per share in the
prior year. Effective June 30, 1994, the Company adopted a plan to dispose of
its Education Centers subsidiary. The plan resulted in a second quarter charge
of $40,032,000 ($1.35 loss per share) 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 and segregated as
discontinued operations for the periods ending June 30, 1994 and prior period
statements of operations have been restated to reflect this change.
8
<PAGE> 9
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Revenues at ICS Learning Systems increased significantly during the quarter
primarily due to continued strong revenue performance at the domestic
operations while revenues at the international operations increased slightly.
Increased operating income at the domestic operation was offset by customary
seasonal losses at MicroMash and lower operating income at the international
operations resulting in relatively flat operating income as compared to the
prior year. Increased revenues at the domestic operation were primarily due to
a 33.2% increase in enrollments and the acquisition of MicroMash during the
first quarter of 1994. The significant domestic enrollment increase primarily
resulted from the higher enrollment conversion rates resulting from the
expanded telesales efforts, which enroll students directly over the phone.
International revenues increased slightly during 1994 primarily due to
increased enrollments of 3.3% during the quarter. Enrollments increased at all
locations except Canada, which experienced lower telesales leads during 1994
resulting in lower overall enrollment conversion rates. Course service costs
at the domestic operation decreased as a percentage of revenue primarily due to
product mix while the international operations remained relatively flat. As a
result of higher spending at the international operations, selling and
promotional costs increased as a percentage of revenue. In addition, the
expanded domestic telesales efforts resulted in a slight increase in selling
and promotional costs as a percentage to revenues. General and administrative
costs were higher during the second quarter of 1994 primarily due to increased
costs associated with the MicroMash operation and the initial costs to
integrate information systems.
Revenues increased at Steck-Vaughn during the quarter while operating income
declined. The revenue increase primarily resulted from higher sales in the
elementary school product lines and increased distributor sales for library
products. Publishing costs and materials were higher as a percentage of
revenues during the quarter primarily due to the increased distributor sales
which have higher associated publishing costs. Additionally, the continued
expansion of Steck-Vaughn's product line resulted in increased product
development costs during the period. Selling and promotional costs increased
during the quarter due to the reorganization and expansion of the Steck-Vaughn
sales force effective January 1994. The 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.
Revenues at NETG decreased at both the domestic and international
operations during the quarter. Operating results at the domestic operations
improved as compared to the prior year while operating results at the
international operations decreased primarily due to the revenue decline. The
revenue decrease at the domestic and international operations primarily
resulted from lower contract backlog at the beginning of 1994 as compared to
1993. New orders and contracts slightly increased during the period; however,
decreasing contract backlog has more than offset the new orders and renewal
increases. Operating results improved at the domestic operations due to cost
reductions throughout the organization.Course service costs decreased during
1994 primarily due to the lower revenues, reduced product development expenses
and lower overall royalty rates paid to outside course developers. Selling and
marketing costs decreased significantly primarily due to reductions in the
sales force and lower commission costs resulting from lower revenues. General
and administrative costs decreased primarily due to favorable loss experience
rates resulting in lower insurance costs which were partially offset by
increased consulting costs. The increased consulting costs primarily relate to
the reengineering effort underway at NETG which has significantly contributed
to the cost reductions discussed above.
9
<PAGE> 10
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Operating results of ICS and NETG foreign operations by geographic region
experienced similar changes in revenues and income as discussed above. Foreign
currency exchange gains, recorded to other income, of $212,000 were recorded
during the quarter compared to losses of $438,000 in the prior year period.
General corporate expenses decreased during the period primarily due to
favorable loss experience rates resulting in lower insurance costs and reduced
outside consulting costs for the company-wide financial reengineering effort
funded by the corporate location.
Investment income increased during the period due to gains realized in
connection with the sale of certain marketable securities.
10
<PAGE> 11
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------- Percent
(dollars in thousands) 1994 1993 Variance Change
- - ---------------------- ---- ---- -------- -------
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 57,777 $ 49,383 $ 8,394 17.0
Steck-Vaughn Publishing 24,641 24,279 362 1.5
NETG 24,031 28,832 (4,801) (16.7)
Other 1,360 511 849 166.1
-------- --------- --------
Total Net Revenues $107,809 $ 103,005 $ 4,804 4.7
======== ========= ========
Operating Income (Loss):
ICS Learning Systems $ 10,167 $ 9,098 $ 1,069 11.7
Steck-Vaughn Publishing 4,693 5,925 (1,232) (20.8)
NETG (8,566) (14,040) 5,474 39.0
Other (571) (410) (161) (39.3)
-------- --------- --------
Total Segment Operating Income 5,723 573 5,150 --
General corporate expenses (3,997) (5,711) 1,714 30.0
Interest expense (2,963) (2,872) (91) (3.2)
Investment income 1,899 1,316 583 44.3
Other income and (expense) 307 (81) 388 --
-------- --------- --------
Income (Loss) Before Income Taxes
(Benefit), Minority Interest and
Discontinued Operations 969 (6,775) 7,744 --
Income taxes (benefit) 405 (2,768) 3,173 --
-------- --------- --------
Income (Loss) Before Minority Interest
and Discontinued Operations 564 (4,007) 4,571 --
Minority Interest 497 -- 497 --
-------- --------- --------
Income (Loss) From Continuing
Operations 67 (4,007) 4,074 --
Discontinued operations (49,452) (3,888) (45,564) --
-------- --------- --------
Net Loss $(49,385) $ (7,895) $(41,490) --
======== ========= ========
</TABLE>
Six Months Ended June 30, 1994 Compared to Six Months Ended June 30, 1993
- - -------------------------------------------------------------------------
Revenues of $107,809,000 for the six months ended June 30, 1994, were
$4,804,000 or 4.7% higher than revenues of $103,005,000 in the prior year.
Income from continuing operations was $67,000 compared to a loss of $4,007,000
or $.13 per share. Net loss for the period was $49,385,000 or $1.67 per share
compared to a loss of $7,895,000 or $.26 per share in the prior year.
ICS and NETG experienced similar changes in revenues and operating results as
occurred for the three month period previously discussed.
Increased revenues at Steck-Vaughn resulted primarily from the higher second
quarter revenues previously discussed which were partially offset by lower
revenues during the first quarter of the year. The reduced first quarter
revenues primarily resulted from adverse winter weather conditions affecting
the Midwest, mid-Atlantic and Northeast regions of the United States.
Additionally, the sales force reorganization during the beginning of the year
resulted in a temporary disruption in the sales organization. Operating income
decreased compared to the prior year primarily due to the same explanations
discussed in the quarter analysis.
11
<PAGE> 12
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
ICS and NETG foreign operations by geographic region experienced similar
changes in revenues and income as discussed above. Foreign currency exchange
gains of $307,000 were recorded during the period as compared to losses of
$81,000 in the prior year.
Liquidity and Capital Resources
- - -------------------------------
The Company's primary sources of liquidity are cash, marketable securities and
cash provided from operations. (See Note 3 to the financial statements
regarding discontinued operations.) At June 30, 1994, the Company had
$43,547,000 in cash and marketable securities, of which $13,549,000 was held in
the account of Steck-Vaughn.
In December 1993, the Company entered into a revolving bank credit agreement in
the amount of $10,000,000 which matures on December 21, 1994. As of June 30,
1994, $7,000,000 was outstanding under the revolving bank credit agreement. On
June 10, 1994, Steck-Vaughn entered into a revolving bank credit agreement in
the amount of $10,000,000 with a maturity of June 10, 1996. The agreement
provides for borrowings at prime plus .5 percent or, at Steck-Vaughn's option,
LIBOR plus 1.5 percent. At June 30, 1994, no amounts were outstanding under the
bank credit facility.
Cash outflows from operating activities for the six months ended June 30, 1994,
of $7,392,000 were $10,534,000 lower than the cash from operating activities of
$3,142,000 in the prior year. The decrease in cash flow is primarily
attributable to changes in accrued expenses of $14,221,000 primarily resulting
from the 1994 payment of certain accruals primarily at NETG and corporate,
and changes in net receivables due to the declining contract receivables at
NETG from long term contract revenues. Partially offsetting these decreases
were lower cash requirements of $8,393,000 for accrued and deferred income
taxes.
Cash flows from financing activities increased during 1994 primarily as a
result of the $7,000,000 draw on the available line of credit and the financing
of the ICS Learning Systems land and building which resulted in proceeds of
$4,188,000. The line of credit provided approximately $4,000,000 to finance
the acquisition of MicroMash during the first quarter of the year.
The Company expects that cash, marketable securities, the revolving bank credit
agreement and cash provided from operations, which includes to a certain
extent, the continued funding of Education Centers' students under government
student financial aid programs until final disposition of the schools, will be
sufficient to provide for the teach-out of the Education Centers, planned
working capital requirements, debt service and capital expenditures for the
foreseeable future.
12
<PAGE> 13
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
A regular annual meeting of the stockholders of the Company was held on May 13,
1994. Three directors were elected for terms that will continue until the
Company's annual meeting of stockholders in 1997, or until each director's
successor has been elected and qualified. The vote was as follows:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------------
Name For Authority Withheld
------------------- ----------- ------------------
<S> <C> <C>
Leonard W. Jaffe 25,947,665 160,189
Frederic V. Malek 25,948,744 159,110
William D. Walsh 25,962,639 145,215
</TABLE>
The stockholders also ratified the appointment of Price Waterhouse as
Independent Public Accountants. The vote was as follows:
<TABLE>
<CAPTION>
Number of Shares
-------------------------------------------
For Against Abstain
----------- ------- -------
<S> <C> <C>
25,941,510 108,801 57,543
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a) See Exhibit Index following this Form 10-Q.
b) Reports on Form 8-K. On July 13, 1994, the Company filed a Current Report on
Form 8- K dated June 28, 1994 reporting the Company's announcement of its
plans to discontinue the operations of its National Education Centers
subsidiary.
13
<PAGE> 14
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 1994 By /s/ KEITH K. OGATA
---------------------------------------
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
14
<PAGE> 15
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
(Item 6(a))
<TABLE>
<CAPTION>
Exhibit # Description Sequentially # Page
- - --------- ----------- -------------------
<S> <C> <C>
10.1 National Education Corporation Retirement Plan *
(Restated as of January 1, 1989) (As Amended
through January 1, 1992) (1)
10.2 National Education Corporation Retirement Plan *
Trust (2)
10.3 1981 Long-Term Incentive Plan (3) *
10.4 1983 Stock Option Plan (4) *
10.5 Advanced Systems, Incorporated 1984 Stock Option *
and Stock Appreciation Rights Plan (5)
10.6 1986 Stock Option and Incentive Plan as Amended (6) *
10.7 1990 Stock Option and Incentive Plan (7) *
10.8 1991 Directors' Stock Option Plan (8) *
10.9 Rights Agreement, dated October 29, 1986, between *
National Education Corporation and Bank of America
National Trust and Savings Association, Rights Agent
(including exhibits thereto) (9)
10.10 Addendum No. 1 to Rights Agreement, dated *
October 29, 1986 (10)
10.11 Indenture, dated as of May 15, 1986, between *
National Education Corporation and Continental
Illinois National Bank and Trust Company of Chicago,
as Trustee (11)
10.12 Tripartite Agreement, dated as of May 31, 1990, *
among National Education Corporation, Continental
Bank as Resigning Trustee, and IBJ Schroeder Bank
& Trust Company as Successor Trustee (12)
10.13 National Education Corporation Purchase Agreement, *
Senior Subordinated Convertible Debentures, dated
as of February 15, 1991 (13)
10.14 National Education Corporation Supplemental *
Executive Retirement Plan, as Amended (14)
10.15 Supplemental Benefit Plan for Non-Employee *
Directors (15)
</TABLE>
15
<PAGE> 16
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Exhibit # Description Sequentially # Page
- - --------- ----------- --------------------
<S> <C> <C>
10.16 Retirement Agreement with J.J. McNaughton (16) *
10.17 Intercompany Agreement between National *
Education Corporation and Steck-Vaughn Publishing
Corporation, dated June 30, 1993 (the "Intercompany
Agreement") (17)
10.18 Tax Sharing Agreement between National Education *
Corporation and Its Direct and Indirect Corporate
Subsidiaries, dated January 1, 1993 (18)
10.19 Asset Purchase Agreement between Steck-VaughnCompany *
and Creative Edge, Inc., dated as of April 26,1993 (19)
10.20 $10,000,000 Credit Agreement between National *
Education Corporation and Bankers Trust Company
as Agent, dated as of December 22, 1993 (the "Credit
Agreement") (Confidential treatment under Rule 24b-
2 has been granted for portions of this exhibit.) (20)
10.21 First Amendment to Credit Agreement, dated as of *
December 31, 1993 (21)
10.22 Second Amendment to Credit Agreement, dated as of *
April 15,1994 (Confidential treatment under Rule
24b-2 has been requested for portions of this exhibit.)
(22)
10.23 First Amendment to Intercompany Agreement, dated
June 10, 1994 between National Education
Corporation and Steck-Vaughn Publishing
Corporation (24)
10.24 Third Amendment to Credit Agreement, dated as of
June 24, 1994 (Confidential treatment under Rule
24b-2 has been requested for portions of this exhibit.)
(24)
10.25 $10,000,000 Credit Agreement between Steck-Vaughn *
Company and NationsBank of Texas, dated as of
June 10, 1994 (23)
11.1 Calculation of Earnings Per Share (24)
</TABLE>
* Incorporated by reference from a previously filed document.
16
<PAGE> 17
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
1) Incorporated by reference to Exhibit 10.1 filed with the Annual Report on
Form 10-K for the year ended December 31, 1992, filed March 22, 1993.
2) Incorporated by reference to Exhibit 10(b) filed with Registration Statement
on Form S- 8 (No. 2-86904), filed October 3, 1983.
3) Incorporated by reference to Exhibit 15 filed with Registration Statement on
Form S-8 (No. 2-71650), filed April 7, 1981.
4) Incorporated by reference to Exhibit D filed with the 1983 Proxy Statement
dated April 25, 1983, for the annual meeting dated May 19, 1983.
5) Incorporated by reference to Exhibit 10.15 filed with the Annual Report on
Form 10-K for the year ended December 31, 1987, filed March 30, 1988.
6) Incorporated by reference to Exhibit 10.17 filed with the Annual Report on
Form 10-K for the year ended December 31, 1990, filed April 1, 1991.
7) Incorporated by reference to Exhibit "A" filed with the 1990 Proxy
Statement, filed April 2, 1990.
8) Incorporated by reference to Exhibit "A" filed with the 1991 Proxy
Statement, filed April 1, 1991.
9) Incorporated by reference to Exhibit 4.1 filed with Form 8-K Current Report,
dated October 29, 1986, filed October 30, 1986.
10) Incorporated by reference to Exhibit 4 filed with the Annual Report on Form
10-K for the year ended December 31, 1987, filed March 30, 1988.
11) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to
Registration Statement on Form S-3 (No. 33-5552), filed May 16, 1986.
12) Incorporated by reference to Exhibit 4 filed with the Form 10-Q Quarterly
Report for the quarterly period ended June 30, 1990.
13) Incorporated by reference to Exhibit 4 filed with Form 8-K Current Report,
dated February 20, 1991, filed February 27, 1991.
14) Incorporated by reference to Exhibit 10.17 filed with the Annual Report on
Form 10-K for the year ended December 31, 1991, filed April 1, 1992.
15) Incorporated by reference to Exhibit 10.18 filed with the Annual Report on
Form 10-K for the year ended December 31, 1991, filed April 1, 1992.
16) Incorporated by reference to Exhibit 10.19 filed with the Annual Report on
Form 10-K for the year ended December 31, 1991, filed April 1, 1992.
17) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1 to the
Steck- Vaughn Publishing Corporation Registration Statement on Form S-1,
File No. 33-62334, filed June 17, 1993.
17
<PAGE> 18
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
18) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1 to the
Steck- Vaughn Publishing Corporation Registration Statement on Form S-1,
File No. 33-62334, filed June 17, 1993.
19) Incorporated by reference to Exhibit 10.13 filed with the Steck-Vaughn
Publishing Corporation Registration Statement on Form S-1, File No.
33-62334, filed May 7, 1993.
20) Incorporated by reference to Exhibit 10.20 filed with the Annual Report on
Form 10-K for the year ended December 31, 1993, filed March 28, 1994.
21) Incorporated by reference to Exhibit 10.21 filed with the Annual Report on
Form 10-K for the year ended December 31, 1993, filed March 28, 1994.
22) Incorporated by reference to Exhibit 10.22 filed with the Quarterly Report
on Form 10- Q for the quarter ended March 31, 1994, filed May 12, 1994.
23) Incorporated by reference to Exhibit 10.14 filed with Steck-Vaughn
Publishing Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 1994, filed on August 11, 1994.
24) Filed herewith.
18
<PAGE> 1
EXHIBIT 10.23
FIRST AMENDMENT TO
INTERCOMPANY AGREEMENT
This FIRST AMENDMENT TO INTERCOMPANY AGREEMENT (the "First
Amendment") is made as of June 10, 1994, by and between STECK-VAUGHN PUBLISHING
CORPORATION, a Delaware corporation (the "Company"), and NATIONAL EDUCATION
CORPORATION, a Delaware corporation ("NEC"), and amends that certain
Intercompany Agreement (the "Agreement") dated June 30, 1993, by and between
the Company and NEC.
RECITALS
A. Pursuant to the Agreement, NEC and the Company each
provide certain services to the other company on certain terms and conditions
as set forth in the Agreement.
B. Pursuant to that certain Loan Agreement dated June 10,
1994, and that certain Revolving Promissory Note dated June 10, 1994
(collectively, the "Loan Documents"), by and between the Company and
NationsBank of Texas, N.A. ("NationsBank"), NationsBank has agreed to loan
funds to the Company from time to time in accordance with certain terms and
conditions set forth in the Loan Documents.
C. NEC and the Company desire to amend the Agreement in
connection with certain matters provided for in the Loan Documents.
AGREEMENT
NOW, THEREFORE, NEC and the Company hereby agree as follows:
1. Section 2 of the Agreement shall be amended and restated
in its entirety to read as follows:
"2. Borrowings.
NEC may borrow funds from time to time from Steck-Vaughn
in the normal course of business. Principal amounts owed on such
borrowings will bear interest at the rate provided for from time to
time under that certain Loan Agreement dated June 10, 1994, and that
certain Revolving Promissory Note dated June 10, 1994, by and
between Steck-Vaughn and NationsBank of Texas, N.A., with interest
payable on the 10th day of each January, April, July and October at
which any amounts are then outstanding. Principal and interest may
be paid in full at any time and shall be paid on the termination of
this Agreement as specified in Section 3 hereof unless renewed as
provided in Section 3 hereof. Steck-Vaughn also may, by notice to
NEC, declare the entire principal sum, with accrued interest, due
and payable upon the failure of NEC to pay interest thereon when due
(provided, however, that NEC shall have one (1) business day
following such notice to cure such failure to pay interest) or in
the event of:
<PAGE> 2
(i) the dissolution and/or liquidation of NEC;
(ii) the sale, conveyance, transfer or other encumbrance by
NEC of more than 50% of the business and assets now owned or
hereafter acquired by NEC or any interest therein;
(iii) the merger or consolidation of NEC with or into
any corporation or entity in which NEC is not the surviving
corporation;
(iv) the appointment of a receiver of any of the property of,
assignment for the benefit of creditors by, or the commencement of
any proceedings under any bankruptcy act or insolvency laws by or
against NEC and, except in the case of a voluntary filing by NEC,
the continuance thereof for a period of thirty (30) days
(v) the declaration of a default of NEC under any
note, loan agreement or security agreement respecting any
indebtedness of NEC in excess of $1,000,000 now owed or hereafter
incurred; or
(vi) the decrease in NEC's ownership of capital stock
of Steck-Vaughn to less than fifty percent (50%) of the voting power
of Steck-Vaughn then outstanding, whether by reason of NEC's sale of
Steck-Vaughn stock or the issuance of additional stock by
Steck-Vaughn or otherwise."
2. Item IV.B. under "Treasury" on page A-2 of Exhibit A
shall be amended and restated in its entirety to read as follows:
"B. Intercompany Borrowings
Funds borrowed by NEC from Steck-Vaughn in the
normal course of business will bear interest at
the rate provided for from time to time under
that certain Loan Agreement dated June 10, 1994,
and that certain Revolving Promissory Note dated
June 10, 1994, by and between Steck-Vaughn and
NationsBank of Texas, N.A."
3. Item IV.C. under "Treasury" on page A-2 of Exhibit A is
hereby deleted in its entirety.
4. This First Amendment shall become effective concurrently
with the effectiveness of the Loan Documents.
5. Except as expressly set forth in this First Amendment,
the terms and conditions of the Agreement are hereby ratified and confirmed,
and remain in full force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this First Amendment
as of the date first written above.
NATIONAL EDUCATION CORPORATION
By: /s/
--------------------------------
Its: VP
--------------------------------
STECK-VAUGHN PUBLISHING CORPORATION
By: /s/
--------------------------------
Its: VP
--------------------------------
<PAGE> 1
EXHIBIT 10.24
* 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
NATIONAL EDUCATION CORPORATION
THIRD AMENDMENT
TO CREDIT AGREEMENT
This THIRD AMENDMENT TO CREDIT AGREEMENT (this
"Amendment") is dated as of June 24, 1994 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 Credit Agreement dated as of
December 22, 1993 by and among the Borrower, the Bank and the Agent, as amended
by that certain First Amendment to Credit Agreement dated as of December 31,
1993 and that certain Second Amendment to Credit Agreement dated as of April
15, 1994 (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 certain terms and conditions of the
Credit Agreement should be amended; 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 adding thereto the following defined terms in the appropriate alphabetical
order:
"`Ed Centers Charge' shall mean the charge (in an amount
not exceeding $40,100,000) to be taken by the Borrower against its
income in the second quarter of its
1
<PAGE> 2
1994 fiscal year in connection with its decision to discontinue the
operations of Ed Centers and the resulting write-down of its
investment in, and costs associated with the discontinuation of the
operations of, Ed Centers."
"`Ed Centers Discontinued Operations' means, from and
after the date that the Company publicly announces its decision to
discontinue the operations of Ed Centers and to take the Ed Centers
Charge, the operations of Ed Centers."
1.2 AMENDMENTS TO SECTION 8.04: LEASES. Section
8.04 of the Credit Agreement is hereby amended and restated in its entirety as
follows:
"8.04 Leases. The Borrower will not permit the
aggregate payments (including, without limitation, any property
taxes paid as additional rent or lease payments) by the Borrower and
its Subsidiaries on a consolidated basis under agreements to rent or
lease any real or personal property (including capitalized lease
obligations), excluding any leases of real or personal property that
is only used in connection with Ed Centers Discontinued Operations,
to exceed $4,500,000 during any fiscal quarter."
1.3 AMENDMENTS TO SECTION 8.05: INDEBTEDNESS.
Section 8.05 of the Credit Agreement is hereby amended by deleting the
reference to subsection 8.01(viii) in clause (xiii) thereof and substituting
therefor a reference to subsection 8.02(viii).
1.4 AMENDMENTS TO SECTION 8.08: CAPITAL
EXPENDITURES. Section 8.08 of the Credit Agreement is hereby amended and
restated in its entirety as follows:
"8.08 Capital Expenditures. Except for (a)
expenditures made by the Borrower and its Subsidiaries to acquire
assets in the Acquisitions in an aggregate amount not exceeding
$ * and (b) expenditures made to acquire assets that are only
used in connection with the Ed Centers Discontinued Operations in an
aggregate amount not exceeding $7,000,000, the Borrower will not,
and will not permit any of its Subsidiaries to, make any expenditure
for fixed or capital assets (including, without limitation,
expenditures for product development and maintenance and repairs
which should be capitalized in accordance with generally accepted
accounting principles and including capitalized lease obligations)
during the 1994 fiscal year which would cause the aggregate amount
of all such expenditures (excluding any such expenditures made to
acquire assets in Acquisitions or for use in connection with
2
<PAGE> 3
Ed Centers Discontinued Operations) for the Borrower and its
Subsidiaries to exceed $ * in such fiscal year."
* 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
1.5 AMENDMENTS TO SECTION 8.09: RATIO OF LIABILITIES
TO NET WORTH. Section 8.09 of the Credit Agreement is hereby amended and
restated in its entirety as follows:
"8.09 Ratio of Liabilities to Net Worth. The Borrower
will not permit the ratio of its Consolidated Liabilities to its
Adjusted Consolidated Net Worth at any time during the fiscal
quarters set forth below to be more than the ratio set forth
opposite such quarters; provided that, for purposes of this Section,
(a) any addition to the equity capital of the Borrower resulting
from the conversion of the Convertible Notes shall be deemed to
constitute Indebtedness for the purposes of determining Consolidated
Liabilities and Adjusted Consolidated Net Worth, (b) all liabilities
that are attributable only to Ed Centers Discontinued Operations
shall be disregarded in determining Consolidated Liabilities and (c)
all additions to (or deductions from) Adjusted Consolidated Net
Worth that would result from any net income (or net loss, other than
the Ed Centers Charge) accruing on or after April 1, 1994, that is
attributable solely to Ed Centers Discontinued Operations shall be
disregarded in determining Adjusted Consolidated Net Worth:
<TABLE>
<CAPTION>
Quarter Ended Ratio
------------------ -----
<S> <C>
June 30, 1994 1.80:1.00
September 30, 1994 *
December 31, 1994 * "
</TABLE>
* 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
1.6 AMENDMENTS TO SECTION 8.10: MINIMUM CONSOLIDATED
EBITDA. Section 8.10 of the Credit Agreement is hereby amended and restated in
its entirety as follows:
"8.10 Minimum Consolidated EBITDA. The Borrower will
not permit its Consolidated EBITDA for the cumulative prior four
fiscal quarters ending on each date set forth below to be less than
the amount set forth opposite such date;
3
<PAGE> 4
provided that, for purposes of this Section, all income, interest
expense, depreciation expense, tax expense, amortization expense,
non-cash gains or losses, minority interests, and income (or losses)
accruing on or after April 1, 1994, that are attributable only to Ed
Centers Discontinued Operations shall be disregarded:
<TABLE>
<CAPTION>
Prior Four Fiscal
Quarters Ending Amount
------------------- -------
<S> <C>
June 30, 1994 $12,500,000
September 30, 1994 *
December 31, 1994 * "
</TABLE>
* 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
1.7 AMENDMENTS TO SECTION 8.11: MINIMUM CONSOLIDATED NET WORTH.
Section 8.11 of the Credit Agreement is hereby amended and restated in its
entirety as follows:
"8.11 Minimum Consolidated Net Worth. The Borrower will not
permit its Adjusted Consolidated Net Worth at any time during the fiscal
quarter ending on the date set forth below to be less than the amount set
forth opposite such date; provided that, for purposes of this Section, (i)
any addition to the equity capital of the Borrower resulting from the
conversion of the Convertible Notes shall be deemed to constitute
Indebtedness for the purposes of determining Adjusted Consolidated Net
Worth and (ii) any addition to (or deduction from) Adjusted Consolidated
Net Worth that would result from any net income (or net loss, other than
the Ed Centers Charge) accruing on or after April 1, 1994, that is
attributable only to Ed Centers Discontinued Operations shall be
disregarded in determining Adjusted Consolidated Net Worth:
4
<PAGE> 5
<TABLE>
<CAPTION>
Quarters Ending Amount
--------------- ------
<S> <C>
June 30, 1994 $ 97,500,000
September 30, 1994 *
December 31, 1994 * "
</TABLE>
* 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
1.8 AMENDMENTS TO SECTION 8.12: FIXED CHARGE COVERAGE RATIO.
Section 8.12 of the Credit Agreement is hereby amended and restated in its
entirety as follows:
"8.12 Fixed Charge Coverage Ratio. The Borrower will not permit
the ratio of (i) the sum of (A) Consolidated EBITDA of the Borrower and
its Subsidiaries plus (B) the lease payments made or accrued by the
Borrower and its Subsidiaries on a consolidated basis to (ii) the
Consolidated Fixed Charges of the Borrower and its Subsidiaries (the
"Fixed Charge Coverage Ratio") for the cumulative prior four fiscal
quarters ending on the date set forth below to be less than the ratio set
forth opposite such date; provided that for the purposes of this Section,
all income, interest expense, depreciation expense, tax expense,
depreciation expense, amortization expense, non-cash gains or losses,
minority interests, and income (or losses) accruing on or after April 1,
1994, that are attributable only to Ed Centers Discontinued Operations
shall be disregarded in determining Consolidated EBITDA of the Borrower
and its Subsidiaries, all lease payments made on or after April 1, 1994,
that are attributable only to Ed Centers Discontinued Operations shall be
disregarded in determining lease payments of the Borrower and its
Subsidiaries, and all Consolidated Fixed Charges accruing on or after
April 1, 1994, that are attributable only to Ed Centers Discontinued
Operations shall be disregarded in determining Consolidated Fixed Charges
of the Borrower and its Subsidiaries:
<TABLE>
<CAPTION>
Prior Four Fiscal
Quarters Ending Ratio
----------------- -----
<S> <C>
June 30, 1994 1.08:1.00
September 30, 1994 *
December 31, 1994 * "
</TABLE>
* 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
5
<PAGE> 6
1.9 AMENDMENTS TO SECTION 8.14: LIMITATION ON SUBSIDIARY
DISTRIBUTIONS. Section 8.14 of the Credit Agreement is hereby amended by
deleting the word "and" immediately preceding clause (vi) thereof and adding
the following clause (vii) at the end thereof (immediately following the word
"Agreement" and prior to the period):
", and (vii) any agreements, consented to by the Bank, pursuant to which
Indebtedness permitted under 8.05(xiii) is or may be outstanding"
1.10 AMENDMENTS TO SCHEDULE II: MATERIAL ADVERSE CHANGES.
Schedule II to the Credit Agreement is hereby amended by adding the following
paragraph 4 at the bottom thereof:
"4. The Borrower may take a charge not exceeding $40,100,000 as the
result of its decision to discontinue the operations of Ed
Centers."
SECTION 2. CONSENT TO INDEBTEDNESS UNDER SECTION 8.05(XIII) OF
THE CREDIT AGREEMENT
The Bank hereby consents to the terms and conditions set forth in
the Loan Agreement, Guaranty Agreement and Security Agreement attached hereto
as Annex A for the purposes of Section 8.05(xiii) of the Credit Agreement.
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
6
<PAGE> 7
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.
7
<PAGE> 8
G. ABSENCE OF DEFAULT. No event has occurred and is
continuing or will result from the consummation of the transactions
contemplated by this 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
8
<PAGE> 9
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 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; EFFECTIVENESS. 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
9
<PAGE> 10
all such 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 amendments to the Credit Agreement set
forth in Sections 1.2 through 1.10 of this Amendment shall not be effective
until such time as the Borrower announces its determination to discontinue the
operations of Ed Centers and to take the Ed Centers Charge.
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]
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed as of the date first above written by their respective officers
thereunto duly authorized.
NATIONAL EDUCATION CORPORATION
By: /s/
---------------------------------
Title: Vice President
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: /s/
---------------------------------
Title: Vice President
STECK-VAUGHN PUBLISHING CORPORATION
NATIONAL EDUCATION INTERNATIONAL CORP.
NATIONAL EDUCATION CREDIT CORPORATION
NATIONAL EDUCATION FOREIGN SALES CORP.
NATIONAL EDUCATION PAYROLL CORP.
NEC SUB. INC
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
NETG HOLDING, INC.,
AS THE SUBORDINATED SUBSIDIARIES
By: /s/
---------------------------------
Title: Vice President
S-1
<PAGE> 12
BANKERS TRUST COMPANY, AS THE BANK AND AS THE AGENT
By: /s/
---------------------------------------------------
Title: Assistant Vice President
S-2
<PAGE> 1
EXHIBIT 11.1
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CALCULATION OF EARNINGS PER SHARE
---------------------------------
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 1,003 $ (982) $ 67 $ (4,007)
======== ======= ======== ========
NET LOSS $(46,441) $(3,546) $(49,385) $ (7,895)
======== ======= ======== ========
COMMON STOCK:
Shares outstanding from beginning of period 29,506 29,982 29,405 29,968
Pro rata shares:
Stock options exercised 10 11 93 14
Shares purchased from treasury, from date of purchase (8) (221) (6) (153)
Assumed exercise of stock options, using treasury stock
method 118 300 149 268
-------- ------- -------- --------
Weighted average number of shares outstanding 29,626 30,072 29,641 30,097
======== ======= ======== ========
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS $ .03 $ (.03) $ -- $ (.13)
======== ======= ======== ========
LOSS PER SHARE $ (1.57) $ (.12) $ (1.67) $ (.26)
======== ======= ======== ========
</TABLE>
