SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1994
Commission file number 1-6981
NATIONAL EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 95-2774428
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18400 Von Karman Avenue, Irvine, California 92715-1594
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 714/474-9400
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:
29,571,977 common stock shares outstanding at October 31, 1994
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(amounts in thousands, except per share amounts) 1994 1993 1994 1993
__________ _________ ___________ __________
<S> <C> <C> <C> <C>
Tuition and Contract Revenues $ 44,487 $ 37,774 $ 127,655 $ 116,500
Publishing Revenues 18,852 17,431 43,493 41,710
_________ ________ __________ _________
Net Revenues 63,339 55,205 171,148 158,210
Costs and Expenses:
Contract course materials and service costs 17,937 18,530 51,794 54,593
Publishing costs and materials 6,285 5,701 16,897 15,097
Selling and promotion 25,563 22,393 69,899 63,477
General and administrative 8,200 9,660 24,625 28,257
Amortization of acquired intangible assets 530 1,176 1,383 4,179
Interest expense 1,637 1,425 4,646 4,297
Investment income (599) (555) (2,544) (1,871)
Other income (146) (540) (453) (459)
Unusual items -- 9,232 -- 9,232
Gain on Steck-Vaughn Publishing Corporation public
stock offering -- (21,260) -- (21,260)
_________ ________ __________ _________
Income Before Income Tax Benefit, Minority Interest and
Discontinued Operations 3,932 9,443 4,901 2,668
Income tax (benefit) 1,594 (3,748) 1,999 (6,515)
_________ ________ __________ _________
Income Before Minority Interest and Discontinued
Operations 2,338 13,191 2,902 9,183
Minority interest in consolidated subsidiary 589 341 1,086 341
_________ ________ __________ _________
Income From Continuing Operations 1,749 12,850 1,816 8,842
Loss from discontinued operations -- (16,662) (9,420) (20,549)
Loss on disposal of discontinued operations -- -- (40,032) --
_________ ________ __________ _________
Net Income (Loss) $ 1,749 $ (3,812) $ (47,636) $ (11,707)
========== ========= ========== ==========
Earnings (Loss) Per Share From Continuing Operations:
Primary earnings per share $.06 $.43 $.06 $.30
==== ==== ==== ====
Fully diluted earnings per share $.06 $.37 $.06 $.27
==== ==== ==== ====
Earnings (Loss) Per Share $.06 $(.13) $(1.61) $(.39)
==== ====== ======= ======
Weighted Average Number of Shares Outstanding:
Primary Shares 29,658 29,628 29,643 29,939
Fully diluted shares 36,958 36,928 36,943 37,239
<FN>
Unaudited.
See accompanying notes and management's discussion and analysis.
</TABLE>
2
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
September 30, December 31, September 30,
(dollars in thousands) 1994 1993 1993
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
ASSETS
Current Assets
Cash, including time deposits of $21,131, $32,855 and $36,700 $ 24,551 $ 38,546 $ 39,521
Investment securities:
Held to maturity and available-for-sale securities 10,701 -- --
At lower of cost or market (market value of $0, $17,964 and $11,755) -- 16,300 10,585
Receivables, net of allowance of $3,271, $10,437 and $9,313 30,758 54,012 49,616
Inventories and supplies 22,782 25,594 25,006
Prepaid and deferred marketing expenses 40,994 37,187 45,352
Assets held for disposition 3,736 -- --
Other current assets 17,181 19,038 17,744
_________ __________ _________
Total current assets 150,703 190,677 187,824
Contracts Receivable 529 2,212 4,393
Land, Buildings and Equipment, less accumulated
depreciation of $62,076, $118,997 and $119,934 23,569 46,056 45,829
Acquired Intangible Assets, less accumulated amortization
of $88,521, $95,635 and $95,206 50,655 48,497 48,927
Deferred Income Taxes 25,793 25,793 27,484
Other Assets 5,795 10,656 11,210
_________ __________ _________
$ 257,044 $ 323,891 $ 325,667
========= ========== =========
</TABLE>
<TABLE>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,168 $ 8,635 $ 7,754
Accrued expenses 30,960 42,351 43,151
Accrued salaries and wages 6,577 8,726 8,374
Accrued disposition costs 6,738 12,282 14,299
Deferred contract revenues 8,902 16,425 19,019
Current portion of long-term debt 5,813 607 617
Accrued and deferred income taxes 1,429 3,149 --
_________ __________ _________
Total current liabilities 68,587 92,175 93,214
_________ __________ _________
Liabilities Payable After One Year:
Long-term debt, less current portion 5,374 2,556 2,716
Senior subordinated convertible debentures 20,000 20,000 20,000
Convertible subordinated debentures 57,494 57,494 57,494
Other noncurrent liabilities 8,187 7,989 10,869
_________ __________ _________
91,055 88,039 91,079
_________ __________ _________
Minority Interest in Equity of Consolidated Subsidiary 8,925 8,046 7,782
_________ __________ _________
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;
30,268,725 shares, 30,092,810 shares and 30,086,781 shares issued 2,110 2,108 2,108
Additional paid-in capital 132,863 132,262 132,147
Retained (deficit) earnings (33,955) 13,681 11,593
Unrealized gain on available-for-sale securities, net of tax 142 -- --
Cumulative foreign exchange translation adjustment (7,775) (7,565) (7,304)
Notes receivable under stock option plans -- -- (97)
_________ __________ _________
93,385 140,486 138,447
Less common stock in treasury; 697,556 shares, 689,315 shares
and 689,315 shares (4,908) (4,855) (4,855)
_________ __________ _________
Total stockholders' equity 88,477 135,631 133,592
_________ __________ _________
$ 257,044 $ 323,891 $ 325,667
========= ========== =========
<FN>
Unaudited.
See accompanying notes and management's discussion and analysis.
</TABLE>
3
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 1994 1993 1994 1993
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 1,749 $ (3,812) $ (47,636) $ (11,707)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Loss on discontinued operations -- 16,662 9,420 20,549
Loss on disposal of discontinued operations -- -- 40,032 --
Depreciation and amortization 1,472 1,562 4,201 5,410
Amortization of acquired intangible assets 530 1,176 1,383 4,179
Provision for doubtful accounts 110 302 411 1,037
Gain on Steck-Vaughn Publishing Corporation public stock
offering -- (21,260) -- (21,260)
Gain on sale of land, buildings and equipment -- (381) -- (381)
Write-off of acquired intangible assets -- 9,232 -- 9,232
(Gain)/loss on foreign currency exchange (146) (158) (453) (77)
Change in assets and liabilities:
Receivables, net (2,597) (233) 9,980 20,286
Inventories and supplies 656 428 1,183 941
Prepaid and deferred marketing expenses (4,882) (4,428) (15,912) (12,859)
Accounts payable and accrued expenses 1,834 801 (10,333) 2,855
Accrued and deferred income taxes 406 (12,456) (1,997) (23,252)
Deferred contract revenues (1,183) 274 (1,844) (3,069)
Other 1,417 305 3,539 (728)
________ ________ _________ _________
Net Cash From Operating Activities (634) (11,986) (8,026) (8,844)
________ ________ _________ _________
Cash Flows For Investing Activities:
Additions to land, building and equipment (1,927) (2,350) (5,562) (7,207)
Dispositions of land, buildings and equipment 39 390 299 417
Changes in marketable securities 4,483 1,270 5,818 410
Acquisition of business, net of cash acquired -- -- (3,870) (5,417)
Discontinued operations (4,613) (5,875) (13,352) (11,708)
________ ________ _________ _________
Net Cash For Investing Activities (2,018) (6,565) (16,667) (23,505)
________ ________ _________ _________
Cash Flows From Financing Activities:
Additions to long-term debt -- -- 3,906 --
Reductions in long-term debt (229) (286) (491) (489)
Net proceeds from Steck-Vaughn Publishing Corporation public
stock offering -- 28,701 -- 28,701
Changes in short-term borrowings (1,913) -- 5,397 --
Minority interest in earnings of consolidated subsidiary 738 341 879 341
Common stock, stock options and related tax benefits 34 79 603 245
Notes receivable under a stock option plan -- 10 -- 10
Purchase of common stock for treasury -- (1,114) (53) (4,685)
________ ________ _________ _________
Net Cash From Financing Activities (1,370) 27,731 10,241 24,123
________ ________ _________ _________
Effect of exchange rate changes on cash 243 (198) 457 (722)
________ ________ _________ _________
Net Change in Cash and Equivalents (3,779) 8,982 (13,995) (8,948)
Cash and equivalents at the beginning of the period 28,330 30,539 38,546 48,469
________ ________ _________ _________
Cash and Equivalents at the End of the Period $ 24,551 $ 39,521 $ 24,551 $ 39,521
======== ======== ========= =========
<FN>
Unaudited.
See accompanying notes and management's discussion and analysis.
</TABLE>
4
<PAGE>
<PAGE>
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 and
provide for estimated costs of disposing of the operation. No tax benefits
were provided on this charge. During the third quarter of 1994, the Company
entered more substantive negotiations with a prospective buyer interested in
purchasing a majority of the schools and assuming the teach-out
responsibility at the remaining schools which would be closed. Based on the
current assumptions to close the transaction, management believes that the
amount reserved is adequate and no further charges are currently anticipated.
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 $25,084,000 and
$32,370,000 for the three months ended September 30, 1994 and 1993,
respectively, and revenues for the nine months ended September 30, 1994 and
1993 were $76,537,000 and $101,580,000, respectively. No tax benefits were
recorded on Education Centers losses for the three months ended September 30,
1994, while a tax benefit of $7,395,000 was provided for the prior year
period. Tax benefits of $1,008,000 and $9,120,000 were provided for
Education Centers losses for the nine months ended September 30, 1994 and
1993, respectively.
5
<PAGE>
<PAGE>
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 September 30, 1994 balance sheet as net assets held for
disposition. Liabilities associated with the cost of completing the
transaction and providing for future obligations retained by the Company 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
Primary earnings (loss) per share are computed based on the weighted average
number of common shares outstanding during the respective periods, including
dilutive stock options. Fully diluted earnings (loss) per share are computed
based on the assumption that all dilutive convertible debentures have been
converted to common stock with a corresponding increase in net income to
reflect a reduction in related interest expense, less applicable taxes.
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 $219,000 and a related
deferred tax liability of $77,000, resulting in a net increase of $142,000 in
stockholders' equity.
6
<PAGE>
<PAGE>
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>
September 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 $ 5,000 $ -- $ -- $ 5,000
________ ________ ________ ________
Available-for-sale:
Corporate income funds 3,532 189 (151) 3,570
Preferred stock 1,950 229 (48) 2,131
________ ________ ________ ________
Total available-for-sale 5,482 418 (199) 5,701
________ ________ ________ ________
Total securities $ 10,482 $ 418 $ (199) $ 10,701
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
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
======== ======== ========= ========
</TABLE>
NOTE 6 - Statements of Cash Flows Supplementary Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 1994 1993 1994 1993
______________________________________________________ ________ _________ ________ ________
<S> <C> <C> <C> <C>
Cash Paid During the Period for:
Interest expense $ 1,445 $ 1,020 $ 4,574 $ 3,854
======= ======== ======= =======
Income taxes, net of income tax refunds $ 640 $ 1,067 $ 2,612 $ 6,858
======= ======== ======= =======
</TABLE>
7
<PAGE>
<PAGE>
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>
Three Months Ended
September 30, Percent
(dollars in thousands) 1993 1992 Variance Change
______________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 31,312 $ 24,845 $ 6,467 26.0
Steck-Vaughn Publishing 18,852 17,431 1,421 8.2
NETG 12,419 12,617 (198) (1.6)
Other 756 312 444 142.3
_________ _________ ________
Total Net Revenues $ 63,339 $ 55,205 $ 8,134 14.7
========= ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Operating Income (Loss):
ICS Learning Systems $ 5,696 $ 5,068 $ 628 12.4
_________ _________ ________
Steck-Vaughn Publishing 5,485 5,213 272 5.2
_________ _________ ________
NETG operating loss before unusual items (4,409) (9,318) 4,909 52.7
Unusual items -- (9,232) 9,232 n/m
_________ _________ ________
NETG (4,409) (18,550) 14,141 76.2
_________ _________ ________
Other 255 (233) 488 n/m
_________ _________ ________
Total Segment Operating Income (Loss): 7,027 (8,502) 15,529 n/m
General corporate expenses (2,203) (2,985) 782 26.2
Interest expense (1,637) (1,425) (212) (14.9)
Investment income 599 555 44 7.9
Gain on Steck-Vaughn Publishing Corporation
public stock offering -- 21,260 (21,260) n/m
Other income and (expense) 146 540 (394) (73.0)
_________ _________ ________
Income Before Income Taxes (Benefit), Minority
Interest and Discontinued Operations 3,932 9,443 (5,511) (58.4)
Income taxes (benefit) 1,594 (3,748) 5,342 n/m
_________ _________ ________
Income Before Minority Interest and
Discontinued Operations 2,338 13,191 (10,853) (82.3)
Minority interest 589 341 248 72.7
_________ _________ ________
Income From Continuing Operations 1,749 12,850 (11,101) (86.4)
Discontinued operations -- (16,662) 16,662 n/m
_________ _________ ________
Net Income (Loss) $ 1,749 $ (3,812) $ 5,561 n/m
========= ========= =========
<FN>
n/m: Not meaningful.
</TABLE>
8
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<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Three Months Ended September 30, 1994 Compared to Three Months Ended
September 30, 1993
Revenues of $63,339,000 for the three months ended September 30, 1994 were
$8,134,000 or 14.7% higher than revenues of $55,205,000 in the prior year.
Income from continuing operations was $1,749,000 or $.06 per fully diluted
share compared to income of $12,850,000 or $.37 per fully diluted share in
1993. Net income for the period was $1,749,000 or $.06 compared to a net
loss of $3,812,000 or $.13 per share in the prior year. The operating
results for 1993 include a nonrecurring charge related to NETG which resulted
from the write-down of certain acquired intangible assets and a gain of
$21,260,000 resulting from the initial public stock offering of Steck-Vaughn
Publishing Corporation. Additionally, the third quarter of 1993 has been
restated to show the Company's Education Centers subsidiary as a discontinued
operation due to a plan of disposition adopted during the second quarter of
1994 (see further discussion in the nine month period).
Revenues at ICS Learning Systems continued to increase significantly during
the quarter primarily due to record performance at the domestic operations
while the international operations increased only slightly. Domestic
operating income increased significantly during the period primarily due to
revenue growth while international operating income decreased despite higher
revenues. Increased revenues at the domestic operation primarily resulted
from enrollment increases of 52% during the quarter and revenues from
MicroMash which was acquired during the first quarter of 1994. The
significant domestic enrollment increase primarily resulted from the
continued success of the expanded telesales efforts which have resulted in
higher conversion of leads to enrollments than experienced in the prior year
and an increase of 21% in selling and promotional spending. The revenue
increase at the international operation primarily resulted from higher
revenues at Canada and the Australia/New Zealand operations. The higher
revenues at Canada primarily resulted from increased student payments during
the period while the Australia/New Zealand operation experienced strong
enrollment growth of 23%. International operating income decreased as a
result of higher selling and promotional expenses which did not generate
anticipated enrollment growth. General and administrative costs at the
domestic operations increased during the quarter primarily due to additional
costs at the MicroMash operation and initial system costs incurred for the
conversion to a new information system.
Revenues and operating income at Steck-Vaughn increased during the third
quarter as compared to the prior year. Steck-Vaughn experienced higher
revenues in all major product lines during the quarter with the largest
increase in the elementary school products which benefited from growth in the
Reading, Math and Literature products. Adult education products also
experienced strong increases during the quarter resulting from the success of
courses in Adult Basic Education and English as a Second Language. Selling
price increases and higher distributor sales during 1994 also contributed to
the revenue increase. Publishing costs increased during the quarter as a
result of increased volume and higher materials costs. The increased
materials costs were primarily caused by the higher distributors sales which
carry a lower margin and resulted in a slight increase in publishing costs as
a percentage of revenues. Selling and promotional costs increased during the
quarter due to the expansion of the sales organization during 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. General and administrative expenses decreased during
the quarter primarily due to favorable loss experience which resulted in
lower insurance expenses.
9
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
NETG revenues decreased slightly during the quarter as a result of lower
revenues at the international operations which were partially offset by
increased domestic revenues. Higher revenues at the domestic operation
primarily resulted from a new product licensing agreement initiated during
the third quarter which simplifies the customers' ability to acquire NETG
products; hosever, these increases werre partially offset by slightly lower
new orders and contracts were down slightly at the domestic operations as
compared to 1993 levels. Revenues at the international operations decreased
primarily due to lower contract backlog at the beginning of 1994 as compared
to 1993. New orders and contracts at the international operations increased
during the period; however, decreasing contract backlog has more than offset
the new orders and renewal business. Operating results at the domestic
operations improved significantly during the period primarily due to
reductions in product development costs, lower general and administrative
expenses, and the nonrecurring unusual item recorded during 1993. The
decrease in general and administrative expenses primarily resulted from
reduced headcount, lower consulting costs, and reduced insurance expenses.
Operating results at the international operations decreased primarily due to
lower revenues.
Operating results of ICS and NETG foreign operations by geographic region are
discussed above. Foreign currency exchange gains, recorded to other income,
were $146,000 compared to gains of $158,000 in the prior year.
General corporate expenses decreased during the period primarily due to
reduced overall costs and favorable loss experience rates which resulted in
lower insurance expenses.
10
<PAGE>
<PAGE>
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>
Nine Months Ended
September 30, Percent
(dollars in thousands) 1994 1993 Variance Change
______________________ __________ __________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 89,089 $ 74,228 $ 14,861 20.0
Steck-Vaughn Publishing 43,493 41,710 1,783 4.3
NETG 36,450 41,449 (4,999) (12.1)
Other 2,116 823 1,293 157.1
_________ _________ ________
Total Net Revenues $ 171,148 $ 158,210 $ 12,938 8.2
========= ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Operating Income (Loss):
ICS Learning Systems $ 15,863 $ 14,166 $ 1,697 12.0
_________ _________ ________
Steck-Vaughn Publishing 10,178 11,138 (960) (8.6)
_________ _________ ________
NETG operating loss before unusual items (12,975) (23,358) 10,383 44.5
Unusual items -- (9,232) 9,232 n/m
_________ _________ ________
NETG (12,975) (32,590) 19,615 60.2
Other (315) (643) 328 51.0
_________ _________ ________
Total Segment Operating Income (Loss) 12,751 (7,929) 20,680 n/m
General corporate expenses (6,201) (8,696) 2,495 28.7
Interest expense (4,646) (4,297) (349) (8.1)
Investment income 2,544 1,871 673 36.0
Gain on Steck-Vaughn Publishing Corporation
public stock offering -- 21,260 (21,260) n/m
Other income and (expense) 453 459 (6) (1.3)
_________ _________ ________
Income Before Income Taxes (Benefit), Minority
Interest and Discontinued Operations 4,901 2,668 2,233 83.7
Income taxes (benefit) 1,999 (6,515) 8,514 n/m
_________ _________ ________
Income Before Minority Interest and
Discontinued Operations 2,902 9,183 (6,281) (68.4)
Minority interest 1,086 341 745 218.5
_________ _________ ________
Income From Continuing Operations 1,816 8,842 (7,026) (79.5)
Discontinued operations (49,452) (20,549) (28,903) (140.7)
_________ _________ ________
Net Loss $ (47,636) $ (11,707) $(35,929) (306.9)
========== ========== =========
<FN>
n/m: Not meaningful.
</TABLE>
11
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Nine Months Ended September 30, 1994 Compared to Nine Months Ended
September 30, 1993
Revenues of $171,148,000 for the nine months ended September 30, 1994, were
$12,938,000 or 8.2% higher than revenues of $158,210,000 in the prior year.
Income from continuing operations of $1,816,000 or $.06 per fully diluted
share compared to income of $8,842,000 or $.27 per fully diluted share in the
prior year. Net loss for the period of $47,636,000 or $1.61 per share
compared to a loss of $11,707,000 or $.39 per share in the prior year.
During the second quarter of 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 to
estimated net realizable value and provide for estimated costs to dispose of
the operation. During the third quarter of 1994, the Company entered into
more substantive negotiations with a prospective buyer interested in
purchasing a majority of the schools and assuming the responsibility of
teaching-out the remaining schools. The revenues and expenses of the
Education Centers have been offset and segregated as discontinued operations
for the periods ending September 30, 1994 and prior period statements of
operations have been restated to reflect this change.
ICS experienced similar changes in revenues and operating income for the nine
month period as occurred for the three month period previously discussed.
Revenues at Steck-Vaughn increased during the period primarily due to higher
revenues in the second and third quarters 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.
Revenues during the second and third quarter experienced similar changes as
previously discussed in the three month analysis. Operating income decreased
during 1994 as compared to the prior year primarily due to higher materials
costs associated with increased distributor sales during the period and
higher selling and promotional costs resulting from the expanded sales force.
Additionally, product development expense increased 11% over the prior year
period. Partially offsetting the increased costs were lower general and
administrative costs primarily due to reduced insurance expenses resulting
from favorable loss experience rates.
NETG experienced similar changes in revenues and operating results as
occurred for the three month period previously discussed except for revenues
at the domestic operations. Revenues at the domestic operations decreased
for the nine month period as compared to the prior year period primarily due
to lower revenues in the first six months of the year resulting from reduced
contract value backlogs at the beginning of 1994 as compared to 1993. These
decreases were partially offset by higher third quarter revenues previously
discussed in the three month period.
ICS and NETG foreign operations by geographic region are discussed above.
Foreign currency exchange gains of $453,000 were recorded during the period
as compared to gains of $77,000 in the prior year.
Investment income increased during the period primarily due to gains realized
in connection with the sale of certain marketable securities.
12
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, marketable securities
and cash provided from operations. (See Note 3 to the financial statements
regarding discontinued operations.) At September 30, 1994, the Company had
$35,252,000 in cash and marketable securities of which $17,027,000 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
September 30, 1994, $5,000,000 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 September 30, 1994, no
amounts were outstanding under the bank credit facility.
Cash outflows from operating activities for the nine months ended September
30, 1994 of $8,116,000 decreased $9,062,000 as compared to cash inflows of
$946,000 in the prior year primarily due to changes in net receivables
resulting from diminishing contract receivables at NETG from long-term
contract revenues. As a result of prior year changes in selling NETG
multimedia training products that are generally one year agreements, NETG's
receivables for prior year's long-term contracts will no longer provide a
significant source of working capital.
Cash flows from financing activities increased during 1994 primarily due to
the $5,000,000 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 draw on the line of credit was used 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, cash provided from operations, which includes, to a certain
extent, the continued funding of Education Centers' students under government
student financial aid programs, subject to a timely disposition of the
schools, will be sufficient to provide for planned working capital
requirements, debt service and capital expenditures for the foreseeable
future.
13
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index following this Form 10-Q.
(b) 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.
14
<PAGE>
<PAGE>
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.
NATIONAL EDUCATION CORPORATION
Date: November 14, 1994
By /s/ Keith K. Ogata
___________________________
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
15
<PAGE>
<PAGE>
INDEX TO EXHIBITS
(Item 6(a))
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.1 National Education Corporation Retirement Plan
(Restated as of January 1, 1989 and 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
August 5, 1991 (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, Conti-
nental Bank as Resigning Trustee, and IBJ
Schroder Bank & Trust Company as Successor
Trustee (12) . . . . . . . . . . . . . . . . . . . . . *
</TABLE>
16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.13 National Education Corporation Purchase Agree-
ment, Senior Subordinated Convertible Deben-
tures, 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) . . . . . . . . . . . . . . . . . . . . *
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-Vaughn
Company 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 (23) . . . . . . . . . . . . . . . . . . . *
</TABLE>
17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.24 Third Amendment to Credit Agreement, dated as
of June 24, 1994 (Confidential treatment under
Rule 24b-2 has been granted 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 (25) . . . . . . . . . . . . . . . . . . *
11.1 Calculation of Primary Earnings Per Share (26) . . . .
11.2 Calculation of Fully Diluted Earnings Per
Share (26) . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
__________________
* incorporated by reference from a previously filed document
18
<PAGE>
<PAGE>
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 10.19 filed with the Annual
Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
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.
19
<PAGE>
<PAGE>
16) Incorporated by reference to Exhibit 10.9 filed with the Annual
Report on Form 10-K for the year ended December 31, 1987, filed
March 30, 1988.
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.
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 10.23 filed with the
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, filed on August 11, 1994.
24) Incorporated by reference to Exhibit 10.24 filed with the
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, filed on August 11, 1994.
25) 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.
26) Filed herewith.
20
<PAGE>
<PAGE>
EXHIBIT 11.1
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF PRIMARY EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ ________________________
1994 1993 1994 1993
__________ _________ ___________ __________
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 1,749 $12,850 $ 1,816 $ 8,842
_______ ________ _________ _________
NET INCOME (LOSS) $ 1,749 $(3,812) $(47,636) $(11,707)
======= ======== ========= =========
Shares outstanding from beginning of period 29,516 29,994 29,405 29,968
Pro rata shares:
Stock options exercised 59 35 119 30
Shares purchased for treasury, from date of purchase (8) (658) (7) (323)
Assumed exercise of stock options, using treasury
stock method 91 257 126 264
_______ ________ _________ _________
Weighted average number of shares outstanding 29,658 29,628 29,643 29,939
======= ======== ========= =========
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $.06 $.43 $.06 $.30
==== ===== ==== ====
LOSS PER SHARE $.06 $(.13) $(1.61) $(.39)
==== ====== ======= ======
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 11.2
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ ________________________
1994 1993 1994 1993
__________ _________ ___________ __________
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 1,749 $(3,812) $(47,636) $(11,707)
Add back senior debenture interest 270 241 752 723
Add back junior debenture interest 570 570 1,709 1,709
_______ ________ _________ _________
NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $ 2,589 $(3,001) $(45,175) $ (9,275)
======= ======== ========= =========
COMMON STOCK:
Shares outstanding from beginning of period 29,516 29,994 29,405 29,968
Stock options exercised 59 35 119 30
Shares purchased for treasury, from date of purchase (8) (658) (7) (323)
Assumed exercise of stock options,
using treasury stock method 91 257 126 264
Assumed conversion of senior subordinated debentures,
from the latter of the beginning of the period
or the date of issue 5,000 5,000 5,000 5,000
Assumed conversion of junior subordinated debentures,
from the latter of the beginning of the period
or the date of issue 2,300 2,300 2,300 2,300
_______ ________ _________ _________
Weighted average number of shares outstanding 36,958 36,928 36,943 37,239
======= ======== ========= =========
FULLY DILUTED EARNINGS (LOSS) PER SHARE $.06 $(.13) $(1.61) $(.39)
==== ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1993
<PERIOD-START> Jan-01-1994
<PERIOD-END> Sep-30-1994
<PERIOD-TYPE> 9-MOS
<CASH> 24,551
<SECURITIES> 10,701
<RECEIVABLES> 34,029
<ALLOWANCES> (3,271)
<INVENTORY> 22,782
<CURRENT-ASSETS> 150,703
<PP&E> 85,645
<DEPRECIATION> (62,076)
<TOTAL-ASSETS> 257,044
<CURRENT-LIABILITIES> 68,587
<BONDS> 77,494
0
0
<COMMON> 2,110
<OTHER-SE> 86,367
<TOTAL-LIABILITY-AND-EQUITY> 257,044
<SALES> 171,148
<TOTAL-REVENUES> 171,148
<CGS> 68,280
<TOTAL-COSTS> 1,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 411
<INTEREST-EXPENSE> 4,646
<INCOME-PRETAX> 4,901
<INCOME-TAX> 1,999
<INCOME-CONTINUING> 1,816
<DISCONTINUED> (49,452)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,636)
<EPS-PRIMARY> (1.61)
<EPS-DILUTED> (1.61)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1993
<PERIOD-START> Jul-01-1994
<PERIOD-END> Sep-30-1994
<PERIOD-TYPE> 3-MOS
<CASH> 24,551
<SECURITIES> 10,701
<RECEIVABLES> 34,029
<ALLOWANCES> (3,271)
<INVENTORY> 22,782
<CURRENT-ASSETS> 150,703
<PP&E> 85,645
<DEPRECIATION> (62,076)
<TOTAL-ASSETS> 257,044
<CURRENT-LIABILITIES> 68,587
<BONDS> 77,494
0
0
<COMMON> 2,110
<OTHER-SE> 86,367
<TOTAL-LIABILITY-AND-EQUITY> 257,044
<SALES> 63,339
<TOTAL-REVENUES> 63,339
<CGS> 24,112
<TOTAL-COSTS> 530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> 1,637
<INCOME-PRETAX> 3,932
<INCOME-TAX> 1,594
<INCOME-CONTINUING> 2,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,749
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
