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, 1995
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:
35,122,912 common stock shares outstanding at October 20, 1995
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ _______________________
(amounts in thousands, except per share amounts) 1995 1994 1995 1994
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Tuition and Contract Revenues $ 51,657 $ 44,487 $143,455 $127,655
Publishing Revenues 20,372 18,852 46,797 43,493
__________ _________ __________ _________
Net Revenues 72,029 63,339 190,252 171,148
Costs and Expenses:
Contract course materials and service costs 18,737 14,863 56,685 43,078
Publishing costs and materials 4,997 4,421 12,490 11,357
Product development 4,525 4,938 14,450 14,256
Selling and promotion 29,877 29,187 85,854 79,624
General and administrative 7,228 8,200 25,395 24,625
Amortization of prior period deferred marketing -- 4,007 1,470 17,213
Amortization of acquired intangible assets 219 530 1,329 1,383
Interest expense 2,352 1,637 6,732 4,646
Investment income (814) (599) (2,030) (2,543)
Other income, net (42) (146) (307) (453)
Unusual items -- -- 77,805 --
__________ _________ __________ _________
Income (Loss) Before Income Tax Benefit, Minority
Interest and Discontinued Operations 4,950 (3,699) (89,621) (22,038)
Income tax provision (benefit) 1,930 (140) (2,603) (4,123)
__________ _________ __________ _________
Income (Loss) Before Minority Interest and
Discontinued Operations 3,020 (3,559) (87,018) (17,915)
Minority interest 625 589 1,065 1,086
__________ _________ __________ _________
Income (Loss) From Continuing Operations 2,395 (4,148) (88,083) (19,001)
Loss from discontinued operations -- -- -- (9,420)
Loss on disposal of discontinued operations -- -- -- (40,032)
__________ _________ __________ _________
Net Income (Loss) $ 2,395 $ (4,148) $(88,083) $(68,453)
======== ========= ========= =========
2<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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) 1995 1994 1995 1994
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Earnings (Loss) Per Share From Continuing Operations:
Primary earnings per share $ .08 $ (.14) $ (2.89) $ (.64)
======== ========= ========= =========
Fully diluted earnings per share $ .08 $ (.14) $ (2.89) $ (.64)
======== ========= ========= =========
Earnings (Loss) Per Share $ .08 $ (.14) $ (2.89) $ (2.31)
======== ========= ========= =========
Weighted Average Number of Shares Outstanding:
Primary Shares 31,776 29,658 30,500 29,643
Fully diluted shares 38,267 36,958 37,881 36,943
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
3<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) 1995 1994 1994
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 22,641 $ 17,297 $ 24,551
Investment securities 1,846 10,833 10,701
Receivables, net of allowance of $3,583, $2,787 and $3,271 31,364 45,186 30,758
Inventories and supplies 26,417 23,827 22,782
Prepaid and deferred marketing expenses 7,428 3,223 14,053
Assets held for disposition -- 25,867 3,736
Other current assets 25,316 18,006 17,181
_________ __________ _________
Total current assets 115,012 144,239 123,762
Land, Buildings and Equipment, less accumulated depreciation
of $31,814, $63,240 and $62,076 23,054 25,404 23,569
Acquired Intangible Assets, less accumulated amortization
of $13,226, $89,005 and $88,521 9,453 52,703 50,655
Deferred Income Taxes 23,073 28,482 25,793
Other Assets 8,363 8,248 6,324
_________ __________ _________
$ 178,955 $ 259,076 $ 230,103
========= ========== =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 9,545 $ 7,771 $ 8,168
Accrued expenses 36,127 30,625 26,265
Accrued short-term restructuring charges 6,722 -- --
Accrued salaries and wages 5,663 5,448 6,577
Accrued disposition costs -- 25,116 6,738
Deferred contract revenues 7,883 11,905 8,902
Current portion of long-term debt and short-term borrowings 14,041 6,407 5,813
_________ __________ _________
Total current liabilities 79,981 87,272 62,463
_________ __________ _________
Liabilities Payable After One Year:
Long-term debt, less current portion 7,351 6,389 5,374
Senior subordinated convertible debentures -- 20,000 20,000
Convertible subordinated debentures 57,494 57,494 57,494
Accrued long-term restructuring charges 12,151 -- --
Other noncurrent liabilities 8,090 7,667 8,187
_________ __________ _________
85,086 91,550 91,055
_________ __________ _________
Minority Interest in Equity of Consolidated Subsidiary 9,190 8,221 8,925
_________ __________ _________
4<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
September 30, December 31, September 30,
(dollars in thousands) 1995 1994 1994
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
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;
35,820,468 shares, 30,275,831 shares and 30,268,725 shares issued 2,193 2,110 2,110
Additional paid-in capital 154,882 133,043 132,863
Accumulated deficit (138,327) (50,244) (54,772)
Unrealized gain (loss) on available-for-sale securities, net of tax 33 (21) 142
Cumulative foreign exchange translation adjustment (7,734) (7,947) (7,775)
Notes receivable under stock option plans (1,441) -- --
_________ __________ _________
9,606 76,941 72,568
Less common stock in treasury 697,556 shares, 697,556 shares and
697,556 shares (4,908) (4,908) (4,908)
_________ __________ _________
Total stockholders' equity 4,698 72,033 67,660
_________ __________ _________
$ 178,955 $ 259,076 $ 230,103
========= ========== =========
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
5<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
_________________________ ________________________
(dollars in thousands) 1995 1994 1995 1994
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 2,395 $ (4,148) $ (88,083) $ (68,453)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Loss on discontinued operations -- -- -- 9,420
Tax benefit from discontinued operations -- -- -- 1,008
Loss on disposal of discontinued operations -- -- -- 40,032
Depreciation and amortization 1,157 1,471 4,163 4,201
Amortization of acquired intangible assets 219 530 1,329 1,383
Amortization of prior period deferred marketing -- 4,007 1,470 17,213
Provision for doubtful accounts 227 110 2,148 411
Write-off of acquired intangible assets -- -- 47,509 --
(Gain) loss on foreign currency exchange (42) (146) (307) (453)
Change in assets and liabilities:
Receivables, net (6,552) (2,597) 11,709 9,980
Inventories and supplies (1,616) 656 (1,949) 1,183
Prepaid and deferred marketing expenses 129 (1,257) (4,446) (6,184)
Accounts payable and accrued expenses 6,272 6,317 (1,142) (6,675)
Accrued restructuring charges (2,608) -- 26,498 --
Accrued and deferred income taxes 838 (5,312) 255 (8,121)
Deferred contract revenues (1,648) (1,183) (4,081) (1,844)
Other (181) 1,417 (1,742) 3,539
________ ________ _________ _________
Net Cash From Operating Activities (1,410) (135) (6,669) (3,360)
________ ________ _________ _________
Cash Flows For Investing Activities:
Additions to land, building and equipment (610) (1,927) (5,977) (5,562)
Dispositions of land, buildings and equipment 44 40 (146) 299
Purchases of investment securities -- (1,521) (189) (4,771)
Proceeds from the sale or redemption of securities 430 6,004 9,266 10,589
Acquisition of business, net of cash acquired -- -- -- (3,870)
Discontinued operations (651) (5,113) (1,420) (18,018)
________ ________ _________ _________
Net Cash For Investing Activities (787) (2,517) 1,534 (21,333)
________ ________ _________ _________
6<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
_________________________ ________________________
(dollars in thousands) 1995 1994 1995 1994
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Additions to long-term debt 1,462 (3) 2,038 3,906
Reductions in long-term debt (481) (228) (1,076) (491)
Changes in short-term borrowings (780) (1,911) 7,634 5,397
Minority interest in earnings of consolidated subsidiary 624 738 969 879
Common stock, stock options and related tax benefits 736 34 1,922 603
Notes receivable under a stock option plan (262) -- (1,441) --
Purchase of common stock for treasury -- -- -- (53)
________ ________ _________ _________
Net Cash From Financing Activities 1,299 (1,370) 10,046 10,241
________ ________ _________ _________
Effect of Exchange Rate Changes on Cash 375 243 433 457
________ ________ _________ _________
Net Change in Cash and Equivalents (523) (3,779) 5,344 (13,995)
Cash and Equivalents at the Beginning of the Period 23,164 28,330 17,297 38,546
________ ________ _________ _________
Cash and Equivalents at the End of the Period $ 22,641 $ 24,551 $ 22,641 $ 24,551
======== ======== ========= =========
<FN>
Unaudited.
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
7<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 disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these financial statements be read in conjunction with the financial
statements, accounting policies, and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
The results of operations for interim periods are not necessarily indicative
of the results of operations to be expected for the year.
In the second quarter the Company adopted, effective January 1, 1995, the
provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets" (FASB 121). Prior to
January 1, 1995, the Company reviewed the recoverability of its long-lived
assets and intangible assets by comparing projected related cash flows on an
undiscounted basis to the net book value of the assets. In the event the
recoverability of the assets was impaired, the Company would have measured
the impairment by comparing projected operating income and related cash flows
on an undiscounted basis to the net book value of the assets. Under the
provisions of FASB 121, the Company will continue to review the
recoverability of long-lived assets and intangible assets by comparing cash
flows on an undiscounted basis to the net book value of the assets. In the
event the undiscounted cash flows are less than the net book value of the
assets, the carrying value of the assets will be written-down to their fair
value, less cost to sell. In addition, FASB 121 requires that assets to be
disposed of be measured at the lower of cost or fair value, less cost to
sell. Adopting FASB 121 had no effect on the Company's financial statements
except for the write-off of goodwill as described further at Note 3.
In December 1993, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement
of Position No. 93-7 ("SOP"), "Reporting on Advertising Costs". The SOP
generally requires advertising costs, other than direct-response advertising,
to be expensed as incurred. In the fourth quarter of 1994, ICS adopted the
SOP effective January 1, 1994. In adopting the SOP in 1994, ICS' total
advertising, selling and promotion costs were expensed as incurred in 1994
rather than deferred and amortized as in prior periods. Adoption of the SOP
in 1994 resulted in a charge of $7,631,000 for the three months ended
September 30, 1994. The charge consisted of two components. First, a charge
of $4,007,000 resulted from the amortization of the deferred marketing
balance at December 31, 1993 into 1994. Second, a charge of $3,624,000
resulted from increased selling and promotion spending above the amortization
that would have been expensed in accordance with the Company's previous
8<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 (continued)
___________________________________________________
accounting policy. Adoption of the SOP in 1994 resulted in a charge of
$26,939,000 for the nine months ended September 30, 1994. This charge
consisted of two components. First a charge of $17,213,000 resulted from the
amortization of the deferred marketing balance at December 31, 1993 into
1994. Second, a charge of $9,726,000 resulted from increased selling and
promotion spending above the amortization that would have been expensed in
accordance with the Company's previous accounting policy. At December 31,
1994, a deferred marketing balance of $1,470,000 remained, of which
$1,311,000 was amortized in the first quarter of 1995, with the remaining
$159,000 amortized in the second quarter of 1995.
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 1995
presentation.
NOTE 2 - 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 1994 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. Based on the current assumptions to dispose of
the Education Centers, 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.
Education Centers' negative cash flow of $651,000 for the three months ended
September 30, 1995 improved $4,462,000 from the prior year period due
primarily to proceeds from the sale of schools and expense reduction at the
operation.
Of the 29 remaining Education Centers schools as of December 31, 1994, the
Company has consummated the sale of 20 schools, and has entered into a
binding contract to sell an additional six schools in the next three months.
In addition, the Company has entered into agreements with additional parties
to teachout the students of or sell other remaining schools. The Company
expects to substantially complete the disposal of the Education Centers
schools by year end.
9<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 2 - Business Disposition (continued)
_________________________________________
Due to the sale/contractual sale of 26 schools, the assets held for sale and
accrued disposition costs of the remaining schools are considered immaterial
as of September 30, 1995 and, accordingly, the amounts previously classified
thereunder were reclassified to other current assets and accrued expenses
(regulatory and contractual obligations of the Education Centers) of
$6,886,000 and $6,940,000, respectively, as of September 30, 1995.
For purposes of presenting the statement of cash flows, prior year periods
have been reclassified to reflect the discontinued operations.
NOTE 3 - Write-off of Goodwill
______________________________
NETG has experienced significant operating losses over the past several years
in an environment of substantial changes in the training of information
systems and technology. Due to the many outstanding opportunities in the
training marketplace, especially in information technology, the Company
remained optimistic over the past periods about future sales and earnings,
such that through the first quarter of 1995, management's best estimates of
the future results of NETG's operations supported the recoverability of
recorded goodwill balances. However, given continuing losses through the
second quarter of 1995, management concluded that NETG could not return to
profitability in the foreseeable future without significant changes in its
operating structure and business direction.
As a result, the Company implemented a reorganization and downsizing of
NETG's operations in the second quarter. During the second quarter the
Company implemented changes in key management positions including the
Company's Chief Executive Officer, NETG's President and other NETG senior
management positions. In addition, certain product lines have been
discontinued and the subsidiary has reorganized its sales and marketing
effort to enhance its channels of distribution which, among other things,
resulted in the restructuring described in Note 4. As a result of these
changes, the Company has revised NETG's financial projections, consistent
with management's best estimate of future results of operations. Based upon
this estimate of the future results of operations, the estimated net cash
flows over the remaining life of NETG's intangible assets (goodwill) are less
than the net book value of the goodwill at June 30, 1995. Under the
provisions of FASB 121, the Company has estimated the fair value of its
investment in NETG by discounting estimated future net cash flows at a rate
commensurate with the related risk. Based upon this analysis, management
believes NETG to have only a nominal fair value such that, after considering
the estimated costs to sell, the goodwill balance of $42,719,000 related to
the Company's 1986 acquisition of what is now NETG was written-off during the
second quarter.
10<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 3 - Write-off of Goodwill (continued)
__________________________________________
Additionally, in connection with the restructuring of NETG during the second
quarter, the Company discontinued the operations of Spectrum, a subsidiary of
NETG which provided primarily custom developed training to businesses. As a
result, the Company recorded the assets and liabilities of Spectrum at their
fair value and recorded a write-off of goodwill in the amount of $4,790,000
($.26 per share) during the second quarter. The acquisition of Spectrum in
1988 was accounted for as a pooling-of-interests. The goodwill was related
to an acquisition made by Spectrum prior to 1988. Spectrum's revenue and
operating loss before interest and amortization of intangibles for the nine
months ended September 30, 1995 and September 30, 1994 and the twelve months
ended December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, December 31,
_________________________ ___________________
(dollars in thousands) 1995 1994 1994
________________________________________________________ __________ _________ ___________________
<S> <C> <C> <C>
Revenues $ 1,600 $ 4,219 $ 5,247
Operating loss before interest and
amortization of intangibles $ (1,433) $ (860) $ (1,126)
</TABLE>
The write-off of goodwill is included within unusual items in the
consolidated statements of operations. As management revised its estimate of
the subsidiary's future cash flows as a result of second quarter events, the
adoption of FASB 121 had no effect on the consolidated results of operations
of any prior periods.
NOTE 4 - Restructuring Charges
______________________________
As a result of continued losses at NETG, the Company resolved to
significantly lower the overall cost structure while focusing on specific
training areas to permit NETG to return to profitability. Accordingly, the
Company approved a restructuring plan for NETG in June 1995 which resulted in
a nonrecurring charge of $28,652,000 ($.95 per share). No tax benefits were
provided on this charge. The charge includes severance related payments,
excess facilities costs, the write-down of inventory and fixed assets of
certain discontinued products, and other restructuring related items such as
charges related to canceled contracts and agreements. The following
summarizes these charges, the related write-offs and cash paid in connection
with the restructuring.
11<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 4 - Restructuring Charges (continued)
__________________________________________
<TABLE>
<CAPTION>
Severance Excess Fixed Assets
(dollars in thousands) Payments Facilities and Inventory Other Total
_____________________________________________ _________ __________ _____________ _________ _________
<S> <C> <C> <C> <C> <C>
1995 restructuring charges $ 3,435 $ 16,040 $ 4,020 $ 5,157 $ 28,652
Noncash write-off -- -- (4,020) (3,506) (7,526)
Cash paid (1,084) (1,108) -- (1,001) (3,193)
_________ _________ __________ _________ _________
Accrued restructuring at
September 30, 1995 $ 2,351 $ 14,932 $ -- $ 650 $ 17,933
========= ========= ========== ========= =========
</TABLE>
Amounts related to severance covered approximately one hundred employees
involved primarily in sales and marketing, distribution and other
administrative functions at NETG's domestic and European locations. Amounts
related to facilities reflect the cost of leases for excess space arising
from the consolidation of space within the subsidiary's U.S. headquarters and
the subsidiary's domestic and European sales offices. The noncurrent portion
of the restructuring charges relates primarily to leases on unutilized space
which will require payments through 2004.
Additionally, during the second quarter, an unusual charge was recorded in
the amount of $1,644,000 ($.05 per share) at NEC Corporate primarily for
severance related payments to the former chief executive officer and
corporate expenses related to the restructuring of NETG. The cumulative cash
paid in connection with this charge was $593,000.
NOTE 5 - Conversion of $20 Million Senior Subordinated Convertible
Debentures into Common Stock
__________________________________________________________________
Effective September 11, 1995, the holders of $20 million of the Company's
senior subordinated convertible debentures, which bore interest at 10
percent, converted such debentures into 5 million shares of the Company's
common stock. The debentures had been issued to certain entities affiliated
with Richard C. Blum & Associates, L.P. (RCBA), who maintained discretionary
investment control over these entities. The Chairman of the Board of RCBA is
Richard C. Blum, a director of the Company.
12<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 6 - 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 7 - 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. 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 $54,000 and a related
deferred tax liability of $21,000, resulting in a net increase of $33,000 in
stockholders' equity.
During the nine months ended September 30, 1995 and 1994, the Company did not
realize a material gain or loss from the sale of available-for-sale
securities.
NOTE 7 - Statements of Cash Flows Supplementary Information
___________________________________________________________
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
_________________________ ________________________
(dollars in thousands) 1995 1994 1995 1994
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Paid During the Period For:
Interest expense $ 2,121 $ 1,445 $ 6,471 $ 4,574
Income taxes, net of income tax
refunds $ 288 $ 677 $ 338 $ 2,487
13<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>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Variance Change
________________________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues:
ICS Learning Systems $ 37,946 $ 31,312 $ 6,634 21.2%
Steck-Vaughn Publishing 20,372 18,852 1,520 8.1
NETG 12,977 12,419 558 4.5
Other 734 756 (22) (2.9)
_________ _________ ________
Total Net Revenues $ 72,029 $ 63,339 $ 8,690 13.7
========= ========= ========
Operating Income (Loss):
ICS Learning Systems before amortization 2,179 2,072 107 5.2
Amortization of prior period
deferred marketing -- (4,007) 4,007 n/m
_________ _________ ________
ICS Learning Systems 2,179 (1,935) 4,114 n/m
Steck-Vaughn Publishing 5,528 5,305 223 4.2
NETG 59 (4,409) 4,468 n/m
Other 205 255 (50) (19.6)
_________ _________ ________
Total Segment Operating Income (Loss): 7,971 (784) 8,755 n/m
General corporate expenses (1,525) (2,023) 498 24.6
Interest expense (2,352) (1,637) (715) (43.7)
Investment income 814 599 215 35.9
Other income, net 42 146 (104) (71.2)
_________ _________ ________
Income (Loss) Before Tax Benefit, Minority
Interest and Discontinued Operations 4,950 (3,699) 8,649 n/m
Income tax provision (benefit) 1,930 (140) 2,070 n/m
_________ _________ ________
Income (Loss) Before Minority Interest and
Discontinued Operations 3,020 (3,559) 6,579 n/m
Minority interest 625 589 36 6.1
_________ _________ ________
Net Income (Loss) $ 2,395 $ (4,148) $ 6,543 n/m
========= ========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
14<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)
Detailed Segment Operating Results:
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended September 30, 1995
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 72,029 $ 37,946 $ 20,372 $ 12,977 $ 734
Costs and Expenses:
Contract course materials and service costs 18,739 14,071 34 4,219 415
Publishing costs and materials 4,997 -- 4,997 -- --
Product development 4,525 873 2,069 1,583 --
Selling and promotion 29,877 18,174 6,498 5,115 90
General and administrative 5,706 2,620 1,061 2,001 24
Amortization of acquired intangible assets 214 29 185 -- --
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ 7,971 $ 2,179 $ 5,528 $ 59 $ 205
========= ========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended September 30, 1994
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 63,339 $ 31,312 $ 18,852 $ 12,419 $ 756
Costs and Expenses:
Contract course materials and service costs 14,863 9,182 29 5,104 548
Publishing costs and materials 4,421 -- 4,421 -- --
Product development 4,938 987 1,835 2,116 --
Selling and promotion 29,187 16,930 6,258 6,133 (134)
General and administrative 6,177 2,029 924 3,141 83
Amortization of prior period deferred
marketing 4,007 4,007 -- -- --
Amortization of acquired intangible assets 530 112 80 334 4
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ (784) $ (1,935) $ 5,305 $ (4,409) $ 255
========= ========= ========== ========= =========
</TABLE>
15<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)
Three Months Ended September 30, 1995 Compared to Three Months Ended
September 30, 1994
____________________________________________________________________
Revenues of $72,029,000 for the three months ended September 30, 1995 were
$8,690,000 or 13.7% higher than revenues of $63,339,000 in the prior year.
Net income for the period was $2,395,000 or $.08 per share, compared to a net
loss of $4,148,000 or $.14 per share in the prior year.
ICS Learning Systems:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Traditional Distance Education - Domestic $ 23,435 $ 17,636 32.9%
Traditional Distance Education - International 10,744 10,311 4.2
Industrial and Business 1,866 1,913 (2.5)
MicroMash 1,901 1,452 30.9
_________ _________
Total Revenues $ 37,946 $ 31,312 21.2
========= =========
Traditional Business:
New Enrollments:
Domestic 74,211 68,546 8.3
International 29,637 32,655 (9.2)
_________ _________
Total New Enrollments 103,848 101,201 2.6
========= =========
Gross Enrollment Value (GEV):
Domestic 59,338 52,801 12.4
International 20,172 18,318 10.1
_________ _________
Total GEV 79,510 71,119 11.8
========= =========
Advertising and Promotion Spending:
Domestic 12,121 10,592 14.4
International 4,577 4,463 2.6
_________ _________
Total Advertising and Promotion Spending 16,698 15,055 10.9
========= =========
Unearned Future Tuition Revenue at
September 30 (a) $ 182,820 $ 164,348 11.2
========= =========
<FN>
(a) Approximately 45% of unearned future tuition revenue is realized into
revenue.
</FN>
</TABLE>
16<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)
Revenues at ICS Learning Systems increased during the quarter primarily
due to strong performance at the domestic operations while the
international operations increased only slightly. Revenues increased
primarily due to strong domestic enrollment increases of 22.3% in the
first six months of 1995 and enrollment increases of 8.3% during the
quarter. The domestic enrollment increase primarily resulted from higher
marketing spending, continued success of the expanded telesales efforts
which have resulted in higher conversion of leads to enrollments and
higher enrollments in the desktop computer related courses which carries a
higher tuition price. The revenue increase at the international operation
resulted primarily from higher revenues in Canada and Australia.
Effective September 15, 1995, domestic ICS discontinued bundling the
computer hardware with the desktop computer related training courses. The
following details the domestic revenues and estimated revenues related to
the specific computer hardware of these courses.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
_________________________ ________________________
(dollars in thousands) 1995 1994 1995 1994
______________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Domestic:
Total computer related course revenues $ 6,991 $ 5,181 $ 19,313 $ 13,121
Computer hardware revenue allocation $ 3,485 $ 2,517 $ 10,120 $ 5,826
Operating income increased due to the amortization of prior period deferred
marketing costs in 1994. Barring the effects of the amortization of prior
period deferred marketing, operating income increased 5.2% compared to the
prior year period. Additionally, operating income margins decreased
approximately 1% due primarily to increased course material costs,
especially computer costs in the related courses, and higher general and
administrative costs resulting primarily from ongoing costs incurred for
the conversion to a new information system.
17<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)
Steck-Vaughn Publishing:
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Elementary/High School $ 14,167 $ 12,222 15.9%
Adult Education 3,373 3,891 (13.3)
Library 2,832 2,739 3.4
_________ _________
Total Revenues $ 20,372 $ 18,852 8.1
========= =========
</TABLE>
Revenues and operating income at Steck-Vaughn increased during the third
quarter as compared to the prior year due primarily to selling price
increases, strengthening in the traditional elementary market and from the
recently acquired Berrent product line in November 1994. Revenues in the
adult education product line decreased as compared to the prior year due
to the anticipated fourth quarter release of new products, including GED
and Pre-GED products. Revenues increased modestly in the library product
line primarily due to revenues generated from the distribution agreement
with Abdo & Daughters, a publisher of high interest, low-reading level
products in key curriculum content areas. Publishing costs increased
during the quarter resulting from higher paper costs and changes in
product mix to higher cost product sales. Amortization of acquired
intangibles increased during the quarter due to the Berrent acquisition in
late 1994.
NETG:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Domestic without Spectrum $ 6,806 $ 7,805 (12.8)%
Spectrum 257 1,198 (78.5)
International 5,914 3,416 73.1
_________ _________
Total Revenues $ 12,977 $ 12,419 4.5
========= =========
</TABLE>
18<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 modestly increased while operating income significantly
improved during the quarter as compared to the prior year. Domestic
revenues, excluding Spectrum, continued to decrease while international
revenues significantly increased due to strong performance in the U.K.
operation. The significant increase in the U.K. operations results from
an experienced management team coupled with effective sales and marketing
strategies implemented in 1994. Operating results improved significantly
due to increased revenues in the international operations and the
reduction in overall expenses resulting from the restructuring implemented
in June/July 1995.
General corporate expenses decreased during the period primarily due to
continued cost control and reduced overall costs.
Operating results of ICS and NETG foreign operations by geographic region are
discussed above. Foreign currency exchange gains, recorded to other income,
were $42,000 compared to gains of $146,000 in the prior year.
19<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) 1995 1994 Variance Change
______________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 107,611 $ 89,089 $ 18,522 20.8%
Steck-Vaughn Publishing 46,797 43,493 3,304 7.6
NETG 33,348 36,450 (3,102) (8.5)
Other 2,496 2,116 380 18.0
_________ _________ ________
Total Net Revenues $ 190,252 $ 171,148 $ 19,104 11.2
========= ========= ========
Operating Income (Loss):
ICS Learning Systems before amortization 3,231 6,137 (2,906) (47.4)
Amortization of prior period
deferred marketing (1,470) (17,213) 15,743 91.5
_________ _________ ________
ICS Learning Systems 1,761 (11,076) 12,837 115.9
Steck-Vaughn Publishing 9,079 9,638 (559) (5.8)
NETG before unusual items (13,803) (12,975) (828) (6.4)
Unusual items (76,161) -- (76,161) n/m
_________ _________ ________
NETG (89,964) (12,975) (76,989) n/m
Other 638 (316) 954 n/m
_________ _________ ________
Total Segment Operating Loss (78,486) (14,729) (63,757) n/m
General corporate expenses (5,096) (5,659) 563 9.9
Interest expense (6,732) (4,646) (2,086) (44.9)
Investment income 2,030 2,543 (513) (20.2)
Unusual items (1,644) -- (1,644) n/m
Other income, net 307 453 (146) 32.2
_________ _________ ________
Loss Before Tax Benefit, Minority
Interest and Discontinued Operations (89,621) (22,038) (67,583) n/m
Tax benefit (2,603) (4,123) 1,520 36.9
_________ _________ ________
Loss Before Minority Interest and
Discontinued Operations (87,018) (17,915) (69,103) n/m
Minority interest 1,065 1,086 (21) (1.9)
Loss From Continuing Operations (88,083) (19,001) (69,082) n/m
Discontinued operations -- (49,452) 49,452 n/m
_________ _________ ________
Net Loss $ (88,083) $ (68,453) $(19,630) (28.7)
========= ========= ========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
20<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)
Detailed Segment Operating Results:
<TABLE>
<CAPTION>
(dollars in thousands) Nine Months Ended September 30, 1995
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 190,252 $ 107,611 $ 46,797 $ 33,348 $ 2,496
Costs and Expenses:
Contract course materials and service costs 56,685 39,891 83 15,307 1,404
Publishing costs and materials 12,489 -- 12,489 -- --
Product development 14,450 2,529 6,444 5,477 --
Selling and promotion 85,854 54,307 14,602 16,606 339
General and administrative 20,315 7,562 3,546 9,092 115
Amortization of prior period deferred
marketing 1,470 1,470 -- -- --
Amortization of acquired intangible assets 1,314 91 554 669 --
Unusual items 76,161 -- -- 76,161 --
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ (78,486) $ 1,761 $ 9,079 $ (89,964) $ 638
========= ========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Nine Months Ended September 30, 1994
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 171,148 $ 89,089 $ 43,493 $ 36,450 $ 2,116
Costs and Expenses:
Contract course materials and service costs 43,078 26,399 70 15,010 1,599
Publishing costs and materials 11,357 -- 11,357 -- --
Product development 14,256 2,399 5,470 6,387 --
Selling and promotion 79,625 48,051 13,684 17,538 352
General and administrative 19,013 6,022 3,033 9,487 471
Amortization of prior period deferred
marketing 17,213 17,213 -- -- --
Amortization of acquired intangible assets 1,335 81 241 1,003 10
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ (14,729) $ (11,076) $ 9,638 $ (12,975) $ (316)
========= ========= ========== ========= =========
</TABLE>
21<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, 1995 Compared to Nine Months Ended September,
1994
_____________________________________________________________________________
Revenues of $190,252,000 for the nine months ended September 30, 1995, were
$19,104,000 or 11.2% higher than revenues of $171,148,000 in the prior year.
Loss from continuing operations was $88,083,000 or $2.89 per share, compared
to a loss of $19,001,000 or $.64 per share in the prior year. Net loss for
the period was $88,083,000 or $2.89 per share compared to a loss of
$68,453,000 or $2.31 share in the prior year.
ICS Learning Systems:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Traditional Distance Education - Domestic $ 64,767 $ 49,878 29.9%
Traditional Distance Education - International 32,161 30,274 6.2
Industrial and Business 5,963 5,505 8.3
MicroMash 4,720 3,432 37.5
_________ _________
Total Revenues $ 107,611 $ 89,089 20.8
========= =========
Traditional Business:
New Enrollments:
Domestic 226,057 192,664 17.3
International 91,936 96,863 (5.1)
_________ _________
Total New Enrollments 317,993 289,527 9.8
========= =========
Gross Enrollment Value (GEV):
Domestic $ 180,102 $ 143,959 25.1
International 58,901 53,497 10.1
_________ _________
Total GEV $ 239,003 $ 197,456 21.0
========= =========
Advertising and Promotion Spending:
Domestic $ 35,589 $ 29,823 19.3
International 14,240 12,894 10.4
_________ _________
Total Advertising and Promotion Spending $ 49,829 $ 42,717 16.6
========= =========
</TABLE>
22<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)
ICS experienced similar changes in revenues and operating results as
occurred for the three month period previously discussed with the
following exceptions. Operating income and operating margins decreased
(barring the effects of amortization of prior period deferred marketing)
$2,906,000 and 4% respectively, due to increased computer hardware costs
in the desktop computer related courses.
Steck-Vaughn Publishing:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Elementary/High School $ 28,731 $ 25,968 10.6%
Adult Education 9,936 10,185 (2.4)
Library 8,130 7,340 10.8
_________ _________
Total Revenues $ 46,797 $ 43,493 7.6
========= =========
</TABLE>
Steck-Vaughn experienced similar changes in revenues as occurred for the
three month period while operating income and margins decreased due
primarily to higher product development expenses and general and
administrative expenses resulting from one-time insurance credits from
favorable loss experience in 1994.
NETG:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Domestic without Spectrum $ 16,041 $ 20,902 (23.3)%
Spectrum 1,600 4,219 (62.1)
International 15,707 11,329 38.6
_________ _________
Total Revenues $ 33,348 $ 36,450 (8.5)
========= =========
</TABLE>
23<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 experienced lower revenues and operating results primarily due to
significantly lower domestic revenues partially offset by higher
international revenues and the unusual charges taken in the second quarter
to restructure the operation and write-off the goodwill. Barring the
effects of the unusual charges, operating results modestly decreased due
primarily to lower domestic revenues. The effects of the recent
restructuring, excluding Spectrum, are anticipated to result in reduced
annualized expenses of approximately $14 million, primarily from payroll
related, facilities and other operating expenses. See Notes 3 and 4 to
the Notes to Consolidated Financial Statements for a further discussion of
the restructuring and write-off of goodwill.
General corporate expenses experienced similar changes as occurred in the
three month period ending September 30, 1995.
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 gains of
$453,000 in the prior year.
24<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, investment securities
and cash provided from operations. At September 30, 1995, the Company had
$24,487,000 in cash and investment securities of which $11,474,000 was held
in the account of Steck-Vaughn. As of September 30, 1995, the Company had a
revolving bank credit agreement in the amount of $12,000,000 of which
$12,000,000 was outstanding. During the nine month period ending September
30, 1995, the Company increased borrowings under the credit facility by
$7,000,000 to the current outstanding amount. The Company also has an
intercompany credit facility with Steck-Vaughn in the amount of $10,000,000
of which $6,500,000 was outstanding as of September 30, 1995.
For the nine months ended September 30, 1995, net cash from operating
activities of negative $6,669,000 decreased $3,309,000 from a negative
$3,360,000 in the prior year period. The decrease in cash from operating
activities is due primarily to increases in other current assets at ICS which
represent the unamortized portion of the computers shipped to students and
NETG restructuring payments of $3,193,000.
For the nine months ended September 30, 1995, net cash for investing
activities improved to $1,534,000 from negative $21,333,000 in the prior year
period. The $22,867,000 increase was due primarily to 1) higher cash flows
of $16,598,000 from the Education Centers resulting from cost control,
improved student starts and proceeds from the sale of schools of $5,257,000,
2) acquisition of MicroMash for $3,870,000 in 1994 and 3) changes in net
proceeds from securities of $3,259,000.
The Company expects that cash, investment securities, bank credit facility,
Steck-Vaughn credit facility, which has been extended to March 31, 1996, and
cash provided from operations will be sufficient to provide for planned
working capital requirements, debt service, capital expenditures and
restructuring payments at NETG for the foreseeable future.
25<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) No reports on Form 8-K were filed for the period for which this report is
filed.
26<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.
Date: November 8, 1995
By /s/ Keith K. Ogata
___________________________
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
27<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
(Item 6(a))
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
3.1 Restated Certificate of Incorporation of
the Company <F3> . . . . . . . . . . . . . . . . . . . <F1>
3.2 By-Laws of the Company, as amended <F4>. . . . . . . . <F1>
10.1<F2> National Education Corporation Retirement Plan
(Restated as of January 1, 1989 and as Amended
through January 1, 1992) <F5>. . . . . . . . . . . . . <F1>
10.2 National Education Corporation Retirement Plan
Trust <F6> . . . . . . . . . . . . . . . . . . . . . . <F1>
10.3<F2> Advanced Systems, Incorporated 1984 Stock
Option and Stock Appreciation Rights Plan <F7> . . . . <F1>
10.4<F2> 1986 Stock Option and Incentive Plan, as
amended <F8> . . . . . . . . . . . . . . . . . . . . . <F1>
10.5<F2> Amended and Restated 1990 Stock Option and
Incentive Plan <F9>. . . . . . . . . . . . . . . . . . <F1>
10.6<F2> Amended and Restated 1991 Directors' Stock
Option and Award Plan <F10>. . . . . . . . . . . . . . <F1>
10.7 Rights Agreement, dated October 29, 1986,
between National Education Corporation and
Bank of America National Trust and Savings
Association, Rights Agent (including exhibits
thereto) <F11> . . . . . . . . . . . . . . . . . . . . <F1>
10.8 Addendum No. 1 to Rights Agreement, dated
August 5, 1991 <F12> . . . . . . . . . . . . . . . . . <F1>
10.9 Indenture, dated as of May 15, 1986, between
National Education Corporation and Continental
Illinois National Bank and Trust Company of
Chicago, as Trustee <F13>. . . . . . . . . . . . . . . <F1>
28<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.10 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 <F14>. . . . . . . . . . . . . . . . . . . . . <F1>
10.11 National Education Corporation Purchase Agree-
ment, Senior Subordinated Convertible Deben-
tures, dated as of February 15, 1991 <F15> . . . . . . <F1>
10.12<F2> National Education Corporation Supplemental
Executive Retirement Plan, as amended <F16>. . . . . . <F1>
10.13<F2> Supplemental Benefit Plan for Non-Employee
Directors <F17>. . . . . . . . . . . . . . . . . . . . <F1>
10.14 Intercompany Agreement between National
Education Corporation and Steck-Vaughn
Publishing Corporation, dated June 30, 1993 <F18>. . . <F1>
10.15 Tax Sharing Agreement between National
Education Corporation and Its Direct and
Indirect Corporate Subsidiaries, dated
January 1, 1993 <F19>. . . . . . . . . . . . . . . . . <F1>
10.16 Asset Purchase Agreement between Steck-Vaughn
Company and Creative Edge Inc., dated as of
April 26, 1993 <F20> . . . . . . . . . . . . . . . . . <F1>
10.17 $13,500,000 Amended and Restated Credit Agreement
among National Education Corporation, the Banks
named therein and Bankers Trust Company as Agent,
dated February 28, 1995 (the "Credit Agreement")
(Confidential treatment under Rule 24b-2 has been
granted for portions of this exhibit) <F21>. . . . . . <F1>
10.18 First Amendment to Intercompany Agreement,
dated June 10, 1994, between National Education
Corporation and Steck-Vaughn Publishing
Corporation <F22>. . . . . . . . . . . . . . . . . . . <F1>
10.19 $10,000,000 Credit Agreement between Steck-Vaughn
Company and NationsBank of Texas, dated as of
June 10, 1994 <F23>. . . . . . . . . . . . . . . . . . <F1>
29<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.20 Revolving Line of Credit Note and Option
Agreement between National Education Corporation and
Steck-Vaughn Publishing Corporation, dated
February 28, 1995 <F24>. . . . . . . . . . . . . . . . <F1>
10.21<F2> Executive Employment Agreement between National
Education Corporation and Sam Yau <F25>. . . . . . . . <F1>
10.22 First Amendment and Limited Waiver to Credit Agreement
among National Education Corporation, the Banks
named therein and Bankers Trust Company as Agent,
dated July 31, 1995 <F26>. . . . . . . . . . . . . . .
10.23 Debenture Conversion Agreement among National
Education Corporation and the Holders identified
therein, dated August 31, 1995 <F26> . . . . . . . . .
10.24 Amendment of Loan Agreement between Nationsbank of
Texas, N.A. and Steck-Vaughn Company, dated
September 29, 1995 <F26> . . . . . . . . . . . . . . .
11.1 Calculation of Primary Earnings Per Share <F26>. . . .
11.2 Calculation of Fully Diluted Earnings Per Share <F26>.
27.1 Financial Data Schedule <F26>. . . . . . . . . . . . .
<FN>
________________________________
<F1> incorporated by reference from a previously filed document
<F2> denotes management contract or compensatory plan or arrangement
<F3> Incorporated by reference to Exhibit 19-2 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1987.
<F4> Incorporated by reference to Exhibit 10 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990.
<F5> Incorporated by reference to Exhibit 10.1 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, filed
March 22, 1993.
<F6> Incorporated by reference to Exhibit 10(b) filed with Registrant's
Registration Statement on Form S-8 (No. 2-86904), filed October 3,
1983.
30<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<F7> Incorporated by reference to Exhibit 10.15 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987,
filed March 30, 1988.
<F8> Incorporated by reference to Exhibit 10.17 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990, filed
April 1, 1991.
<F9> Incorporated by reference to Exhibit A in the Registrant's Proxy
Statement furnished in connection with the Annual Meeting of
Stockholders held June 27, 1995, filed May 22, 1995.
<F10> Incorporated by reference to Exhibit B in the Registrant's Proxy
Statement furnished in connection with the Annual Meeting of
Stockholders held June 27, 1995, filed May 22, 1995.
<F11> Incorporated by reference to Exhibit 4.1 filed with Registrant's
Current Report on Form 8-K, dated October 29, 1986, filed October 30,
1986.
<F12> Incorporated by reference to Exhibit 10.19 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
<F13> Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to
Registrant's Registration Statement on Form S-3 (No. 33-5552), filed
May 16, 1986.
<F14> Incorporated by reference to Exhibit 4 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990.
<F15> Incorporated by reference to Exhibit 4 filed with Registrant's Current
Report on Form 8-K, dated February 20, 1991, filed February 27, 1991.
<F16> Incorporated by reference to Exhibit 10.17 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
<F17> Incorporated by reference to Exhibit 10.18 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
<F18> Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1
to Steck-Vaughn Publishing Corporation's Registration Statement on
Form S-1, File No. 33-62334, filed June 17, 1993.
<F19> Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1
to Steck-Vaughn Publishing Corporation's Registration Statement on
Form S-1, File No. 33-62334, filed June 17, 1993.
<F20> Incorporated by reference to Exhibit 10.13 filed with Steck-Vaughn
Publishing Corporation's Registration Statement on Form S-1, File No.
33-62334, filed May 7, 1993.
31<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<F21> Incorporated by reference to Exhibit 10.18 filed with Registrant's
Annual Report on Form 10-K for the year ended December 13, 1994, filed
March 30, 1995.
<F22> Incorporated by reference to Exhibit 10.23 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994,
filed on August 11, 1994.
<F23> Incorporated by reference to Exhibit 10.14 filed with Steck-Vaughn
Publishing Corporation's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, filed on August 11, 1994.
<F24> Incorporated by reference to Exhibit 10.12 filed with Steck-Vaughn
Publishing Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994, filed March 29, 1995.
<F25> Incorporated by reference to Exhibit 10.21 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995,
filed on May 11, 1995.
<F26> Filed herewith.
</FN>
</TABLE>
32
<PAGE>
<PAGE>
EXHIBIT 10.22
FIRST AMENDMENT AND LIMITED WAIVER
TO CREDIT AGREEMENT
This FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT (this
"Amendment") is dated as of August 4, 1995 and entered into by and among
National Education Corporation, a Delaware corporation (the "Borrower"), the
Bank listed on the signature pages hereof (the "Bank"), and Bankers Trust
Company, as agent for the Bank (the "Agent") and, for purposes of Sections 3
and 4 hereof, the Subsidiaries of the Borrower listed on the signature pages
hereof, and is made with reference to that certain Amended and Restated
Credit Agreement dated as of February 28, 1995 by and among the Borrower, the
Bank and the Agent (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:
"`1995 Charges' shall mean the charges, in an aggregate amount not
exceeding $77,820,000 to be taken by the Borrower against its income in
its 1995 fiscal year as the result of the restructuring of the
operations of NETG and Borrower (National Education Corporation
corporate), which shall result in charges not exceeding $30,300,000, and
certain write-offs of goodwill in an amount not exceeding $47,520,000.
1995 Charges shall not, however, include any Second Quarter Charges."
1<PAGE>
<PAGE>
"`Second Quarter Charges' shall mean operating charges in an
aggregate amount not exceeding $3,100,000 to be taken by the Borrower
against its income in the second quarter of its 1995 fiscal year in
relation to the operations of NETG and its Subsidiaries."
1.2 Amendments to Section 8.09: Ratio of Liabilities to Net
Worth. Section 8.09 of the Credit Agreement is hereby amended by deleting
the proviso therefrom in its entirety and substituting the following proviso
therefor:
"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, (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, and (d)
to the extent Adjusted Consolidated Net Worth would be reduced by
any amount as the result of the 1995 Charges or any Second Quarter
Charges, the amount of such reduction shall be disregarded in
determining Adjusted Consolidated Net Worth"
1.3 Amendments to Section 8.10(a): Minimum Consolidated EBITDA.
Section 8.10(a) of the Credit Agreement is hereby amended by deleting the
proviso therefrom in its entirety and substituting the following proviso
therefor:
"provided that, for purposes of this Section, (a) 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 in determining Consolidated EBITDA, (b) all 1995
Charges shall be disregarded in determining Consolidated EBITDA,
and (c) all Second Quarter Charges shall be disregarded in
determining EBITDA for the four quarter period ending as of the
last day of the second quarter of the Borrower's 1995 fiscal year"
1.4 Amendments to Section 8.11: Minimum Consolidated Net Worth.
Section 8.11 of the Credit Agreement is hereby amended by deleting the
proviso therefrom and substituting the following proviso therefor:
2<PAGE>
<PAGE>
"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 Adjusted Consolidated Net Worth,
(b) 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, and (c) to the extent Adjusted Consolidated Net Worth would
be reduced by any amount as the result of the 1995 Charges or
Second Quarter Charges, the amount of such reduction shall be
disregarded in determining Adjusted Consolidated Net Worth"
1.5 Amendments to Section 8.12: Fixed Charge Coverage Ratio.
Section 8.12 of the Credit Agreement is hereby amended by deleting the
proviso therefrom and substituting the following proviso therefor:
"provided that for the purposes of this Section, (a) 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, (b) all 1995 Charges shall be
disregarded in determining Consolidated EBITDA of the Borrower and
its Subsidiaries, (c) all Second Quarter Charges shall be
disregarded in determining Consolidated EBITDA of the Borrower and
its Subsidiaries for the four quarter period ending on the last day
of the second quarter of the Borrower's 1995 fiscal year, (d) 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 (e) 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"
1.6 Amendments to Schedule II: Material Adverse Changes.
Schedule II to the Credit Agreement is hereby amended by adding the following
paragraph at the bottom thereof:
"The Borrower may take a charges not exceeding $80,920,000 in the
aggregate in its 1995 fiscal year in connection with the
restructuring of NETG and the Borrower (National Education
Corporation corporate), the write-off of certain good will shown on
the books of the Borrower and certain operational charges arising
from the operations of NETG."
3<PAGE>
<PAGE>
Section 2. LIMITED WAIVER OF SECTION 4.01(c) THE CREDIT AGREEMENT
Agent and the Bank hereby waive the Borrower's compliance with
Section 4.01(c) of the Credit Agreement to the extent and only the extent
necessary to permit the Borrower to delay prepaying the Loans with any Cash
Proceeds received from Career Education Corp. in partial payment of the
purchase price for two schools being sold by the Borrower until the earlier
of the date such sale is completed or October 31, 1995.
The foregoing waiver shall be limited exactly as written, and,
without limiting the generality of the foregoing, such waiver shall not be
construed or deemed a waiver of the Borrower's compliance with any other
Section of the Credit Agreement or of the Borrower's compliance with Section
4.01(c) with respect to any other Asset Sale.
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 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.
4<PAGE>
<PAGE>
D. Governmental Consents. The execution and delivery by the
Borrower and each such Subsidiary of this Amendment and the performance by
the Borrower of the Amended Agreement do not and will not require any
registration with, consent or approval of, or notice to, or other action to,
with or by, any Federal, state or other governmental authority or regulatory
body or other Person.
E. Binding Obligation. This Amendment and, in the case of the
Borrower, the Amended Agreement, are the legally valid and binding
obligation(s) of the Borrower and each such Subsidiary, enforceable against
the Borrower or such Subsidiary in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or limiting creditors' rights
generally or by equitable principles relating to enforceability.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in Section 6 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the date hereof to the same extent as though made on
and as of that date, except to the extent that such representations and
warranties specifically relate to an earlier date, in which case they are
true, correct and complete in all material respects as of such earlier date.
G. Absence of Default. 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.
5<PAGE>
<PAGE>
Each Subsidiary Guarantor acknowledges and agrees that the
Subsidiary Guaranty shall continue in full force and effect and that all of
its obligations thereunder shall be valid and enforceable and shall not be
impaired or affected by the execution or effectiveness of this Amendment.
Each Subsidiary Guarantor represents and warrants that all representations
and warranties contained in the Subsidiary Guaranty are true, correct and
complete in all material respects on and as of the date hereof to the same
extent as though made on and as of that date except to the extent that such
representations and warranties specifically relate to an earlier date, in
which case they are true, correct and complete in all material respects as of
such earlier date.
Each Subordinated Subsidiary acknowledges and agrees that the
Subordination Agreement shall continue in full force and effect and that all
of its obligations thereunder shall be valid and enforceable and shall not be
impaired or affected by the execution or effectiveness of this Amendment.
Each Subordinated Subsidiary represents and warrants that all representations
and warranties contained in the Subordination Agreement are true, correct and
complete in all material respects on and as of the date hereof to the same
extent as though made on and as of that date except to the extent that such
representations and warranties specifically relate to an earlier date, in
which case 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.
6<PAGE>
<PAGE>
(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 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.
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]
7<PAGE>
<PAGE>
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: __________________________
Title: _______________________
NETG HOLDING, INC.
NATIONAL EDUCATION TRAINING
GROUP, INC.,
SPECTRUM INTERACTIVE
INCORPORATED
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
INTERNATIONAL CORRESPONDENCE
SCHOOLS, INC.,
as the Subsidiary Guarantors
By: __________________________
Title: _______________________
NATIONAL EDUCATION INTERNATIONAL
CORP.
NATIONAL EDUCATION CREDIT
CORPORATION
NATIONAL EDUCATION FOREIGN SALES
CORP.
NATIONAL EDUCATION PAYROLL CORP.
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
NETG HOLDING, INC.,
as the Subordinated Subsidiaries
By: __________________________
Title: _______________________
BANKERS TRUST COMPANY, as the Bank and as the Agent
By: ___________________________
Title: ________________________
8<PAGE>
<PAGE>
<PAGE>
EXHIBIT 10.23
NATIONAL EDUCATION CORPORATION
DEBENTURE CONVERSION AGREEMENT
This Debenture Conversion Agreement (the "Agreement") is made and
entered into as of the 31st day of August, 1995, by and among National
Education Corporation, a Delaware corporation (the "Company") and each of the
holders identified on Schedule A attached hereto and made a part hereof by
this reference (collectively the "Holders" and singly a "Holder").
RECITALS
A. The Company has previously issued $20 million aggregate principal
amount of its Senior Subordinated Convertible Debentures due 2006 (the
"Debentures").
B. The Holders are the recordholders of the Debentures, each Holder in
the principal amount set forth adjacent to his or its name on Schedule A.
C. The rights, preferences, privileges and restrictions pertaining to
the Debentures are set forth in the Indenture dated May 15, 1993 (the
"Indenture") between the Company and IBJ Schroder Bank & Trust Company (the
"Trustee").
D. Pursuant to the Indenture, and particularly ARTICLES TWO and TWELVE
thereof, the Debentures are convertible into shares of the Company's Common
Stock. Also pursuant to the Indenture, and particularly ARTICLES TWO and
ELEVEN, the Company can redeem the Debentures provided certain conditions are
satisfied. The principal condition is that the closing price of the
Company's Common Stock as reported on the NYSE Composite Tape for any 20
trading days during any 30 consecutive trading day period equals or exceeds
$6.00 per share.
E. The Company desires to provide for an orderly and efficient
conversion of the Debentures into Common Stock. The Conversion Price as of
the date of this Agreement is $4.00 per share of Common Stock. Defined terms
used in this Agreement (identified by initial capital letters) and not
otherwise defined herein shall have the meanings given those terms in the
Indenture.
1<PAGE>
<PAGE>
AGREEMENT
NOW, THEREFORE, for valuable consideration the receipt of which is
hereby acknowledged, the parties mutually agree as follows:
1. Conversion. Within five Trading Days following expiration of any
period of 30 consecutive Trading Days during which on at least 20 of such
Trading Days the reported Closing Price of the Common Stock on the NYSE
Composite Tape equaled or exceeded 150% of the then effective Conversion
Price, each Holder shall surrender for conversion his Debentures, duly
endorsed or assigned to the Company or in blank, at the offices of the
Trustee in the City of New York as specified in Section 1002 of the
Indenture. Such surrender shall be accompanied by each Holder's irrevocable
notice of election to convert and such other items and information as may be
required by the Indenture. Promptly upon such surrender, the Debentures
shall be converted into Company Common Stock in accordance with the terms and
provisions of the Indenture.
2. Payment of Accrued Interest in Stock. Provided the Debentures have
been timely surrendered as provided in Section 1 above, within 30 days after
the date of conversion the Company shall pay to the Holders interest on the
Debentures at the then applicable rate from the Interest Payment Date
immediately preceding the date of conversion through the earlier of: (i) the
date of conversion; and (ii) the date three months after the Interest Payment
Date immediately preceding the date of conversion (the "Accrued Interest").
The Accrued Interest shall be paid in Company Common Stock. Each Holder, as
payment for Accrued Interest shall receive that number of shares of Company
Common Stock derived by dividing the Accrued Interest by the Current Market
Value for a share of Company Common Stock. Current Market Value means the
lower of: (i) the per share closing price of the Company Common Stock as
reported on the NYSE Composite Tape on the date of conversion; and (ii) the
average closing price of the Company's Common Stock as reported on the NYSE
Composite Tape for the 20 Trading Days ending on (and including) the date of
conversion. The date of conversion shall be the date the Holder surrenders
the Debentures to the Trustee duly endorsed for conversion together with the
notice of conversion and other items required by the Indenture.
3. General Provisions.
(a) Assignment and Binding Effect. The rights of each Holder
under this Agreement are personal to each such Holder with respect to the
Debentures held of record by each such Holder as shown on Schedule A and may
not be assigned without the prior written consent of the Company. The
obligations of each Holder under this Agreement are binding on each Holder
severally but not jointly, and shall be binding upon their respective
successors and permitted assigns.
2<PAGE>
<PAGE>
(b) Termination. This Agreement may be terminated by the Company
by written notice to the Holders at their addresses as set forth on Schedule
A at any time after September 30, 1995 provided such termination shall not be
effective with respect to any Holder who has duly surrendered his or its
Debentures for conversion in accordance with the terms of this Agreement
prior to the Company's notice of termination. Except for the Company's right
to terminate as herein specified, this Agreement shall remain in effect until
the Maturity of the Debentures.
(c) Counterparts. This Agreement may be executed in on or more
counterparts, all of which taken together shall be deemed one and the same
agreement.
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
3<PAGE>
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
NATIONAL EDUCATION CORPORATION
By: _________________________________
Keith K. Ogata
Vice President, Chief Financial
Officer and Treasurer
BK CAPITAL PARTNERS II, L.P.
By Richard C. Blum & Associates, L.P., a
California limited partnership, its general
partner
By Richard C. Blum & Associates, Inc., a
California corporation, its general
partner
By: _______________________________
George A. Pavlov
Chief Financial Officer
and Managing Director
BK CAPITAL PARTNERS III, L.P.
By Richard C. Blum & Associates, L.P., a
California limited partnership, its general
partner
By Richard C. Blum & Associates, Inc., a
California corporation, its general
partner
By: _______________________________
George A. Pavlov
Chief Financial Officer
and Managing Director
4<PAGE>
<PAGE>
BK NEC II
By BK-NEC, L.P., a California limited
partnership, its general partner
By Richard C. Blum & Associates, L.P., a
California limited partnership, its
general partner
By Richard C. Blum & Associates,
Inc., a California corporation, its
general partner
By:_____________________________
George A. Pavlov
Chief Financial Officer
and Managing Director
__________________________________
FREDERIC V. MALEK
THE BONDERMAN FAMILY
LIMITED PARTNERSHIP
By: ______________________________
James O'Brien
Attorney-in-Fact
THE COMMON FUND
By Richard C. Blum & Associates, L.P., a
California limited partnership, its investment
adviser
By: ________________________________
George A. Pavlov
Chief Financial Officer
and Managing Director
UNITED CONGREGATION MESORAH
By Richard C. Blum & Associates, L.P., a
California limited partnership, its investment
adviser
By: ________________________________
George A. Pavlov
Chief Financial Officer
and Managing Director
5<PAGE>
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EXHIBIT 10.24
NATIONAL EDUCATION CORPORATION
AMENDMENT OF LOAN AGREEMENT
___________________________
AND REVOLVING PROMISSORY NOTE
_____________________________
This Amendment is made by STECK-VAUGHN COMPANY (the "Borrower"), a
Delaware corporation, and NATIONSBANK OF TEXAS, N.A. ("Lender"), a national
banking association, who agree as follows:
1. Recitals.
1.1 The Borrower previously signed, and delivered to Lender, a certain
Revolving Promissory Note (the "Original Note") dated June 10, 1994, and made
payable to the order of Lender, in the stated principal amount of
$10,000,000.00.
1.2 In connection with the Borrower's signing and delivering the
Original Note, the Borrower and Lender signed, and entered into, a certain
Loan Agreement (the "Original Loan Agreement") dated June 10, 1994.
1.3 The Original Agreement established a certain revolving line of
credit that was to remain in effect for a term of two (2) years; and the
purpose of this Amendment is to extend that term for an additional year by
amending the Original Note and the Original Loan Agreement.
2. Each of Sections 2.1.2, 2.1.4, 2.2.1, and 2.2.2 of the Original
Loan Agreement are hereby amended by changing the term "first anniversary" to
the term "second anniversary" and changing the term "second anniversary" to
the term "third anniversary" each time those respective terms are used in the
Original Loan Agreement. Section 2.1.3 of the Original Loan Agreement is
hereby amended by changing the term "Borrower's 1995 fiscal year" therein to
"Borrower's 1996 fiscal year." Section 2.2.1 of the Original Loan Agreement
is also amended by adding the following sentence at the end of such Section:
"If the First Term Loan is made as aforesaid, the Borrower shall date the
First Term Note the date of such Loan." Section 2.2.2 of the Original Loan
Agreement is also amended by adding the following sentence at the end of such
Section: "If the Second Term Loan is made as aforesaid, the Borrower shall
date the Second Term Note the date of such Loan."
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3. Paragraphs 3.2(e) and (f) of the Original Loan Agreement are hereby
amended to read as follows:
"(e) The Additional Percentage shall be 1.50% unless adjusted in
accordance with this Paragraph (e). If, before Borrower's Annual
Audited Financial Statements for 1995 are available, Borrower advises
Lender that, in Borrower's opinion, Borrower's operating income, as
determined by Generally Accepted Accounting Principles, for 1995, will
be at least $11,300,000.00, then the Additional Percentage shall be
adjusted to 1.40% effective as of the first day of Borrower's 1996
fiscal year; provided, however, that if Borrower's Annual Audited
Financial Statements for 1995 show that such operating income was not at
least $11,300,000.00, then such adjustment in the Additional Percentage
shall be of no effect, so that the Additional Percentage for 1996 shall
be 1.50%. If, before Borrower's Annual Audited
Financial Statements for 1996 are available, Borrower advises Lender
that, in Borrower's opinion, Borrower's operating income, as defined by
Generally Accepted Accounting Principles, for 1996 will be at least
$14,100,000.00, then the Additional Percentage shall be adjusted to
1.30% effective as of the first day of Borrower's 1997 fiscal year;
provided, however, that if Borrower's Annual Audited Financial
Statements for 1996 show that such operating income was not at least
$14,100,000.00, then such adjustment in the Additional Percentage shall
be of no effect, so that the Additional Percentage for 1997 shall be
1.50%. If, before Borrower's Annual Audited Financial Statements for
1997 are available, Borrower advises Lender that, in Borrower's opinion,
Borrower's operating income, as defined by Generally Accepted Accounting
Principles, for 1997 will be at least $17,600,000.00, then the
Additional Percentage shall be adjusted to 1.25% effective as of the
first day of Borrower's 1998 fiscal year; provided, however, that if
Borrower's Annual Audited Financial Statements for 1997 show that such
operating income was not at least $17,600,000.00, then such adjustment
in the Additional Percentage shall be of no effect, so that the
Additional Percentage on and after the first day of Borrower's 1998
fiscal year shall be 1.50%. Any calculation of accrued interest based
on an Additional Percentage that is less than 1.50% shall be provisional
unless and until a determination is made from Borrower's Annual Audited
Financial Statements that the Additional Percentage was appropriately
adjusted to a percentage less than 1.50%, rather than 1.50%."
"(f) The "Prime-Based Rate" shall be the Prime Rate, except that any
time before January 1, 1998, when the Additional Percentage is less than
1.5%, the Prime-Based Rate shall be the difference produced by
subtracting 0.25% from the Prime Rate."
4. Exhibit "B" to the Original Loan Agreement is hereby replaced by,
and with, the EXHIBIT "B" FIRST TERM NOTE that is attached to this Amendment.
Exhibit "C" to the Original Loan Agreement is hereby replaced by, and with,
the EXHIBIT "C" SECOND TERM NOTE that is attached to this Amendment.
5. The Original Note is hereby amended by changing the term "second
anniversary" in the second paragraph thereof to the term "third anniversary."
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6. NOTICE OF FINAL AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Dated: September 29, 1995.
BORROWER: LENDER:
STECK-VAUGHN COMPANY NATIONSBANK OF TEXAS, N.A.
(a Delaware corporation)
By: /s/ Floyd D. Rogers By: /s/ Sylvia H. Maggio
___________________ ____________________
Print Name: Floyd D. Rogers Print Name: Sylvia H. Maggio
Title: Vice President Finance Title: Vice President
CONSENT OF GUARANTOR
____________________
For the benefit of "Lender," as defined in the above Amendment (the
"Amendment"), STECK-VAUGHN PUBLISHING CORPORATION ("Guarantor"), a Delaware
corporation, hereby consents to the Amendment and agrees that (i) the term
"Loan Agreement," as used in the Guaranty Agreement dated June 10, 1994, and
signed by Guarantor for the benefit of such Lender, shall now mean the
"Original Loan Agreement," as defined in the Amendment, as amended by the
Amendment, and (ii) such Guaranty Agreement, as modified by this consent,
continues, and shall continue, in full force and effect.
Dated: September 29, 1995.
GUARANTOR:
STECK-VAUGHN PUBLISHING
CORPORATION
(a Delaware corporation)
By: /s/ Floyd D. Rogers
___________________
Print Name: Floyd D. Rogers
Title: Vice President Finance
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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,
______________________ _______________________
1995 1994 1995 1994
__________ _________ _________ _________
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 2,395 $ (4,148) $(88,083) $(19,001)
========= ======== ======== ========
NET INCOME (LOSS) $ 2,395 $ (4,148) $(88,083) $(68,453)
========= ======== ======== ========
COMMON STOCK:
Shares outstanding from beginning of period 29,578 29,516 29,578 29,405
Pro rata shares:
Stock options exercised 429 59 253 119
Shares purchased for treasury, from date of purchase -- (8) -- (7)
Assumed exercise of stock options, using treasury
stock method 732 91 320 126
Conversion of senior subordinated debentures 1,037 -- 349 --
_________ ________ ________ ________
Weighted average number of shares outstanding 31,776 29,658 30,500 29,643
========= ======== ======== ========
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS $ .08 $ (.14) $ (2.89) $ (.64)
========= ======== ======== ========
LOSS PER SHARE $ .08 $ (.14) $ (2.89) $ (2.31)
========= ======== ======== ========
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</TABLE>
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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,
______________________ _______________________
1995 1994 1995 1994
__________ _________ _________ _________
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 2,395 $ (4,148) $(88,083) $(68,453)
Add back senior debenture interest 237 270 837 752
Add back junior debenture interest 570 570 1,709 1,709
_________ ________ ________ ________
NET LOSS FOR FULLY DILUTED COMPUTATION $ 3,202 $ (3,308) $(85,537) $(65,992)
========= ======== ======== ========
COMMON STOCK:
Shares outstanding from beginning of period 29,578 29,516 29,578 29,405
Stock options exercised 429 59 253 119
Shares purchased for treasury, from date of purchase -- (8) -- (7)
Assumed exercise of stock options, using treasury
stock method 939 91 729 126
Assumed conversion of senior subordinated debentures,
from the latter of the beginning of the period or the
date of issue 5,021 5,000 5,021 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 $ 38,267 36,958 37,881 36,943
========= ======== ======== ========
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ .08 $ .(.14) $ (2.89) $ (2.31)
========= ======== ======== ========
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited consolidated financial statements included in the
Company's quarterly report on Form 10-Q for the quarter ended September 30,
1995, and is qualified in its entirety by reference to such unaudited
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 22,641
<SECURITIES> 1,846
<RECEIVABLES> 34,947
<ALLOWANCES> 3,583
<INVENTORY> 26,417
<CURRENT-ASSETS> 115,012
<PP&E> 54,868
<DEPRECIATION> 31,814
<TOTAL-ASSETS> 178,955
<CURRENT-LIABILITIES> 79,981
<BONDS> 64,845
<COMMON> 2,193
0
0
<OTHER-SE> 2,505
<TOTAL-LIABILITY-AND-EQUITY> 178,955
<SALES> 190,252
<TOTAL-REVENUES> 190,252
<CGS> 69,175
<TOTAL-COSTS> 275,478
<OTHER-EXPENSES> 4,395
<LOSS-PROVISION> 2,148
<INTEREST-EXPENSE> 6,732
<INCOME-PRETAX> (89,621)
<INCOME-TAX> (2,603)
<INCOME-CONTINUING> (88,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (88,083)
<EPS-PRIMARY> (2.89)
<EPS-DILUTED> (2.89)
</TABLE>
