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, 1996
Commission file number 1-6981
NATIONAL EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware IRS No. 95-2774428
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2601 Main Street, 7th Floor Irvine, California 92614
(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:
35,540,573 common stock shares outstanding at September 30, 1996
<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) 1996 1995 1996 1995
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Tuition and Contract Revenues $ 49,879 $ 51,657 $142,075 $143,455
Publishing Revenues 32,419 20,372 66,176 46,797
__________ _________ __________ _________
Total Net Revenues 82,298 72,029 208,251 190,252
Costs and Expenses:
Contract course materials and service costs 16,969 18,703 50,083 56,602
Publishing costs and materials 8,837 5,031 19,728 12,573
Product development 6,390 4,525 17,695 14,450
Selling and promotion 29,594 28,375 76,442 79,523
General and administrative 7,257 7,228 21,463 25,395
Amortization of prior period deferred marketing -- -- -- 1,470
Amortization of acquired intangible assets 710 219 1,709 1,329
Interest expense 2,002 2,352 6,119 6,732
Investment income (1,260) (814) (2,201) (2,030)
Other expense (income) (16) (42) 21 (307)
Unusual items -- -- 4,100 77,805
__________ _________ __________ _________
Income (Loss) Before Income Taxes and Minority
Interest 11,815 6,452 13,092 (83,290)
Income taxes 1,772 -- 579 --
__________ _________ __________ _________
Income (Loss) Before Minority Interest 10,043 6,452 12,513 (83,290)
Minority interest in consolidated subsidiary 736 625 367 1,065
__________ _________ __________ _________
Net Income (Loss) $ 9,307 $ 5,827 $ 12,146 $(84,355)
========== ========= ========== =========
<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) 1996 1995 1996 1995
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Primary Earnings (Loss) Per Share $ .25 $ .18 $ .33 $ (2.77)
======== ========= ========= =========
Fully Diluted Earnings (Loss) Per Share $ .25 $ .17 $ .33 $ (2.77)
======== ========= ========= =========
Weighted Average Number of Shares Outstanding
Primary Shares 36,832 31,776 36,650 30,500
Fully diluted shares 39,196 38,267 39,103 37,881
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(dollars in thousands) 1996 1995 1995
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 14,671 $ 22,120 $ 22,641
Investment securities 1,399 1,748 1,846
Receivables, net of allowance of $2,823, $2,742 and $3,583 52,215 36,397 31,364
Inventories and supplies 33,261 31,847 28,285
Income tax receivable -- 9,313 9,313
Prepaid and deferred marketing expenses 11,027 2,675 13,759
Other current assets 12,452 10,765 21,908
_________ __________ _________
Total current assets 125,025 114,865 129,116
Land, buildings and equipment, less accumulated depreciation
of $24,033, $31,992 and $31,814 28,215 24,028 23,054
Acquired intangible assets, less accumulated amortization
of $3,790, $13,333 and $13,226 26,908 13,428 9,453
Deferred income taxes 24,768 24,768 23,073
Other assets 6,536 8,173 11,771
_________ __________ _________
$ 211,452 $ 185,262 $ 196,467
========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 10,201 $ 6,072 $ 9,545
Accrued expenses 25,249 29,022 36,491
Accrued short-term restructuring charges 2,734 8,246 6,722
Accrued salaries and wages 6,379 5,627 5,663
Deferred contract revenues 6,046 7,421 7,883
Current portion of long-term debt and short-term borrowings 8,267 12,338 14,041
Accrued and deferred income taxes 18,336 14,446 12,223
_________ __________ _________
Total current liabilities 77,212 83,172 92,568
_________ __________ _________
Liabilities Payable After One Year
Long-term debt, less current portion 27,159 8,839 7,351
Convertible subordinated debentures 54,619 57,494 57,494
Accrued long-term restructuring charges 8,968 10,089 12,151
Other noncurrent liabilities 10,196 8,683 8,090
_________ __________ _________
100,942 85,105 85,086
_________ __________ _________
Minority Interest in Equity of Consolidated Subsidiary 9,907 9,504 9,190
_________ __________ _________
<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) 1996 1995 1995
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
Stockholders' Equity
Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued -- -- --
Common stock, $.01 par value; 65,000,000 shares authorized;
36,239,254, 35,834,124 and 35,820,468 shares issued 2,170 2,166 2,193
Additional paid-in capital 157,351 155,100 154,882
Accumulated deficit (124,338) (136,484) (133,402)
Unrealized gain on available-for-sale securities, net of tax 1 10 33
Cumulative foreign exchange translation adjustment (6,312) (7,005) (7,734)
Notes receivable under stock option plans (573) (1,398) (1,441)
_________ __________ _________
28,299 12,389 14,531
Less common stock in treasury, 697,555 shares (4,908) (4,908) (4,908)
_________ __________ _________
Total stockholders' equity 23,391 7,481 9,623
_________ __________ _________
$ 211,452 $ 185,262 $ 196,467
========= ========== =========
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
<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) 1996 1995 1996 1995
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 9,307 $ 5,827 $ 12,146 $ (84,355)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 1,409 1,157 3,851 4,163
Amortization of acquired intangible assets 711 219 1,709 1,329
Amortization of prior period deferred marketing -- -- -- 1,470
Provision for doubtful accounts 170 227 256 2,148
Write-off of acquired intangible assets -- -- -- 47,509
Write-off of in-process research and development -- -- 4,100 --
Loss on sale of property, plant and equipment, net -- -- (91) --
(Gain) loss on foreign currency exchange (17) (42) 10 (307)
Change in assets and liabilities:
Receivables, net (14,729) (6,552) (11,605) 11,709
Inventories and supplies 790 (1,616) (1,130) (1,949)
Prepaid and deferred marketing expenses 1,732 (1,373) (8,360) (10,777)
Income tax receivable 9,313 -- 9,313 --
Accounts payable and accrued expenses 3,802 4,342 (1,272) 1,461
Accrued restructuring reserve (2,617) (2,608) (6,914) 26,498
Accrued and deferred income taxes 3,000 838 4,986 255
Deferred contract revenues (1,391) (1,648) (2,816) (4,081)
Other (1,564) (181) (1,759) (1,742)
________ ________ _________ _________
Net cash from operating activities 9,916 (1,410) 2,424 (6,669)
________ ________ _________ _________
Cash Flows For Investing Activities:
Additions to land, building and equipment (2,597) (610) (6,870) (3,236)
Dispositions of land, buildings and equipment 51 44 219 (146)
Purchases of investment securities -- -- -- (189)
Proceeds from the sale or redemption of securities -- 430 335 9,266
Acquisition of businesses, net of cash acquired -- -- (12,173) --
Discontinued operations -- (651) -- (1,420)
________ ________ _________ _________
Net cash for investing activities (2,546) (787) (18,489) 4,275
________ ________ _________ _________
<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) 1996 1995 1996 1995
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Additions to long-term debt -- 1,462 13,000 103
Reductions in long-term debt (1,580) (481) (4,643) (1,076)
Changes in short-term borrowings (4,364) (780) (3,742) 6,828
Minority interest in earnings of consolidated subsidiary 750 624 403 969
Common stock, stock options and related tax benefits 203 474 2,255 481
Payments received on notes receivable under stock option plan -- -- 825 --
________ ________ _________ _________
Net cash from financing activities (4,991) 1,299 8,098 7,305
________ ________ _________ _________
Effect of exchange rate changes on cash 332 375 518 433
________ ________ _________ _________
Net change in cash and equivalents 2,711 (523) (7,449) 5,344
Cash and equivalents at the beginning of the period 11,960 23,164 22,120 17,297
________ ________ _________ _________
Cash and equivalents at the end of the period $ 14,671 $ 22,641 $ 14,671 $ 22,641
======== ======== ========= =========
<FN>
Unaudited.
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
<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, all of which are of a normal
recurring nature, 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, 1995. The results of operations for interim periods are
not necessarily indicative of the results of operations to be expected for
the year.
Due to the seasonal nature of the Company's traditional selling cycle, a
substantial portion of selling and marketing costs of the Company are
deferred in the first half of the year and fully amortized later in the
calendar year to properly match the costs with revenues.
The Company follows Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed", in recording and classifying the costs incurred for the
development of software products. Such costs are expensed as incurred until
the product under development reaches technological feasibility, at which
point all such costs are capitalized and amortized over the estimated
economic life of the product. These capitalized costs will increase with
more software media based training and education products at NETG and Steck-
Vaughn.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
NOTE 2 - Business Combinations
______________________________
Effective April 30, 1996, the Company, through Steck-Vaughn Publishing
Corporation, acquired all of the common stock of Edunetics, Ltd., an Israel
corporation engaged in the development of educational software, for cash
consideration of $12,000,000, plus out of pocket acquisition expenses. The
purchase price was financed under Steck-Vaughn's bank credit agreement and by
existing cash and marketable securities. The acquisition was accounted for
using the purchase method of accounting. In the second quarter of 1996 the
purchase price was allocated to assets and liabilities, including in-process
research and development projects, based on their estimated fair values as of
the date of acquisition. The estimated value of the in-process research and
development projects of $4,100,000 was written-off in the second quarter of
1996. This acquisition increased intangible assets, primarily goodwill, by
approximately $7,200,000.<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 2 - Business Combinations (continued)
__________________________________________
During the second quarter, ICS acquired all of the outstanding common stock
of California College for Health Sciences (CCHS) for approximately $833,000
cash and the issuance of $4,340,000 of notes payable, at a 7% interest rate,
due June 30, 1997. The notes payable were paid in July 1996 after the
receipt of a tax refund (see Note 4). CCHS provides healthcare self-study
courses and four-year and master degree distance learning programs. This
transaction was accounted for as a purchase and resulted in an increase to
intangible assets, primarily goodwill, of $7,518,000.
The intangible assets acquired are being amortized over a weighted average
life of approximately ten years and 15 years for Edunetics and CCHS,
respectively. The operating results of both acquired companies were included
in the Company's consolidated financial statements since the effective dates
of the acquisitions. The net assets and operating results of the purchased
entities were not material to the consolidated financial statements of the
Company.
NOTE 3 - Unusual and Nonrecurring Items
_______________________________________
The unusual item for the nine months ended September 30, 1996 represents the
$4,100,000 ($.11 per share) write-off of in-process research and development
in connection with the acquisition of Edunetics in the second quarter of 1996
as more fully explained in Note 2.
In the second quarter of 1995, the Company restructured NETG, which resulted
in an unusual charge of $28,652,000 ($.95 per share), and also recorded a
$1,644,000 ($.05 per share) charge at NEC Corporate for restructuring. In
the fourth quarter of 1995, NETG further reduced its organization in Germany
and recorded a restructure charge of $1,952,000 ($.06 per share). No tax
benefits were provided on these charges. The charges included severance
related payments, excess facilities costs, the write-down of inventory and
fixed assets of certain discontinued products and other restructuring related
items, such as charges related to canceled contracts and agreements. In the
second quarter of 1995, the Company also wrote-off the goodwill balance at
NETG of $47,509,000 ($1.58 per share).
Set forth below is a summary of the restructuring activity for the nine
months ended September 30, 1996.
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 3 - Unusual and Nonrecurring Items (continued)
___________________________________________________
<TABLE>
<CAPTION>
Excess Severance
(dollars in thousands) Facilities Payments Other Total
_____________________________________________ _________ __________ _____________ _________
<S> <C> <C> <C> <C>
Accrued restructuring at
December 31, 1995 $ 14,557 $ 2,611 $ 546 $ 17,714
Noncash write-off -- -- 288 288
Cash paid (3,625) (2,083) (851) (6,559)
_________ _________ __________ _________
Accrued restructuring at
September 30, 1996 $ 10,932 $ 528 $ (17) $ 11,443
========= ========= ========== =========
</TABLE
In the third quarter of 1996, the Company recorded a nonrecurring expense of
approximately $732,000 ($861,000 pretax) or $.02 per share, related to a
change in CEO at Steck-Vaughn. The Company also recorded nonrecurring
interest income of $990,000 on the income tax refund received in July 1996.
NOTE 4 - Income Taxes
_____________________
Income tax provision for the three and nine month periods ended September 30,
1996, reflects taxes provided on pretax income at an estimated annual
effective tax rate of 15%. The income tax provision on a year-to-date basis
excludes the $4,100,000 write-off of in-process research and development at
Edunetics which is not deductible for tax purposes, and is reduced by a
$2,000,000 tax benefit of a tax refund received and recognized in the second
quarter of 1996.
During the third quarter 1996, the Company received $11,516,000 of IRS tax
refund, including interest.
NOTE 5 - Earnings (Loss) Per Share
__________________________________
Primary earnings (loss) per share are computed based on the weighted average
number of common shares outstanding during the respective periods, including
dilutive stock options. Fully diluted earnings (loss) per share are computed
based on the assumption that the convertible debentures had been converted to
common stock, with a corresponding increase in net income to reflect a
reduction in related interest expense, less applicable taxes.
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 5 - Earnings (Loss) Per Share (continued)
______________________________________________
Effective September 11, 1995, the holders of all $20,000,000 of the Company's
10% senior subordinated convertible debentures converted such debentures,
including accrued interest, into 5,021,000 shares of the Company's common
stock. Earnings per share on a pro forma basis, assuming the conversion had
taken place at January 1, 1995, for the third quarter of 1995 would have been
$.17 compared to the reported earnings per share of $.18. Loss per share on
a pro forma basis for the nine months ended September 30, 1995 would have
been ($2.36) compared to a reported loss per share of ($2.77).
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 6 - Statements of Cash Flows Supplementary Information
___________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
_________________________ ________________________
(dollars in thousands) 1996 1995 1996 1995
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Paid (Received) During the Period For:
Interest expense $ 835 $ 2,121 $ 4,395 $ 6,471
Income tax (refunds) payments, net (10,749) 288 (14,153) 338
Detail of Noncash Investing and
Financial Activities:
Sale of land, building and equipment
in exchange for note receivable $ -- $ -- $ 165 $ 416
Assets acquired through capital leases 110 2,032 458 3,366
Notes receivable under stock option plans -- 262 -- 1,441
Acquisition of Businesses:
Working capital, other than cash $ -- $ -- $ (6,346) $ --
Property, plant and equipment -- -- (959) --
Other assets -- -- (17,503) --
Liabilities assumed in acquisition, including
$4,340,000 of notes payable to sellers -- -- 12,635 --
__________ _________ _________ _________
Net cash used to acquire businesses $ -- $ -- $ (12,173) $ --
</TABLE>
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Variance Change
________________________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues:
ICS Learning Systems $ 35,288 $ 37,946 $ (2,658) (7.0)%
Steck-Vaughn Publishing 32,419 20,372 12,047 59.1
NETG 14,017 12,977 1,040 8.0
Other 574 734 (160) (21.8)
_________ _________ ________
Total Net Revenues $ 82,298 $ 72,029 $ 10,269 14.3
========= ========= ========
Operating Income:
ICS Learning Systems 5,522 3,681 1,841 50.0
Steck-Vaughn Publishing 7,192 5,528 1,664 30.1
NETG 990 59 931 n/m
Other 169 205 (36) (17.6)
_________ _________ ________
Total Segment Operating Income 13,873 9,473 4,400 46.4
General corporate expenses (1,332) (1,525) 193 (12.7)
Interest expense (2,002) (2,352) 350 (14.9)
Investment income 1,260 814 446 54.8
Other income 16 42 (26) (61.9)
_________ _________ ________
Income Before Income Taxes and
Minority Interest 11,815 6,452 5,363 83.1
Income taxes 1,772 -- 1,772 n/m
_________ _________ ________
Income Before Minority Interest 10,043 6,452 3,591 55.7
Minority interest 736 625 111 17.8
_________ _________ ________
Net Income $ 9,307 $ 5,827 $ 3,480 59.7
========= ========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
The discussion in this document contains trend analysis and other forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document.
<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, 1996
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 82,298 $ 35,288 $ 32,419 $ 14,017 $ 574
Costs and Expenses:
Contract course materials and service costs 16,969 12,110 -- 4,592 267
Publishing costs and materials 8,837 -- 8,837 -- --
Product development 6,390 731 3,544 2,115 --
Selling and promotion 29,594 14,200 9,772 5,525 97
General and administrative 5,929 2,575 2,518 795 41
Amortization of acquired intangible assets 706 150 556 -- --
_________ _________ __________ _________ _________
Segment Operating Income $ 13,873 $ 5,522 $ 7,192 $ 990 $ 169
========= ========= ========== ========= =========
</TABLE>
<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 18,705 14,071 -- 4,219 415
Publishing costs and materials 5,031 -- 5,031 -- --
Product development 4,525 873 2,069 1,583 --
Selling and promotion 28,375 16,672 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 $ 9,473 $ 3,681 $ 5,528 $ 59 $ 205
========= ========= ========== ========= =========
</TABLE>
<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, 1996 Compared to Three Months Ended
September 30, 1995
____________________________________________________________________
Revenues of $82,298,000 for the three months ended September 30, 1996, were
$10,269,000 or 14.3% higher than revenues of $72,029,000 in the prior year.
Net income for the period was $9,307,000 or $.25 per share compared to income
of $5,827,000 or $.18 per share ($.17 per fully diluted share) in the prior
year. The results of Steck-Vaughn reflects approximately $3,200,000 of
revenue ($1,440,000 of operating income) which the Company had orders for in
the second quarter of 1996, but was unable to ship by the end of the second
quarter due to problems encountered in the implementation of a new warehouse
management system. During the third quarter, Steck-Vaughn shipped all the
excess backlog from the second quarter and all shippable orders received
during the third quarter.
Income tax provision for the three months ended September 30, 1996, reflects
taxes provided on pretax income at an estimated annual effective tax rate of
15%. The operating results for the three months ended September 30, 1996
also contain a nonrecurring charge of approximately $732,000 ($861,000
pretax) or $.02 per share, related to the change in CEO at Steck-Vaughn. The
Company also recorded nonrecurring interest income of $990,000 on the income
tax refund received in July 1996.
<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 Learning Systems:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Traditional Distance Education - Domestic $ 19,001 $ 23,435 (18.9)%
Traditional Distance Education - International 10,922 10,744 1.7
Business and Industrial 2,394 1,866 28.3
Professional 2,971 1,901 56.3
_________ _________
Total Revenues $ 35,288 $ 37,946 (7.0)
========= =========
Traditional Distance Education:
_______________________________
New Enrollments:
Domestic 70,618 74,211 (4.8)
International 28,290 29,637 (4.5)
_________ _________
Total New Enrollments 98,908 103,848 (4.8)
========= =========
Gross Enrollment Value (GEV):
Domestic $ 42,076 $ 58,988 (28.7)
International 20,127 20,172 (.2)
_________ _________
Total GEV $ 62,203 $ 79,160 (21.4)
========= =========
Selling and Promotion Spending:
Domestic $ 8,485 $ 11,842 (28.3)
International 5,574 5,122 8.8
_________ _________
Total Selling and Promotion Spending $ 14,059 $ 16,964 (17.1)
========= =========
Estimated realization of future tuition revenue 47% 45%
</TABLE>
ICS revenues of $35,288,000 for the third quarter of 1996 were
$2,658,000 (7.0%) lower than the comparable quarter in 1995.
Professional revenue, which includes MicroMash and California College
for Health Sciences (CCHS) increased $1,070,000 (56.3%) due to the
acquisition of CCHS. Business and Industrial revenue increased
$528,000 (28.3%). Traditional domestic revenue declined $4,434,000
(18.9%) while traditional international revenue increased $178,000
(1.7%).
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
ICS Learning Systems (continued):
Total revenue, excluding PC hardware revenue, was $33,810,000 and
$32,444,000 for the third quarter of 1996 and 1995, respectively,
reflecting an increase of 4.2%. Traditional domestic revenue decreased
primarily due to the elimination of the sale of computer hardware with PC
courses for all enrollments after September 15, 1995. Although new
enrollments were lower, revenue realization rates improved. New
enrollments, which are an indicator of future revenues, declined 4.8%
domestically, due primarily to the reduction in selling and promotional
spending. The decline in enrollments was primarily from the PC programs
which, in addition to the reduction in selling and promotional spending,
was primarily impacted by eliminating the computer hardware from the PC
courses. The elimination of the computer hardware has resulted in
improved margins by 10.7 percentage points for the operation.
International revenue increased $178,000 (1.7%) over the comparable
period last year. Revenues in Canada increased over the prior year
period due to a year-to-date enrollment increase and a larger mix of
higher priced courses. International Mail Sales revenue increased as a
result of an increase in enrollments. These increases were partially
offset by lower revenue in Australia/New Zealand caused by lower
enrollments as a result of telesales understaffing in the first and
second quarters and lower revenue in the U.K. as a result of fewer
year-to-date enrollments caused by advertising underspending in the
first quarter and lower advertising productivity.
Course material and service costs decreased $1,961,000 (decreased 2.8%
as a percent of revenues) due to the elimination of computer hardware
from computer courses, partially offset by the acquisition of CCHS
which added $550,000 to costs, volume related increases in
International, and increased customer service initiatives.
Selling and promotion spending for traditional business decreased
$2,905,000 from the comparable prior year period. There is not a
corresponding dollar for dollar reduction in selling and promotion
expenses because the Company defers a substantial portion of the
selling and marketing spending incurred in the first half of the year
and fully amortizes the deferral to expense later in the year to
properly match the expenses with the related revenues.
Selling and promotion expenses deceased $2,472,000 (decreased 3.7% as a
percent of revenues) due to a reduction in media spending as a result
of concentrating on higher profit media and eliminating spending on
lower yield media, partially offset by increased expenses of $173,000
due to the acquisition of CCHS, as well as higher International
spending in all markets.
<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 Learning Systems (continued):
General and administrative expenses decreased slightly as reductions in
outside consulting expense related to an information systems
implementation project and lower payroll related benefits expense more
than offset the increase in expense of $139,000 resulting from the
acquisition of CCHS.
Domestic GEV decreased 28.7% due to the decrease in the average
contract price as a result of eliminating the sale of PC hardware from
PC courses and an enrollment decrease for the quarter of 4.8%.
International GEV deceased .2% due to decreases in Canada and the U.K.,
partially offset by increases in Australia/New Zealand and IMS. The
decrease in GEV is a result of a 4.5% decease in enrollments for the
quarter, partially offset by higher average contract price due to a
larger mix of higher priced courses.
Steck-Vaughn Publishing:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Steck-Vaughn Core Business:
Elementary and High School (El/Hi) $ 18,330 $ 14,167 29.4%
Adult Education 4,771 3,373 41.4
Library 4,941 2,832 74.5
_________ _________
28,042 20,372 37.6
Summit Learning 2,691 -- n/m
Edunetics 1,686 -- n/m
_________ _________
Total Revenues $ 32,419 $ 20,372 59.1
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<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 (continued):
The above revenues reflect Steck-Vaughn's actual shipments for the quarter
ended September 30, 1996 including $3,200,000 of shipments in the third
quarter related to orders in backlog at the end of the second quarter
which could not be shipped then due to problems encountered in the
implementation of a new warehouse management system. These orders would
have been shipped in the second quarter had the difficulties in
implementing the new warehouse management system not occurred.
Accordingly, management believes that analysis of the revenues for the
period is more meaningful on a pro forma presentation basis reflecting
the exclusion of the $3,200,000 of unshipped orders as set forth below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Pro forma Net Revenues by Product Line
(excluding $3,200,000 of second quarter
excess backlog):
Steck-Vaughn Core Business:
Elementary and High School (El/Hi) $ 16,474 $ 14,167 16.3%
Adult Education 4,124 3,373 22.3
Library 4,244 2,832 49.9
_________ _________
24,842 20,372 21.9
Summit Learning 2,691 -- n/m
Edunetics 1,686 -- n/m
_________ _________
Total Pro forma Revenues $ 29,219 $ 20,372 43.4
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<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 (continued):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Operating Income (Loss) by Product Line:
Steck-Vaughn Core Business $ 7,966 $ 5,528 44.1%
Summit Learning (156) -- n/m
Edunetics (618) -- n/m
_________ _________
Operating income $ 7,192 $ 5,528 30.1
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Pro forma Operating Income (Loss) by
Product Line (excluding $1,440,000 estimated
effect on operating income related to
$3,200,000 of second quarter excess backlog):
Steck-Vaughn Core Business $ 6,526 $ 5,528 18.1%
Summit Learning (156) -- n/m
Edunetics (618) -- n/m
_________ _________
Pro forma Operating Income $ 5,752 $ 5,528 4.1
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
Revenues increased 59.1% for the three months ended September 30, 1996.
Of the 59.1% increase for the quarter, 21.5% is attributable to the
acquisition of Summit Learning and Edunetics, 15.7% is due to the
carryover into the third quarter of the second quarter's excess
backlog, and 21.9% is attributable to the increase in the third quarter
of Steck-Vaughn's core business.
<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 (continued):
El/Hi sales increased 29.4% (16.3% without the excess backlog) during
the third quarter, as compared to last year, as sales of traditional
skills and test preparation products continued to be strong. This
growth was driven by the continued interest among educators in
returning to basic skills instruction. Best selling products in the
El/Hi market segment address such key curriculum areas as phonics,
spelling, reading, math, science, and social studies. The strong
performance of test preparation and assessment products, bolstered by
the product line acquired from Berrent Publications, Inc. in November
1994, reflects the increased use of standardized tests in public
schools.
Sale of adult education products increased 41.4% (22.3% without the
excess backlog) due to the acquisition of the Educational Development
Laboratories, Inc. (EDL) technology product in October 1995.
Library sales increased, with sales for the third quarter up 74.5%
(49.9% without the excess backlog) compared to the prior year.
Exclusive distribution agreements entered into in 1995 and early 1996
with Wayland Publishers, Abdo and Daughters, and Larousse Kingfisher
Chambers, Inc., were responsible for much of the increase. The release
of two major revised Steck-Vaughn series, the 53-volume Portrait of
America and the 24-volume Raintree Illustrated Science Encyclopedia,
also contributed to the increase.
With the growth of the library product line, Steck-Vaughn restructured
its sales force during the third quarter to expand its coverage of the
library market. Steck-Vaughn has engaged 97 independent sales reps to
carry the entire library product line, allowing Steck-Vaughn's
dedicated sales force to focus exclusively on the elementary
<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 (continued):
curriculum and newly-acquired Edunetics lines. In addition, Steck-Vaughn
expanded its telemarketing sales force, creating rep teams for each of its
three main library product lines.
Summit Learning sales during the third quarter of $2,691,000 were
incremental to Steck-Vaughn, following the acquisition of Summit in
December 1995. Summit has a direct response marketing channel
(catalog), enabling Steck-Vaughn to increasingly reach decision makers
within the schools. The Company has added selected Steck-Vaughn print
and Edunetics CD-ROM products and included significant new products in
the Summit catalogs. The Young Explorers catalog is distributed to
consumers in the fall to coincide with holiday gift buying, providing
entry to the home market.
Edunetics revenue was attributable primarily to contractual obligations
for systems installations. During the third quarter, Edunetics
recognized its first revenue under the three-year, $3,800,000 contract
entered into in June 1996 with the Detroit public school system to
provide Edunetics' proprietary educational software programs to 60
schools within the district. Steck-Vaughn acquired Edunetics, Ltd. in
April 1996 to move into the educational software market. Edunetics
launched eight new titles in the summer of 1996, with eleven new titles
planned for release in 1997.
Publishing costs increased $3,806,000 (75.7%) primarily due to the
acquisitions of Edunetics and Summit, as well as the increased volume
in the core business. Publishing costs as a percentage of revenues
increased for the third quarter ended September 30, 1996, as compared
to 1995, primarily due to the inclusion of the Summit business.
Publishing costs of the Steck-Vaughn core business, which excludes
Summit and Edunetics, for the third quarter ended September 30, 1996,
represented 24.6% of core business revenues as compared to 24.5% for
the same period in the previous year. Increases in the cost of printed
products resulted from the increase in products acquired through
distribution agreements as opposed to internal development and the
increased use of wholesalers to sell library titles, partially offset
by the increased sales of technology and testing products, which carry
higher gross margins, and the decline in royalty expense due to the
increase in products acquired through distribution agreements.
Fulfillment expenses were also higher due to increases in labor costs
necessary to implement the new warehouse management system and
eliminate the excess backlog. Summit Learning's product and
fulfillment costs, at 62.0% of revenues, reflect the non-propriety
nature of the product line.
Product development expense increased $1,475,000 (increased .8% as a
percent of revenues) due to increased investments in new product lines
of the recently acquired EDL and Edunetics businesses and the expansion
of the library line.
<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 (continued):
Selling and promotion costs increased $3,274,000 (decreased 1.8% as a
percent of revenues) for the third quarter ended September 30, 1996, as
compared to the prior year, due to higher commissions resulting from
increased revenues and the expansion of the telemarketing sales force.
Catalog expense increased in part due to the acceleration of the
recognition of catalog expenses in accordance with Steck-Vaughn's
adoption in 1995 of accounting standard SOP 93-7, and due to the
acquisition of Summit, a catalog marketer, in December 1995.
General and administrative expenses increased in the third quarter due
to the inclusion of $861,000 in costs attributable to the change in
chief executive officer at Steck-Vaughn. This nonrecurring expense
included obligations under the previous CEO's employment contract, as
well as expenses incurred in the employment of the new chief executive.
General and administrative expenses also increased during the third
quarter with the inclusion of Edunetics' operations for a full quarter.
Amortization expense increased due to the acquisitions of Edunetics in
April 1996, of EDL in October 1995, and Summit in December 1995.
Operating income for the quarter ended September 30, 1996, as compared
to 1995, increased for Steck-Vaughn's core business due to the
carryover into the third quarter of the second quarter's excess backlog
and as a result of the increase in El/Hi, adult education and library
product lines, as previously explained in the discussion on revenues.
Operating income for the quarter was negatively impacted by the
$861,000 nonrecurring charge for the change in CEO at Steck-Vaughn.
The operating results of Summit and Edunetics reflect the start-up
phase of both divisions.
Pro forma operating income for the quarter ended September 30, 1996, as
compared to 1995, increased for Steck-Vaughn's core business due to the
increases in El/Hi, adult education and library product lines. Pro
forma operating income of the core business as a percentage of revenues
for the three months ended September 30, 1996, as compared to 1995, was
slightly lower due to the $861,000 nonrecurring charge for the change
in CEO at Steck-Vaughn. Excluding this nonrecurring charge, pro forma
operating income of the core business as a percentage of revenues
increased due to economies resulting from the increase in sales.
<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:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Domestic $ 6,845 $ 6,806 .6%
International 7,172 5,914 21.3
Spectrum -- 257 n/m
_________ _________
Total Revenues $ 14,017 $ 12,977 8.0
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________
1996 1995
______________________________________________ _________ _________
<S> <C> <C>
Number of Internally Developed Products Completed:
Client/Server 40 5
Mainframe 6 --
Desktop 15 4
Business Skills 3 --
_________ _________
Total 64 9
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
_____________________
1996 1995
______________________________________________ _________ _________
<S> <C> <C>
Number of Third Party Developed Products Completed:
Client/Server 14 3
Mainframe -- --
Desktop 16 14
Business Skills 17 3
_________ _________
Total 47 20
========= =========
/TABLE
<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 (continued):
NETG revenues of $14,017,000 increased $1,040,000 (8.0%) for the third
quarter of 1996 compared to the comparable period in 1995. Excluding
Spectrum, revenues increased 10.2%. Domestic revenues increased
slightly as revenues for desktop and client/server processing courses,
which experienced a 41.7% increase, more than offset the decline in
mainframe computer courses and certain business skills courses.
International revenue increased $1,258,000 (21.3%) as a result of a
79.7% increase in revenues for desktop and client/server courses,
partially offset by a decline in revenue due to a reduction in
mainframe computer and business skills courses. Also contributing to
the increase was $450,000 of revenue from early renewals of contracts.
Operating income was $990,000 for the third quarter of 1996 compared to
operating income for the same period in 1995 of $59,000.
Course service costs increased $373,000 (increased .2% as a percent of
revenues) from the 1995 comparable quarter. The discontinuance of
Spectrum reduced costs by $299,000. The most significant contributing
factors to the increased expenses were higher royalty expense as a
result of sales in Europe of more third party products and higher
material cost of sales as a result of increased volume in Europe.
These increases more than offset the savings in the U.S. of outsourcing
the shipping and distribution function. Because NETG is significantly
increasing the number of internally developed courses, NETG should
experience lower royalty expense in the future.
Product development expense increased $532,000 (increased 2.9% as a
percent of revenues) due to more products being developed in 1996.
Approximately $3,500,000 of product development expense for a
substantial number of the internally developed courses released in the
current year was incurred and charged to expense in the fourth quarter
of 1995.
Selling and promotion expense increased $410,000 (remained unchanged as
a percent of revenues). Most of the increase was due to increased
headcount in the field sales force, partially offset by lower expenses
due to the discontinuance of Spectrum.
General and administrative expense decreased $1,206,000 (decreased 9.7%
as a percent of revenues) due to favorable outcomes of certain legal
disputes, a reduction in headcount and overhead expenses such as
facilities costs as a result of the restructuring actions and
renegotiation of leased facilities in the U.K., and the discontinuance
of Spectrum.
Operating results of ICS and NETG foreign operations by geographic region are
discussed above. The third quarter foreign currency exchange gains, recorded
to other income, were $16,000 compared to gains of $42,000 in the prior year.
<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)
Corporate and Other:
General corporate expenses decreased $193,000 (.5% as a percent of revenues)
as a result of lower facilities costs and ongoing cost control.
Interest expense decreased due to the conversion on September 11, 1995, of
all $20,000,000 of the Company's 10% senior subordinated convertible
debentures into shares of the Company's common stock.
Investment income includes nonrecurring interest income of $990,000 on the
IRS tax refund received in July 1996.
<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) 1996 1995 Variance Change
______________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues:
ICS Learning Systems $ 107,072 $ 107,611 $ (539) (.5)%
Steck-Vaughn Publishing 66,176 46,797 19,379 41.4
NETG 33,322 33,348 (26) (0.1)
Other 1,681 2,496 (815) (32.7)
_________ _________ ________
Total Net Revenues $ 208,251 $ 190,252 $ 17,999 9.5
========= ========= ========
Operating Income (Loss):
ICS Learning Systems before amortization $ 13,349 $ 9,562 $ 3,787 39.6
Amortization of prior period
deferred marketing -- (1,470) 1,470 n/m
_________ _________ ________
ICS Learning Systems 13,349 8,092 5,257 65.0
Steck-Vaughn Publishing before unusual
items 9,993 9,079 914 10.1
Unusual items (4,100) -- (4,100) n/m
_________ _________ ________
Steck-Vaughn Publishing 5,893 9,079 (3,186) (35.1)
NETG before unusual items 1,342 (13,803) 15,145 n/m
Unusual items -- (76,161) 76,161 n/m
_________ _________ ________
NETG 1,342 (89,964) 91,306 n/m
Other 378 638 (260) (40.8)
_________ _________ ________
Total Segment Operating Income (Loss) 20,962 (72,155) 93,117 n/m
General corporate expenses (3,931) (5,096) 1,165 (22.9)
Interest expense (6,119) (6,732) 613 (9.1)
Investment income 2,201 2,030 171 8.4
Unusual items -- (1,644) 1,644 n/m
Other (expense) income (21) 307 (328) n/m
_________ _________ ________
Income (Loss) Before Income Taxes and
Minority Interest 13,092 (83,290) 96,382 n/m
Income taxes 579 -- 579 n/m
_________ _________ ________
Income (Loss) Before Minority Interest 12,513 (83,290) 95,803 n/m
Minority interest 367 1,065 (698) (65.5)
_________ _________ ________
Net Income (Loss) $ 12,146 $ (84,355) $ 96,501 n/m
========= ========= ========
<FN>
n/m: Not meaningful.
</FN>
/TABLE
<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, 1996
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 208,251 $ 107,072 $ 66,176 $ 33,322 $ 1,681
Costs and Expenses:
Contract course materials and service costs 50,083 39,276 -- 9,993 814
Publishing costs and materials 19,728 -- 19,728 -- --
Product development 17,695 2,845 9,408 5,442 --
Selling and promotion 76,442 42,131 20,559 13,400 352
General and administrative 17,545 9,142 5,121 3,145 137
Amortization of acquired intangible assets 1,696 329 1,367 -- --
Unusual items 4,100 -- 4,100 -- --
_________ _________ __________ _________ _________
Segment Operating Income $ 20,962 $ 13,349 $ 5,893 $ 1,342 $ 378
========= ========= ========== ========= =========
</TABLE>
<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 56,602 39,891 -- 15,307 1,404
Publishing costs and materials 12,573 -- 12,573 -- --
Product development 14,450 2,529 6,444 5,477 --
Selling and promotion 79,523 47,976 14,602 16,606 339
General and administrative 20,314 7,562 3,545 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) $ (72,155) $ 8,092 $ 9,079 $ (89,964) $ 638
========= ========= ========== ========= =========
</TABLE>
<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, 1996 Compared to Nine Months Ended
September 30, 1995
__________________________________________________________________
Revenues of $208,251,000 for the nine months ended September 30, 1996, were
$17,999,000 (9.5%) higher than revenues of $190,252,000 in the prior year.
Net income for the period was $12,146,000 or $.33 per share compared to a
loss of ($84,355,000) or ($2.77) per share in the prior year.
The operating results for the nine months ended September 30, 1996 and 1995
include the write-off of in-process research and development in 1996, and
unusual items representing restructuring charges and write-off of goodwill in
1995. The 1996 operating results also contain a nonrecurring charge of
approximately $732,000 ($861,000 pretax) or $.02 per share, related to the
change in CEO at Steck-Vaughn. The Company also recorded nonrecurring
interest income of $990,000 on the income tax refund received in July 1996.
Excluding unusual items and the benefit of a $2,000,000 tax refund in 1996,
net income (loss) would have been $13,553,000 or $.37 per share for the nine
months ended September 30, 1996, and ($6,550,000) or ($.21) per share for the
nine months ended September 30, 1995.
Income tax provision for the nine months ended September 30, 1996 reflects
taxes provided on pretax income, excluding the $4,100,000 write-off of in-
process research and development at Edunetics which is not deductible for tax
purposes, at an estimated annual effective tax rate of 15%, reduced by a
$2,000,000 tax benefit of a tax refund received and recognized in the second
quarter of 1996.
ICS Learning Systems:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Traditional Distance Education - Domestic $ 58,789 $ 64,767 (9.2)%
Traditional Distance Education - International 32,956 32,161 2.5
Business and Industrial 7,692 5,963 29.0
Professional 7,635 4,720 61.8
_________ _________
Total Revenues $ 107,072 $ 107,611 (.5)
========= =========
Traditional Distance Education:
-------------------------------
New Enrollments:
Domestic 218,801 226,057 (3.2)
<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 Learning Systems (continued):
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
International 87,050 91,936 (5.3)
_________ _________
Total New Enrollments 305,851 317,993 (3.8)
========= =========
Gross Enrollment Value (GEV):
Domestic $ 129,537 $ 179,752 (27.9)
International 63,301 58,901 7.5
_________ _________
Total GEV $ 192,838 $ 238,653 (19.2)
========= =========
Selling and Promotion Spending:
Domestic $ 27,465 $ 34,706 (20.9)
International 16,057 15,735 2.0
_________ _________
Total Selling and Promotion Spending $ 43,522 $ 50,441 (13.7)
========= =========
</TABLE>
ICS experienced similar changes in revenues and operating results as
occurred for the three month period previously discussed, except as
follows.
Product development expense increased $316,000 (increased .3% as a
percent of revenues) due to more courses under development in 1996
compared to 1995.
The 1995 year-to-date results include $1,470,000 of amortization of
prior period deferred marketing due to the adoption in 1994 of a new
accounting pronouncement. There was no amortization of prior period
deferred marketing in 1996.
General and administrative expenses increased $1,580,000 (1.5% as a
percent of revenues) due to higher expenses of information systems due
to implementation of a new integrated information system, the
acquisition of CCHS which added $344,000 to expenses and increased
costs in the Business and Industrial products.
<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>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Steck-Vaughn Core Business:
Elementary and High School $ 32,482 $ 28,731 13.1%
Adult Education 10,931 9,936 10.0
Library 12,932 8,130 59.1
_________ _________
56,345 46,797 20.4
Summit Learning 7,025 -- n/m
Edunetics 2,806 -- n/m
_________ _________
Total Revenues $ 66,176 $ 46,797 41.4
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent of Revenue
(dollars in thousands) 1996 1995 Year-to-Date
1996 1995
______________________________________________ _________ _________ _______ _______
<S> <C> <C> <C> <C>
Operating Income (Loss) by Product Line:
Steck-Vaughn Core Business $ 11,155 $ 9,079 19.8% 19.4%
Summit Learning (356) -- (5.1) --
Edunetics (806) -- (28.7) --
_________ _________
9,993 9,079 15.1 19.4
Write-off of in-process research and development (4,100) --
_________ _________
Operating income $ 5,893 $ 9,079
========= =========
</TABLE>
<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 (continued):
Steck-Vaughn experienced similar changes in revenues and operating results
as occurred for the three month period previously discussed, except there
is no impact for the nine month period of second quarter backlog shipped
in the third quarter. Operating income as a percentage of revenues for
the nine months ended September 30, 1996, as compared to 1995, was up
slightly for the core business as economies resulting from the increase in
sales more than offset the reduction in operating income caused by the
$861,000 nonrecurring charge for the change in CEO at Steck-Vaughn. Also,
operating income for the nine month period includes a $4,100,000 write-off
of in-process research and development in connection with the acquisition
of Edunetics in the second quarter of 1996.
NETG:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Domestic $ 16,018 $ 16,041 (.1)%
International 17,304 15,707 10.2
Spectrum -- 1,600 n/m
_________ _________
Total Revenues $ 33,322 $ 33,348 (.1)
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
Course service costs decreased $5,314,000 (decreased 15.9% as a percent of
revenues) from the 1995 comparable period. Most of the decrease occurred
because in 1995 NETG recorded a $1,946,000 increase in the allowance for
doubtful accounts. The discontinuance of Spectrum reduced costs by
$2,082,000. The other most significant contributing factors to the
reduced expenses were a reduction in headcount and related expenses as a
result of the 1995 restructure actions.
Selling and promotion expense decreased $3,206,000 (decreased 9.6% as a
percent of revenues). Most of the decrease was due to reduced
headcount and related expenses compared to the first half of 1995 as a
result of the 1995 restructure actions; lowered sales and marketing
expense as NETG reduced spending to bring the expenses in line with the
new business model; nonrecurring expense charges of $731,000 in the
second quarter of 1995 in the U.K. and Germany and lower expenses due
to the discontinuance of Spectrum.<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 (continued):
General and administrative expense decreased $5,947,000 (decreased
17.8% as a percent of revenues) due principally to a reduction in
headcount and overhead expenses, such as facilities costs as a result
of the restructuring actions in the second quarter of 1995 and the
renegotiation of leased facilities in the U.K.; the discontinuance of
Spectrum and due to favorable outcomes of certain legal disputes.
In the second quarter of 1995, the Company restructured NETG, which
resulted in an unusual charge of $28,652,000 ($.95 per share). In the
fourth quarter of 1995, NETG further reduced its organization in
Germany and recorded a restructure charge of $1,952,000 ($.06 per
share). No tax benefits were provided on these charges. The charges
included severance related payments, excess facilities costs, the
write-down of inventory and fixed assets of certain discontinued
products and other restructuring related items, such as charges related
to canceled contracts and agreements. In the second quarter of 1995,
the Company also wrote-off the goodwill balance at NETG of $47,509,000
($1.58 per share).
<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 (continued):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________
1996 1995
______________________________________________ _________ _________
<S> <C> <C>
Number of Internally Developed Products Completed:
Client/Server 83 8
Mainframe 11 2
Desktop 36 6
Business Skills 4 --
_________ _________
Total 134 16
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
_____________________
1996 1995
______________________________________________ _________ _________
<S> <C> <C>
Number of Third Party Developed Products Completed:
Client/Server 25 38
Mainframe 8 14
Desktop 35 29
Business Skills 72 14
_________ _________
Total 140 95
========= =========
</TABLE>
ICS and NETG foreign operations by geographic region experienced similar
changes in revenues and income as discussed above. Foreign currency exchange
losses of $21,000 were recorded during the period as compared to gains of
$307,000 in the prior year.
<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)
Corporate and Other:
General corporate expenses and interest expense experienced similar changes
as occurred for the three month period previously discussed. In the second
quarter of 1995, the Company recorded a $1,644,000 ($.05 per share) charge at
Corporate for restructuring.
Liquidity and Capital Resources
_______________________________
The Company's primary sources of liquidity are cash, investment securities
and cash provided from operations. At September 30, 1996, the Company had
$16,070,000 in cash and investment securities of which $7,035,000 was held in
the account of Steck-Vaughn.
The Company has a revolving bank credit agreement in the amount of
$20,000,000 which expires January 1998. As of September 30, 1996,
$12,100,000 was outstanding under this credit agreement. Additionally,
Steck-Vaughn has a revolving bank credit agreement in the amount of
$15,000,000 which expires June 1998. As of September 30, 1996, $10,000,000
was outstanding under this credit agreement.
During July 1996, the Company terminated its credit facility with Steck-
Vaughn in the amount of $5,000,000.
On April 30, 1996, Steck-Vaughn acquired all of the stock of Edunetics Ltd.,
a corporation engaged in the development of educational software, for cash
consideration of $12,000,000. At closing, the purchase price was funded by
cash on hand of Steck-Vaughn and Steck-Vaughn's bank line of credit. Also,
during the second quarter of 1996, ICS acquired all of the outstanding common
stock of California College for Health Sciences (CCHS) for approximately
$833,000 cash and the issuance of $4,340,000 of notes payable bearing
interest at 7%. During July 1996, the notes were fully paid after receipt of
a tax refund from the IRS. Additionally, ICS acquired the product line of
SMH, a provider of legal bar review distance education materials, for
$696,000.
Net cash flow from operating activities for the quarter ended September 30,
1996 of $9,916,000 was $11,326,000 favorable compared to the prior year
period due primarily to the tax refund from the IRS in the amount of
$11,516,000 and improved operating performance, partially offset by increased
receivables of $14,729,000 of which $8,835,000 and $5,638,000 are
attributable to Steck-Vaughn and NETG, respectively. The increases in
accounts receivable are due to increased revenues during September 1996, as
compared to 1995, at Steck-Vaughn and NETG.
<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 (continued)
___________________________________________
Net cash flow from operating activities for the nine months ended September
30, 1996 of $2,424,000 was $9,093,000 favorable compared to the prior year
period due to similar factors explained above. Net cash for investing
activities for the nine months ended September 30, 1996 of $18,489,000 was
$22,764,000 unfavorable compared to the prior year period primarily due to
acquisition payments of $12,173,000 during 1996 and the net change in
proceeds from the sale of securities in the amount of $9,077,000.
The Company expects that cash, investment securities, bank credit facilities,
and cash provided from operations will be sufficient to provide for planned
working capital requirements, product development, debt service, and capital
expenditures for the foreseeable future. Additionally, the Company expects
to buy back five percent of its $57,500,000 subordinated convertible
debentures in the open marketplace in order to satisfy its 1997 sinking fund
obligations under the indenture. At the 1996 stockholders' meeting, the
shareholders approved an increase in the number of authorized common shares
from 50,000,000 to 65,000,000 shares.
<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.
<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 4, 1996
By /s/ Keith K. Ogata
___________________________
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
<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
of National Education Corporation (1). . . . . . . . . *
3.2 Amendment to Restated Certificate of Incorporation of
National Education Corporation (31). . . . . . . . . . *
3.3 By-Laws of the Company, as amended (2) . . . . . . . . *
10.1** National Education Corporation Retirement Plan
(Restated as of January 1, 1989 and as Amended
through January 1, 1992) (3) . . . . . . . . . . . . . *
10.2** Advanced Systems, Incorporated 1984 Stock
Option and Stock Appreciation Rights Plan (4). . . . . *
10.3** 1986 Stock Option and Incentive Plan, as
amended (5). . . . . . . . . . . . . . . . . . . . . . *
10.4** Amended and Restated 1990 Stock Option and
Incentive Plan (6) . . . . . . . . . . . . . . . . . . *
10.5** Amended and Restated 1991 Directors' Stock
Option and Award Plan (7). . . . . . . . . . . . . . . *
10.6 Rights Agreement, dated October 29, 1986,
between National Education Corporation and
Bank of America National Trust and Savings
Association, Rights Agent (including exhibits
thereto) (8) . . . . . . . . . . . . . . . . . . . . . *
10.7 Addendum No. 1 to Rights Agreement, dated
August 5, 1991 (9) . . . . . . . . . . . . . . . . . . *
10.8 Indenture, dated as of May 15, 1986, between
National Education Corporation and Continental
Illinois National Bank and Trust Company of
Chicago, as Trustee (10) . . . . . . . . . . . . . . . *
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.9 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 (11) . . . . . . . . . . . . . . . . . . . . . *
10.10** National Education Corporation Supplemental
Executive Retirement Plan, as amended (12) . . . . . . *
10.11** Supplemental Benefit Plan for Non-Employee
Directors (13) . . . . . . . . . . . . . . . . . . . . *
10.12** Executive Employment Agreement between National
Education Corporation and Sam Yau (14) . . . . . . . . *
10.13 Intercompany Agreement between National
Education Corporation and Steck-Vaughn
Publishing Corporation, dated June 30, 1993
(the "Intercompany Agreement") (15). . . . . . . . . . *
10.14 First Amendment to Intercompany Agreement,
dated June 10, 1994 (16) . . . . . . . . . . . . . . . *
10.15 Tax Sharing Agreement between National
Education Corporation and Its Direct and
Indirect Corporate Subsidiaries, dated
January 1, 1993 (17) . . . . . . . . . . . . . . . . . *
10.16 $13,500,000 Amended and Restated Credit Agreement
among National Education Corporation, the Banks
named therein and Bankers Trust Company as Agent,
dated February 28, 1995 (the "Credit Agreement")
(Confidential treatment under Rule 24b-2 has been
granted for portions of this exhibit) (18) . . . . . . *
10.17 First Amendment and Limited Waiver to Credit
Agreement, dated July 31, 1995 (19). . . . . . . . . . *
10.18 Second Amendment to Credit Agreement, dated
December 21, 1995 (20) . . . . . . . . . . . . . . . . *
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.19 Revolving Line of Credit Note and Option
Agreement between National Education Corporation and
Steck-Vaughn Publishing Corporation, dated
February 28, 1995 (21) . . . . . . . . . . . . . . . . *
10.20 Renewal and Extension Agreement between National
Education Corporation and Steck-Vaughn Publishing
Corporation, effective December 31, 1995 (22). . . . . *
10.21 First Amendment to Stock Option Agreement between
National Education Corporation and Steck-Vaughn
Publishing Corporation, effective December 31, 1995 (23) *
10.22 Letter Amendment to Stock Option Agreement between
National Education Corporation and Steck-Vaughn
Publishing Corporation, dated February 1, 1996 (24). . *
10.23 Second Renewal and Extension Agreement and Second
Amendment to Stock Option Agreement, dated March 31,
1996 between National Education Corporation and
Steck-Vaughn Publishing Corporation (27) . . . . . . . *
10.24 Debenture Conversion Agreement among National
Education Corporation and the Holders identified
therein, dated August 31, 1995 (25). . . . . . . . . . *
10.25 Credit Agreement among National Education Corporation,
certain banks and BZW Division of Barclays Bank PLC,
as Agent, dated January 19, 1996 (the "BZW Credit
Agreement") (26) . . . . . . . . . . . . . . . . . . . *
10.26 Waiver and First Amendment to BZW Credit Agreement,
dated April 9, 1996 (28) . . . . . . . . . . . . . . . *
10.27 Loan Agreement dated April 29, 1996, between Steck-
Vaughn Company and NationsBank of Texas, N.A. (29) . . *
10.28 Third Renewal and Extension Agreement and Third
Amendment to Stock Option Agreement, dated June 30, 1996
between National Education Corporation and Steck-Vaughn
Publishing Corporation (30). . . . . . . . . . . . . . *
11.1 Calculation of Primary Earnings Per Share (32) . . . .
11.2 Calculation of Fully Diluted Earnings Per Share (32) .
27.1 Financial Data Schedule (32) . . . . . . . . . . . . .
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
________________________________
<FN>
* incorporated by reference from a previously filed document
** denotes management contract or compensatory plan or arrangement
1) Incorporated by reference to Exhibit 3.1 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995, filed March 19, 1996.
2) Incorporated by reference to Exhibit 10 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1990.
3) Incorporated by reference to Exhibit 10.1 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992, filed March 22, 1993.
4) Incorporated by reference to Exhibit 10.15 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1987, filed March 30, 1988.
5) Incorporated by reference to Exhibit 10.17 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, filed April 1, 1991.
6) Incorporated by reference to Exhibit "B" filed with National Education
Corporation's Proxy Statement, furnished in connection with the Annual
Meeting of Stockholders held June 27, 1995, filed May 22, 1995.
7) Incorporated by reference to Exhibit "A" filed with National Education
Corporation's Proxy Statement, furnished in connection with the Annual
Meeting of Stockholders held June 27, 1995, filed May 22, 1995.
8) Incorporated by reference to Exhibit 4.1 filed with National Education
Corporation's Current Report on Form 8-K, dated October 29, 1986,
filed October 30, 1986.
9) Incorporated by reference to Exhibit 10.19 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1991, filed April 1, 1992.
10) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to
National Education Corporation's Registration Statement on Form S-3
(No. 33-5552), filed May 16, 1986.
11) Incorporated by reference to Exhibit 4 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1990.
12) Incorporated by reference to Exhibit 10.17 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1991, filed April 1, 1992.
13) Incorporated by reference to Exhibit 10.18 filed with National
Education Corporations Annual Report on Form 10-K for the year ended
December 31, 1991, filed April 1, 1992.<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
14) Incorporated by reference to Exhibit 10.21 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995.
15) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1
to Steck-Vaughn Publishing Corporation's Registration Statement on
Form S-1 (No. 33-62334), filed June 17, 1993.
16) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, filed August 11, 1994.
17) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1
to Steck-Vaughn Publishing Corporation's Registration Statement on
Form S-1 (No. 33-62334), filed June 17, 1993.
18) Incorporated by reference to Exhibit 10.18 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 13, 1994, filed March 31, 1995.
19) Incorporated by reference to Exhibit 10.22 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, filed on November 9, 1995.
20) Incorporated by reference to Exhibit 10.18 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, filed on March 19, 1996.
21) Incorporated by reference to Exhibit 10.12 filed with Steck-Vaughn
Publishing Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994, filed March 29, 1995.
22) Incorporated by reference to Exhibit 10.22 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, filed March 19, 1996.
23) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, filed March 19, 1996.
24) Incorporated by reference to Exhibit 10.24 filed with National
Education Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, filed March 19, 1996.
25) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the first
quarter ended September 30, 1995, filed November 9, 1995.
26) Incorporated by reference to Exhibit 10.26 filed with National
Education Corporation's Annual Report on Form 10-K/A, Amendment No.1,
for the year ended December 31, 1995, filed July 26, 1996.
27) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, filed May 8, 1996.
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
28) Incorporated by reference to Exhibit 10.26 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, filed May 8, 1996.
29) Incorporated by reference to Exhibit 10.27 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, filed May 8, 1996.
30) Incorporated by reference to Exhibit 10.28 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, filed August 7, 1996.
31) Incorporated by reference to Exhibit "A" filed with National Education
Corporation's Proxy Statement, furnished in connection with the Annual
Meeting of Stockholders held May 29, 1996, filed April 15, 1996.
32) Filed herewith.
</FN>
</TABLE>
<PAGE>
EXHIBIT 11.1
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF PRIMARY EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ _______________________
1996 1995 1996 1995
__________ _________ _________ _________
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 9,307 $ 5,827 $ 12,146 $(84,355)
__________ _________ _________ _________
COMMON STOCK:
Shares outstanding from beginning of period 35,137 29,578 35,137 29,578
Pro rata shares:
Stock options exercised 392 429 220 253
Assumed exercise of stock options, using treasury
stock method 1,303 732 1,293 320
Conversion of senior subordinated debentures -- 1,037 -- 349
_________ ________ ________ ________
Weighted average number of shares outstanding 36,832 31,776 36,650 30,500
_________ ________ ________ ________
EARNINGS (LOSS) PER SHARE $ .25 $ .18 $ .33 $ (2.77)
========= ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 11.2
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ _______________________
1996 1995 1996 1995
__________ _________ _________ _________
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 9,307 $ 5,827 $ 12,146 $(84,355)
Add back senior debenture interest, net of applicable taxes -- 237 -- 837
Add back junior debenture interest, net of applicable taxes 570 570 1,709 1,709
_________ ________ ________ ________
NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $ 9,877 $ 6,634 $ 13,855 $(81,809)
--------- -------- -------- --------
COMMON STOCK:
Shares outstanding from beginning of period 35,137 29,578 35,137 29,578
Stock options exercised 392 429 220 253
Assumed exercise of stock options, using treasury
stock method 1,367 939 1,446 729
Assumed conversion of senior subordinated debentures,
from the beginning of the period -- 5,021 -- 5,021
Assumed conversion of junior subordinated debentures,
from the beginning of the period 2,300 2,300 2,300 2,300
_________ ________ ________ ________
Weighted average number of shares outstanding 39,196 38,267 39,103 37,881
_________ ________ ________ ________
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ .25 $ .17 $ .33 $ (2.77)
========= ======== ======== ========
</TABLE>
For the nine month periods, fully diluted earnings (loss) per share is the
same as primary earnings (loss) per share because inclusion of the
convertible debentures is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,671
<SECURITIES> 1,399
<RECEIVABLES> 55,038
<ALLOWANCES> 2,823
<INVENTORY> 33,261
<CURRENT-ASSETS> 125,025
<PP&E> 52,248
<DEPRECIATION> 24,033
<TOTAL-ASSETS> 211,452
<CURRENT-LIABILITIES> 77,212
<BONDS> 81,778
0
0
<COMMON> 2,170
<OTHER-SE> 21,221
<TOTAL-LIABILITY-AND-EQUITY> 211,452
<SALES> 208,251
<TOTAL-REVENUES> 208,251
<CGS> 69,811
<TOTAL-COSTS> 187,120
<OTHER-EXPENSES> 8,039
<LOSS-PROVISION> 256
<INTEREST-EXPENSE> 6,119
<INCOME-PRETAX> 13,092
<INCOME-TAX> 579
<INCOME-CONTINUING> 12,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,146
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
