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 June 30, 1996
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)
2601 Main Street, 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:
35,527,610 common stock shares outstanding at August 4, 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 Six Months Ended
June 30, June 30,
______________________ _______________________
(amounts in thousands, except per share amounts) 1996 1995 1996 1995
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Tuition and Contract Revenues $ 48,288 $ 46,986 $ 92,196 $ 91,798
Publishing Revenues 18,296 15,278 33,757 26,425
__________ _________ __________ _________
Total Net Revenues 66,584 62,264 125,953 118,223
Costs and Expenses:
Contract course materials and service costs 16,904 20,323 33,114 37,899
Publishing costs and materials 5,734 4,166 10,891 7,542
Product development 5,868 4,870 11,305 9,925
Selling and promotion 24,911 27,648 46,848 51,148
General and administrative 6,567 8,856 14,206 18,167
Amortization of prior period deferred marketing -- 159 -- 1,470
Amortization of acquired intangible assets 621 545 999 1,110
Interest expense 2,096 2,403 4,117 4,380
Investment income (529) (807) (941) (1,216)
Other expense (income) (24) (29) 37 (265)
Unusual items 4,100 77,805 4,100 77,805
__________ _________ __________ _________
Income (Loss) Before Income Tax Benefit and Minority
Interest 336 (83,675) 1,277 (89,742)
Income tax benefit (1,334) -- (1,193) --
__________ _________ __________ _________
Income (Loss) Before Minority Interest 1,670 (83,675) 2,470 (89,742)
Minority interest in consolidated subsidiary (504) 350 (369) 440
__________ _________ __________ _________
Net Income (Loss) $ 2,174 $(84,025) $ 2,839 $(90,182)
======== ========= ========= =========
Earnings (Loss) Per Share $ .06 $ (2.79) $ .08 $ (3.02)
======== ========= ========= =========
Weighted Average Number of Shares Outstanding
Primary shares 36,746 30,111 36,541 29,881
Fully diluted shares 39,045 37,721 38,899 37,417
<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>
June 30, December 31, June 30,
(dollars in thousands) 1996 1995 1995
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 11,960 $ 22,120 $ 23,164
Investment securities 1,399 1,748 2,335
Receivables, net of allowance of $3,242, $2,742 and $3,488 38,013 36,397 25,470
Inventories and supplies 34,039 31,847 26,687
Net assets held for disposition -- -- 21,795
Income tax receivable 9,313 9,313 9,313
Prepaid and deferred marketing expenses 12,759 2,675 12,375
Other current assets 11,250 10,765 15,930
_________ __________ _________
Total current assets 118,733 114,865 137,069
Land, buildings and equipment, less accumulated depreciation
of $26,068, $31,992 and $66,406 26,957 24,028 23,687
Acquired intangible assets, less accumulated amortization of
$10,230, $13,333 and $12,965 27,643 13,428 9,640
Deferred income taxes 24,768 24,768 23,073
Other assets 6,847 8,173 8,831
_________ __________ _________
$ 204,948 $ 185,262 $ 202,300
========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 10,248 $ 6,072 $ 7,027
Accrued expenses 23,329 29,022 27,699
Accrued short-term restructuring charges 4,882 8,246 9,251
Accrued salaries and wages 4,998 5,627 5,639
Accrued disposition costs -- -- 20,275
Deferred contract revenues 7,428 7,421 9,573
Current portion of long-term debt and short-term borrowings 11,820 12,338 14,821
Accrued and deferred income taxes 16,365 14,446 11,649
_________ __________ _________
Total current liabilities 79,070 83,172 105,934
_________ __________ _________
Liabilities Payable After One Year
Long-term debt, less current portion 29,471 8,839 6,370
Senior subordinated convertible debentures -- -- 20,000
Convertible subordinated debentures 54,619 57,494 57,494
Accrued long-term restructuring charges 9,377 10,089 12,174
Other noncurrent liabilities 9,557 8,683 7,967
_________ __________ _________
103,024 85,105 104,005
_________ __________ _________
Minority Interest in Equity of Consolidated Subsidiary 9,157 9,504 8,566
_________ __________ _________
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
June 30, December 31, June 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;
36,226,291, 35,820,468 and 30,581,631 shares issued 2,169 2,166 2,117
Additional paid-in capital 157,149 155,100 134,222
Accumulated deficit (133,645) (136,484) (139,229)
Unrealized gain on available-for-sale securities, net of tax 1 10 73
Cumulative foreign exchange translation adjustment (6,496) (7,005) (7,301)
Notes receivable under stock option plans (573) (1,398) (1,179)
_________ __________ _________
18,605 12,389 (11,297)
Less common stock in treasury, 697,556 shares (4,908) (4,908) (4,908)
_________ __________ _________
Total stockholders' equity 13,697 7,481 (16,205)
_________ __________ _________
$ 204,948 $ 185,262 $ 202,300
========= ========== =========
<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
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
______________________ _______________________
(amounts in thousands, except per share amounts) 1996 1995 1996 1995
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 2,174 $(84,025) $ 2,839 $ (90,182)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 1,229 1,634 2,442 3,006
Amortization of acquired intangible assets 620 545 998 1,110
Amortization of prior period deferred marketing -- 159 -- 1,470
Provision for doubtful accounts 136 1,811 86 1,921
Write-off of acquired intangible assets -- 47,509 -- 47,509
Write-off of in-process research and development 4,100 -- 4,100 --
Loss on sale of property, plant and equipment, net (91) -- (91) --
(Gain) loss on foreign currency exchange (23) (20) 27 (259)
Change in assets and liabilities:
Receivables, net (3,892) 4,048 3,124 18,261
Inventories and supplies 2 798 (1,920) (333)
Prepaid and deferred marketing expenses 1,690 1,163 (10,092) (9,404)
Accounts payable and accrued expenses (8,310) (2,837) (5,074) (2,881)
Accrued restructuring reserve (2,225) 29,106 (4,297) 29,106
Accrued and deferred income taxes 2,110 (338) 1,986 (583)
Deferred contract revenues (447) (2,881) (1,425) (2,433)
Other (980) (586) (195) (1,567)
__________ _________ __________ _________
Net cash from operating activities (3,907) (3,914) (7,492) (5,259)
__________ _________ __________ _________
Cash Flows For Investing Activities:
Additions to land, building and equipment (2,358) (3,295) (4,273) (5,367)
Dispositions of land, buildings and equipment 104 (286) 168 (190)
Purchases of investment securities 85 (189) 335 (189)
Proceeds from the sale or redemption of securities -- 154 -- 8,836
Acquisition of businesses, net of cash acquired (12,173) -- (12,173) --
Discontinued operations -- (390) -- (769)
__________ _________ __________ _________
Net cash for investing activities (14,342) (4,006) (15,943) 2,321
__________ _________ __________ _________
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
______________________ _______________________
(amounts in thousands, except per share amounts) 1996 1995 1996 1995
________________________________________________ __________ _________ __________ _________
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Additions to long-term debt 13,000 518 13,000 576
Reductions in long-term debt (2,549) (370) (3,063) (595)
Changes in short-term borrowings (1,406) 5,439 622 8,414
Minority interest in earnings of consolidated subsidiary (499) 350 (347) 345
Common stock, stock options and related tax benefits 1,734 1,186 2,052 1,186
Payments received on notes receivable under stock option plan 372 (1,179) 825 (1,179)
__________ _________ __________ _________
Net cash from financing activities 10,652 5,944 13,089 8,747
__________ _________ __________ _________
Effect of exchange rate changes on cash 120 (140) 186 58
__________ _________ __________ _________
Net change in cash and equivalents (7,477) (2,116) (10,160) 5,867
Cash and equivalents at the beginning of the period 19,437 25,280 22,120 17,297
__________ _________ __________ _________
Cash and equivalents at the end of the period $ 11,960 $ 23,164 $ 11,960 $ 23,164
======== ========= ========= =========
<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 necessary to present fairly the
financial position, results of operations and cash flows. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles 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 costs are becoming increasingly material to the Company's
financial statements with more software media based training and education
products at NETG and Steck-Vaughn through its recent acquisition of Edunetics
(see Note 2).
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 preliminary 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 $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 Items
______________________
The unusual item for the second quarter of 1996 represents the $4,100,000
($.11 per share) write-off of in-process research and development in
connection with the acquisition of Edunetics as more fully explained in Note
2.
In the second quarter of 1995, the Company approved a restructuring plan for
NETG which resulted in an unusual charge of $28,652,000 ($.95 per share).
The Company, in the second quarter of 1995, also recorded a $1,644,000 ($.05
per share) charge at NEC Corporate for restructuring. Additionally, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 3 - Unusual Items (continued)
__________________________________
Set forth below is a summary of the restructuring activity for the first six
months of 1996.
<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
Non-cash write-off -- -- 384 384
Cash paid (2,280) (1,572) (339) (4,191)
__________ __________ ___________ __________
Accrued restructuring at June 30, 1996 $ 12,277 $ 1,039 $ 591 $ 13,907
========== ========== =========== ==========
</TABLE>
NOTE 4 - Income Taxes
_____________________
Income tax benefit for the three and six month periods ended June 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.
Subsequent to June 30, 1996, the Company received $10,700,000 of its
anticipated $12,000,000 income tax refund, including interest. The balance of
the refund is expected during the third quarter of 1996.
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 were
anti-dilutive for all periods and are not presented.
Effective September 11, 1995, the holders of $20,000,000 of the Company's 10%
senior subordinated convertible debentures converted such debentures, including
accrued interest, into 5,021,000 of the Company's common stock. Loss per share
on a pro forma basis, assuming the conversion had taken place at January 1,
1995, for the second quarter of 1995 would have been ($2.38) compared to the
reported loss per share of ($2.79). Loss per share on a pro forma basis for
the six months ended June 30, 1995 would have been ($2.56) compared to a
reported loss per share of ($3.02).
<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>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
_________________________ ________________________
(dollars in thousands) 1996 1995 1996 1995
________________________________________________________ __________ _________ _________ _________
<S> <C> <C> <C> <C>
Cash Paid During the Period For:
Interest expense $ 2,708 $ 2,965 $ 3,560 $ 4,350
Income tax (refunds) payments, net (3,601) (199) (3,404) 50
Detail of Noncash Investing and Financing Activities:
Sale of land, building and equipment
in exchange for note receivable $ 165 $ 416 $ 165 $ 416
Assets acquired through capital leases 345 625 348 709
Notes receivable under stock option plans -- 1,179 -- 1,179
Acquisition of Businesses:
Working capital, other than cash $ (6,346) $ -- $ (6,346) $ --
Property, plant and equipment (959) -- (959) --
Other assets (17,503) -- (17,503) --
Liabilities assumed in acquisition 12,635 -- 12,635 --
_________ _________ __________ __________
Net cash used to acquire businesses $(12,173) $ -- $ (12,173) $ --
</TABLE>
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
June 30,
_____________________ Percent
(dollars in thousands) 1996 1995 Variance Change
________________________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues:
ICS Learning Systems $ 37,778 $ 35,721 $ 2,057 5.8%
Steck-Vaughn Publishing 18,296 15,278 3,018 19.8
NETG 9,942 10,355 (413) (4.0)
Other 568 910 (342) (37.6)
_________ _________ ________
Total Net Revenues $ 66,584 $ 62,264 $ 4,320 6.9
_________ _________ ________
Operating Income (Loss):
ICS Learning Systems before amortization $ 4,923 $ 3,356 $ 1,567 46.7
Amortization of prior period deferred marketing -- (159) 159 n/m
_________ _________ ________
ICS Learning Systems 4,923 3,197 1,726 54.0
Steck-Vaughn Publishing before unusual items 1,766 2,905 (1,139) (39.2)
Unusual items (4,100) -- (4,100) n/m
_________ _________ ________
Steck-Vaughn Publishing (2,334) 2,905 (5,239) n/m
NETG before unusual items 299 (8,868) 9,167 n/m
Unusual items -- (76,161) 76,161 n/m
_________ _________ ________
NETG 299 (85,029) 85,328 n/m
Other 132 267 (135) (50.6)
_________ _________ ________
Total Segment Operating Income (Loss) 3,020 (78,660) 81,680 n/m
General corporate expenses (1,141) (1,804) 663 (36.8)
Interest expense (2,096) (2,403) 307 (12.8)
Investment income 529 807 (278) (34.4)
Unusual items -- (1,644) 1,644 n/m
Other (expense) income 24 29 (5) (17.2)
_________ _________ ________
Income (Loss) Before Income Tax Benefit
and Minority Interest 336 (83,675) 84,011 n/m
Income tax benefit (1,334) -- (1,334) n/m
_________ _________ ________
Income (Loss) Before Minority Interest 1,670 (83,675) 85,345 n/m
Minority interest (504) 350 (854) n/m
_________ _________ ________
Net Income (Loss) $ 2,174 $ (84,025) $ 86,199 n/m
========= ========= ========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
Detailed Segment Operating Results:
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended June 30, 1996
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 66,584 $ 37,778 $ 18,296 $ 9,942 $ 568
Costs and Expenses:
Contract course materials and service costs 16,904 13,634 -- 3,005 265
Publishing costs and materials 5,734 -- 5,734 -- --
Product development 5,868 1,081 3,198 1,589 --
Selling and promotion 24,911 14,873 5,798 4,100 140
General and administrative 5,431 3,116 1,335 949 31
Amortization of acquired intangible assets 616 151 465 -- --
Unusual items 4,100 -- 4,100 -- --
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ 3,020 $ 4,923 $ (2,334) $ 299 $ 132
========= ========= ========== ========= =========
</TABLE>
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended June 30, 1995
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 62,264 $ 35,721 $ 15,278 $ 10,355 $ 910
Costs and Expenses:
Contract course materials and service costs 20,321 13,247 -- 6,564 510
Publishing costs and materials 4,166 -- 4,166 -- --
Product development 4,870 1,048 2,069 1,753 --
Selling and promotion 27,648 15,743 4,684 7,114 107
General and administrative 7,059 2,307 1,269 3,457 26
Amortization of prior period deferred marketing 159 159 -- -- --
Amortization of acquired intangible assets 540 20 185 335 --
Unusual items 76,161 -- -- 76,161 --
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ (78,660) $ 3,197 $ 2,905 $ (85,029) $ 267
========= ========= ========== ========= =========
</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 June 30, 1996 Compared to Three Months Ended June 30, 1995
_____________________________________________________________________________
Revenues of $66,584,000 for the three months ended June 30, 1996, were
$4,320,000 or 6.9% higher than revenues of $62,264,000 in the prior year. Net
income for the period was $2,174,000 or $.06 per share compared to a loss of
($84,025,000) or ($2.79) per share in the prior year. The operating results
for the quarter ended June 30, 1995 include unusual items representing
restructuring charges ($28,652,000 or $.95 per share) and write-off of goodwill
($47,509,000 or $1.58 per share) at NETG and restructuring charges at NEC
Corporate of $1,644,000 ($.05 per share). The unusual item for the quarter
ended June 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 by Steck-Vaughn, as more fully explained in Note 2 of the
accompanying Notes to Consolidated Financial Statements. Excluding unusual
items and the benefit of a $2,000,000 tax refund, net income (loss) would have
been $3,581,000 or $.10 per share for the quarter ended June 30, 1996, and
($6,220,000) or ($.21) per share for the quarter ended June 30, 1995.
Income tax benefit for the three and six month periods ended June 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.
Excluding unusual items, the operating results for the second quarter of 1996
are better than the comparable period in 1995 principally due to the turnaround
of NETG and improved operating results at ICS. The improvement in operating
results at NETG was due in large part to the restructuring actions taken in the
second quarter of 1995.
Steck-Vaughn's revenues and results of operations were negatively impacted by
the inability to ship an estimated $3,200,000 of orders in backlog as a result
of problems encountered in the implementation of a new warehouse management
system. The Company believes that these unfilled orders would have been
shipped had the difficulties in implementing the new warehouse management
system not occurred. The Company expects that these unfilled orders and
problems in the new management warehouse system will be satisfactorily resolved
during the third quarter. On a pro forma basis, reflecting this backlog as
shipped would have increased revenue by $3,200,000, operating income by
$1,440,000 and net income by $1,069,000 or $.03 per share. While management is
confident that the $3,200,000 of unshipped backlog will be shipped in the third
quarter, no assurance can be given that a portion of the backlog will not be
cancelled prior to shipment.
<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
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Revenues:
Traditional Distance Education - Domestic $ 20,531 $ 21,187
(3.1)%
Traditional Distance Education - International 11,042 10,920
1.1
Business and Industrial 2,855 2,049
39.3
Professional 3,350 1,565
114.1
_________ _________
Total Revenues $ 37,778 $ 35,721
5.8
========= =========
Traditional Business:
____________________
New Enrollments:
Domestic 67,336 72,120
(6.6)
International 27,611 25,667
7.6
_________ _________
Total New Enrollments 94,947 97,787
(2.9)
========= =========
Gross Enrollment Value (GEV)
Domestic $ 40,701 $ 59,072
(31.1)
International 19,470 15,822
23.1
_________ _________
Total GEV $ 60,171 $ 74,894
(19.7)
========= =========
Selling and Promotion Spending:
Domestic $ 5,569 $ 8,345
(33.3)
International 4,612 4,247
8.6
_________ _________
Total Selling and Promotion Spending $ 10,181 $ 12,592
(19.1)
========= =========
Estimated realization of future tuition revenue 49% 43%
</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)
ICS Learning Systems (continued):
________________________________
ICS revenues of $37,778,000 for the second quarter of 1996 were $2,057,000
(5.8%) higher than the comparable quarter in 1995. Professional revenue,
which includes MicroMash and California College for Health Sciences (CCHS),
increased $1,785,000 (114.1%) due principally to the acquisition of CCHS and
also due to increased sales to the Internal Revenue Service. Business and
Industrial revenue increased $806,000 (39.3%). Traditional international
revenue increased $122,000 (1.1%) while traditional domestic revenue
declined $656,000 (3.1%).
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. Traditional domestic revenue, excluding PC hardware
revenue, was $18,414,000 and $18,296,000 for the second quarter of 1996 and
1995, respectively, reflecting an increase of 0.6%. Although new
enrollments were lower, attrition rates on courses were improved, reflecting
a better realization of revenue. New enrollments, which is an indicator of
future revenues, declined 6.6% 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 partially impacted by eliminating the
computer hardware from the PC courses. The elimination of the computer
hardware has resulted in improved margins for the operation.
International revenue increased $122,000 (1.1%) over the comparable period
last year. Revenues in Canada increased over the prior year period due to
an 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 telesales understaffing and lower revenue in
the U.K. as a result of advertising underspending in the prior quarter. New
enrollments increased by 7.6% primarily as a result of higher enrollments at
IMS, Canada and Singapore, partially offset by declines in the U.K. and
Australia/New Zealand.
Course material service costs increased $387,000 (decreased 1.0% as a
percent of revenues) due to the acquisition of CCHS which added $538,000 to
costs, volume related increases in International, MicroMash, Business and
Industrial and increased customer service initiatives such as Welcome Call,
which have improved the start rates of students. These increases were
partially offset by decreased traditional domestic expenses due to
elimination of computer hardware from computer courses.
Selling and promotion spending for traditional business decreased $2,411,000
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.
<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):
________________________________
Selling and promotion expenses decreased $870,000 (decreased 4.7% 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 $207,000 due to the
acquisition of CCHS and higher International spending in all markets.
General and administrative expenses increased $809,000 (increased 1.7% as a
percent of revenues) due to higher expenses of information systems due to
implementation of a new integration information system, the acquisition of
CCHS which added $205,000 to expenses, increased costs in the Business and
Industrial products and higher payroll in the U.K.
Domestic GEV decreased 31.1% 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 of 6.6%.
International GEV increased 23.1% due to increases in Canada, IMS and
Australia/New Zealand, partially offset by a decrease in the U.K. The
increase in GEV is a result of a net 7.6% increase in enrollments, as well
as higher average contract price due to a larger mix of higher priced
courses.
Steck-Vaughn Publishing:
_______________________
<TABLE>
<CAPTION>
Three Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Revenues:
Steck-Vaughn:
Elementary and High School (El/Hi) $ 7,000 $ 8,744
(19.9)%
Adult Education 3,339 3,698
(9.7)
Library 4,272 2,836
50.6
_________ _________
14,611 15,278
(4.4)
Summit Learning 2,565 --
n/m
Edunetics 1,120 --
n/m
========= =========
Total Revenues $ 18,296 $ 15,278
19.8
========= =========
<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 June 30, 1996. Steck-Vaughn's results of operations were negatively
impacted by the inability of Steck-Vaughn to ship an estimated $3,200,000
orders in backlog as a result of problems encountered in the implementation
of a new warehouse management system. The Company believes that these
orders would have been shipped 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
inclusion of the $3,200,000 of unshipped orders as set forth below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Net Revenues by Product Line (with pro forma sales):
Steck-Vaughn:
Elementary and High School (El/Hi) $ 8,856 $ 8,744
1.3%
Adult Education 3,986 3,698
7.8
Library 4,969 2,836
75.2
_________ _________
17,811 15,278
16.6
Summit Learning 2,565 --
n/m
Edunetics 1,120 --
n/m
========= =========
Total Revenues $ 21,496 $ 15,278
40.7
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
El/Hi revenues on a pro forma basis were relatively flat during the quarter
ended June 30, 1996, when compared to 1995. The flat results are
attributable to a seasonal fluctuation consistent with the end of the
school-year, with third quarter revenues typically much higher for this
segment.
Sales of adult education products for the second quarter ended June 30,
1996, increased 7.8% on a pro forma basis over the previous year primarily
due to the addition of the Educational Development Laboratories, Inc. (EDL)
technology product to the Steck-Vaughn line of early-skills level computer
instruction. Sales of traditional adult product for the quarter were down
11% on a pro forma basis relative to the prior year as the release of
federal funds occurred too late in the quarter to impact significant 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)
Steck-Vaughn Publishing (continued):
___________________________________
Library sales on a pro forma basis continued their strong growth, with sales
for the second quarter ended June 30, 1996, up 75.2% over the same period in
1995. Much of the growth is attributable to sales of products developed by
Wayland Publishers, Abdo and Daughters, and Larousse Kingfisher Chambers,
Inc., for which Steck-Vaughn has exclusive distribution rights. The release
in January 1996 of Steck-Vaughn's revised 53-volume Portrait of America
series has made a sizable contribution to the increase in revenues.
With the growth of the library product line, management feels that the size
of its current sales force is insufficient to adequately present all of the
library product to school and public libraries while representing
Steck-Vaughn's elementary curriculum product line at the same time. To
expand its coverage of the library market, Steck-Vaughn has begun to engage
independent sales organizations to carry all of its library products. By
the end of the third quarter, it is expected that independent reps will be
under contract for all of the most populous states, allowing Steck-Vaughn's
own field sales force to focus their attention on selling elementary
curriculum product. In addition, Steck-Vaughn is expanding its
telemarketing sales force, creating rep teams for each library line.
Revenues were also augmented by general price increases of 10.1% and 5.7%
effective September 1, 1995 and 1994, respectively.
Summit Learning (Summit) sales of $2,565,000 were incremental to the Company
in 1996, following the acquisition of Summit in December 1995. Steck-Vaughn
has added selected Steck-Vaughn print products to the Summit catalogs,
included significant new product in the fall Science and Math catalogs, and
increased the quantities of the 1996 Young Explorers catalog to be
distributed to consumers in the fall.
Edunetics revenue for the most part is tied to contractual obligations for
systems installations until the new modular products are ready for sale
later this year. In June 1996, the Company entered into a three-year,
$3,400,000 contract with Detroit public schools to provide Edunetics'
proprietary educational software programs to 60 schools within the district.
Publishing cost as a percentage of revenues increased for the second quarter
ended June 30, 1996, as compared to 1995, primarily due to the inclusion of
the Summit business. Publishing costs of the Steck-Vaughn product lines,
which excludes Summit and Edunetics, for the second quarter ended June 30,
1996, represented 28.1% of publishing revenues as compared to 27.1% 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
<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):
___________________________________
through distribution agreements. Fulfillment expenses were also higher due
to increases in labor costs necessary to implement the new warehouse
management system and minimize the backlog. Summit Learning's product and
fulfillment costs, at 56.7% of revenues reflect the non-propriety nature of
the product line.
Product development expense increased $1,129,000 (increased 3.9% as a
percent of revenues) due to the acquisitions and the related investments in
new product lines of EDL, Edunetics and the proprietary product for Summit
catalogs; the addition of a development department; the expansion of the
library development department and more staffing as more of the design work
is done internally.
Selling and promotion costs increased $1,114,000 (increased 1.0% as a
percent of revenues) for the second quarter ended June 30, 1996, as compared
to the prior year, due to higher commissions which resulted from increased
revenues and higher catalog expense due in part to the acceleration of the
recognition of catalog expenses in accordance with the Company's adoption in
1995 of accounting standard SOP 93-7, and catalog expenses of Summit.
General and administrative expense for the quarter ended June 30, 1996,
increased slightly (decreased 1.0% as a percent of revenues) as compared to
the prior year due to the new Summit division, filling staff vacancies, and
increased information systems costs.
Amortization expense increased due to the acquisitions of Edunetics in April
1996, of EDL in October 1995 and Summit in December 1995.
For the second quarter of 1996, Summit reported operating income of $15,000
and Edunetics reported an operating loss of ($188,000), excluding the
$4,100,000 write-off of in-process research and development.
<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
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Operating Income (Loss) by Product Line:
Steck-Vaughn $ 1,939 $ 2,905
(33.3)%
Summit Learning 15 --
n/m
Edunetics (188) --
n/m
_________ _________
1,766 2,905
(39.2)
Write-off of in-process research and development (4,100) --
n/m
_________ _________
Operating income (loss) $ (2,334) $ 2,905
n/m
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
Operating income for the quarter ended June 30, 1996, as compared to 1995,
declined for Steck-Vaughn's product line due to the backlog of unshipped
orders. When pro forma operating income of $1,440,000 is added to the
Steck-Vaughn product line operating income of $1,939,000, the pro forma
operating margin is 19.0% for both the 1996 and 1995 quarters. The increase in
pro forma operating income is attributable to the 16.6% increase in sales on a
pro forma basis. The operating results of Summit and Edunetics reflect the
seasonality of Summit's business and the start-up phase of both operations.
<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
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Revenues:
Domestic $ 4,366 $ 4,616
(5.4)%
International 5,576 5,146
8.4
Spectrum -- 593
n/m
_________ _________
Total Revenues $ 9,942 $ 10,355
(4.0)
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
_____________________
(dollars in thousands) 1996 1995
______________________________________________ _________ _________
<S> <C> <C>
Number of Internally Developed Products Completed:
Client/Server 34 2
Mainframe 5 --
Desktop 7 1
Business Skills 1 --
========= =========
Total 47 3
========= =========
Number of Third Party Developed Products Completed:
Client/Server 1 22
Mainframe -- --
Desktop 1 14
Business Skills 14 4
========= =========
Total 16 40
========= =========
</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 $9,942,000 decreased $413,000 (4.0%) for the second quarter
of 1996 compared to the comparable period in 1995 primarily due to Spectrum,
which discontinued its operations in 1995 and a decline in domestic revenue.
Excluding Spectrum, revenues increased 1.8%. Domestic revenues decreased
principally due to a reduction in the sales force in 1995 which have not
been fully replaced, and a decline in product demand for mainframe computer
courses and certain business skills courses which was not completely offset
by the increased revenues for desktop and client/server processing of 13.0%
for the second quarter of 1996.
International revenue increased $430,000 (8.4%) as a result of a 60.4%
increase in revenues for desktop and client/server courses, partially offset
by a decline in revenue in Germany due to a reduction in mainframe computer
and business skills courses. Client/server and desktop revenue in Germany
increased by 6.3% compared to the second quarter of 1995.
Operating income was $299,000 for the second quarter of 1996 compared to an
operating loss for the same period in 1995 of ($85,029,000). The 1995
results of operations included restructuring charges in the second quarter
of 1995 of $28,652,000 ($.95 per share), and the write-off of goodwill of
$47,509,000 ($1.58 per share). Excluding the unusual item charges which
totaled $76,161,000, operating loss was ($8,868,000) in 1995.
The turnaround of NETG is principally due to the restructure actions
undertaken in 1995 to reduce the cost structure and realign the business.
These actions included discontinuing certain product lines, closing excess
facilities, reducing headcount, writing-down inventory and fixed assets of
certain product lines and canceling certain contracts and agreements.
Course service costs decreased $3,559,000 (decreased 33.2% as a percent of
revenues) from the 1995 comparable quarter. Most of the decrease occurred
because in 1995 NETG recorded a $1,779,000 increase in the allowance for
doubtful accounts compared to $74,000 for the second quarter of 1996.
The discontinuance of Spectrum reduced costs by $950,000. 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;
lower royalty expense as a result of sales of more in-house developed
product and lower material cost of sales as a result of improved purchasing
and production efficiencies in the U.K.
Product development expense decreased $164,000 (decreased 1.0% as a percent
of revenues) due to the reductions in headcount as a result of the June 1995
restructuring in the U.S. and Europe, as well as a restructuring in Europe
in the fourth quarter of 1995 (resulting in an unusual item charge in that
quarter of $1,952,000 ($.06 per share)). 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.
<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):
________________
Selling and promotion expense decreased $3,014,000 (decreased 27.5% as a
percent of revenues). Most of the decrease was due to reduced headcount and
related expenses 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; partially offset by higher commission expense.
General and administrative expense decreased $2,508,000 (decreased 23.8% as
a percent of revenues) due to a reduction in headcount and overhead expenses
such as facilities costs as a result of the restructuring actions; lower
legal and outside consulting expenses, and the discontinuance of Spectrum.
Operating results of ICS and NETG foreign operations by geographic region are
discussed above. The second quarter foreign currency exchange gains, recorded
to other income, were $24,000 compared to gains of $29,000 in the prior year.
Corporate and Other:
___________________
General corporate expenses decreased $663,000 (1.2% as a percent of revenues)
as a result of lower facilities costs and ongoing cost control.
The average total debt outstanding decreased compared to the second quarter of
1995 principally as a result of the conversion of $20,000,000 of the Company's
10% senior subordinated debentures into 5,021,000 shares of the Company's
common stock in September 1995. Interest expense increased because of the
additional interest on higher bank borrowings and amortization of financing
fees incurred under the new bank credit agreement of January 19, 1996.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Variance Change
______________________________________________ _________ _________
_________ ________
<S> <C> <C>
<C> <C>
Net Revenues:
ICS Learning Systems $ 71,784 $ 69,665 $
2,119 3.0%
Steck-Vaughn Publishing 33,757 26,425
7,332 27.7
NETG 19,305 20,371
(1,066) (5.2)
Other ,107 1,762
(655) (37.2)
_________ _________
________
Total Net Revenues $ 125,953 $ 118,223 $
7,730 6.5
========= =========
========
<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 (continued):
_______________________________
<CAPTION>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Variance Change
______________________________________________ _________ _________
_________ ________
<S> <C> <C>
<C> <C>
Operating Income (Loss):
ICS Learning Systems before amortization $ 7,827 $ 5,881 $
1,946 33.1
Amortization of prior period
deferred marketing -- (1,470)
1,470 n/m
_________ _________
________
ICS Learning Systems 7,827 4,411
3,416 77.4
Steck-Vaughn Publishing before unusual items 2,801 3,551
(750) (21.1)
Unusual items (4,100) --
(4,100) n/m
_________ _________
________
Steck-Vaughn Publishing (1,299) 3,551
(4,850) n/m
NETG before unusual items 352 (13,862)
14,214 n/m
Unusual items -- (76,161)
76,161 n/m
_________ _________
________
NETG 352 (90,023)
90,375 n/m
Other 209 433
(224) (51.7)
_________ _________
________
Total Segment Operating Income (Loss) 7,089 (81,628)
88,717 n/m
General corporate expenses (2,599) (3,571)
972 (27.2)
Interest expense (4,117) (4,380)
263 (6.0)
Investment income 941 1,216
(275) (22.6)
Unusual items -- (1,644)
1,644 n/m
Other (expense) income (37) 265
(302) n/m
_________ _________
________
Income (Loss) Before Income Tax Benefit
and Minority Interest 1,277 (89,742)
91,019 n/m
Income tax benefit (1,193) --
(1,193) n/m
_________ _________
________
Income (Loss) Before Minority Interest 2,470 (89,742)
92,212 n/m
Minority interest (369) 440
(809) n/m
_________ _________
________
Net Income (Loss) $ 2,839 $ (90,182) $
93,021 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) Six Months
Ended June 30, 1996
_____________________________________________
______________________________________________________________
ICS
Steck-
Learning
Vaughn
Total Systems
Publishing NETG Other
_________ _________
__________ _________ _________
<S> <C> <C>
<C> <C> <C>
Net Revenues $ 125,953 $ 71,784 $
33,757 $ 19,305 $ 1,107
Costs and Expenses:
Contract course materials and service costs 33,114 27,166
-- 5,401 547
Publishing costs and materials 10,891 --
10,891 -- --
Product development 11,305 2,114
5,864 3,327 --
Selling and promotion 46,848 27,931
10,787 7,875 255
General and administrative 11,616 6,567
2,603 2,350 96
Amortization of acquired intangible assets 990 179
811 -- --
Unusual items 4,100 --
4,100 -- --
_________ _________
__________ _________ _________
Segment Operating Income (Loss) $ 7,089 $ 7,827 $
(1,299) $ 352 $ 209
========= =========
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Six Months
Ended June 30, 1995
_____________________________________________
______________________________________________________________
ICS
Steck-
Learning
Vaughn
Total Systems
Publishing NETG Other
_________ _________
__________ _________ _________
<S> <C> <C>
<C> <C> <C>
Net Revenues $ 118,223 $ 69,665 $
26,425 $ 20,371 $ 1,762
Costs and Expenses:
Contract course materials and service costs 37,897 25,820
-- 11,088 989
Publishing costs and materials 7,542 --
7,542 -- --
Product development 9,925 1,656
4,375 3,894 --
Selling and promotion 51,148 31,304
8,104 11,491 249
General and administrative 14,608 4,942
2,484 7,091 91
Amortization of prior period deferred marketing 1,470 1,470
-- -- --
Amortization of acquired intangible assets 1,100 62
369 669 --
Unusual items 76,161 --
-- 76,161 --
_________ _________
__________ _________ _________
Segment Operating Income (Loss) $ (81,628) $ 4,411 $
3,551 $ (90,023) $ 433
========= =========
========== ========= =========
</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)
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
_________________________________________________________________________
Revenues of $125,953,000 for the six months ended June 30, 1996, were
$7,730,000 (6.5%) higher than revenues of $118,223,000 in the prior year. Net
income for the period was $2,839,000 or $.08 per share compared to a loss of
($90,182,000) or ($3.02) per share in the prior year.
The operating results for the six months ended June 30, 1996 and 1995 include
the write-off of in-process research and development, and unusual items
representing restructuring charges and write-off of goodwill, respectively, as
discussed in the results for the quarter ended June 30, 1996. Excluding
unusual items and the benefit of a $2,000,000 tax refund, net income (loss)
would have been $4,246,000 or $.12 per share for the six months ended June 30,
1996, and ($12,377,000) or ($.41) per share for the six months ended June 30,
1995.
Income tax benefit for the six months ended June 30, 1996 was computed in the
same manner as the benefit for the three months then ended. Revenues and
operating income were negatively impacted by the shipping delays at
Steck-Vaughn described earlier.
Excluding unusual items, the operating results for the six months ended June
30, 1996 are better than the comparable period in 1995, principally due to the
turnaround of NETG (due primarily to the restructuring actions taken) and also
due to improved operating results at ICS.
ICS Learning Systems:
____________________
<TABLE>
<CAPTION>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Revenues:
Traditional Distance Education - Domestic $ 39,788 $ 41,332
(3.7)%
Traditional Distance Education - International 22,034 21,417
2.9
Business and Industrial 5,298 4,097
29.3
Professional 4,664 2,819
65.4
_________ _________
Total Revenues $ 71,784 $ 69,665
3.0
========= =========
Traditional Business:
New Enrollments:
Domestic 148,183 151,846
(2.4)
International 58,760 62,299
(5.7)
_________ _________
Total New Enrollments 206,943 214,145
(3.4)
========= =========
<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>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Gross Enrollment Value (GEV)
Domestic $ 87,461 $ 120,764
(27.6)
International 43,174 38,729
11.5
_________ _________
Total GEV $ 130,635 $ 159,493
(18.1)
========= =========
Selling and Promotion Spending:
Domestic $ 18,980 $ 22,864
(17.0)
International 10,483 10,905
(3.9)
_________ _________
Total Selling and Promotion Spending $ 29,463 $ 33,769
(12.8)
========= =========
Estimated realization of future tuition revenue 50% 44%
</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 $458,000 (increased 0.6% as a percent
of revenue) due to more courses under development in 1996 compared to 1995.
As a result of the spending, ICS traditional business expects to introduce
approximately nine courses in 1996 versus four courses in 1995.
Selling and promotion expense in traditional international business was
lower by $422,000 year-to-date (decreased 6.0% as a percent of revenue)
because the increased spending in the combined international markets in the
second quarter did not offset the first quarter underspending which occurred
principally in the U.K. Additionally, the 1995 year-to-date results include
$1,470,000 of amortization of prior period deferred marketing ($159,000 for
the second quarter of 1995) due to the adoption in 1995 of a new accounting
pronouncement. No such costs were expensed in 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)
Steck-Vaughn Publishing:
_______________________
<TABLE>
<CAPTION>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Revenues:
Steck-Vaughn:
Elementary/High School $ 14,152 $ 14,564
(2.8)%
Adult Education 6,160 6,563
(6.1)
Library 7,991 5,298
50.8
_________ _________
28,303 26,425
7.1
Summit Learning 4,334 --
n/m
Edunetics 1,120 --
n/m
_________ _________
Total Revenues $ 33,757 $ 26,425
27.7
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
The above revenue data are presented on a historical basis. The
presentation below is on a pro forma basis, including the $3,200,000 of
unshipped backlog, and in the opinion of management represents a more
meaningful comparison of operations.
<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>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Net Revenues by Product Line:
(with pro forma sales)
Steck-Vaughn:
Elementary/High School $ 16,008 $ 14,564
9.9%
Adult Education 6,807 6,563
3.7
Library 8,688 5,298
64.0
_________ _________
31,503 26,425
19.2
Summit Learning 4,334 --
n/m
Edunetics 1,120 --
n/m
_________ _________
Total Revenues $ 36,957 $ 26,425
39.9
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
Revenue increases for El/Hi for the year resulted from sales of traditional
skills products in reading, spelling, and math, as well as testing and
assessment products. The strength of both of these types of products is
indicative of the return of schools to teaching basic skills using
traditional approaches and the increased use of standardized tests as a
means of assessing students' progress and measuring the success of
individual schools.
<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>
Six Months Ended
Percentage of Revenue
June 30,
Year-to-Date
_____________________
______________________
(dollars in thousands) 1996 1995
1996 1995
______________________________________________ _________ _________
_________ ________
<S> <C> <C>
<C> <C>
Operating Income (Loss) by Product Line:
Steck-Vaughn $ 3,189 $ 3,551
11.3% 13.4%
Summit Learning (200) --
(4.6) n/m
Edunetics (188) --
(16.8) n/m
_________ _________
2,801 3,551
8.3 13.4
Write-off of in-process research and development (4,100) --
n/m n/m
_________ _________
Operating income (loss) $ (1,299) $ 3,551
n/m n/m
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
Operating income as a percentage of revenues for the six months ended June
30, 1996, as compared to 1995, declined for Steck-Vaughn's product line due
to the backlog of unshipped orders. When pro forma operating income of
$1,440,000 is added to the Steck-Vaughn product line operating income of
$3,189,000, the pro forma operating margin is 14.7% compared to 13.4% last
year. The increase in pro forma operating income is attributable to the
19.2% increase in sales on a pro forma basis. The operating results of
Summit and Edunetics reflect the seasonality of Summit's business and the
start-up phase of both divisions.
The actual and pro forma operating results for the six months experienced
similar changes as occurred for the quarter, except as noted in the above
narrative.
<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>
Six Months Ended
June 30,
_____________________
Percent
(dollars in thousands) 1996 1995
Change
______________________________________________ _________ _________
_________
<S> <C> <C>
<C>
Revenues:
Domestic $ 9,173 $ 9,235
(.7)%
International 10,132 9,793
3.5
Spectrum -- 1,343
n/m
_________ _________
Total Revenues $ 19,305 $ 20,371
(5.2)
========= =========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
NETG experienced similar changes in revenues and operating results as
occurred for the three month period previously discussed.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
_____________________
(dollars in thousands) 1996 1995
______________________________________________ _________ _________
<S> <C> <C>
Number of Internally Developed Products Completed:
Client/Server 43 3
Mainframe 5 2
Desktop 21 2
Business Skills 1 --
_________ _________
Total 70 7
========= =========
Number of Third Party Developed Products Completed:
Client/Server 11 35
Mainframe 8 14
Desktop 19 15
Business Skills 55 11
_________ _________
Total 93 75
========= =========
</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):
________________
ICS and NETG foreign operations by geographic region experienced similar
changes in revenues and income as discussed above. Foreign currency exchange
losses of $37,000 were recorded during the period as compared to gains of
$265,000 in the prior year.
Corporate and Other:
___________________
General corporate expenses and interest expense experienced similar changes as
occurred for the three month period previously discussed.
Liquidity and Capital Resources
_______________________________
The Company's primary sources of liquidity are cash, investment securities and
cash provided from operations. At June 30, 1996, the Company had $13,359,000
in cash and investment securities of which $3,081,000 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 June 30, 1996, $12,100,000 was outstanding
under the credit agreement.
The Company had a credit facility with Steck-Vaughn in the amount of $5,000,000
which was extended during the quarter and was scheduled to expire December 31,
1996, of which $3,000,000 was outstanding at June 30, 1996. As of July 31,
1996, the Company paid down the $3,000,000 line of credit and terminated the
credit facility with Steck-Vaughn. In April 1996, Steck-Vaughn increased its
bank line of credit from $10,000,000 to $15,000,000 to provide for the
acquisition of Edunetics. As of June 30, 1996, $11,000,000 was outstanding
under this line of credit. During the second quarter, Steck-Vaughn acquired
Edunetics, using its line of credit and cash to fund the $12,000,000 purchase
price. Additionally, ICS acquired CCHS, paying $833,000 in cash and providing
notes of $4,340,000. Furthermore, ICS acquired the product line of SMH, a
provider of legal bar review distance education materials.
Net cash outflow before bank financing for the quarter ended June 30, 1996 of
$18,600,000 was $11,100,000 unfavorable compared to the prior year due
primarily to acquisition payments of $12,173,000, net of cash acquired, due to
the acquisitions of Edunetics, CCHS and SMH; increases of $1,300,000 in
accounts receivable balance at NETG due to higher sales at the end of the
second quarter of 1996 versus 1995; an unfavorable variance at Steck-Vaughn due
to delays in shipping and payment of $800,000 to settle litigation and
increases in working capital for Summit and Edunetics. These unfavorable
variances were partially offset by receipt of a refund of $4,000,000 from the
IRS from an income tax carryback and improved operating income and working
capital improvements at ICS.
<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)
___________________________________________
Subsequent to June 30, 1996, the Company received $10,700,000 of its
anticipated $12,000,000 income tax refund, including interest. The remaining
refund is expected during the third quarter of 1996. With the $10,700,000, NEC
paid off $3,000,000 to Steck-Vaughn, paid off the $4,340,000 notes for the
acquisition of CCHS and paid down $2,000,000 of the revolving bank credit
borrowings incurred subsequent to quarter end. At July 31, 1996, the amount
outstanding under the revolving bank credit agreement was $12,100,000.
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 obligation under
the indenture. At the annual stockholders' meeting, the shareholders approved
an increase in the number of authorized common shares from 50 million to 65
million.
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
A regular annual meeting of the stockholders of the Company was held on May 29,
1996. Three directors were elected for terms that will continue until the
Company's annual meeting of stockholders in 1999, or until each director's
successor has been elected and qualified. The vote was as follows:
<TABLE>
<CAPTION>
Number of Shares
______________________________________
Name For Authority Withheld
_______________________________________________________________
<S> <C> <C>
David Bonderman 28,490,828 1,915,244
Michael R. Klein 30,105,286 300,786
John J. McNaughton 30,089,421 316,651
</TABLE>
The stockholders approved an amendment to the Company's Restated Certificate of
Incorporation. The vote was as follows:
<TABLE>
<CAPTION>
Number of Shares
____________________________________________________
For Against Abstain
____________________________________________________
<S> <C> <C> <C>
29,291,247 1,060,973 53,852
</TABLE>
The stockholders also ratified the appointment of Price Waterhouse as
Independent Public Accountants. The vote was as follows:
<TABLE>
<CAPTION>
Number of Shares
____________________________________________________
For Against Abstain
____________________________________________________
<S> <C> <C> <C>
30,105,178 38,838 262,056
</TABLE>
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: August 7, 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 National
Education Corporation (1) *
3.2 By-Laws of National Education Corporation, 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) *
10.9 Tripartite Agreement, dated as of May 31, 1990, among
National Education Corporation, Continental Bank as
Resigning Trustee, and IBJ Schroeder Bank & Trust Company
as Successor Trustee (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) *
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
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) *
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) *
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
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") (Confidential treatment under Rule 24b-2
has been requested for portions of this exhibit) (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 (30)
11.2 Calculation of Fully Diluted Earnings Per Share (30)
27.1 Financial Data Schedule (30)
<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.
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
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
Corporation's Annual Report on Form 10-K for the year ended December 31,
1991, filed April 1, 1992.
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.
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
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 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.
(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 July 26, 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 July 26, 1996.
30) Filed herewith.
</FN>
</TABLE>
EXHIBIT 10.28
THIRD RENEWAL AND EXTENSION AGREEMENT
WHEREAS, National Education Corporation ("Borrower") executed a Revolving
Line of Credit Note (the "Note") dated February 28, 1995, payable to the order
of Steck-Vaughn Publishing Corporation ("Lender"), in the original principal
sum of $10,000,000.00;
WHEREAS, the indebtedness evidenced by the Note, as renewed, modified and
extended, is secured by an Intercreditor Pledge Agreement Pledge and Security
Agreement (the "Security Agreement") dated January 19, 1996 between Borrower,
as Pledgor, and BZW Division of Barclays Bank PLC, as collateral agent,
covering, among other collateral, all of the issued and outstanding shares of
capital stock at any time owned by Borrower of Lender;
WHEREAS, Borrower and Lender have heretofore renewed, modified and
extended the Note pursuant to a Renewal and Extension Agreement (the "First
Renewal") dated as of December 31, 1995 and a Second Renewal and Extension
Agreement ("the Second Renewal") dated as of March 31, 1996 between Borrower
and Lender;
WHEREAS, Borrower has requested Lender to again renew and extend the term
of the Note;
NOW, THEREFORE, Borrower and Lender agree that:
1. After the effective date hereof, the Note shall be due and payable
as follows, to wit:
Interest only shall be due and payable monthly as it accrues on the
first day of each month beginning July 1, 1996 and continuing on the
first day of each month thereafter until December 31, 1996 when the
entire balance of unpaid principal and accrued, unpaid interest shall
be due and payable in full. Each installment shall be applied first
to the payment of accrued interest payable on the unpaid principal
balance, with the remainder being applied to the reduction of
principal.
2. The principal balance of the Note from time to time remaining
unpaid shall continue to bear interest at the rate of interest
applicable thereto as set forth in the Note, provided that the
interest payable shall not exceed the maximum amount that may be
lawfully charged.
After default or maturity, principal and past-due interest shall bear
interest at the rate of interest applicable thereto as set forth in
the Note, provided that the interest payable shall not exceed the
maximum amount that may be lawfully charged.
3. All agreements between Borrower and Lender, whether now existing
or hereafter arising and whether written or oral, are hereby limited
so that in no contingency, whether by reason of demand for payment or
acceleration of the maturity of the Note, as renewed, modified and
extended, or otherwise, shall the interest contracted for, charged or
received by Lender exceed the maximum amount permissible under
applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to Lender in excess of the maximum lawful
amount, the interest payable to Lender shall be reduced to the
maximum amount permitted under applicable law; and if from any
circumstance Lender shall ever receive anything of value deemed
interest by applicable law in excess of the maximum lawful amount, an
amount equal to any excessive interest shall be applied to the
reduction of the principal of the Note, as renewed, modified and
extended, and not to the payment of interest, or if such excessive
interest exceeds the unpaid balance of principal of the Note, as
renewed, modified and extended, such excess shall be refunded to
Borrower. All interest paid or agreed to be paid to the holder of
the Note, as herein renewed, modified and extended, shall, to the
extent permitted by applicable law, be amortized, prorated,
allocated, and spread so that the interest thereon shall not exceed
the maximum amount permitted by applicable law. This paragraph shall
control all agreements between Borrower and Lender.
4. Borrower hereby renews the Note and promises to pay to the order
of Lender at its offices at 1025 Northern Boulevard, Roslyn, New York
(or such other place of payment as the Lender shall notify Borrower)
the principal sum thereof as may be advanced and remains unpaid, with
interest as specified in the Note, as renewed, modified and extended,
and to perform all of Borrower's obligations under the Note, the
Security Agreement, and any other documents pertaining thereto (the
"Other Documents").
5. Borrower covenants and warrants that the Note, the Security
Agreement and the Other Documents are not in default after giving
effect to the extension, modification and renewal herein granted;
there are no defenses, counterclaims or offsets to the Note, the
Security Agreement or the Other Documents; that the Note and Security
Agreement, as renewed, modified and extended, are in full force and
effect, and that the Security Agreement shall continue to secure
payment of the indebtedness evidenced by the Note, as renewed,
modified and extended.
6. Borrower further covenants and warrants to Lender that the
execution and delivery of this Third Renewal and Extension Agreement
by Borrower will not be in contravention of or cause a default under
any agreement to which Borrower is a party.
7. The Note, as renewed, modified and extended, shall be construed in
accordance with the laws of the State of New York and the laws of the
United States applicable to transactions in the State of New York.
8. The Note, the Security Agreement and the Other Documents shall
remain in full force and effect as renewed, modified and extended by
the First Renewal, the Second Renewal and by this Third Renewal and
Extension Agreement. Without limiting the foregoing the
modifications to the Note contained in paragraph numbers 1 and 2 of
the Second Renewal pertaining to reducing the maximum amount that may
be drawn under the Note and modifying an Event of Default under the
Note shall continue to remain in full force and effect.
9. This Third Renewal and Extension Agreement may be executed in
duplicate originals and each duplicate shall have the same force and
effect as an original.
<PAGE>
EXECUTED to be effective as of June 30, 1996
"BORROWER"
NATIONAL EDUCATION CORPORATION
By:________________________________
Name: _________________________
Title: _________________________
"LENDER"
STECK-VAUGHN PUBLISHING
CORPORATION
By: ______________________________
Name: _________________________
Title: _________________________
<PAGE>
THIRD AMENDMENT TO STOCK OPTION AGREEMENT
This Third Amendment to Stock Option Agreement is made and entered into by
and between National Education Corporation, a Delaware Corporation ("Company")
and Steck-Vaughn Publishing Corporation ("Optionee") as of June 30, 1996.
Recitals
1. Company and Optionee entered into that certain Stock Option Agreement
(the "Stock Option Agreement") dated as of February 28, 1995 pursuant to which
the Company granted Optionee a stock option to purchase from the Company
290,000 shares of the stock of Optionee owned by the Company.
2. The Stock Option Agreement has heretofore been amended by that certain
First Amendment to Stock Option Agreement (the "First Amendment") dated as of
December 31, 1995, and that certain Second Amendment to Stock Option Agreement
(the "Second Amendment") dated as of March 31, 1996.
3. Company and Optionee desire to again amend the Stock Option Agreement
to extend certain dates and to amend certain other matters contained therein.
Agreement
Now, Therefore, for $10.00 and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged by the Company and
Optionee hereby agree as follows, to wit:
1. Section 2 of the Stock Option Agreement is hereby amended in its
entirety to hereafter read as follows, to wit:
2. Term of Option
Unless earlier exercised pursuant to Section 3 of this
Agreement, the Option shall terminate on, and shall not be
exercisable after the earlier of (a) December 31, 1997, or (b) the
date, if any, the Option is terminated pursuant to Section 8 below.
2. Subsection 3.1 of the Stock Option Agreement is hereby amended in its
entirety to hereafter read as follows, to wit:
3.1 Exercisability
This Option may only be exercised, in whole or in part, once at
any time after the earlier of (i) February 28, 1997 or (ii) any time
one or more Events of Default (which have not been cured within any
applicable cure period) have occurred under and as defined in that
certain Revolving Line of Credit Note dated February 28, 1995 in the
original principal amount of $10,000,000.00 executed by the Company
and payable to the order of Optionee as renewed, modified and
extended by that certain Renewal and Extension Agreement (the "First
Renewal") dated as of December 31, 1995, that certain Second Renewal
and Extension Agreement (the "Second Renewal") dated as of March 31,
1996 and that certain Third Renewal and Extension Agreement (the
"Third Renewal") dated as of June 30, 1996 and each between the
Company and Optionee (said Revolving Line of Credit Note as so
renewed, modified and extended by said First Renewal, Second Renewal
and Third Renewal being herein referred to as the "Note"), until the
expiration of the term of the Option as provided in Section 2 hereof.
For purposes hereof, a business day shall mean any day which is not a
Saturday, Sunday or federal legal holiday.
3. Section 8 of the Stock Option Agreement is hereby amended in its
entirety to hereafter read as follows, to wit:
8. Redemption
At any time on or after the Credit Line Termination Date
(hereafter defined) and provided that the Option has not theretofore
been exercised, the Company may redeem the Option upon written notice
of such redemption and payment of the Redemption Price (hereafter
defined) by the Company to Optionee. Upon the written notice of such
redemption and payment of the Redemption Price by the Company to
Optionee on or after the Credit Line Termination Date, the Option, to
the extent not theretofore exercised, shall terminate for all
purposes and shall not be of any further force and effect; provided
that such termination shall not impair or affect Optionee's rights
with respect to Shares previously exercised pursuant to the Option or
Shares previously acquired by Optionee pursuant to the Option. The
"Redemption Price" shall mean the greater of (i) the Yield Amount
(hereafter defined) plus the Adjustment Amount (hereafter defined) or
(ii) $1,012,500 plus $1,250 per day for each day after June 30, 1996
until and including the earlier of (x) December 31, 1996 or (y) the
date of payment of the Redemption Price by the Company to Optionee.
The "Yield Amount" shall mean an amount equal to (i) twenty-five
percent (25%) per annum on the principal balance from time to time
outstanding under the Note from the Grant Date to and including the
Credit Line Termination Date; less (ii) all interest which at any
time has accrued under the Note from the Grant Date to and including
the Credit Line Termination Date. The "Adjustment Amount" shall mean
an amount equal to twenty-five percent (25%) per annum on the Yield
Amount from the Credit Line Termination Date to and including the
date of payment of the Redemption Price by the Company to Optionee.
For purposes of this Section 8, the Credit Line Termination Date
means (i) December 31, 1996, if the indebtedness evidenced by the
Note is paid in full on such date and the Company has not prior to
December 31, 1996 agreed by a written notice delivered to Optionee
that the revolving line of credit available under and evidenced by
the Note has been terminated, (ii) the date on which the indebtedness
evidenced by the Note is fully paid, if the indebtedness evidenced by
the Note is not fully paid on December 31, 1996, or (iii) the date on
which both the indebtedness evidenced by the Note has been fully paid
and the Company has agreed by a written notice delivered to Optionee
that the revolving line of credit available under and evidenced by
the Note has been terminated, if the Company has agreed by a written
notice delivered to Optionee that the revolving line of credit
available under and evidenced by the Note is terminated prior to
December 31, 1996. The Redemption Price may be paid by the Company to
Optionee, at the Company's option, in either or a combination of (i)
cash, or (ii) shares of Optionee's common stock owned by the Company
having a fair market value equal to the Redemption Price (or such
balance thereof not otherwise paid in cash) based upon the close
price for shares of Optionee's common stock on the NASDAQ National
Market on the most recent day that Optionee's shares of common stock
were traded on the NASDAQ National Market prior to the date of full
payment of the Redemption Price by the Company to Optionee, provided
that such shares of Optionee's common stock paid in payment of the
Redemption Price are paid and delivered by the Company to Optionee
free and clear of all liens and encumbrances. In the event
Optionee's common stock is no longer traded on the NASDAQ National
Market, then the fair market value of Optionee's common stock for
purposes of determining payment of the Redemption Price shall be
determined on such other basis as the Company and Optionee shall
mutually agree. The Redemption Price may be prepaid by the Company
to Optionee in such proportions and at such times as the Company may
elect provided that the Option shall not be redeemed until the
Redemption Price is fully paid and the other terms of this Section 8
are complied with by the Company. Notwithstanding anything contained
in this Section 8 to the contrary, and unless Optionee otherwise
agrees in writing, the Company shall have no right to redeem and
terminate the Option pursuant to this Section 8 at anytime any one or
more Events of Default (as defined in the Note) exists and is
continuing. Nothing contained in this Agreement (i) shall be
construed to extend or to commit to extend the revolving line of
credit available under the Note or the maturity of the Note past
December 31, 1996; or (ii) impair or affect Optionee's rights and
remedies with respect to any collateral securing the indebtedness
evidenced by the Note. The redemption of the Option pursuant to this
Section 8 may be made after notice of exercise of the Option has been
given by the Optionee to the Company provided that written notice of
such redemption and payment of the Redemption Price is made by the
Company to Optionee prior to the Exercise Date specified in
Optionee's notice of exercise of the Option to be given to the
Company pursuant to Section 3.2.
4. THIS THIRD AMENDMENT TO STOCK OPTION AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
5. The Company covenants and warrants to Optionee that the execution and
delivery of this Third Amendment to Stock Option Agreement by the Company is
not in contravention of and will not cause a default under any agreement to
which the Company is a party.
6. To the extent of any conflict between the terms of this Third Amendment
to Stock Option Agreement and the First Amendment or the Second Amendment, the
terms and provisions of this Third Amendment to Stock Option Agreement shall
govern and control.
7. Except as amended hereby and by the First Amendment and the Second
Amendment, the Stock Option Agreement shall remain in full force in effect in
accordance with its terms.
IN WITNESS WHEREOF, the parties have entered into this Third Amendment to Stock
Option Agreement as of the date first above written.
"COMPANY" "OPTIONEE"
NATIONAL EDUCATION CORPORATION STECK-VAUGHN PUBLISHING
CORPORATION
By:___________________________________ By:______________________________
Name:____________________________ Name:____________________________
Title:___________________________ Title:___________________________
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 Six Months Ended
June 30, June 30,
_____________________ ______________________
1996
1995 1996 1995
_________ ________ ________ ________
<S> <C>
<C> <C> <C>
NET INCOME (LOSS) $
2,174 $(84,025) $ 2,839 $(90,182)
_________ ________ ________ ________
COMMON STOCK:
Shares outstanding from beginning of period
35,137 29,578 35,137 29,578
Pro rata shares:
Stock options exercised
243 289 133 164
Assumed exercise of stock options, using treasury
stock method
1,366 244 1,271 139
_________ ________ ________ ________
Weighted average number of shares outstanding
36,746 30,111 36,541 29,881
_________ ________ ________ ________
EARNINGS (LOSS) PER SHARE $
.06 $ (2.79) $ .08 $ (3.02)
========= ======== ======== ========
</TABLE>
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 Six Months Ended
June 30, June 30,
______________________ _______________________
1996
1995 1996 1995
__________ _________ _________ _________
<S> <C>
<C> <C> <C>
NET INCOME (LOSS) $
2,174 $(84,025) $ 2,839 $(90,182)
Add back senior debenture interest, net of applicable taxes
- -- 300 -- 600
Add back junior debenture interest, net of applicable taxes
570 570 1,140 1,140
_________ ________ ________ ________
NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $
2,744 $(83,155) $ 3,979 $(88,442)
_________ ________ ________ ________
COMMON STOCK:
Shares outstanding from beginning of period
35,137 29,578 35,137 29,578
Stock options exercised
243 289 133 164
Assumed exercise of stock options, using treasury
stock method
1,366 554 1,330 375
Assumed conversion of senior subordinated debentures,
from the beginning of the period
- -- 5,000 -- 5,000
Assumed conversion of junior subordinated debentures,
from the beginning of the period
2,299 2,300 2,299 2,300
_________ ________ ________ ________
Weighted average number of shares outstanding
39,045 37,721 38,899 37,417
_________ ________ ________ ________
FULLY DILUTED EARNINGS (LOSS) PER SHARE $
.06 $ (2.20) $ .08 $ (3.02)
========= ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 11,960
<SECURITIES> 1,399
<RECEIVABLES> 41,255
<ALLOWANCES> 3,242
<INVENTORY> 34,039
<CURRENT-ASSETS> 118,733
<PP&E> 53,025
<DEPRECIATION> 26,068
<TOTAL-ASSETS> 204,948
<CURRENT-LIABILITIES> 79,070
<BONDS> 84,090
0
0
<COMMON> 2,169
<OTHER-SE> 11,528
<TOTAL-LIABILITY-AND-EQUITY> 204,948
<SALES> 125,953
<TOTAL-REVENUES> 125,953
<CGS> 55,310
<TOTAL-COSTS> 117,363
<OTHER-EXPENSES> 7,313
<LOSS-PROVISION> 86
<INTEREST-EXPENSE> 4,117
<INCOME-PRETAX> 1,277
<INCOME-TAX> (1,193)
<INCOME-CONTINUING> 2,839
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,839
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
