-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CRXCleYpMRPBRzFZdtkdhRIovHyrKaQczO4NhrjERIEIPfU4uys5OGzVkgAOwtyv C8ANh5zgY/6JA7KX6KAkzw== 0000277821-96-000006.txt : 19960809 0000277821-96-000006.hdr.sgml : 19960809 ACCESSION NUMBER: 0000277821-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL EDUCATION CORP CENTRAL INDEX KEY: 0000277821 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 952774428 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06981 FILM NUMBER: 96605460 BUSINESS ADDRESS: STREET 1: 2601 MAIN STREET CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 714-474-9400 MAIL ADDRESS: STREET 1: 18400 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92715 10-Q 1 LIVE SUBMISSION 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 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Part I. FINANCIAL INFORMATION Item 1. Financial Statements
Three Months Ended Six Months Ended June 30, June 30, ______________________ _______________________ (amounts in thousands, except per share amounts) 1996 1995 1996 1995 ________________________________________________ __________ _________ __________ _________ 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 Unaudited See accompanying notes and management's discussion and analysis.
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
June 30, December 31, June 30, (dollars in thousands) 1996 1995 1995 ____________________________________________________________________ _____________ _____________ _____________ 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 _________ __________ _________ NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) June 30, December 31, June 30, (dollars in thousands) 1996 1995 1995 ____________________________________________________________________ _____________ _____________ _____________ 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 ========= ========== ========= Unaudited See accompanying notes and management's discussion and analysis.
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
Three Months Ended Six Months Ended June 30, June 30, ______________________ _______________________ (amounts in thousands, except per share amounts) 1996 1995 1996 1995 ________________________________________________ __________ _________ __________ _________ 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 __________ _________ __________ _________ NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) Three Months Ended Six Months Ended June 30, June 30, ______________________ _______________________ (amounts in thousands, except per share amounts) 1996 1995 1996 1995 ________________________________________________ __________ _________ __________ _________ 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 ======== ========= ========= ========= Unaudited See accompanying notes and management's discussion and analysis.
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. 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). 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.
Excess Severance (dollars in thousands) Facilities Payments Other Total _____________________________________________ _________ __________ ___________ _________ 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 ========== ========== =========== ==========
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). 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 ___________________________________________________________
Three Months Ended Six Months Ended June 30, June 30, _________________________ ________________________ (dollars in thousands) 1996 1995 1996 1995 ________________________________________________________ __________ _________ _________ _________ 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) $ --
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
Three Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Variance Change ________________________________________________________ _________ _________ _________ ________ 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 ========= ========= ======== n/m: Not meaningful.
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:
(dollars in thousands) Three Months Ended June 30, 1996 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ 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 ========= ========= ========== ========= =========
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)
(dollars in thousands) Three Months Ended June 30, 1995 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ 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 ========= ========= ========== ========= =========
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. 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: ____________________
Three Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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%
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. 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: _______________________
Three Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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 ========= ========= n/m: Not meaningful.
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.
Three Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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 ========= ========= n/m: Not meaningful.
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. 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 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. 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): ___________________________________
Three Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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 ========= ========= n/m: Not meaningful.
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. 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: ____
Three Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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) ========= ========= n/m: Not meaningful.
Three Months Ended June 30, _____________________ (dollars in thousands) 1996 1995 ______________________________________________ _________ _________ 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 ========= =========
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. 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.
Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Variance Change ______________________________________________ _________ _________ _________ ________ 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 ========= ========= ======== 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): _______________________________ Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Variance Change ______________________________________________ _________ _________ _________ ________ 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 ========= ========= ======== n/m: Not meaningful.
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:
(dollars in thousands) Six Months Ended June 30, 1996 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ 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 ========= ========= ========== ========= =========
(dollars in thousands) Six Months Ended June 30, 1995 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ 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 ========= ========= ========== ========= =========
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: ____________________
Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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) ========= ========= 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): ________________________________ Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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%
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. 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: _______________________
Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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 ========= ========= n/m: Not meaningful.
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. 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): ___________________________________
Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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 ========= ========= n/m: Not meaningful.
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. 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): ___________________________________
Six Months Ended Percentage of Revenue June 30, Year-to-Date _____________________ ______________________ (dollars in thousands) 1996 1995 1996 1995 ______________________________________________ _________ _________ _________ ________ 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 ========= ========= n/m: Not meaningful.
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. 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: ____
Six Months Ended June 30, _____________________ Percent (dollars in thousands) 1996 1995 Change ______________________________________________ _________ _________ _________ 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) ========= ========= n/m: Not meaningful.
NETG experienced similar changes in revenues and operating results as occurred for the three month period previously discussed.
Six Months Ended June 30, _____________________ (dollars in thousands) 1996 1995 ______________________________________________ _________ _________ 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 ========= =========
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. 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. 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:
Number of Shares ______________________________________ Name For Authority Withheld _______________________________________________________________ David Bonderman 28,490,828 1,915,244 Michael R. Klein 30,105,286 300,786 John J. McNaughton 30,089,421 316,651
The stockholders approved an amendment to the Company's Restated Certificate of Incorporation. The vote was as follows:
Number of Shares ____________________________________________________ For Against Abstain ____________________________________________________ 29,291,247 1,060,973 53,852
The stockholders also ratified the appointment of Price Waterhouse as Independent Public Accountants. The vote was as follows:
Number of Shares ____________________________________________________ For Against Abstain ____________________________________________________ 30,105,178 38,838 262,056
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. 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 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (Item 6(a))
Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 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) * NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 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) * NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 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) _____________ * 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. 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. 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.
EX-10.28 2 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. EXECUTED to be effective as of June 30, 1996 "BORROWER" NATIONAL EDUCATION CORPORATION By:________________________________ Name: _________________________ Title: _________________________ "LENDER" STECK-VAUGHN PUBLISHING CORPORATION By: ______________________________ Name: _________________________ Title: _________________________ 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:___________________________ EX-11.1 3 EXHIBIT 11.1 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF PRIMARY EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, _____________________ ______________________ 1996 1995 1996 1995 _________ ________ ________ ________ 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) ========= ======== ======== ========
EX-11.2 4 EXHIBIT 11.2 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF FULLY DILUTED EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ______________________ _______________________ 1996 1995 1996 1995 __________ _________ _________ _________ 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) ========= ======== ======== ========
EX-27 5
5 1,000 6-MOS DEC-31-1995 JUN-30-1996 11,960 1,399 41,255 3,242 34,039 118,733 53,025 26,068 204,948 79,070 84,090 0 0 2,169 11,528 204,948 125,953 125,953 55,310 117,363 7,313 86 4,117 1,277 (1,193) 2,839 0 0 0 2,839 .08 .08
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