-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, q3poJCMR2BCUq+163iGtHlQBqitzuKeQTTwxfN098YdWOSfr57P9iHR9Q9Q/RLKe r7T3vtbxL7R2dv65/5Yu8A== 0000277821-94-000008.txt : 19941122 0000277821-94-000008.hdr.sgml : 19941122 ACCESSION NUMBER: 0000277821-94-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941115 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL EDUCATION CORP CENTRAL INDEX KEY: 0000277821 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94560220 BUSINESS ADDRESS: STREET 1: 18400 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 7144749400 MAIL ADDRESS: STREET 2: 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 September 30, 1994 Commission file number 1-6981 NATIONAL EDUCATION CORPORATION (Exact name of registrant as specified in its charter) Delaware I.R.S. No. 95-2774428 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 18400 Von Karman Avenue, Irvine, California 92715-1594 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 714/474-9400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 29,571,977 common stock shares outstanding at October 31, 1994 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Part I. FINANCIAL INFORMATION Item 1. Financial Statements
Three Months Ended Nine Months Ended September 30, September 30, (amounts in thousands, except per share amounts) 1994 1993 1994 1993 __________ _________ ___________ __________ Tuition and Contract Revenues $ 44,487 $ 37,774 $ 127,655 $ 116,500 Publishing Revenues 18,852 17,431 43,493 41,710 _________ ________ __________ _________ Net Revenues 63,339 55,205 171,148 158,210 Costs and Expenses: Contract course materials and service costs 17,937 18,530 51,794 54,593 Publishing costs and materials 6,285 5,701 16,897 15,097 Selling and promotion 25,563 22,393 69,899 63,477 General and administrative 8,200 9,660 24,625 28,257 Amortization of acquired intangible assets 530 1,176 1,383 4,179 Interest expense 1,637 1,425 4,646 4,297 Investment income (599) (555) (2,544) (1,871) Other income (146) (540) (453) (459) Unusual items -- 9,232 -- 9,232 Gain on Steck-Vaughn Publishing Corporation public stock offering -- (21,260) -- (21,260) _________ ________ __________ _________ Income Before Income Tax Benefit, Minority Interest and Discontinued Operations 3,932 9,443 4,901 2,668 Income tax (benefit) 1,594 (3,748) 1,999 (6,515) _________ ________ __________ _________ Income Before Minority Interest and Discontinued Operations 2,338 13,191 2,902 9,183 Minority interest in consolidated subsidiary 589 341 1,086 341 _________ ________ __________ _________ Income From Continuing Operations 1,749 12,850 1,816 8,842 Loss from discontinued operations -- (16,662) (9,420) (20,549) Loss on disposal of discontinued operations -- -- (40,032) -- _________ ________ __________ _________ Net Income (Loss) $ 1,749 $ (3,812) $ (47,636) $ (11,707) ========== ========= ========== ========== Earnings (Loss) Per Share From Continuing Operations: Primary earnings per share $.06 $.43 $.06 $.30 ==== ==== ==== ==== Fully diluted earnings per share $.06 $.37 $.06 $.27 ==== ==== ==== ==== Earnings (Loss) Per Share $.06 $(.13) $(1.61) $(.39) ==== ====== ======= ====== Weighted Average Number of Shares Outstanding: Primary Shares 29,658 29,628 29,643 29,939 Fully diluted shares 36,958 36,928 36,943 37,239 Unaudited. See accompanying notes and management's discussion and analysis.
2 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
September 30, December 31, September 30, (dollars in thousands) 1994 1993 1993 ____________________________________________________________________ _____________ _____________ _____________ ASSETS Current Assets Cash, including time deposits of $21,131, $32,855 and $36,700 $ 24,551 $ 38,546 $ 39,521 Investment securities: Held to maturity and available-for-sale securities 10,701 -- -- At lower of cost or market (market value of $0, $17,964 and $11,755) -- 16,300 10,585 Receivables, net of allowance of $3,271, $10,437 and $9,313 30,758 54,012 49,616 Inventories and supplies 22,782 25,594 25,006 Prepaid and deferred marketing expenses 40,994 37,187 45,352 Assets held for disposition 3,736 -- -- Other current assets 17,181 19,038 17,744 _________ __________ _________ Total current assets 150,703 190,677 187,824 Contracts Receivable 529 2,212 4,393 Land, Buildings and Equipment, less accumulated depreciation of $62,076, $118,997 and $119,934 23,569 46,056 45,829 Acquired Intangible Assets, less accumulated amortization of $88,521, $95,635 and $95,206 50,655 48,497 48,927 Deferred Income Taxes 25,793 25,793 27,484 Other Assets 5,795 10,656 11,210 _________ __________ _________ $ 257,044 $ 323,891 $ 325,667 ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 8,168 $ 8,635 $ 7,754 Accrued expenses 30,960 42,351 43,151 Accrued salaries and wages 6,577 8,726 8,374 Accrued disposition costs 6,738 12,282 14,299 Deferred contract revenues 8,902 16,425 19,019 Current portion of long-term debt 5,813 607 617 Accrued and deferred income taxes 1,429 3,149 -- _________ __________ _________ Total current liabilities 68,587 92,175 93,214 _________ __________ _________ Liabilities Payable After One Year: Long-term debt, less current portion 5,374 2,556 2,716 Senior subordinated convertible debentures 20,000 20,000 20,000 Convertible subordinated debentures 57,494 57,494 57,494 Other noncurrent liabilities 8,187 7,989 10,869 _________ __________ _________ 91,055 88,039 91,079 _________ __________ _________ Minority Interest in Equity of Consolidated Subsidiary 8,925 8,046 7,782 _________ __________ _________ Stockholder's Equity: Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued -- -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 30,268,725 shares, 30,092,810 shares and 30,086,781 shares issued 2,110 2,108 2,108 Additional paid-in capital 132,863 132,262 132,147 Retained (deficit) earnings (33,955) 13,681 11,593 Unrealized gain on available-for-sale securities, net of tax 142 -- -- Cumulative foreign exchange translation adjustment (7,775) (7,565) (7,304) Notes receivable under stock option plans -- -- (97) _________ __________ _________ 93,385 140,486 138,447 Less common stock in treasury; 697,556 shares, 689,315 shares and 689,315 shares (4,908) (4,855) (4,855) _________ __________ _________ Total stockholders' equity 88,477 135,631 133,592 _________ __________ _________ $ 257,044 $ 323,891 $ 325,667 ========= ========== ========= Unaudited. See accompanying notes and management's discussion and analysis.
3 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued)
Three Months Ended Nine Months Ended September 30, September 30, (dollars in thousands) 1994 1993 1994 1993 ________________________________________________________ __________ _________ _________ _________ Cash Flows From Operating Activities: Net income (loss) $ 1,749 $ (3,812) $ (47,636) $ (11,707) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Loss on discontinued operations -- 16,662 9,420 20,549 Loss on disposal of discontinued operations -- -- 40,032 -- Depreciation and amortization 1,472 1,562 4,201 5,410 Amortization of acquired intangible assets 530 1,176 1,383 4,179 Provision for doubtful accounts 110 302 411 1,037 Gain on Steck-Vaughn Publishing Corporation public stock offering -- (21,260) -- (21,260) Gain on sale of land, buildings and equipment -- (381) -- (381) Write-off of acquired intangible assets -- 9,232 -- 9,232 (Gain)/loss on foreign currency exchange (146) (158) (453) (77) Change in assets and liabilities: Receivables, net (2,597) (233) 9,980 20,286 Inventories and supplies 656 428 1,183 941 Prepaid and deferred marketing expenses (4,882) (4,428) (15,912) (12,859) Accounts payable and accrued expenses 1,834 801 (10,333) 2,855 Accrued and deferred income taxes 406 (12,456) (1,997) (23,252) Deferred contract revenues (1,183) 274 (1,844) (3,069) Other 1,417 305 3,539 (728) ________ ________ _________ _________ Net Cash From Operating Activities (634) (11,986) (8,026) (8,844) ________ ________ _________ _________ Cash Flows For Investing Activities: Additions to land, building and equipment (1,927) (2,350) (5,562) (7,207) Dispositions of land, buildings and equipment 39 390 299 417 Changes in marketable securities 4,483 1,270 5,818 410 Acquisition of business, net of cash acquired -- -- (3,870) (5,417) Discontinued operations (4,613) (5,875) (13,352) (11,708) ________ ________ _________ _________ Net Cash For Investing Activities (2,018) (6,565) (16,667) (23,505) ________ ________ _________ _________ Cash Flows From Financing Activities: Additions to long-term debt -- -- 3,906 -- Reductions in long-term debt (229) (286) (491) (489) Net proceeds from Steck-Vaughn Publishing Corporation public stock offering -- 28,701 -- 28,701 Changes in short-term borrowings (1,913) -- 5,397 -- Minority interest in earnings of consolidated subsidiary 738 341 879 341 Common stock, stock options and related tax benefits 34 79 603 245 Notes receivable under a stock option plan -- 10 -- 10 Purchase of common stock for treasury -- (1,114) (53) (4,685) ________ ________ _________ _________ Net Cash From Financing Activities (1,370) 27,731 10,241 24,123 ________ ________ _________ _________ Effect of exchange rate changes on cash 243 (198) 457 (722) ________ ________ _________ _________ Net Change in Cash and Equivalents (3,779) 8,982 (13,995) (8,948) Cash and equivalents at the beginning of the period 28,330 30,539 38,546 48,469 ________ ________ _________ _________ Cash and Equivalents at the End of the Period $ 24,551 $ 39,521 $ 24,551 $ 39,521 ======== ======== ========= ========= Unaudited. See accompanying notes and management's discussion and analysis.
4 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 1 - Summary of Accounting Policies In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these financial statements be read in conjunction with the financial statements, accounting policies, and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1993. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the year. A substantial portion of selling and promotion costs at National Education Training Group (NETG) and Steck-Vaughn are deferred and fully amortized within the calendar year to properly match the costs with revenues due to the seasonal nature of revenue realization. Due to the seasonal nature of NETG's and Steck-Vaughn's traditional selling cycle, selling and promotion costs are typically deferred in the first half of the year and amortized in the latter half of the year. Certain prior year amounts have been reclassified to conform with the 1994 presentation (see Note 3). NOTE 2 - Business Combination During the first quarter of 1994, the Company, through ICS Learning Systems, purchased the stock of M-Mash, Inc. (MicroMash) for approximately $3,870,000, net of cash received. The transaction was accounted for as a purchase and the operating results of MicroMash have been included in the Company's consolidated financial statements since the effective date of acquisition. The net assets and operating results of MicroMash are not material to the consolidated financial statements of the Company. NOTE 3 - Business Disposition In June 1994, the Company adopted a plan to dispose of its Education Centers subsidiary. As a result, the Company recorded a second quarter charge of $40,032,000 to write-down assets to estimated net realizable value and provide for estimated costs of disposing of the operation. No tax benefits were provided on this charge. During the third quarter of 1994, the Company entered more substantive negotiations with a prospective buyer interested in purchasing a majority of the schools and assuming the teach-out responsibility at the remaining schools which would be closed. Based on the current assumptions to close the transaction, management believes that the amount reserved is adequate and no further charges are currently anticipated. The Education Centers are being accounted for as discontinued operations and prior period statements of operations have been reclassified to reflect this treatment. Revenues for the Education Centers were $25,084,000 and $32,370,000 for the three months ended September 30, 1994 and 1993, respectively, and revenues for the nine months ended September 30, 1994 and 1993 were $76,537,000 and $101,580,000, respectively. No tax benefits were recorded on Education Centers losses for the three months ended September 30, 1994, while a tax benefit of $7,395,000 was provided for the prior year period. Tax benefits of $1,008,000 and $9,120,000 were provided for Education Centers losses for the nine months ended September 30, 1994 and 1993, respectively. 5 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 3 - Business Disposition (continued) The estimated net realizable value of the Education Centers assets have been segregated on the September 30, 1994 balance sheet as net assets held for disposition. Liabilities associated with the cost of completing the transaction and providing for future obligations retained by the Company have been segregated as accrued disposition costs. Prior period balance sheet information has not been restated to reflect the discontinuance of the Education Centers. For purposes of presenting the statement of cash flows, prior year periods have been reclassified to reflect the discontinued operations. NOTE 4 - Earnings (Loss) Per Share Primary earnings (loss) per share are computed based on the weighted average number of common shares outstanding during the respective periods, including dilutive stock options. Fully diluted earnings (loss) per share are computed based on the assumption that all dilutive convertible debentures have been converted to common stock with a corresponding increase in net income to reflect a reduction in related interest expense, less applicable taxes. NOTE 5 - Investment Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), which resulted in a change in the accounting for debt and equity securities held for investment purposes. Prior to January 1, 1994, the Company carried debt and equity securities at the lower of aggregate cost or market value. In accordance with SFAS 115, the Company's debt and equity securities are now considered as either held-to-maturity or available-for-sale. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold to maturity and are carried at amortized cost. Available-for-sale securities represent those securities that do not meet the classification of held-to-maturity and are not actively traded. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of stockholders' equity, net of applicable taxes, until realized. Since the adoption of this standard, the Company recorded increases in available-for-sale securities of $219,000 and a related deferred tax liability of $77,000, resulting in a net increase of $142,000 in stockholders' equity. 6 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 5 - Investment Securities (continued) The amortized cost and estimated fair value of the securities are as follows:
September 30, 1994 _____________________________________________________ Gross Gross Amortized Unrealized Unrealized Fair (dollars in thousands) Cost Gain Loss Value ___________________________________________ _________ __________ __________ _________ Tax exempt municipal bond funds held-to-maturity $ 5,000 $ -- $ -- $ 5,000 ________ ________ ________ ________ Available-for-sale: Corporate income funds 3,532 189 (151) 3,570 Preferred stock 1,950 229 (48) 2,131 ________ ________ ________ ________ Total available-for-sale 5,482 418 (199) 5,701 ________ ________ ________ ________ Total securities $ 10,482 $ 418 $ (199) $ 10,701 ======== ======== ========= ========
December 31, 1993 _____________________________________________________ Gross Gross Amortized Unrealized Unrealized Fair (dollars in thousands) Cost Gain Loss Value ___________________________________________ _________ __________ __________ _________ Tax exempt municipal bond funds held-to-maturity $ 5,500 $ -- $ -- $ 5,500 ________ ________ ________ ________ Available-for-sale: Corporate income funds 6,678 503 (123) 7,058 Preferred stock 3,797 581 (54) 4,324 Other 325 757 -- 1,082 ________ ________ ________ ________ Total available-for-sale 10,800 1,841 (177) 12,464 ________ ________ ________ ________ Total securities $ 16,300 $ 1,841 $ (177) $ 17,964 ======== ======== ========= ========
NOTE 6 - Statements of Cash Flows Supplementary Information
Three Months Ended Nine Months Ended September 30, September 30, (dollars in thousands) 1994 1993 1994 1993 ______________________________________________________ ________ _________ ________ ________ Cash Paid During the Period for: Interest expense $ 1,445 $ 1,020 $ 4,574 $ 3,854 ======= ======== ======= ======= Income taxes, net of income tax refunds $ 640 $ 1,067 $ 2,612 $ 6,858 ======= ======== ======= =======
7 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended September 30, Percent (dollars in thousands) 1993 1992 Variance Change ______________________________________________ _________ _________ _________ ________ Net Revenues ICS Learning Systems $ 31,312 $ 24,845 $ 6,467 26.0 Steck-Vaughn Publishing 18,852 17,431 1,421 8.2 NETG 12,419 12,617 (198) (1.6) Other 756 312 444 142.3 _________ _________ ________ Total Net Revenues $ 63,339 $ 55,205 $ 8,134 14.7 ========= ========= =========
Operating Income (Loss): ICS Learning Systems $ 5,696 $ 5,068 $ 628 12.4 _________ _________ ________ Steck-Vaughn Publishing 5,485 5,213 272 5.2 _________ _________ ________ NETG operating loss before unusual items (4,409) (9,318) 4,909 52.7 Unusual items -- (9,232) 9,232 n/m _________ _________ ________ NETG (4,409) (18,550) 14,141 76.2 _________ _________ ________ Other 255 (233) 488 n/m _________ _________ ________ Total Segment Operating Income (Loss): 7,027 (8,502) 15,529 n/m General corporate expenses (2,203) (2,985) 782 26.2 Interest expense (1,637) (1,425) (212) (14.9) Investment income 599 555 44 7.9 Gain on Steck-Vaughn Publishing Corporation public stock offering -- 21,260 (21,260) n/m Other income and (expense) 146 540 (394) (73.0) _________ _________ ________ Income Before Income Taxes (Benefit), Minority Interest and Discontinued Operations 3,932 9,443 (5,511) (58.4) Income taxes (benefit) 1,594 (3,748) 5,342 n/m _________ _________ ________ Income Before Minority Interest and Discontinued Operations 2,338 13,191 (10,853) (82.3) Minority interest 589 341 248 72.7 _________ _________ ________ Income From Continuing Operations 1,749 12,850 (11,101) (86.4) Discontinued operations -- (16,662) 16,662 n/m _________ _________ ________ Net Income (Loss) $ 1,749 $ (3,812) $ 5,561 n/m ========= ========= ========= n/m: Not meaningful.
8 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended September 30, 1994 Compared to Three Months Ended September 30, 1993 Revenues of $63,339,000 for the three months ended September 30, 1994 were $8,134,000 or 14.7% higher than revenues of $55,205,000 in the prior year. Income from continuing operations was $1,749,000 or $.06 per fully diluted share compared to income of $12,850,000 or $.37 per fully diluted share in 1993. Net income for the period was $1,749,000 or $.06 compared to a net loss of $3,812,000 or $.13 per share in the prior year. The operating results for 1993 include a nonrecurring charge related to NETG which resulted from the write-down of certain acquired intangible assets and a gain of $21,260,000 resulting from the initial public stock offering of Steck-Vaughn Publishing Corporation. Additionally, the third quarter of 1993 has been restated to show the Company's Education Centers subsidiary as a discontinued operation due to a plan of disposition adopted during the second quarter of 1994 (see further discussion in the nine month period). Revenues at ICS Learning Systems continued to increase significantly during the quarter primarily due to record performance at the domestic operations while the international operations increased only slightly. Domestic operating income increased significantly during the period primarily due to revenue growth while international operating income decreased despite higher revenues. Increased revenues at the domestic operation primarily resulted from enrollment increases of 52% during the quarter and revenues from MicroMash which was acquired during the first quarter of 1994. The significant domestic enrollment increase primarily resulted from the continued success of the expanded telesales efforts which have resulted in higher conversion of leads to enrollments than experienced in the prior year and an increase of 21% in selling and promotional spending. The revenue increase at the international operation primarily resulted from higher revenues at Canada and the Australia/New Zealand operations. The higher revenues at Canada primarily resulted from increased student payments during the period while the Australia/New Zealand operation experienced strong enrollment growth of 23%. International operating income decreased as a result of higher selling and promotional expenses which did not generate anticipated enrollment growth. General and administrative costs at the domestic operations increased during the quarter primarily due to additional costs at the MicroMash operation and initial system costs incurred for the conversion to a new information system. Revenues and operating income at Steck-Vaughn increased during the third quarter as compared to the prior year. Steck-Vaughn experienced higher revenues in all major product lines during the quarter with the largest increase in the elementary school products which benefited from growth in the Reading, Math and Literature products. Adult education products also experienced strong increases during the quarter resulting from the success of courses in Adult Basic Education and English as a Second Language. Selling price increases and higher distributor sales during 1994 also contributed to the revenue increase. Publishing costs increased during the quarter as a result of increased volume and higher materials costs. The increased materials costs were primarily caused by the higher distributors sales which carry a lower margin and resulted in a slight increase in publishing costs as a percentage of revenues. Selling and promotional costs increased during the quarter due to the expansion of the sales organization during January 1994. The reorganization resulted in the segmentation of the sales force into two groups. One group focuses on the elementary, junior high and library marketplaces while the other group focuses on the high school and adult education marketplaces. General and administrative expenses decreased during the quarter primarily due to favorable loss experience which resulted in lower insurance expenses. 9 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) NETG revenues decreased slightly during the quarter as a result of lower revenues at the international operations which were partially offset by increased domestic revenues. Higher revenues at the domestic operation primarily resulted from a new product licensing agreement initiated during the third quarter which simplifies the customers' ability to acquire NETG products; hosever, these increases werre partially offset by slightly lower new orders and contracts were down slightly at the domestic operations as compared to 1993 levels. Revenues at the international operations decreased primarily due to lower contract backlog at the beginning of 1994 as compared to 1993. New orders and contracts at the international operations increased during the period; however, decreasing contract backlog has more than offset the new orders and renewal business. Operating results at the domestic operations improved significantly during the period primarily due to reductions in product development costs, lower general and administrative expenses, and the nonrecurring unusual item recorded during 1993. The decrease in general and administrative expenses primarily resulted from reduced headcount, lower consulting costs, and reduced insurance expenses. Operating results at the international operations decreased primarily due to lower revenues. Operating results of ICS and NETG foreign operations by geographic region are discussed above. Foreign currency exchange gains, recorded to other income, were $146,000 compared to gains of $158,000 in the prior year. General corporate expenses decreased during the period primarily due to reduced overall costs and favorable loss experience rates which resulted in lower insurance expenses. 10 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Nine Months Ended September 30, Percent (dollars in thousands) 1994 1993 Variance Change ______________________ __________ __________ _________ ________ Net Revenues ICS Learning Systems $ 89,089 $ 74,228 $ 14,861 20.0 Steck-Vaughn Publishing 43,493 41,710 1,783 4.3 NETG 36,450 41,449 (4,999) (12.1) Other 2,116 823 1,293 157.1 _________ _________ ________ Total Net Revenues $ 171,148 $ 158,210 $ 12,938 8.2 ========= ========= =========
Operating Income (Loss): ICS Learning Systems $ 15,863 $ 14,166 $ 1,697 12.0 _________ _________ ________ Steck-Vaughn Publishing 10,178 11,138 (960) (8.6) _________ _________ ________ NETG operating loss before unusual items (12,975) (23,358) 10,383 44.5 Unusual items -- (9,232) 9,232 n/m _________ _________ ________ NETG (12,975) (32,590) 19,615 60.2 Other (315) (643) 328 51.0 _________ _________ ________ Total Segment Operating Income (Loss) 12,751 (7,929) 20,680 n/m General corporate expenses (6,201) (8,696) 2,495 28.7 Interest expense (4,646) (4,297) (349) (8.1) Investment income 2,544 1,871 673 36.0 Gain on Steck-Vaughn Publishing Corporation public stock offering -- 21,260 (21,260) n/m Other income and (expense) 453 459 (6) (1.3) _________ _________ ________ Income Before Income Taxes (Benefit), Minority Interest and Discontinued Operations 4,901 2,668 2,233 83.7 Income taxes (benefit) 1,999 (6,515) 8,514 n/m _________ _________ ________ Income Before Minority Interest and Discontinued Operations 2,902 9,183 (6,281) (68.4) Minority interest 1,086 341 745 218.5 _________ _________ ________ Income From Continuing Operations 1,816 8,842 (7,026) (79.5) Discontinued operations (49,452) (20,549) (28,903) (140.7) _________ _________ ________ Net Loss $ (47,636) $ (11,707) $(35,929) (306.9) ========== ========== ========= n/m: Not meaningful.
11 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Nine Months Ended September 30, 1994 Compared to Nine Months Ended September 30, 1993 Revenues of $171,148,000 for the nine months ended September 30, 1994, were $12,938,000 or 8.2% higher than revenues of $158,210,000 in the prior year. Income from continuing operations of $1,816,000 or $.06 per fully diluted share compared to income of $8,842,000 or $.27 per fully diluted share in the prior year. Net loss for the period of $47,636,000 or $1.61 per share compared to a loss of $11,707,000 or $.39 per share in the prior year. During the second quarter of 1994, the Company adopted a plan to dispose of its Education Centers subsidiary. The plan resulted in a second quarter charge of $40,032,000 ($1.35 loss per share) to write-down assets to estimated net realizable value and provide for estimated costs to dispose of the operation. During the third quarter of 1994, the Company entered into more substantive negotiations with a prospective buyer interested in purchasing a majority of the schools and assuming the responsibility of teaching-out the remaining schools. The revenues and expenses of the Education Centers have been offset and segregated as discontinued operations for the periods ending September 30, 1994 and prior period statements of operations have been restated to reflect this change. ICS experienced similar changes in revenues and operating income for the nine month period as occurred for the three month period previously discussed. Revenues at Steck-Vaughn increased during the period primarily due to higher revenues in the second and third quarters which were partially offset by lower revenues during the first quarter of the year. The reduced first quarter revenues primarily resulted from adverse winter weather conditions affecting the midwest, mid-Atlantic and northeast regions of the United States. Additionally, the sales force reorganization during the beginning of the year resulted in a temporary disruption in the sales organization. Revenues during the second and third quarter experienced similar changes as previously discussed in the three month analysis. Operating income decreased during 1994 as compared to the prior year primarily due to higher materials costs associated with increased distributor sales during the period and higher selling and promotional costs resulting from the expanded sales force. Additionally, product development expense increased 11% over the prior year period. Partially offsetting the increased costs were lower general and administrative costs primarily due to reduced insurance expenses resulting from favorable loss experience rates. NETG experienced similar changes in revenues and operating results as occurred for the three month period previously discussed except for revenues at the domestic operations. Revenues at the domestic operations decreased for the nine month period as compared to the prior year period primarily due to lower revenues in the first six months of the year resulting from reduced contract value backlogs at the beginning of 1994 as compared to 1993. These decreases were partially offset by higher third quarter revenues previously discussed in the three month period. ICS and NETG foreign operations by geographic region are discussed above. Foreign currency exchange gains of $453,000 were recorded during the period as compared to gains of $77,000 in the prior year. Investment income increased during the period primarily due to gains realized in connection with the sale of certain marketable securities. 12 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources The Company's primary sources of liquidity are cash, marketable securities and cash provided from operations. (See Note 3 to the financial statements regarding discontinued operations.) At September 30, 1994, the Company had $35,252,000 in cash and marketable securities of which $17,027,000 was held in the account of Steck-Vaughn. In December 1993, the Company entered into a revolving bank credit agreement in the amount of $10,000,000 which matures on December 21, 1994. As of September 30, 1994, $5,000,000 was outstanding under the revolving bank credit agreement. On June 10, 1994, Steck-Vaughn entered into a revolving bank credit agreement in the amount of $10,000,000 with a maturity of June 10, 1996. The agreement provides for borrowings at prime plus .5 percent or, at Steck-Vaughn's option, LIBOR plus 1.5 percent. At September 30, 1994, no amounts were outstanding under the bank credit facility. Cash outflows from operating activities for the nine months ended September 30, 1994 of $8,116,000 decreased $9,062,000 as compared to cash inflows of $946,000 in the prior year primarily due to changes in net receivables resulting from diminishing contract receivables at NETG from long-term contract revenues. As a result of prior year changes in selling NETG multimedia training products that are generally one year agreements, NETG's receivables for prior year's long-term contracts will no longer provide a significant source of working capital. Cash flows from financing activities increased during 1994 primarily due to the $5,000,000 draw on the available line of credit and the financing of the ICS Learning Systems land and building which resulted in proceeds of $4,188,000. The draw on the line of credit was used to finance the acquisition of MicroMash during the first quarter of the year. The Company expects that cash, marketable securities, the revolving bank credit agreement, cash provided from operations, which includes, to a certain extent, the continued funding of Education Centers' students under government student financial aid programs, subject to a timely disposition of the schools, will be sufficient to provide for planned working capital requirements, debt service and capital expenditures for the foreseeable future. 13 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index following this Form 10-Q. (b) Reports on Form 8-K. On July 13, 1994, the Company filed a Current Report on Form 8-K dated June 28, 1994 reporting the Company's announcement of its plans to discontinue the operations of its National Education Centers subsidiary. 14 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL EDUCATION CORPORATION Date: November 14, 1994 By /s/ Keith K. Ogata ___________________________ Keith K. Ogata Vice President, Chief Financial Officer and Treasurer 15 INDEX TO EXHIBITS (Item 6(a))
Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.1 National Education Corporation Retirement Plan (Restated as of January 1, 1989 and as Amended through January 1, 1992) (1) . . . . . . . . . . . . . * 10.2 National Education Corporation Retirement Plan Trust (2). . . . . . . . . . . . . . . . . . . . . . . * 10.3 1981 Long-Term Incentive Plan (3). . . . . . . . . . . * 10.4 1983 Stock Option Plan (4) . . . . . . . . . . . . . . * 10.5 Advanced Systems, Incorporated 1984 Stock Option and Stock Appreciation Rights Plan (5). . . . . * 10.6 1986 Stock Option and Incentive Plan as Amended (6). . . . . . . . . . . . . . . . . . . . . . * 10.7 1990 Stock Option and Incentive Plan (7) . . . . . . . * 10.8 1991 Directors' Stock Option Plan (8). . . . . . . . . * 10.9 Rights Agreement, dated October 29, 1986, between National Education Corporation and Bank of America National Trust and Savings Association, Rights Agent (including exhibits thereto) (9) . . . . . . . . . . . . . . . . . . . . . * 10.10 Addendum No. 1 to Rights Agreement, dated August 5, 1991 (10) . . . . . . . . . . . . . . . . . * 10.11 Indenture, dated as of May 15, 1986, between National Education Corporation and Continental Illinois National Bank and Trust Company of Chicago, as Trustee (11) . . . . . . . . . . . . . . . * 10.12 Tripartite Agreement, dated as of May 31, 1990, among National Education Corporation, Conti- nental Bank as Resigning Trustee, and IBJ Schroder Bank & Trust Company as Successor Trustee (12) . . . . . . . . . . . . . . . . . . . . . *
16
Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.13 National Education Corporation Purchase Agree- ment, Senior Subordinated Convertible Deben- tures, dated as of February 15, 1991 (13). . . . . . . * 10.14 National Education Corporation Supplemental Executive Retirement Plan, as Amended (14) . . . . . . * 10.15 Supplemental Benefit Plan for Non-Employee Directors (15) . . . . . . . . . . . . . . . . . . . . * 10.16 Retirement Agreement with J.J. McNaughton (16) . . . . * 10.17 Intercompany Agreement Between National Education Corporation and Steck-Vaughn Publishing Corporation, dated June 30, 1993 (the "Intercompany Agreement") (17). . . . . . . . . . * 10.18 Tax Sharing Agreement Between National Education Corporation and Its Direct and Indirect Corporate Subsidiaries, dated January 1, 1993 (18) . . . . . . . . . . . . . . . . . * 10.19 Asset Purchase Agreement Between Steck-Vaughn Company and Creative Edge Inc., dated as of April 26, 1993 (19). . . . . . . . . . . . . . . . . . * 10.20 $10,000,000 Credit Agreement Between National Education Corporation and Bankers Trust Company as Agent, dated as of December 22, 1993 (the "Credit Agreement") (Confidential treatment under Rule 24b-2 has been granted for portions of this exhibit.)(20) . . . . . . . . . . * 10.21 First Amendment to Credit Agreement, dated as of December 31, 1993 (21). . . . . . . . . . . . . . . * 10.22 Second Amendment to Credit Agreement, dated as of April 15, 1994 (Confidential treatment under Rule 24b-2 has been requested for portions of this exhibit.) (22). . . . . . . . . . . . * 10.23 First Amendment to Intercompany Agreement, dated June 10, 1994 between National Education Corporation and Steck-Vaughn Publishing Corporation (23) . . . . . . . . . . . . . . . . . . . *
17
Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.24 Third Amendment to Credit Agreement, dated as of June 24, 1994 (Confidential treatment under Rule 24b-2 has been granted for portions of this exhibit.) (24). . . . . . . . . . . . . . . . . . * 10.25 $10,000,000 Credit Agreement between Steck-Vaughn Company and NationsBank of Texas, dated as of June 10, 1994 (25) . . . . . . . . . . . . . . . . . . * 11.1 Calculation of Primary Earnings Per Share (26) . . . . 11.2 Calculation of Fully Diluted Earnings Per Share (26) . . . . . . . . . . . . . . . . . . . . . .
__________________ * incorporated by reference from a previously filed document 18 1) Incorporated by reference to Exhibit 10.1 filed with the Annual Report on Form 10-K for the year ended December 31, 1992, filed March 22, 1993. 2) Incorporated by reference to Exhibit 10(b) filed with Registration Statement on Form S-8 (No. 2-86904), filed October 3, 1983. 3) Incorporated by reference to Exhibit 15 filed with Registration Statement on Form S-8 (No. 2-71650), filed April 7, 1981. 4) Incorporated by reference to Exhibit D filed with the 1983 Proxy Statement dated April 25, 1983, for the annual meeting dated May 19, 1983. 5) Incorporated by reference to Exhibit 10.15 filed with the Annual Report on Form 10-K for the year ended December 31, 1987, filed March 30, 1988. 6) Incorporated by reference to Exhibit 10.17 filed with the Annual Report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991. 7) Incorporated by reference to Exhibit "A" filed with the 1990 Proxy Statement, filed April 2, 1990. 8) Incorporated by reference to Exhibit "A" filed with the 1991 Proxy Statement, filed April 1, 1991. 9) Incorporated by reference to Exhibit 4.1 filed with Form 8-K Current Report, dated October 29, 1986, filed October 30, 1986. 10) Incorporated by reference to Exhibit 10.19 filed with the Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. 11) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to Registration Statement on Form S-3 (No. 33-5552), filed May 16, 1986. 12) Incorporated by reference to Exhibit 4 filed with the Form 10-Q Quarterly Report for the quarterly period ended June 30, 1990. 13) Incorporated by reference to Exhibit 4 filed with Form 8-K Current Report, dated February 20, 1991, filed February 27, 1991. 14) Incorporated by reference to Exhibit 10.17 filed with the Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. 15) Incorporated by reference to Exhibit 10.18 filed with the Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. 19 16) Incorporated by reference to Exhibit 10.9 filed with the Annual Report on Form 10-K for the year ended December 31, 1987, filed March 30, 1988. 17) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1 to the Steck-Vaughn Publishing Corporation Registration Statement on Form S-1, File No. 33-62334, filed June 17, 1993. 18) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1 to the Steck-Vaughn Publishing Corporation Registration Statement on Form S-1, File No. 33-62334, filed June 17, 1993. 19) Incorporated by reference to Exhibit 10.13 filed with the Steck- Vaughn Publishing Corporation Registration Statement on Form S-1, File No. 33-62334, filed May 7, 1993. 20) Incorporated by reference to Exhibit 10.20 filed with the Annual Report on Form 10-K for the year ended December 31, 1993, filed March 28, 1994. 21) Incorporated by reference to Exhibit 10.21 filed with the Annual Report on Form 10-K for the year ended December 31, 1993, filed March 28, 1994. 22) Incorporated by reference to Exhibit 10.22 filed with the Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, filed May 12, 1994. 23) Incorporated by reference to Exhibit 10.23 filed with the Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed on August 11, 1994. 24) Incorporated by reference to Exhibit 10.24 filed with the Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed on August 11, 1994. 25) Incorporated by reference to Exhibit 10.14 filed with Steck- Vaughn Publishing Corporation's Quarterly Report on Form 10-Q for the period ended June 30, 1994, filed on August 11, 1994. 26) Filed herewith. 20 EX-11.1 2 CALCULATION OF PRIMARY EARNINGS PER SHARE EXHIBIT 11.1 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES CALCULATION OF PRIMARY EARNINGS PER SHARE (Amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ______________________ ________________________ 1994 1993 1994 1993 __________ _________ ___________ __________ INCOME (LOSS) FROM CONTINUING OPERATIONS $ 1,749 $12,850 $ 1,816 $ 8,842 _______ ________ _________ _________ NET INCOME (LOSS) $ 1,749 $(3,812) $(47,636) $(11,707) ======= ======== ========= ========= Shares outstanding from beginning of period 29,516 29,994 29,405 29,968 Pro rata shares: Stock options exercised 59 35 119 30 Shares purchased for treasury, from date of purchase (8) (658) (7) (323) Assumed exercise of stock options, using treasury stock method 91 257 126 264 _______ ________ _________ _________ Weighted average number of shares outstanding 29,658 29,628 29,643 29,939 ======= ======== ========= ========= EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $.06 $.43 $.06 $.30 ==== ===== ==== ==== LOSS PER SHARE $.06 $(.13) $(1.61) $(.39) ==== ====== ======= ======
EX-11.2 3 CALCULATION OF FULLY DILUTED EARNINGS PER SHARE 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 Nine Months Ended September 30, September 30, ______________________ ________________________ 1994 1993 1994 1993 __________ _________ ___________ __________ NET INCOME (LOSS) $ 1,749 $(3,812) $(47,636) $(11,707) Add back senior debenture interest 270 241 752 723 Add back junior debenture interest 570 570 1,709 1,709 _______ ________ _________ _________ NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $ 2,589 $(3,001) $(45,175) $ (9,275) ======= ======== ========= ========= COMMON STOCK: Shares outstanding from beginning of period 29,516 29,994 29,405 29,968 Stock options exercised 59 35 119 30 Shares purchased for treasury, from date of purchase (8) (658) (7) (323) Assumed exercise of stock options, using treasury stock method 91 257 126 264 Assumed conversion of senior subordinated debentures, from the latter of the beginning of the period or the date of issue 5,000 5,000 5,000 5,000 Assumed conversion of junior subordinated debentures, from the latter of the beginning of the period or the date of issue 2,300 2,300 2,300 2,300 _______ ________ _________ _________ Weighted average number of shares outstanding 36,958 36,928 36,943 37,239 ======= ======== ========= ========= FULLY DILUTED EARNINGS (LOSS) PER SHARE $.06 $(.13) $(1.61) $(.39) ==== ====== ======= ======
EX-27 4 ARTICLE 5 FIN. DATA SCHEDULE FOR 3RD QTR 10-Q
5 1,000 Dec-31-1993 Jan-01-1994 Sep-30-1994 9-MOS 24,551 10,701 34,029 (3,271) 22,782 150,703 85,645 (62,076) 257,044 68,587 77,494 0 0 2,110 86,367 257,044 171,148 171,148 68,280 1,383 0 411 4,646 4,901 1,999 1,816 (49,452) 0 0 (47,636) (1.61) (1.61)
EX-27 5 ARTICLE 5 FIN. DATA SCHEDULE FOR 3RD QTR 10-Q
5 1,000 Dec-31-1993 Jul-01-1994 Sep-30-1994 3-MOS 24,551 10,701 34,029 (3,271) 22,782 150,703 85,645 (62,076) 257,044 68,587 77,494 0 0 2,110 86,367 257,044 63,339 63,339 24,112 530 0 110 1,637 3,932 1,594 2,338 0 0 0 1,749 .06 .06
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