-----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, Bx8l6I7Rh8y3vv6q1FuOSskRlDOgNjuYSizxMLgi0eEUJq/yakKI/T6MLzXpRkTx f7qqFtKEjrbv0e4Q0BfY7w== 0000277821-95-000018.txt : 19951118 0000277821-95-000018.hdr.sgml : 19951118 ACCESSION NUMBER: 0000277821-95-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951109 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: 95588908 BUSINESS ADDRESS: STREET 1: 18400 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 7144749400 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 September 30, 1995 Commission file number 1-6981 NATIONAL EDUCATION CORPORATION (Exact name of registrant as specified in its charter) Delaware I.R.S. No. 95-2774428 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 18400 Von Karman Avenue, Irvine, California 92715-1594 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 714/474-9400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 35,122,912 common stock shares outstanding at October 20, 1995 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) 1995 1994 1995 1994 ________________________________________________ __________ _________ __________ _________ Tuition and Contract Revenues $ 51,657 $ 44,487 $143,455 $127,655 Publishing Revenues 20,372 18,852 46,797 43,493 __________ _________ __________ _________ Net Revenues 72,029 63,339 190,252 171,148 Costs and Expenses: Contract course materials and service costs 18,737 14,863 56,685 43,078 Publishing costs and materials 4,997 4,421 12,490 11,357 Product development 4,525 4,938 14,450 14,256 Selling and promotion 29,877 29,187 85,854 79,624 General and administrative 7,228 8,200 25,395 24,625 Amortization of prior period deferred marketing -- 4,007 1,470 17,213 Amortization of acquired intangible assets 219 530 1,329 1,383 Interest expense 2,352 1,637 6,732 4,646 Investment income (814) (599) (2,030) (2,543) Other income, net (42) (146) (307) (453) Unusual items -- -- 77,805 -- __________ _________ __________ _________ Income (Loss) Before Income Tax Benefit, Minority Interest and Discontinued Operations 4,950 (3,699) (89,621) (22,038) Income tax provision (benefit) 1,930 (140) (2,603) (4,123) __________ _________ __________ _________ Income (Loss) Before Minority Interest and Discontinued Operations 3,020 (3,559) (87,018) (17,915) Minority interest 625 589 1,065 1,086 __________ _________ __________ _________ Income (Loss) From Continuing Operations 2,395 (4,148) (88,083) (19,001) Loss from discontinued operations -- -- -- (9,420) Loss on disposal of discontinued operations -- -- -- (40,032) __________ _________ __________ _________ Net Income (Loss) $ 2,395 $ (4,148) $(88,083) $(68,453) ======== ========= ========= ========= 2 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) 1995 1994 1995 1994 ________________________________________________ __________ _________ __________ _________ Earnings (Loss) Per Share From Continuing Operations: Primary earnings per share $ .08 $ (.14) $ (2.89) $ (.64) ======== ========= ========= ========= Fully diluted earnings per share $ .08 $ (.14) $ (2.89) $ (.64) ======== ========= ========= ========= Earnings (Loss) Per Share $ .08 $ (.14) $ (2.89) $ (2.31) ======== ========= ========= ========= Weighted Average Number of Shares Outstanding: Primary Shares 31,776 29,658 30,500 29,643 Fully diluted shares 38,267 36,958 37,881 36,943 Unaudited See accompanying notes and management's discussion and analysis.
3 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) 1995 1994 1994 ____________________________________________________________________ _____________ _____________ _____________ ASSETS Current Assets Cash and cash equivalents $ 22,641 $ 17,297 $ 24,551 Investment securities 1,846 10,833 10,701 Receivables, net of allowance of $3,583, $2,787 and $3,271 31,364 45,186 30,758 Inventories and supplies 26,417 23,827 22,782 Prepaid and deferred marketing expenses 7,428 3,223 14,053 Assets held for disposition -- 25,867 3,736 Other current assets 25,316 18,006 17,181 _________ __________ _________ Total current assets 115,012 144,239 123,762 Land, Buildings and Equipment, less accumulated depreciation of $31,814, $63,240 and $62,076 23,054 25,404 23,569 Acquired Intangible Assets, less accumulated amortization of $13,226, $89,005 and $88,521 9,453 52,703 50,655 Deferred Income Taxes 23,073 28,482 25,793 Other Assets 8,363 8,248 6,324 _________ __________ _________ $ 178,955 $ 259,076 $ 230,103 ========= ========== ========= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 9,545 $ 7,771 $ 8,168 Accrued expenses 36,127 30,625 26,265 Accrued short-term restructuring charges 6,722 -- -- Accrued salaries and wages 5,663 5,448 6,577 Accrued disposition costs -- 25,116 6,738 Deferred contract revenues 7,883 11,905 8,902 Current portion of long-term debt and short-term borrowings 14,041 6,407 5,813 _________ __________ _________ Total current liabilities 79,981 87,272 62,463 _________ __________ _________ Liabilities Payable After One Year: Long-term debt, less current portion 7,351 6,389 5,374 Senior subordinated convertible debentures -- 20,000 20,000 Convertible subordinated debentures 57,494 57,494 57,494 Accrued long-term restructuring charges 12,151 -- -- Other noncurrent liabilities 8,090 7,667 8,187 _________ __________ _________ 85,086 91,550 91,055 _________ __________ _________ Minority Interest in Equity of Consolidated Subsidiary 9,190 8,221 8,925 _________ __________ _________ 4 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) 1995 1994 1994 ____________________________________________________________________ _____________ _____________ _____________ Stockholder's Equity: Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued -- -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 35,820,468 shares, 30,275,831 shares and 30,268,725 shares issued 2,193 2,110 2,110 Additional paid-in capital 154,882 133,043 132,863 Accumulated deficit (138,327) (50,244) (54,772) Unrealized gain (loss) on available-for-sale securities, net of tax 33 (21) 142 Cumulative foreign exchange translation adjustment (7,734) (7,947) (7,775) Notes receivable under stock option plans (1,441) -- -- _________ __________ _________ 9,606 76,941 72,568 Less common stock in treasury 697,556 shares, 697,556 shares and 697,556 shares (4,908) (4,908) (4,908) _________ __________ _________ Total stockholders' equity 4,698 72,033 67,660 _________ __________ _________ $ 178,955 $ 259,076 $ 230,103 ========= ========== ========= Unaudited See accompanying notes and management's discussion and analysis.
5 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) 1995 1994 1995 1994 ________________________________________________________ __________ _________ _________ _________ Cash Flows From Operating Activities: Net income (loss) $ 2,395 $ (4,148) $ (88,083) $ (68,453) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Loss on discontinued operations -- -- -- 9,420 Tax benefit from discontinued operations -- -- -- 1,008 Loss on disposal of discontinued operations -- -- -- 40,032 Depreciation and amortization 1,157 1,471 4,163 4,201 Amortization of acquired intangible assets 219 530 1,329 1,383 Amortization of prior period deferred marketing -- 4,007 1,470 17,213 Provision for doubtful accounts 227 110 2,148 411 Write-off of acquired intangible assets -- -- 47,509 -- (Gain) loss on foreign currency exchange (42) (146) (307) (453) Change in assets and liabilities: Receivables, net (6,552) (2,597) 11,709 9,980 Inventories and supplies (1,616) 656 (1,949) 1,183 Prepaid and deferred marketing expenses 129 (1,257) (4,446) (6,184) Accounts payable and accrued expenses 6,272 6,317 (1,142) (6,675) Accrued restructuring charges (2,608) -- 26,498 -- Accrued and deferred income taxes 838 (5,312) 255 (8,121) Deferred contract revenues (1,648) (1,183) (4,081) (1,844) Other (181) 1,417 (1,742) 3,539 ________ ________ _________ _________ Net Cash From Operating Activities (1,410) (135) (6,669) (3,360) ________ ________ _________ _________ Cash Flows For Investing Activities: Additions to land, building and equipment (610) (1,927) (5,977) (5,562) Dispositions of land, buildings and equipment 44 40 (146) 299 Purchases of investment securities -- (1,521) (189) (4,771) Proceeds from the sale or redemption of securities 430 6,004 9,266 10,589 Acquisition of business, net of cash acquired -- -- -- (3,870) Discontinued operations (651) (5,113) (1,420) (18,018) ________ ________ _________ _________ Net Cash For Investing Activities (787) (2,517) 1,534 (21,333) ________ ________ _________ _________ 6 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) 1995 1994 1995 1994 ________________________________________________________ __________ _________ _________ _________ Cash Flows From Financing Activities: Additions to long-term debt 1,462 (3) 2,038 3,906 Reductions in long-term debt (481) (228) (1,076) (491) Changes in short-term borrowings (780) (1,911) 7,634 5,397 Minority interest in earnings of consolidated subsidiary 624 738 969 879 Common stock, stock options and related tax benefits 736 34 1,922 603 Notes receivable under a stock option plan (262) -- (1,441) -- Purchase of common stock for treasury -- -- -- (53) ________ ________ _________ _________ Net Cash From Financing Activities 1,299 (1,370) 10,046 10,241 ________ ________ _________ _________ Effect of Exchange Rate Changes on Cash 375 243 433 457 ________ ________ _________ _________ Net Change in Cash and Equivalents (523) (3,779) 5,344 (13,995) Cash and Equivalents at the Beginning of the Period 23,164 28,330 17,297 38,546 ________ ________ _________ _________ Cash and Equivalents at the End of the Period $ 22,641 $ 24,551 $ 22,641 $ 24,551 ======== ======== ========= ========= Unaudited. See accompanying notes and management's discussion and analysis.
7 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 1 - Summary of Accounting Policies _______________________________________ In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these financial statements be read in conjunction with the financial statements, accounting policies, and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the year. In the second quarter the Company adopted, effective January 1, 1995, the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" (FASB 121). Prior to January 1, 1995, the Company reviewed the recoverability of its long-lived assets and intangible assets by comparing projected related cash flows on an undiscounted basis to the net book value of the assets. In the event the recoverability of the assets was impaired, the Company would have measured the impairment by comparing projected operating income and related cash flows on an undiscounted basis to the net book value of the assets. Under the provisions of FASB 121, the Company will continue to review the recoverability of long-lived assets and intangible assets by comparing cash flows on an undiscounted basis to the net book value of the assets. In the event the undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written-down to their fair value, less cost to sell. In addition, FASB 121 requires that assets to be disposed of be measured at the lower of cost or fair value, less cost to sell. Adopting FASB 121 had no effect on the Company's financial statements except for the write-off of goodwill as described further at Note 3. In December 1993, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 93-7 ("SOP"), "Reporting on Advertising Costs". The SOP generally requires advertising costs, other than direct-response advertising, to be expensed as incurred. In the fourth quarter of 1994, ICS adopted the SOP effective January 1, 1994. In adopting the SOP in 1994, ICS' total advertising, selling and promotion costs were expensed as incurred in 1994 rather than deferred and amortized as in prior periods. Adoption of the SOP in 1994 resulted in a charge of $7,631,000 for the three months ended September 30, 1994. The charge consisted of two components. First, a charge of $4,007,000 resulted from the amortization of the deferred marketing balance at December 31, 1993 into 1994. Second, a charge of $3,624,000 resulted from increased selling and promotion spending above the amortization that would have been expensed in accordance with the Company's previous 8 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 1 - Summary of Accounting Policies (continued) ___________________________________________________ accounting policy. Adoption of the SOP in 1994 resulted in a charge of $26,939,000 for the nine months ended September 30, 1994. This charge consisted of two components. First a charge of $17,213,000 resulted from the amortization of the deferred marketing balance at December 31, 1993 into 1994. Second, a charge of $9,726,000 resulted from increased selling and promotion spending above the amortization that would have been expensed in accordance with the Company's previous accounting policy. At December 31, 1994, a deferred marketing balance of $1,470,000 remained, of which $1,311,000 was amortized in the first quarter of 1995, with the remaining $159,000 amortized in the second quarter of 1995. A substantial portion of selling and promotion costs at National Education Training Group (NETG) and Steck-Vaughn are deferred and fully amortized within the calendar year to properly match the costs with revenues due to the seasonal nature of revenue realization. Due to the seasonal nature of NETG's and Steck-Vaughn's traditional selling cycle, selling and promotion costs are typically deferred in the first half of the year and amortized in the latter half of the year. Certain prior year amounts have been reclassified to conform with the 1995 presentation. NOTE 2 - Business Disposition _____________________________ In June 1994, the Company adopted a plan to dispose of its Education Centers subsidiary. As a result, the Company recorded a second quarter 1994 charge of $40,032,000 to write-down assets to estimated net realizable value and provide for estimated costs of disposing of the operation. No tax benefits were provided on this charge. Based on the current assumptions to dispose of the Education Centers, management believes that the amount reserved is adequate and no further charges are currently anticipated. The Education Centers are being accounted for as discontinued operations and prior period statements of operations have been reclassified to reflect this treatment. Education Centers' negative cash flow of $651,000 for the three months ended September 30, 1995 improved $4,462,000 from the prior year period due primarily to proceeds from the sale of schools and expense reduction at the operation. Of the 29 remaining Education Centers schools as of December 31, 1994, the Company has consummated the sale of 20 schools, and has entered into a binding contract to sell an additional six schools in the next three months. In addition, the Company has entered into agreements with additional parties to teachout the students of or sell other remaining schools. The Company expects to substantially complete the disposal of the Education Centers schools by year end. 9 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 2 - Business Disposition (continued) _________________________________________ Due to the sale/contractual sale of 26 schools, the assets held for sale and accrued disposition costs of the remaining schools are considered immaterial as of September 30, 1995 and, accordingly, the amounts previously classified thereunder were reclassified to other current assets and accrued expenses (regulatory and contractual obligations of the Education Centers) of $6,886,000 and $6,940,000, respectively, as of September 30, 1995. For purposes of presenting the statement of cash flows, prior year periods have been reclassified to reflect the discontinued operations. NOTE 3 - Write-off of Goodwill ______________________________ NETG has experienced significant operating losses over the past several years in an environment of substantial changes in the training of information systems and technology. Due to the many outstanding opportunities in the training marketplace, especially in information technology, the Company remained optimistic over the past periods about future sales and earnings, such that through the first quarter of 1995, management's best estimates of the future results of NETG's operations supported the recoverability of recorded goodwill balances. However, given continuing losses through the second quarter of 1995, management concluded that NETG could not return to profitability in the foreseeable future without significant changes in its operating structure and business direction. As a result, the Company implemented a reorganization and downsizing of NETG's operations in the second quarter. During the second quarter the Company implemented changes in key management positions including the Company's Chief Executive Officer, NETG's President and other NETG senior management positions. In addition, certain product lines have been discontinued and the subsidiary has reorganized its sales and marketing effort to enhance its channels of distribution which, among other things, resulted in the restructuring described in Note 4. As a result of these changes, the Company has revised NETG's financial projections, consistent with management's best estimate of future results of operations. Based upon this estimate of the future results of operations, the estimated net cash flows over the remaining life of NETG's intangible assets (goodwill) are less than the net book value of the goodwill at June 30, 1995. Under the provisions of FASB 121, the Company has estimated the fair value of its investment in NETG by discounting estimated future net cash flows at a rate commensurate with the related risk. Based upon this analysis, management believes NETG to have only a nominal fair value such that, after considering the estimated costs to sell, the goodwill balance of $42,719,000 related to the Company's 1986 acquisition of what is now NETG was written-off during the second quarter. 10 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 3 - Write-off of Goodwill (continued) __________________________________________ Additionally, in connection with the restructuring of NETG during the second quarter, the Company discontinued the operations of Spectrum, a subsidiary of NETG which provided primarily custom developed training to businesses. As a result, the Company recorded the assets and liabilities of Spectrum at their fair value and recorded a write-off of goodwill in the amount of $4,790,000 ($.26 per share) during the second quarter. The acquisition of Spectrum in 1988 was accounted for as a pooling-of-interests. The goodwill was related to an acquisition made by Spectrum prior to 1988. Spectrum's revenue and operating loss before interest and amortization of intangibles for the nine months ended September 30, 1995 and September 30, 1994 and the twelve months ended December 31, 1994 are as follows:
Nine Months Ended Twelve Months Ended September 30, December 31, _________________________ ___________________ (dollars in thousands) 1995 1994 1994 ________________________________________________________ __________ _________ ___________________ Revenues $ 1,600 $ 4,219 $ 5,247 Operating loss before interest and amortization of intangibles $ (1,433) $ (860) $ (1,126)
The write-off of goodwill is included within unusual items in the consolidated statements of operations. As management revised its estimate of the subsidiary's future cash flows as a result of second quarter events, the adoption of FASB 121 had no effect on the consolidated results of operations of any prior periods. NOTE 4 - Restructuring Charges ______________________________ As a result of continued losses at NETG, the Company resolved to significantly lower the overall cost structure while focusing on specific training areas to permit NETG to return to profitability. Accordingly, the Company approved a restructuring plan for NETG in June 1995 which resulted in a nonrecurring charge of $28,652,000 ($.95 per share). No tax benefits were provided on this charge. The charge includes severance related payments, excess facilities costs, the write-down of inventory and fixed assets of certain discontinued products, and other restructuring related items such as charges related to canceled contracts and agreements. The following summarizes these charges, the related write-offs and cash paid in connection with the restructuring. 11 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 4 - Restructuring Charges (continued) __________________________________________
Severance Excess Fixed Assets (dollars in thousands) Payments Facilities and Inventory Other Total _____________________________________________ _________ __________ _____________ _________ _________ 1995 restructuring charges $ 3,435 $ 16,040 $ 4,020 $ 5,157 $ 28,652 Noncash write-off -- -- (4,020) (3,506) (7,526) Cash paid (1,084) (1,108) -- (1,001) (3,193) _________ _________ __________ _________ _________ Accrued restructuring at September 30, 1995 $ 2,351 $ 14,932 $ -- $ 650 $ 17,933 ========= ========= ========== ========= =========
Amounts related to severance covered approximately one hundred employees involved primarily in sales and marketing, distribution and other administrative functions at NETG's domestic and European locations. Amounts related to facilities reflect the cost of leases for excess space arising from the consolidation of space within the subsidiary's U.S. headquarters and the subsidiary's domestic and European sales offices. The noncurrent portion of the restructuring charges relates primarily to leases on unutilized space which will require payments through 2004. Additionally, during the second quarter, an unusual charge was recorded in the amount of $1,644,000 ($.05 per share) at NEC Corporate primarily for severance related payments to the former chief executive officer and corporate expenses related to the restructuring of NETG. The cumulative cash paid in connection with this charge was $593,000. NOTE 5 - Conversion of $20 Million Senior Subordinated Convertible Debentures into Common Stock __________________________________________________________________ Effective September 11, 1995, the holders of $20 million of the Company's senior subordinated convertible debentures, which bore interest at 10 percent, converted such debentures into 5 million shares of the Company's common stock. The debentures had been issued to certain entities affiliated with Richard C. Blum & Associates, L.P. (RCBA), who maintained discretionary investment control over these entities. The Chairman of the Board of RCBA is Richard C. Blum, a director of the Company. 12 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) NOTE 6 - Earnings (Loss) Per Share __________________________________ Earnings (loss) per share are computed based on the weighted average number of common shares outstanding during the respective periods, including dilutive stock options. NOTE 7 - Investment Securities ______________________________ Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), which resulted in a change in the accounting for debt and equity securities held for investment purposes. In accordance with SFAS 115, the Company's debt and equity securities are now considered as either held-to-maturity or available-for-sale. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold to maturity and are carried at amortized cost. Available-for-sale securities represent those securities that do not meet the classification of held-to-maturity and are not actively traded. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of stockholders' equity, net of applicable taxes, until realized. Since the adoption of this standard, the Company recorded increases in available-for-sale securities of $54,000 and a related deferred tax liability of $21,000, resulting in a net increase of $33,000 in stockholders' equity. During the nine months ended September 30, 1995 and 1994, the Company did not realize a material gain or loss from the sale of available-for-sale securities. NOTE 7 - Statements of Cash Flows Supplementary Information ___________________________________________________________
Three Months Ended Nine Months Ended September 30, September 30, _________________________ ________________________ (dollars in thousands) 1995 1994 1995 1994 ________________________________________________________ __________ _________ _________ _________ Cash Paid During the Period For: Interest expense $ 2,121 $ 1,445 $ 6,471 $ 4,574 Income taxes, net of income tax refunds $ 288 $ 677 $ 338 $ 2,487 13 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) 1995 1994 Variance Change ________________________________________________________ _________ _________ _________ ________ Net Revenues: ICS Learning Systems $ 37,946 $ 31,312 $ 6,634 21.2% Steck-Vaughn Publishing 20,372 18,852 1,520 8.1 NETG 12,977 12,419 558 4.5 Other 734 756 (22) (2.9) _________ _________ ________ Total Net Revenues $ 72,029 $ 63,339 $ 8,690 13.7 ========= ========= ======== Operating Income (Loss): ICS Learning Systems before amortization 2,179 2,072 107 5.2 Amortization of prior period deferred marketing -- (4,007) 4,007 n/m _________ _________ ________ ICS Learning Systems 2,179 (1,935) 4,114 n/m Steck-Vaughn Publishing 5,528 5,305 223 4.2 NETG 59 (4,409) 4,468 n/m Other 205 255 (50) (19.6) _________ _________ ________ Total Segment Operating Income (Loss): 7,971 (784) 8,755 n/m General corporate expenses (1,525) (2,023) 498 24.6 Interest expense (2,352) (1,637) (715) (43.7) Investment income 814 599 215 35.9 Other income, net 42 146 (104) (71.2) _________ _________ ________ Income (Loss) Before Tax Benefit, Minority Interest and Discontinued Operations 4,950 (3,699) 8,649 n/m Income tax provision (benefit) 1,930 (140) 2,070 n/m _________ _________ ________ Income (Loss) Before Minority Interest and Discontinued Operations 3,020 (3,559) 6,579 n/m Minority interest 625 589 36 6.1 _________ _________ ________ Net Income (Loss) $ 2,395 $ (4,148) $ 6,543 n/m ========= ========= ========= n/m: Not meaningful.
14 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) Three Months Ended September 30, 1995 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ Net Revenues $ 72,029 $ 37,946 $ 20,372 $ 12,977 $ 734 Costs and Expenses: Contract course materials and service costs 18,739 14,071 34 4,219 415 Publishing costs and materials 4,997 -- 4,997 -- -- Product development 4,525 873 2,069 1,583 -- Selling and promotion 29,877 18,174 6,498 5,115 90 General and administrative 5,706 2,620 1,061 2,001 24 Amortization of acquired intangible assets 214 29 185 -- -- _________ _________ __________ _________ _________ Segment Operating Income (Loss) $ 7,971 $ 2,179 $ 5,528 $ 59 $ 205 ========= ========= ========== ========= =========
(dollars in thousands) Three Months Ended September 30, 1994 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ Net Revenues $ 63,339 $ 31,312 $ 18,852 $ 12,419 $ 756 Costs and Expenses: Contract course materials and service costs 14,863 9,182 29 5,104 548 Publishing costs and materials 4,421 -- 4,421 -- -- Product development 4,938 987 1,835 2,116 -- Selling and promotion 29,187 16,930 6,258 6,133 (134) General and administrative 6,177 2,029 924 3,141 83 Amortization of prior period deferred marketing 4,007 4,007 -- -- -- Amortization of acquired intangible assets 530 112 80 334 4 _________ _________ __________ _________ _________ Segment Operating Income (Loss) $ (784) $ (1,935) $ 5,305 $ (4,409) $ 255 ========= ========= ========== ========= =========
15 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended September 30, 1995 Compared to Three Months Ended September 30, 1994 ____________________________________________________________________ Revenues of $72,029,000 for the three months ended September 30, 1995 were $8,690,000 or 13.7% higher than revenues of $63,339,000 in the prior year. Net income for the period was $2,395,000 or $.08 per share, compared to a net loss of $4,148,000 or $.14 per share in the prior year. ICS Learning Systems:
Three Months Ended September 30, _____________________ Percent (dollars in thousands) 1995 1994 Change ______________________________________________ _________ _________ _________ Revenues: Traditional Distance Education - Domestic $ 23,435 $ 17,636 32.9% Traditional Distance Education - International 10,744 10,311 4.2 Industrial and Business 1,866 1,913 (2.5) MicroMash 1,901 1,452 30.9 _________ _________ Total Revenues $ 37,946 $ 31,312 21.2 ========= ========= Traditional Business: New Enrollments: Domestic 74,211 68,546 8.3 International 29,637 32,655 (9.2) _________ _________ Total New Enrollments 103,848 101,201 2.6 ========= ========= Gross Enrollment Value (GEV): Domestic 59,338 52,801 12.4 International 20,172 18,318 10.1 _________ _________ Total GEV 79,510 71,119 11.8 ========= ========= Advertising and Promotion Spending: Domestic 12,121 10,592 14.4 International 4,577 4,463 2.6 _________ _________ Total Advertising and Promotion Spending 16,698 15,055 10.9 ========= ========= Unearned Future Tuition Revenue at September 30 (a) $ 182,820 $ 164,348 11.2 ========= ========= (a) Approximately 45% of unearned future tuition revenue is realized into revenue.
16 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Revenues at ICS Learning Systems increased during the quarter primarily due to strong performance at the domestic operations while the international operations increased only slightly. Revenues increased primarily due to strong domestic enrollment increases of 22.3% in the first six months of 1995 and enrollment increases of 8.3% during the quarter. The domestic enrollment increase primarily resulted from higher marketing spending, continued success of the expanded telesales efforts which have resulted in higher conversion of leads to enrollments and higher enrollments in the desktop computer related courses which carries a higher tuition price. The revenue increase at the international operation resulted primarily from higher revenues in Canada and Australia. Effective September 15, 1995, domestic ICS discontinued bundling the computer hardware with the desktop computer related training courses. The following details the domestic revenues and estimated revenues related to the specific computer hardware of these courses.
Three Months Ended Nine Months Ended September 30, September 30, _________________________ ________________________ (dollars in thousands) 1995 1994 1995 1994 ______________________________________________________ __________ _________ _________ _________ Domestic: Total computer related course revenues $ 6,991 $ 5,181 $ 19,313 $ 13,121 Computer hardware revenue allocation $ 3,485 $ 2,517 $ 10,120 $ 5,826 Operating income increased due to the amortization of prior period deferred marketing costs in 1994. Barring the effects of the amortization of prior period deferred marketing, operating income increased 5.2% compared to the prior year period. Additionally, operating income margins decreased approximately 1% due primarily to increased course material costs, especially computer costs in the related courses, and higher general and administrative costs resulting primarily from ongoing costs incurred for the conversion to a new information system. 17 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:
Three Months Ended September 30, _____________________ Percent (dollars in thousands) 1995 1994 Change ______________________________________________ _________ _________ _________ Revenues: Elementary/High School $ 14,167 $ 12,222 15.9% Adult Education 3,373 3,891 (13.3) Library 2,832 2,739 3.4 _________ _________ Total Revenues $ 20,372 $ 18,852 8.1 ========= =========
Revenues and operating income at Steck-Vaughn increased during the third quarter as compared to the prior year due primarily to selling price increases, strengthening in the traditional elementary market and from the recently acquired Berrent product line in November 1994. Revenues in the adult education product line decreased as compared to the prior year due to the anticipated fourth quarter release of new products, including GED and Pre-GED products. Revenues increased modestly in the library product line primarily due to revenues generated from the distribution agreement with Abdo & Daughters, a publisher of high interest, low-reading level products in key curriculum content areas. Publishing costs increased during the quarter resulting from higher paper costs and changes in product mix to higher cost product sales. Amortization of acquired intangibles increased during the quarter due to the Berrent acquisition in late 1994. NETG:
Three Months Ended September 30, _____________________ Percent (dollars in thousands) 1995 1994 Change ______________________________________________ _________ _________ _________ Revenues: Domestic without Spectrum $ 6,806 $ 7,805 (12.8)% Spectrum 257 1,198 (78.5) International 5,914 3,416 73.1 _________ _________ Total Revenues $ 12,977 $ 12,419 4.5 ========= =========
18 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) NETG revenues modestly increased while operating income significantly improved during the quarter as compared to the prior year. Domestic revenues, excluding Spectrum, continued to decrease while international revenues significantly increased due to strong performance in the U.K. operation. The significant increase in the U.K. operations results from an experienced management team coupled with effective sales and marketing strategies implemented in 1994. Operating results improved significantly due to increased revenues in the international operations and the reduction in overall expenses resulting from the restructuring implemented in June/July 1995. General corporate expenses decreased during the period primarily due to continued cost control and reduced overall costs. Operating results of ICS and NETG foreign operations by geographic region are discussed above. Foreign currency exchange gains, recorded to other income, were $42,000 compared to gains of $146,000 in the prior year. 19 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) 1995 1994 Variance Change ______________________________________________ _________ _________ _________ ________ Net Revenues ICS Learning Systems $ 107,611 $ 89,089 $ 18,522 20.8% Steck-Vaughn Publishing 46,797 43,493 3,304 7.6 NETG 33,348 36,450 (3,102) (8.5) Other 2,496 2,116 380 18.0 _________ _________ ________ Total Net Revenues $ 190,252 $ 171,148 $ 19,104 11.2 ========= ========= ======== Operating Income (Loss): ICS Learning Systems before amortization 3,231 6,137 (2,906) (47.4) Amortization of prior period deferred marketing (1,470) (17,213) 15,743 91.5 _________ _________ ________ ICS Learning Systems 1,761 (11,076) 12,837 115.9 Steck-Vaughn Publishing 9,079 9,638 (559) (5.8) NETG before unusual items (13,803) (12,975) (828) (6.4) Unusual items (76,161) -- (76,161) n/m _________ _________ ________ NETG (89,964) (12,975) (76,989) n/m Other 638 (316) 954 n/m _________ _________ ________ Total Segment Operating Loss (78,486) (14,729) (63,757) n/m General corporate expenses (5,096) (5,659) 563 9.9 Interest expense (6,732) (4,646) (2,086) (44.9) Investment income 2,030 2,543 (513) (20.2) Unusual items (1,644) -- (1,644) n/m Other income, net 307 453 (146) 32.2 _________ _________ ________ Loss Before Tax Benefit, Minority Interest and Discontinued Operations (89,621) (22,038) (67,583) n/m Tax benefit (2,603) (4,123) 1,520 36.9 _________ _________ ________ Loss Before Minority Interest and Discontinued Operations (87,018) (17,915) (69,103) n/m Minority interest 1,065 1,086 (21) (1.9) Loss From Continuing Operations (88,083) (19,001) (69,082) n/m Discontinued operations -- (49,452) 49,452 n/m _________ _________ ________ Net Loss $ (88,083) $ (68,453) $(19,630) (28.7) ========= ========= ======== n/m: Not meaningful.
20 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) Nine Months Ended September 30, 1995 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ Net Revenues $ 190,252 $ 107,611 $ 46,797 $ 33,348 $ 2,496 Costs and Expenses: Contract course materials and service costs 56,685 39,891 83 15,307 1,404 Publishing costs and materials 12,489 -- 12,489 -- -- Product development 14,450 2,529 6,444 5,477 -- Selling and promotion 85,854 54,307 14,602 16,606 339 General and administrative 20,315 7,562 3,546 9,092 115 Amortization of prior period deferred marketing 1,470 1,470 -- -- -- Amortization of acquired intangible assets 1,314 91 554 669 -- Unusual items 76,161 -- -- 76,161 -- _________ _________ __________ _________ _________ Segment Operating Income (Loss) $ (78,486) $ 1,761 $ 9,079 $ (89,964) $ 638 ========= ========= ========== ========= =========
(dollars in thousands) Nine Months Ended September 30, 1994 _____________________________________________ ______________________________________________________________ ICS Steck- Learning Vaughn Total Systems Publishing NETG Other _________ _________ __________ _________ _________ Net Revenues $ 171,148 $ 89,089 $ 43,493 $ 36,450 $ 2,116 Costs and Expenses: Contract course materials and service costs 43,078 26,399 70 15,010 1,599 Publishing costs and materials 11,357 -- 11,357 -- -- Product development 14,256 2,399 5,470 6,387 -- Selling and promotion 79,625 48,051 13,684 17,538 352 General and administrative 19,013 6,022 3,033 9,487 471 Amortization of prior period deferred marketing 17,213 17,213 -- -- -- Amortization of acquired intangible assets 1,335 81 241 1,003 10 _________ _________ __________ _________ _________ Segment Operating Income (Loss) $ (14,729) $ (11,076) $ 9,638 $ (12,975) $ (316) ========= ========= ========== ========= =========
21 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Nine Months Ended September 30, 1995 Compared to Nine Months Ended September, 1994 _____________________________________________________________________________ Revenues of $190,252,000 for the nine months ended September 30, 1995, were $19,104,000 or 11.2% higher than revenues of $171,148,000 in the prior year. Loss from continuing operations was $88,083,000 or $2.89 per share, compared to a loss of $19,001,000 or $.64 per share in the prior year. Net loss for the period was $88,083,000 or $2.89 per share compared to a loss of $68,453,000 or $2.31 share in the prior year. ICS Learning Systems:
Nine Months Ended September 30, _____________________ Percent (dollars in thousands) 1995 1994 Change ______________________________________________ _________ _________ _________ Revenues: Traditional Distance Education - Domestic $ 64,767 $ 49,878 29.9% Traditional Distance Education - International 32,161 30,274 6.2 Industrial and Business 5,963 5,505 8.3 MicroMash 4,720 3,432 37.5 _________ _________ Total Revenues $ 107,611 $ 89,089 20.8 ========= ========= Traditional Business: New Enrollments: Domestic 226,057 192,664 17.3 International 91,936 96,863 (5.1) _________ _________ Total New Enrollments 317,993 289,527 9.8 ========= ========= Gross Enrollment Value (GEV): Domestic $ 180,102 $ 143,959 25.1 International 58,901 53,497 10.1 _________ _________ Total GEV $ 239,003 $ 197,456 21.0 ========= ========= Advertising and Promotion Spending: Domestic $ 35,589 $ 29,823 19.3 International 14,240 12,894 10.4 _________ _________ Total Advertising and Promotion Spending $ 49,829 $ 42,717 16.6 ========= =========
22 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ICS experienced similar changes in revenues and operating results as occurred for the three month period previously discussed with the following exceptions. Operating income and operating margins decreased (barring the effects of amortization of prior period deferred marketing) $2,906,000 and 4% respectively, due to increased computer hardware costs in the desktop computer related courses. Steck-Vaughn Publishing:
Nine Months Ended September 30, _____________________ Percent (dollars in thousands) 1995 1994 Change ______________________________________________ _________ _________ _________ Revenues: Elementary/High School $ 28,731 $ 25,968 10.6% Adult Education 9,936 10,185 (2.4) Library 8,130 7,340 10.8 _________ _________ Total Revenues $ 46,797 $ 43,493 7.6 ========= =========
Steck-Vaughn experienced similar changes in revenues as occurred for the three month period while operating income and margins decreased due primarily to higher product development expenses and general and administrative expenses resulting from one-time insurance credits from favorable loss experience in 1994. NETG:
Nine Months Ended September 30, _____________________ Percent (dollars in thousands) 1995 1994 Change ______________________________________________ _________ _________ _________ Revenues: Domestic without Spectrum $ 16,041 $ 20,902 (23.3)% Spectrum 1,600 4,219 (62.1) International 15,707 11,329 38.6 _________ _________ Total Revenues $ 33,348 $ 36,450 (8.5) ========= =========
23 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) NETG experienced lower revenues and operating results primarily due to significantly lower domestic revenues partially offset by higher international revenues and the unusual charges taken in the second quarter to restructure the operation and write-off the goodwill. Barring the effects of the unusual charges, operating results modestly decreased due primarily to lower domestic revenues. The effects of the recent restructuring, excluding Spectrum, are anticipated to result in reduced annualized expenses of approximately $14 million, primarily from payroll related, facilities and other operating expenses. See Notes 3 and 4 to the Notes to Consolidated Financial Statements for a further discussion of the restructuring and write-off of goodwill. General corporate expenses experienced similar changes as occurred in the three month period ending September 30, 1995. ICS and NETG foreign operations by geographic region experienced similar changes in revenues and income as discussed above. Foreign currency exchange gains of $307,000 were recorded during the period as compared to gains of $453,000 in the prior year. 24 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources _______________________________ The Company's primary sources of liquidity are cash, investment securities and cash provided from operations. At September 30, 1995, the Company had $24,487,000 in cash and investment securities of which $11,474,000 was held in the account of Steck-Vaughn. As of September 30, 1995, the Company had a revolving bank credit agreement in the amount of $12,000,000 of which $12,000,000 was outstanding. During the nine month period ending September 30, 1995, the Company increased borrowings under the credit facility by $7,000,000 to the current outstanding amount. The Company also has an intercompany credit facility with Steck-Vaughn in the amount of $10,000,000 of which $6,500,000 was outstanding as of September 30, 1995. For the nine months ended September 30, 1995, net cash from operating activities of negative $6,669,000 decreased $3,309,000 from a negative $3,360,000 in the prior year period. The decrease in cash from operating activities is due primarily to increases in other current assets at ICS which represent the unamortized portion of the computers shipped to students and NETG restructuring payments of $3,193,000. For the nine months ended September 30, 1995, net cash for investing activities improved to $1,534,000 from negative $21,333,000 in the prior year period. The $22,867,000 increase was due primarily to 1) higher cash flows of $16,598,000 from the Education Centers resulting from cost control, improved student starts and proceeds from the sale of schools of $5,257,000, 2) acquisition of MicroMash for $3,870,000 in 1994 and 3) changes in net proceeds from securities of $3,259,000. The Company expects that cash, investment securities, bank credit facility, Steck-Vaughn credit facility, which has been extended to March 31, 1996, and cash provided from operations will be sufficient to provide for planned working capital requirements, debt service, capital expenditures and restructuring payments at NETG for the foreseeable future. 25 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) See Exhibit Index following this Form 10-Q. b) No reports on Form 8-K were filed for the period for which this report is filed. 26 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 8, 1995 By /s/ Keith K. Ogata ___________________________ Keith K. Ogata Vice President, Chief Financial Officer and Treasurer 27 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (Item 6(a))
Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 3.1 Restated Certificate of Incorporation of the Company . . . . . . . . . . . . . . . . . . . 3.2 By-Laws of the Company, as amended . . . . . . . . 10.1 National Education Corporation Retirement Plan (Restated as of January 1, 1989 and as Amended through January 1, 1992) . . . . . . . . . . . . . 10.2 National Education Corporation Retirement Plan Trust . . . . . . . . . . . . . . . . . . . . . . 10.3 Advanced Systems, Incorporated 1984 Stock Option and Stock Appreciation Rights Plan . . . . 10.4 1986 Stock Option and Incentive Plan, as amended . . . . . . . . . . . . . . . . . . . . . 10.5 Amended and Restated 1990 Stock Option and Incentive Plan . . . . . . . . . . . . . . . . . . 10.6 Amended and Restated 1991 Directors' Stock Option and Award Plan . . . . . . . . . . . . . . 10.7 Rights Agreement, dated October 29, 1986, between National Education Corporation and Bank of America National Trust and Savings Association, Rights Agent (including exhibits thereto) . . . . . . . . . . . . . . . . . . . . 10.8 Addendum No. 1 to Rights Agreement, dated August 5, 1991 . . . . . . . . . . . . . . . . . 10.9 Indenture, dated as of May 15, 1986, between National Education Corporation and Continental Illinois National Bank and Trust Company of Chicago, as Trustee . . . . . . . . . . . . . . . 28 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.10 Tripartite Agreement, dated as of May 31, 1990, among National Education Corporation, Conti- nental Bank as Resigning Trustee, and IBJ Schroder Bank & Trust Company as Successor Trustee . . . . . . . . . . . . . . . . . . . . . 10.11 National Education Corporation Purchase Agree- ment, Senior Subordinated Convertible Deben- tures, dated as of February 15, 1991 . . . . . . 10.12 National Education Corporation Supplemental Executive Retirement Plan, as amended . . . . . . 10.13 Supplemental Benefit Plan for Non-Employee Directors . . . . . . . . . . . . . . . . . . . . 10.14 Intercompany Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated June 30, 1993 . . . 10.15 Tax Sharing Agreement between National Education Corporation and Its Direct and Indirect Corporate Subsidiaries, dated January 1, 1993 . . . . . . . . . . . . . . . . . 10.16 Asset Purchase Agreement between Steck-Vaughn Company and Creative Edge Inc., dated as of April 26, 1993 . . . . . . . . . . . . . . . . . 10.17 $13,500,000 Amended and Restated Credit Agreement among National Education Corporation, the Banks named therein and Bankers Trust Company as Agent, dated February 28, 1995 (the "Credit Agreement") (Confidential treatment under Rule 24b-2 has been granted for portions of this exhibit) . . . . . . 10.18 First Amendment to Intercompany Agreement, dated June 10, 1994, between National Education Corporation and Steck-Vaughn Publishing Corporation . . . . . . . . . . . . . . . . . . . 10.19 $10,000,000 Credit Agreement between Steck-Vaughn Company and NationsBank of Texas, dated as of June 10, 1994 . . . . . . . . . . . . . . . . . . 29 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Sequentially Exhibit Numbered Number Description Page _______ ___________ ____________ 10.20 Revolving Line of Credit Note and Option Agreement between National Education Corporation and Steck-Vaughn Publishing Corporation, dated February 28, 1995 . . . . . . . . . . . . . . . . 10.21 Executive Employment Agreement between National Education Corporation and Sam Yau . . . . . . . . 10.22 First Amendment and Limited Waiver to Credit Agreement among National Education Corporation, the Banks named therein and Bankers Trust Company as Agent, dated July 31, 1995 . . . . . . . . . . . . . . . 10.23 Debenture Conversion Agreement among National Education Corporation and the Holders identified therein, dated August 31, 1995 . . . . . . . . . 10.24 Amendment of Loan Agreement between Nationsbank of Texas, N.A. and Steck-Vaughn Company, dated September 29, 1995 . . . . . . . . . . . . . . . 11.1 Calculation of Primary Earnings Per Share . . . . 11.2 Calculation of Fully Diluted Earnings Per Share . 27.1 Financial Data Schedule . . . . . . . . . . . . . ________________________________ incorporated by reference from a previously filed document denotes management contract or compensatory plan or arrangement Incorporated by reference to Exhibit 19-2 filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987. Incorporated by reference to Exhibit 10 filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. Incorporated by reference to Exhibit 10.1 filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, filed March 22, 1993. Incorporated by reference to Exhibit 10(b) filed with Registrant's Registration Statement on Form S-8 (No. 2-86904), filed October 3, 1983. 30 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Incorporated by reference to Exhibit 10.15 filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1987, filed March 30, 1988. Incorporated by reference to Exhibit 10.17 filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991. Incorporated by reference to Exhibit A in the Registrant's Proxy Statement furnished in connection with the Annual Meeting of Stockholders held June 27, 1995, filed May 22, 1995. Incorporated by reference to Exhibit B in the Registrant's Proxy Statement furnished in connection with the Annual Meeting of Stockholders held June 27, 1995, filed May 22, 1995. Incorporated by reference to Exhibit 4.1 filed with Registrant's Current Report on Form 8-K, dated October 29, 1986, filed October 30, 1986. Incorporated by reference to Exhibit 10.19 filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to Registrant's Registration Statement on Form S-3 (No. 33-5552), filed May 16, 1986. Incorporated by reference to Exhibit 4 filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. Incorporated by reference to Exhibit 4 filed with Registrant's Current Report on Form 8-K, dated February 20, 1991, filed February 27, 1991. Incorporated by reference to Exhibit 10.17 filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. Incorporated by reference to Exhibit 10.18 filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, filed April 1, 1992. Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1 to Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1, File No. 33-62334, filed June 17, 1993. Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1 to Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1, File No. 33-62334, filed June 17, 1993. Incorporated by reference to Exhibit 10.13 filed with Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1, File No. 33-62334, filed May 7, 1993. 31 NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES Incorporated by reference to Exhibit 10.18 filed with Registrant's Annual Report on Form 10-K for the year ended December 13, 1994, filed March 30, 1995. Incorporated by reference to Exhibit 10.23 filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed on August 11, 1994. Incorporated by reference to Exhibit 10.14 filed with Steck-Vaughn Publishing Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed on August 11, 1994. 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. Incorporated by reference to Exhibit 10.21 filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, filed on May 11, 1995. Filed herewith.
32 EX-10.22 2 FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT EXHIBIT 10.22 FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT This FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT (this "Amendment") is dated as of August 4, 1995 and entered into by and among National Education Corporation, a Delaware corporation (the "Borrower"), the Bank listed on the signature pages hereof (the "Bank"), and Bankers Trust Company, as agent for the Bank (the "Agent") and, for purposes of Sections 3 and 4 hereof, the Subsidiaries of the Borrower listed on the signature pages hereof, and is made with reference to that certain Amended and Restated Credit Agreement dated as of February 28, 1995 by and among the Borrower, the Bank and the Agent (the "Credit Agreement"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Borrower and the Bank have agreed, upon the terms and conditions set forth herein, that certain terms and conditions of the Credit Agreement should be amended; and WHEREAS, each of the Subsidiaries of the Borrower party to the Subsidiary Guaranty ("Subsidiary Guarantors") or the Subordination Agreement ("Subordinated Subsidiaries") desires to acknowledge and consent to this Amendment and to reaffirm the continuing effectiveness of the Subsidiary Guaranty or the Subordination Agreement, as the case may be; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: Section 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 Amendment to Section 1.01: Defined Terms. Section 1.01 of the Credit Agreement is hereby amended by adding thereto the following defined terms in the appropriate alphabetical order: "`1995 Charges' shall mean the charges, in an aggregate amount not exceeding $77,820,000 to be taken by the Borrower against its income in its 1995 fiscal year as the result of the restructuring of the operations of NETG and Borrower (National Education Corporation corporate), which shall result in charges not exceeding $30,300,000, and certain write-offs of goodwill in an amount not exceeding $47,520,000. 1995 Charges shall not, however, include any Second Quarter Charges." 1 "`Second Quarter Charges' shall mean operating charges in an aggregate amount not exceeding $3,100,000 to be taken by the Borrower against its income in the second quarter of its 1995 fiscal year in relation to the operations of NETG and its Subsidiaries." 1.2 Amendments to Section 8.09: Ratio of Liabilities to Net Worth. Section 8.09 of the Credit Agreement is hereby amended by deleting the proviso therefrom in its entirety and substituting the following proviso therefor: "provided that, for purposes of this Section, (a) any addition to the equity capital of the Borrower resulting from the conversion of the Convertible Notes shall be deemed to constitute Indebtedness for the purposes of determining Consolidated Liabilities and Adjusted Consolidated Net Worth, (b) all liabilities that are attributable only to Ed Centers Discontinued Operations shall be disregarded in determining Consolidated Liabilities, (c) all additions to (or deductions from) Adjusted Consolidated Net Worth that would result from any net income (or net loss, other than the Ed Centers Charge) accruing on or after April 1, 1994, that is attributable solely to Ed Centers Discontinued Operations shall be disregarded in determining Adjusted Consolidated Net Worth, and (d) to the extent Adjusted Consolidated Net Worth would be reduced by any amount as the result of the 1995 Charges or any Second Quarter Charges, the amount of such reduction shall be disregarded in determining Adjusted Consolidated Net Worth" 1.3 Amendments to Section 8.10(a): Minimum Consolidated EBITDA. Section 8.10(a) of the Credit Agreement is hereby amended by deleting the proviso therefrom in its entirety and substituting the following proviso therefor: "provided that, for purposes of this Section, (a) all income, interest expense, depreciation expense, tax expense, amortization expense, non-cash gains or losses, minority interests, and income (or losses) accruing on or after April 1, 1994, that are attributable only to Ed Centers Discontinued Operations shall be disregarded in determining Consolidated EBITDA, (b) all 1995 Charges shall be disregarded in determining Consolidated EBITDA, and (c) all Second Quarter Charges shall be disregarded in determining EBITDA for the four quarter period ending as of the last day of the second quarter of the Borrower's 1995 fiscal year" 1.4 Amendments to Section 8.11: Minimum Consolidated Net Worth. Section 8.11 of the Credit Agreement is hereby amended by deleting the proviso therefrom and substituting the following proviso therefor: 2 "provided that, for purposes of this Section, (a) any addition to the equity capital of the Borrower resulting from the conversion of the Convertible Notes shall be deemed to constitute Indebtedness for the purposes of determining Adjusted Consolidated Net Worth, (b) any addition to (or deduction from) Adjusted Consolidated Net Worth that would result from any net income (or net loss, other than the Ed Centers Charge) accruing on or after April 1, 1994, that is attributable only to Ed Centers Discontinued Operations shall be disregarded in determining Adjusted Consolidated Net Worth, and (c) to the extent Adjusted Consolidated Net Worth would be reduced by any amount as the result of the 1995 Charges or Second Quarter Charges, the amount of such reduction shall be disregarded in determining Adjusted Consolidated Net Worth" 1.5 Amendments to Section 8.12: Fixed Charge Coverage Ratio. Section 8.12 of the Credit Agreement is hereby amended by deleting the proviso therefrom and substituting the following proviso therefor: "provided that for the purposes of this Section, (a) all income, interest expense, depreciation expense, tax expense, depreciation expense, amortization expense, non-cash gains or losses, minority interests, and income (or losses) accruing on or after April 1, 1994, that are attributable only to Ed Centers Discontinued Operations shall be disregarded in determining Consolidated EBITDA of the Borrower and its Subsidiaries, (b) all 1995 Charges shall be disregarded in determining Consolidated EBITDA of the Borrower and its Subsidiaries, (c) all Second Quarter Charges shall be disregarded in determining Consolidated EBITDA of the Borrower and its Subsidiaries for the four quarter period ending on the last day of the second quarter of the Borrower's 1995 fiscal year, (d) all lease payments made on or after April 1, 1994, that are attributable only to Ed Centers Discontinued Operations shall be disregarded in determining lease payments of the Borrower and its Subsidiaries, and (e) all Consolidated Fixed Charges accruing on or after April 1, 1994, that are attributable only to Ed Centers Discontinued Operations shall be disregarded in determining Consolidated Fixed Charges of the Borrower and its Subsidiaries" 1.6 Amendments to Schedule II: Material Adverse Changes. Schedule II to the Credit Agreement is hereby amended by adding the following paragraph at the bottom thereof: "The Borrower may take a charges not exceeding $80,920,000 in the aggregate in its 1995 fiscal year in connection with the restructuring of NETG and the Borrower (National Education Corporation corporate), the write-off of certain good will shown on the books of the Borrower and certain operational charges arising from the operations of NETG." 3 Section 2. LIMITED WAIVER OF SECTION 4.01(c) THE CREDIT AGREEMENT Agent and the Bank hereby waive the Borrower's compliance with Section 4.01(c) of the Credit Agreement to the extent and only the extent necessary to permit the Borrower to delay prepaying the Loans with any Cash Proceeds received from Career Education Corp. in partial payment of the purchase price for two schools being sold by the Borrower until the earlier of the date such sale is completed or October 31, 1995. The foregoing waiver shall be limited exactly as written, and, without limiting the generality of the foregoing, such waiver shall not be construed or deemed a waiver of the Borrower's compliance with any other Section of the Credit Agreement or of the Borrower's compliance with Section 4.01(c) with respect to any other Asset Sale. Section 3. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Amendment and to amend the provisions of the Credit Agreement in the manner provided herein, the Borrower, and each Subsidiary party to the Subsidiary Guaranty and/or the Subordination Agreement with respect to itself only, represents and warrants to the Bank that the following statements are true, correct and complete: A. Corporate Power and Authority. The Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "Amended Agreement"). Each such Subsidiary has all requisite corporate power and authority to enter into this Amendment and to be bound hereby. B. Authorization of Agreements. The execution and delivery of this Amendment by the Borrower and each such Subsidiary and the performance of the Amended Agreement by the Borrower have been duly authorized by all necessary corporate action by the Borrower and each such Subsidiary, as the case may be. C. No Conflict. The execution and delivery by the Borrower and each such Subsidiary of this Amendment and the performance by the Borrower of the Amended Agreement do not and will not (i) violate any provision of any law, rule or regulation applicable to the Borrower or any of its Subsidiaries, the Certificate of Incorporation or Bylaws of the Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on the Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, or require the consent of any Person under, any mortgage, deed of trust, credit agreement, loan agreement or any other agreement contract or instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) result in or require the creation or imposition of any Lien upon any of their properties or assets. 4 D. Governmental Consents. The execution and delivery by the Borrower and each such Subsidiary of this Amendment and the performance by the Borrower of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Federal, state or other governmental authority or regulatory body or other Person. E. Binding Obligation. This Amendment and, in the case of the Borrower, the Amended Agreement, are the legally valid and binding obligation(s) of the Borrower and each such Subsidiary, enforceable against the Borrower or such Subsidiary in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. Incorporation of Representations and Warranties From Credit Agreement. The representations and warranties contained in Section 6 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. G. Absence of Default. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment which would constitute an Event of Default or a Default. Section 4. ACKNOWLEDGEMENT AND CONSENT Each of the undersigned Subsidiaries of the Borrower acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. Each of the undersigned Subsidiary Guarantors hereby confirms that the Subsidiary Guaranty will continue to guaranty to the fullest extent possible the payment and performance of all Guarantied Obligations (as defined in the Subsidiary Guaranty), including, without limitation, the payment and performance of all Obligations of the Borrower now or hereafter existing under or in respect of the Amended Agreement. Each of the undersigned Subordinated Subsidiaries hereby confirms that the Subordination Agreement will continue to subordinate the Subordinated Debt (as defined in the Subordination Agreement) to Senior Obligations (as defined in the Subordination Agreement), including, without limitation, all obligations of the Borrower now or hereafter existing to make payments under or in respect of the Amended Agreement. 5 Each Subsidiary Guarantor acknowledges and agrees that the Subsidiary Guaranty shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or affected by the execution or effectiveness of this Amendment. Each Subsidiary Guarantor represents and warrants that all representations and warranties contained in the Subsidiary Guaranty are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. Each Subordinated Subsidiary acknowledges and agrees that the Subordination Agreement shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or affected by the execution or effectiveness of this Amendment. Each Subordinated Subsidiary represents and warrants that all representations and warranties contained in the Subordination Agreement are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true, correct and complete in all material respects as of such earlier date. Each of the undersigned Subsidiaries of the Borrower acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Subsidiary is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of any such Subsidiary to any future amendments to the Credit Agreement. Section 5. MISCELLANEOUS A. Reference to and Effect on the Credit Agreement and the Other Credit Documents. (i) On and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment. (ii) Except as specifically amended or modified by this Amendment, the Credit Agreement and the other Credit Documents shall remain in full force and effect and are hereby ratified and confirmed. 6 (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Agent or any Bank under, the Credit Agreement or any of the other Credit Documents. B. Fees and Expenses. The Borrower acknowledges that all costs, fees and expenses as described in subsection 11.01 of the Credit Agreement incurred by the Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower. C. Execution in Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument. D. Effectiveness. This Amendment shall become effective as of the date hereof upon the execution of a counterpart hereof by the Borrower, each Subsidiary of the Borrower party to the Subsidiary Guaranty or the Subordination Agreement and the Bank and the delivery of such counterparts to the Agent. E. Headings. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. F. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER, SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. [Remainder of Page Intentionally Left Blank] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written by their respective officers thereunto duly authorized. NATIONAL EDUCATION CORPORATION By: __________________________ Title: _______________________ NETG HOLDING, INC. NATIONAL EDUCATION TRAINING GROUP, INC., SPECTRUM INTERACTIVE INCORPORATED NATIONAL EDUCATION CENTERS, INC. ICS LEARNING SYSTEMS, INC. INTERNATIONAL CORRESPONDENCE SCHOOLS, INC., as the Subsidiary Guarantors By: __________________________ Title: _______________________ NATIONAL EDUCATION INTERNATIONAL CORP. NATIONAL EDUCATION CREDIT CORPORATION NATIONAL EDUCATION FOREIGN SALES CORP. NATIONAL EDUCATION PAYROLL CORP. NATIONAL EDUCATION CENTERS, INC. ICS LEARNING SYSTEMS, INC. NETG HOLDING, INC., as the Subordinated Subsidiaries By: __________________________ Title: _______________________ BANKERS TRUST COMPANY, as the Bank and as the Agent By: ___________________________ Title: ________________________ 8 EX-10.23 3 DEBENTURE CONVERSION AGREEMENT EXHIBIT 10.23 NATIONAL EDUCATION CORPORATION DEBENTURE CONVERSION AGREEMENT This Debenture Conversion Agreement (the "Agreement") is made and entered into as of the 31st day of August, 1995, by and among National Education Corporation, a Delaware corporation (the "Company") and each of the holders identified on Schedule A attached hereto and made a part hereof by this reference (collectively the "Holders" and singly a "Holder"). RECITALS A. The Company has previously issued $20 million aggregate principal amount of its Senior Subordinated Convertible Debentures due 2006 (the "Debentures"). B. The Holders are the recordholders of the Debentures, each Holder in the principal amount set forth adjacent to his or its name on Schedule A. C. The rights, preferences, privileges and restrictions pertaining to the Debentures are set forth in the Indenture dated May 15, 1993 (the "Indenture") between the Company and IBJ Schroder Bank & Trust Company (the "Trustee"). D. Pursuant to the Indenture, and particularly ARTICLES TWO and TWELVE thereof, the Debentures are convertible into shares of the Company's Common Stock. Also pursuant to the Indenture, and particularly ARTICLES TWO and ELEVEN, the Company can redeem the Debentures provided certain conditions are satisfied. The principal condition is that the closing price of the Company's Common Stock as reported on the NYSE Composite Tape for any 20 trading days during any 30 consecutive trading day period equals or exceeds $6.00 per share. E. The Company desires to provide for an orderly and efficient conversion of the Debentures into Common Stock. The Conversion Price as of the date of this Agreement is $4.00 per share of Common Stock. Defined terms used in this Agreement (identified by initial capital letters) and not otherwise defined herein shall have the meanings given those terms in the Indenture. 1 AGREEMENT NOW, THEREFORE, for valuable consideration the receipt of which is hereby acknowledged, the parties mutually agree as follows: 1. Conversion. Within five Trading Days following expiration of any period of 30 consecutive Trading Days during which on at least 20 of such Trading Days the reported Closing Price of the Common Stock on the NYSE Composite Tape equaled or exceeded 150% of the then effective Conversion Price, each Holder shall surrender for conversion his Debentures, duly endorsed or assigned to the Company or in blank, at the offices of the Trustee in the City of New York as specified in Section 1002 of the Indenture. Such surrender shall be accompanied by each Holder's irrevocable notice of election to convert and such other items and information as may be required by the Indenture. Promptly upon such surrender, the Debentures shall be converted into Company Common Stock in accordance with the terms and provisions of the Indenture. 2. Payment of Accrued Interest in Stock. Provided the Debentures have been timely surrendered as provided in Section 1 above, within 30 days after the date of conversion the Company shall pay to the Holders interest on the Debentures at the then applicable rate from the Interest Payment Date immediately preceding the date of conversion through the earlier of: (i) the date of conversion; and (ii) the date three months after the Interest Payment Date immediately preceding the date of conversion (the "Accrued Interest"). The Accrued Interest shall be paid in Company Common Stock. Each Holder, as payment for Accrued Interest shall receive that number of shares of Company Common Stock derived by dividing the Accrued Interest by the Current Market Value for a share of Company Common Stock. Current Market Value means the lower of: (i) the per share closing price of the Company Common Stock as reported on the NYSE Composite Tape on the date of conversion; and (ii) the average closing price of the Company's Common Stock as reported on the NYSE Composite Tape for the 20 Trading Days ending on (and including) the date of conversion. The date of conversion shall be the date the Holder surrenders the Debentures to the Trustee duly endorsed for conversion together with the notice of conversion and other items required by the Indenture. 3. General Provisions. (a) Assignment and Binding Effect. The rights of each Holder under this Agreement are personal to each such Holder with respect to the Debentures held of record by each such Holder as shown on Schedule A and may not be assigned without the prior written consent of the Company. The obligations of each Holder under this Agreement are binding on each Holder severally but not jointly, and shall be binding upon their respective successors and permitted assigns. 2 (b) Termination. This Agreement may be terminated by the Company by written notice to the Holders at their addresses as set forth on Schedule A at any time after September 30, 1995 provided such termination shall not be effective with respect to any Holder who has duly surrendered his or its Debentures for conversion in accordance with the terms of this Agreement prior to the Company's notice of termination. Except for the Company's right to terminate as herein specified, this Agreement shall remain in effect until the Maturity of the Debentures. (c) Counterparts. This Agreement may be executed in on or more counterparts, all of which taken together shall be deemed one and the same agreement. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 3 IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. NATIONAL EDUCATION CORPORATION By: _________________________________ Keith K. Ogata Vice President, Chief Financial Officer and Treasurer BK CAPITAL PARTNERS II, L.P. By Richard C. Blum & Associates, L.P., a California limited partnership, its general partner By Richard C. Blum & Associates, Inc., a California corporation, its general partner By: _______________________________ George A. Pavlov Chief Financial Officer and Managing Director BK CAPITAL PARTNERS III, L.P. By Richard C. Blum & Associates, L.P., a California limited partnership, its general partner By Richard C. Blum & Associates, Inc., a California corporation, its general partner By: _______________________________ George A. Pavlov Chief Financial Officer and Managing Director 4 BK NEC II By BK-NEC, L.P., a California limited partnership, its general partner By Richard C. Blum & Associates, L.P., a California limited partnership, its general partner By Richard C. Blum & Associates, Inc., a California corporation, its general partner By:_____________________________ George A. Pavlov Chief Financial Officer and Managing Director __________________________________ FREDERIC V. MALEK THE BONDERMAN FAMILY LIMITED PARTNERSHIP By: ______________________________ James O'Brien Attorney-in-Fact THE COMMON FUND By Richard C. Blum & Associates, L.P., a California limited partnership, its investment adviser By: ________________________________ George A. Pavlov Chief Financial Officer and Managing Director UNITED CONGREGATION MESORAH By Richard C. Blum & Associates, L.P., a California limited partnership, its investment adviser By: ________________________________ George A. Pavlov Chief Financial Officer and Managing Director 5 EX-10.24 4 AMENDMENT OF LOAN AGREEMENT AND REVOLVING PROMISSORY NOTE EXHIBIT 10.24 NATIONAL EDUCATION CORPORATION AMENDMENT OF LOAN AGREEMENT ___________________________ AND REVOLVING PROMISSORY NOTE _____________________________ This Amendment is made by STECK-VAUGHN COMPANY (the "Borrower"), a Delaware corporation, and NATIONSBANK OF TEXAS, N.A. ("Lender"), a national banking association, who agree as follows: 1. Recitals. 1.1 The Borrower previously signed, and delivered to Lender, a certain Revolving Promissory Note (the "Original Note") dated June 10, 1994, and made payable to the order of Lender, in the stated principal amount of $10,000,000.00. 1.2 In connection with the Borrower's signing and delivering the Original Note, the Borrower and Lender signed, and entered into, a certain Loan Agreement (the "Original Loan Agreement") dated June 10, 1994. 1.3 The Original Agreement established a certain revolving line of credit that was to remain in effect for a term of two (2) years; and the purpose of this Amendment is to extend that term for an additional year by amending the Original Note and the Original Loan Agreement. 2. Each of Sections 2.1.2, 2.1.4, 2.2.1, and 2.2.2 of the Original Loan Agreement are hereby amended by changing the term "first anniversary" to the term "second anniversary" and changing the term "second anniversary" to the term "third anniversary" each time those respective terms are used in the Original Loan Agreement. Section 2.1.3 of the Original Loan Agreement is hereby amended by changing the term "Borrower's 1995 fiscal year" therein to "Borrower's 1996 fiscal year." Section 2.2.1 of the Original Loan Agreement is also amended by adding the following sentence at the end of such Section: "If the First Term Loan is made as aforesaid, the Borrower shall date the First Term Note the date of such Loan." Section 2.2.2 of the Original Loan Agreement is also amended by adding the following sentence at the end of such Section: "If the Second Term Loan is made as aforesaid, the Borrower shall date the Second Term Note the date of such Loan." 1 3. Paragraphs 3.2(e) and (f) of the Original Loan Agreement are hereby amended to read as follows: "(e) The Additional Percentage shall be 1.50% unless adjusted in accordance with this Paragraph (e). If, before Borrower's Annual Audited Financial Statements for 1995 are available, Borrower advises Lender that, in Borrower's opinion, Borrower's operating income, as determined by Generally Accepted Accounting Principles, for 1995, will be at least $11,300,000.00, then the Additional Percentage shall be adjusted to 1.40% effective as of the first day of Borrower's 1996 fiscal year; provided, however, that if Borrower's Annual Audited Financial Statements for 1995 show that such operating income was not at least $11,300,000.00, then such adjustment in the Additional Percentage shall be of no effect, so that the Additional Percentage for 1996 shall be 1.50%. If, before Borrower's Annual Audited Financial Statements for 1996 are available, Borrower advises Lender that, in Borrower's opinion, Borrower's operating income, as defined by Generally Accepted Accounting Principles, for 1996 will be at least $14,100,000.00, then the Additional Percentage shall be adjusted to 1.30% effective as of the first day of Borrower's 1997 fiscal year; provided, however, that if Borrower's Annual Audited Financial Statements for 1996 show that such operating income was not at least $14,100,000.00, then such adjustment in the Additional Percentage shall be of no effect, so that the Additional Percentage for 1997 shall be 1.50%. If, before Borrower's Annual Audited Financial Statements for 1997 are available, Borrower advises Lender that, in Borrower's opinion, Borrower's operating income, as defined by Generally Accepted Accounting Principles, for 1997 will be at least $17,600,000.00, then the Additional Percentage shall be adjusted to 1.25% effective as of the first day of Borrower's 1998 fiscal year; provided, however, that if Borrower's Annual Audited Financial Statements for 1997 show that such operating income was not at least $17,600,000.00, then such adjustment in the Additional Percentage shall be of no effect, so that the Additional Percentage on and after the first day of Borrower's 1998 fiscal year shall be 1.50%. Any calculation of accrued interest based on an Additional Percentage that is less than 1.50% shall be provisional unless and until a determination is made from Borrower's Annual Audited Financial Statements that the Additional Percentage was appropriately adjusted to a percentage less than 1.50%, rather than 1.50%." "(f) The "Prime-Based Rate" shall be the Prime Rate, except that any time before January 1, 1998, when the Additional Percentage is less than 1.5%, the Prime-Based Rate shall be the difference produced by subtracting 0.25% from the Prime Rate." 4. Exhibit "B" to the Original Loan Agreement is hereby replaced by, and with, the EXHIBIT "B" FIRST TERM NOTE that is attached to this Amendment. Exhibit "C" to the Original Loan Agreement is hereby replaced by, and with, the EXHIBIT "C" SECOND TERM NOTE that is attached to this Amendment. 5. The Original Note is hereby amended by changing the term "second anniversary" in the second paragraph thereof to the term "third anniversary." 2 6. NOTICE OF FINAL AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Dated: September 29, 1995. BORROWER: LENDER: STECK-VAUGHN COMPANY NATIONSBANK OF TEXAS, N.A. (a Delaware corporation) By: /s/ Floyd D. Rogers By: /s/ Sylvia H. Maggio ___________________ ____________________ Print Name: Floyd D. Rogers Print Name: Sylvia H. Maggio Title: Vice President Finance Title: Vice President CONSENT OF GUARANTOR ____________________ For the benefit of "Lender," as defined in the above Amendment (the "Amendment"), STECK-VAUGHN PUBLISHING CORPORATION ("Guarantor"), a Delaware corporation, hereby consents to the Amendment and agrees that (i) the term "Loan Agreement," as used in the Guaranty Agreement dated June 10, 1994, and signed by Guarantor for the benefit of such Lender, shall now mean the "Original Loan Agreement," as defined in the Amendment, as amended by the Amendment, and (ii) such Guaranty Agreement, as modified by this consent, continues, and shall continue, in full force and effect. Dated: September 29, 1995. GUARANTOR: STECK-VAUGHN PUBLISHING CORPORATION (a Delaware corporation) By: /s/ Floyd D. Rogers ___________________ Print Name: Floyd D. Rogers Title: Vice President Finance 3 EX-11.1 5 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, ______________________ _______________________ 1995 1994 1995 1994 __________ _________ _________ _________ INCOME (LOSS) FROM CONTINUING OPERATIONS $ 2,395 $ (4,148) $(88,083) $(19,001) ========= ======== ======== ======== NET INCOME (LOSS) $ 2,395 $ (4,148) $(88,083) $(68,453) ========= ======== ======== ======== COMMON STOCK: Shares outstanding from beginning of period 29,578 29,516 29,578 29,405 Pro rata shares: Stock options exercised 429 59 253 119 Shares purchased for treasury, from date of purchase -- (8) -- (7) Assumed exercise of stock options, using treasury stock method 732 91 320 126 Conversion of senior subordinated debentures 1,037 -- 349 -- _________ ________ ________ ________ Weighted average number of shares outstanding 31,776 29,658 30,500 29,643 ========= ======== ======== ======== EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $ .08 $ (.14) $ (2.89) $ (.64) ========= ======== ======== ======== LOSS PER SHARE $ .08 $ (.14) $ (2.89) $ (2.31) ========= ======== ======== ========
EX-11.2 6 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, ______________________ _______________________ 1995 1994 1995 1994 __________ _________ _________ _________ NET INCOME (LOSS) $ 2,395 $ (4,148) $(88,083) $(68,453) Add back senior debenture interest 237 270 837 752 Add back junior debenture interest 570 570 1,709 1,709 _________ ________ ________ ________ NET LOSS FOR FULLY DILUTED COMPUTATION $ 3,202 $ (3,308) $(85,537) $(65,992) ========= ======== ======== ======== COMMON STOCK: Shares outstanding from beginning of period 29,578 29,516 29,578 29,405 Stock options exercised 429 59 253 119 Shares purchased for treasury, from date of purchase -- (8) -- (7) Assumed exercise of stock options, using treasury stock method 939 91 729 126 Assumed conversion of senior subordinated debentures, from the latter of the beginning of the period or the date of issue 5,021 5,000 5,021 5,000 Assumed conversion of junior subordinated debentures, from the latter of the beginning of the period or the date of issue 2,300 2,300 2,300 2,300 _________ ________ ________ ________ Weighted average number of shares outstanding $ 38,267 36,958 37,881 36,943 ========= ======== ======== ======== FULLY DILUTED EARNINGS (LOSS) PER SHARE $ .08 $ .(.14) $ (2.89) $ (2.31) ========= ======== ======== ========
EX-27 7 ARTICLE 5 FIN. DATA SCHEDULE FOR 3RD QTR 10-Q
5 This schedule contains summary financial information extracted from the Company's unaudited consolidated financial statements included in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, and is qualified in its entirety by reference to such unaudited consolidated financial statements. 1,000 9-MOS DEC-31-1994 JAN-01-1995 SEP-30-1995 22,641 1,846 34,947 3,583 26,417 115,012 54,868 31,814 178,955 79,981 64,845 2,193 0 0 2,505 178,955 190,252 190,252 69,175 275,478 4,395 2,148 6,732 (89,621) (2,603) (88,083) 0 0 0 (88,083) (2.89) (2.89)
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