NEC Reports $1.5-Million Quarterly Loss Amid Troubles at Applied Learning Unit

National Education Corp., which has suffered a yearlong string of setbacks, including the loss of several key executives, displayed the results Monday as it reported a $1.5-million loss for the second quarter.

The numbers were far worse than investors had expected and signaled that National Education has significant troubles at its largest subsidiary, Applied Learning International.

National Education, the nation’s largest provider of educational training services, earned $7.6 million in the second quarter of 1988.

Revenue in the quarter ending June 30 dropped 8% to $96.6 million from $105 million.


In its 1988 annual report, National Education said it believed that it was positioned for an excellent 1989, after record earnings of $46.1 million and what it termed a “successful” merger of several companies into Applied Learning.

But so far 1989 has been anything but a stellar year.

Douglas Arthur, an analyst at Kidder, Peabody & Co., said last week that if the company didn’t report a profit for the second quarter, it could indicate that there are substantial problems at National Education that might not be solved quickly.

Many of those problems seem to be rooted at Applied Learning, where National Education has had difficulties turning several recently acquired companies into a working unit.


Purchasing the new companies was intended to give National Education dominance in the corporate training industry. Instead, it has given National Education a serious test of its abilities.

The company, for years a successful and fast-growing operator of vocational schools and home-study programs, has expanded out of its area of expertise in traditional consumer markets and into far-different and highly specific markets for corporate training.

Some current and former National Education officials said the troubles of the past year have caused dissension throughout the firm, morale problems and an increasing wave of criticism about the management of Chairman H. David Bright.

Leonard W. Jaffe, who heads the executive committee of National Education’s board of directors, said the last several months have been the most unsettled for the company since he joined the board in 1975.


“It’s probably been the most trying period for us,” said Jaffe, a management consultant and private investor.

The first of the setbacks occurred in September, when William Roach, president of National Education’s Applied Learning subsidiary, unexpectedly announced his resignation following what observers said was a bitter clash with Bright, who declined to be interviewed for this story.

Since then, the integration of three acquisitions into Applied Learning has suffered from data-processing foul-ups, a poorly structured sales staff and the resignations of key employees, company officials have said.

Verbal Commitment


Company officials said that many of Applied Learning’s problems--it is responsible for most of the loss reported for National Education’s second quarter--could have been avoided if Roach had been persuaded to stay until a successor could be found. Roach had been chief executive of Advanced Systems, a consulting services firm acquired by National Education in 1987.

One National Education official who asked not to be identified said the merger with Spectrum International was made with a verbal commitment from National Education that every effort would be made to keep Roach.

When Roach left, Jaffe said, the company tried “desperately” to find a successor by the first of this year, but two people turned down offers before Kenneth Riedlinger, a former General Motors executive, was hired in May. In the interim, Bright, who has been chief executive of National Education since 1981, took over the management of Applied Learning.

Critics said the added responsibility forced Bright to turn his attention away from National Education and toward a subsidiary that he had no experience in running. Jaffe said National Education has been successful in the past because its parent company serves as a support group for subsidiaries that are run by very strong presidents.


“David didn’t want to be running Applied Learning,” Jaffe said.

Bright’s time was stretched even thinner in March, when National Education President Jerome W. Cwiertnia resigned, saying he wanted to be with a firm where he could be chief executive officer.

Cwiertnia, who was considered to have been particularly helpful to National Education as a lobbyist on Wall Street and in Congress, has been persuaded to remain with the company as a consultant. One corporate insider said National Education is searching for a new president.

Even in National Education’s area of expertise, its vocational schools, the company has been troubled throughout this year. Enrollments have been flat for most of the year, and the company has had to increase its marketing budget to attract students.


National Education’s vocational schools suffered a blow in June when the government reported that default rates on student loans were exceptionally high at some of the firm’s campuses. Several of the schools could face punitive actions--including the loss of government-insured student loan programs--if their default rates aren’t improved.

In June, the company’s overall problems prompted Standard & Poor’s Corp. to announce that it is considering a downgrade of the rating on National Education’s debt.

In the wake of Monday’s reported loss, industry analysts said a downgrade now is likely.

The company’s overall performance has led to an erosion of National Education’s market value, from nearly $100 million a year ago to about $55 million at the close of trading Monday.


Analysts expect the second-quarter loss to translate into a sizable drop in stock prices when trading opens Tuesday.

National Education stock reached a high of $29 per share last year before starting its decline. Monday it closed at $16.75 per share, up 37.5 cents per share in New York Stock Exchange trading. But the second-quarter loss was disclosed after the stock market closed.

The yearlong decline in the stock’s price has angered investors.

In June, a shareholder filed suit against the company charging Bright and other managers of attempting to manipulate the price of the company’s stock by issuing false reports about earnings prospects.


‘Communication Problems’

“It is unfortunate that management has had communication problems with its shareholders. It’s unfortunate that all shareholders were hurt and not just the ones in the class action,” said Debbie Laudermilk, a portfolio manager for the Texas Teacher Retirement Fund, which owns nearly 50,000 shares of National Education stock out of 31.9 million shares outstanding.

Speaking about the allegations in the suit, Laudermilk said it is unclear whether current management didn’t understand the extent of its problems or if management did not release as much information as it should have.

She and other analysts said they remain optimistic about the company’s long-term prospects, saying the firm owns valuable businesses, including its vocational education schools and study-at-home programs.


But some analysts say they have yet to be convinced that National Education will be successful in the corporate training business of its Applied Learning subsidiary.

Success in the corporate training field requires development of highly specialized products, rather than the standardized courses offered by most vocational schools. Also, corporate programs are marketed to select company executives who determine the training for employees at all levels within the company. In contrast, vocational schools and home-study programs are marketed to a huge pool of individuals looking to develop basic skills, often for the purpose of getting a better job.

Applied Learning President Riedlinger is praised by Jaffe and others in the company for working to fix the subsidiary’s problems. One National Education official said several highly paid consultants have been hired to identify and help resolve the troubles. Meanwhile, Bright continues to make almost weekly trips to Applied Learning’s headquarters in Chicago.

Industry analysts said it is still too early to determine the extent of Applied Learning’s woes, maintaining that even company officials don’t know the severity of the problems.


Meanwhile, National Education’s setbacks may be hurting the company’s attempts to revive its flagging finances.

In a prepared statement Monday, Bright said Applied Learning’s revenue was lower than anticipated in early June in particular because several potentially major contracts weren’t signed. He did not say whether the pacts were canceled or merely delayed.

In addition, National Education reportedly has been attempting for several weeks to acquire a $50-million home-study business from McGraw-Hill, but reduced income, the depressed stock price and the uncertain future of National Education’s credit rating all raise questions about its ability to finance the deal, industry analysts said.