<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [No Fee Required]
Commission File Number 1-1003
NOBEL EDUCATION DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2465204
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
ROSE TREE CORPORATE CENTER II
1400 N. PROVIDENCE ROAD, SUITE 3055
MEDIA, PA 19063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 891-8200
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE
$.001 PER SHARE
(Title of each class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of March 13, 1997, 5,831,955 shares of common stock were outstanding.
The aggregate market value of the shares of common stock owned by non-affiliates
of the Registrant as of March 13, 1997 was approximately $56,964,700 (based upon
the closing sale price of these shares as reported by NASDAQ). Calculation of
the number of shares held by non-affiliates is based on the assumption that the
affiliates of the Company include only directors, executive officers and
stockholders filing Schedules 13D or 13G with the Company. The information
provided shall in no way be construed as an admission that any person whose
holdings are excluded from the figure is an affiliate or that any person whose
holdings are included is not an affiliate and any such admission is hereby
disclaimed. The information provided is included solely for record keeping
purposes of the Securities and Exchange Commission.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
TABLE OF CONTENTS
Item
No. Page
PART I
1. Business......................................................... 1
2. Properties....................................................... 9
3. Legal Proceedings................................................ 10
4. Submission of Matters to a Vote of Security Holders.............. 10
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters.................................. 11
6. Selected Financial Data.......................................... 12
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations................. 13
8. Financial Statements and Supplementary Data...................... 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 22
PART III
10. Directors and Executive Officers of the Registrant............... 23
11. Executive Compensation........................................... 26
12. Security Ownership of Certain Owners and Management.............. 30
13. Certain Relationships and Related Transactions................... 33
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 34
i
<PAGE>
PART I
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company's 1997 outlook and all other statements in this report other than
historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company
believes that its assumptions are reasonable, it cautions that there are
inherent difficulties in predicting the impact of certain factors, especially
those affecting the acceptance of the Company's newly developed and converted
schools and performance of recently acquired businesses, which could cause
actual results to differ materially from predicted results.
ITEM 1. BUSINESS.
GENERAL
Nobel Education Dynamics, Inc.'s business mission is to be the leader in the
United States in providing affordable private education from preschool through
eighth grade for the children of middle-income working families. The Company
has been identified as a market leader "Education Management Organization" (EMO)
for preschool through eighth grade. (EMO is a term used in the investment
community to describe companies which manage education businesses for profit in
multiple sites, similar to the "HMO" label used in the healthcare industry.)
The Company's operations include preschools, child care centers, elementary
schools and middle schools (through eighth grade) throughout the United States.
To attain its objectives, Nobel builds on its experience and expertise both in
education and preschool/child care. As an "education company", the Company's
strategy is to offer practical solutions to a segment of the education problem
in the United States.
Nobel operates nationwide, with 118 preschools, schools and centers in 14
states at March 31, 1997. In California, Nobel operates the Merryhill Country
Schools, which is a private school system of 32 preschools, elementary schools
and middle schools, as well as a recently acquired private school in Orange
County, California. Nationwide, Nobel operates preschools, schools and centers
under various names, including Chesterbrook Academy, in Pennsylvania, New
Jersey, Virginia, Florida, Maryland, North Carolina, South Carolina, Illinois,
Washington, Indiana, Delaware, Maine and Louisiana. Nobel also owns a 20%
interest in an elementary school in Florida.
Management is currently pursuing a three-pronged strategy to take advantage of
the significant growth opportunities in the private education market:
. internal growth at existing schools, including expansions of campus
facilities
. new school development in both existing and new markets
. strategic acquisitions
To facilitate this strategy, Nobel is applying the strengths of its
curriculum-based programs to distinguish itself from its competition. The
strategy also entails geographical clustering of Nobel's
1
<PAGE>
preschools to (i) increase market awareness, (ii) provide a lower risk method
for expansion into elementary and middle schools by providing a feeder
population and (iii) gain operating efficiencies in both management and costs.
In response to market demands for quality schools and preschools, since
September 1995, the Company has converted 23 of its child care centers to a
curriculum-based program, under the "Chesterbrook Academy" name. Conversions
include the adoption of the highly regarded and accredited education curriculums
of Nobel's Merryhill schools and an upgrading of the educationally oriented
teaching materials and computer technology. Following conversion, a
Chesterbrook Academy school typically offers grade levels through kindergarten
or first grade; one or more grades are then planned to be added in subsequent
years, space permitting, through eighth grade. The Company intends to convert
its remaining child care centers to curriculum-based preschools/schools over the
next several years.
Nobel targets its schools and preschools to meet the needs of middle-income
working parents. Most of Nobel's schools, preschools and child care centers are
open from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up. In
most locations, programs are available for children starting at six weeks of
age. For basically the same price as standard child care, parents can leave
children of various ages at one Nobel school knowing they will receive a quality
education during the greater part of the day and be engaged in well-supervised
activities the remainder.
To complement its programs, the Company also operates (i) before and after
school programs and (ii) summer camps (both sports and educational) at its
various school facilities. Nobel also seeks to add other services and products
which will add ancillary income and improve overall operating margins.
The Company's financial strength has improved dramatically since 1992, when
there was a change in management. Strategies of new management have included a
change of the Company's focus to education from child care, strengthening of the
Company's financial condition, divestiture of centers in mature markets and,
after the Company's financial stabilization, expansion into growth areas. With
the implementation of these new strategies, the equity of the Company has
increased from a negative net worth of $3.8 million on December 31, 1991 to
positive net worth of $32.3 million as of December 31, 1996. Net income before
taxes for years 1992, 1993, 1994, 1995 and 1996 were the highest in the
Company's history, with 1996's being the highest at $4.02 million.
Additionally, the Company's EBITDA (earnings before interest, taxes,
depreciation and amortization), a measure of the Company's cash generating
ability, reached a historical high in 1996 at $8.2 million.
The Company's corporate office is located at Rose Tree Corporate Center II,
1400 North Providence Road, Suite 3055, Media, PA 19063. Its telephone number
is (610) 891-8200; its world wide web address is http://www/nobeleducation.com
or http://www/educating.com.
EDUCATIONAL PHILOSOPHY AND IMPLEMENTATION
The educational philosophy of Merryhill and Chesterbrook Academy is based on a
sound research foundation, innovative instructional techniques and quality
practice, and proprietary curricula developed by experienced educational
personnel. Nobel's programs stress the development of the whole child and are
based on concepts of integrated and age-appropriate learning. The curricula
2
<PAGE>
recognize that each child develops according to his or her own abilities and
timetable, but also seek to prepare every student for achievement in accordance
with national content standards and goals. Every child's educational needs are
considered upon entrance into a Nobel school, and progress is regularly
monitored in terms of both the curriculum's objectives and the learner's
cognitive, social, emotional, and physical skill development. The result is the
opportunity for every Nobel student to develop a strong foundation in academic
learning, positive self-esteem, and emotional and physical well-being.
During 1996, the Company adapted the Merryhill curriculum for implementation
in its Chesterbrook Academy schools through the conversion of fourteen child-
care centers on the East Coast and in the mid-West. Staff training sessions
were conducted to prepare teachers to present the curriculum-based program in
the pre-school as well as at elementary grade levels. Instructional techniques
and assessment practices were also instituted and particular content materials
were adopted in the various subject areas.
Under the direction of Nobel's Vice President - Education, the Company
circulates regular "curriculum updates," a publication to assist staff in
planning their daily and weekly programs with current and effective
instructional practices and materials. The Company has also established multi-
media products for a "Learning Lending Library" collection. The Library, which
is managed out of the Company's corporate office, is available to all Nobel
schools for student and teacher development and parent interest. Many of these
resources support the Company's curriculum.
In 1996, the Company launched its National Education Advisory Board. Under
the direction of the Vice President - Education, the Board includes five
nationally-known educators each of whom will advise Nobel on his or her
particular area of expertise: Dr. Zalman Usiskin of the University of Chicago
(Mathematics); Dr. Cathy Collins Block of Texas Christian University (Reading
and Language Arts); Dr. John N. Mangieri of the Institute for Effective
Management (Educational Administration); Dr. Arthur L. Costa of the University
of California at Sacramento (Curriculum and Teacher Development); and Dr. Drew
H. Gitomer of Educational Testing Service (Testing and Evaluation). The Board
will help oversee curriculum development in the Company's schools, advise on the
most renowned teaching methods, and assist in finding the best instructional
materials and practices to help students learn effectively and efficiently.
Board members will also be available to work on special projects and services
that enhance the Company's school programs.
The Company maintains that small class sizes are a basic ingredient of quality
education. Nobel's educational philosophy is based on personalized instruction
that leads to a student's active involvement in learning and understanding. The
program for the Company's schools is a strong skills-based, comprehensive
curriculum that is implemented in ways that attract the learner's curiosity,
enhance students' various learning styles, and employ processes that contribute
to lifelong achievement. Academic areas addressed include reading readiness and
reading, spelling, writing, handwriting, mathematics, science, social studies,
visual and graphic arts, music, physical education and health, and foreign
language. Computer literacy and study skills are interrelated into the program,
as appropriate, in all content areas. The schools employ state-of-the-art
technologies, such as interactive CD-ROMs coordinated with classroom content,
and networking capacity. Merryhill
3
<PAGE>
and Chesterbrook introduce a second language between the ages of two and three,
and continue that instruction into the pre-K, kindergarten, and school age
programs.
The Company offers sports activities and supplemental programs, which include
day field trips coordinated with the curriculum to such places as zoos,
libraries, museums and theaters, and, at the middle school, overnight trips to
such places as Yosemite, California and Washington, D.C. Schools also arrange
classroom presentations by parents and other volunteers, as well as organize
youngsters as presenters to community groups and organizations. To enhance
better the child's physical, social, emotional and intellectual growth, schools
are encouraged to provide fee-based experiences specifically tailored to
particular families' interest in such ancillary activities as dance, gymnastics,
and music lessons.
The Company's programs are implemented by experienced principals and directors
and their faculties. They foster open communication, teamwork and the attention
to detail required to provide a superior service. School directors work closely
with regional and corporate management, particularly in the regular assessment
of program quality. In 1996, the groundwork was laid for a Company-wide Quality
Assurance Program and, early in 1997, a Director of Quality Assurance was
appointed to assess systematically each Nobel school and to provide a procedure
for internal accreditation. Nobel's Quality Assurance Program will set
standards consistent with the external, national accreditation systems in which
the Company participates with such organizations as the National Association for
the Education of Young Children (NAEYC), the National Independent Private School
Association (NIPSA), and the Commission for International and Trans-Regional
Accreditation (CITA). The Program also provides a formal means to recognize and
reward Company educators for their outstanding performance and achievement.
Similarly, the Program also furnishes guidance for the continued training and
staff development of teaching personnel, using both internal trainers and
external consultants.
As of March 15, 1997, the aggregate licensed capacity at the Company's 118
schools and centers exceeded 16,500 children.
OPERATIONS / SCHOOL SYSTEMS
In order to maintain uniform standards, each school and center shares
consistent educational goals and operating procedures. To respond to local
demands, principals are encouraged to tailor curriculums, within Nobel's
standards, to regional needs. Management visits all schools and centers on a
regular basis to review program and facility quality.
Each school and center is staffed with a principal or director, teachers and
teaching assistants. Principals and directors are supervised by district,
regional or area managers. The principal or director is critical to the success
of the school and is provided with ongoing training. Principals and directors
have responsibility for: (i) maintaining the quality of educational services
delivered at their schools, (ii) recommending pricing strategy based upon school
location and local area demographics, (iii) personnel management, (iv) sales and
marketing strategy for their locations and (v) fiscal management.
Principals and directors submit financial reports to the Company's corporate
office and to appropriate district and regional managers each week. These
reports include data on current
4
<PAGE>
enrollment, labor costs and cash receipts. Corporate office personnel then
review each report and prepare weekly combined reports by district, region and
for the Company in total. Weekly or monthly tuition rates and utilization rates
are continually monitored. Each school and center is measured on a monthly basis
versus its individual business plan. Nobel is in the process of evaluating
several state-of-the-art computer systems which would assist the principals in
operating schools and provide management with enhanced operational information.
The Company generally hires experienced individuals and attempts to promote
from within. Employment applicants are thoroughly reviewed with background
checks made to verify accurate employment history and establish background,
reputation and character. After hiring, the faculty is reviewed and evaluated
annually both through formal evaluation and market surveys. All principals and
directors are eligible for incentive compensation based on the profitability of
their schools.
MARKETING AND CUSTOMERS
The Company's management believes that Nobel has a unique position in the
marketplace and has implemented a marketing strategy to capitalize on this
niche. Nobel strives to differentiate itself from the child care providers. In
contrast with mere custodial child care, Nobel's programs stress educational
development through proven curriculum programs, beginning at the preschool level
and continuing through upper grades.
The Company generates the majority of new enrollments from its reputation in
the community and word-of-mouth recommendations of parents. Further, the
Company is geographically clustering its preschools to increase local market
awareness and to provide a feeder population for Nobel elementary and middle
schools. The Company also markets its services through display ads, listings in
local print and radio media and through distribution of promotional materials in
residential areas. Marketing campaigns are conducted in the winter, spring and
fall, primarily at the local level by the Company's directors and principals.
In addition, the various regional offices conduct marketing programs, such as
mass mailings and media advertising.
NEW CENTER AND SCHOOL DEVELOPMENT; ACQUISITIONS
Management expects a significant portion of Nobel's growth for the next few
years to be through the opening of new schools and preschools and strategic
acquisitions of existing schools and preschools.
New school development offers an attractive growth opportunity for Nobel to
expand into both new and existing markets. Proposed development sites are
presented to the Company through a network of developers across the United
States. After site selection, the Company engages a developer or contractor to
build a facility to the Company's specifications. Nobel currently works with
several developers who purchase the land, build the facility and enter into a
long-term lease with Nobel for the premises.
Alternatively, Nobel purchases land itself, constructs the building with its
own or borrowed funds and then seeks to enter into a sale and lease back
transaction with an investor. In December 1996, the Company entered into a
Multi-Site Sale Leaseback Agreement with AEI Fund Management, Inc. ("AEI").
Under that agreement, AEI agreed to purchase from Nobel in sale/leaseback
transactions
5
<PAGE>
up to $15,000,000 worth of parcels through the end of 1999 (subject in each case
to AEI's standard credit, site and other due diligence review). The agreement
also provides that AEI will provide Nobel with land acquisition and construction
loan financing for each project.
In 1996 and first quarter 1997, Nobel opened nine new schools and preschools.
The Company plans to open approximately 12 to 15 new schools in 1997 and 15 to
20 new schools in 1998. The Company's development plans are dependent on the
continued availability of such developer and financing arrangements.
Typically, new schools are single-story stand alone structures located near
residential neighborhoods on sites of acreage appropriate to the nature of the
school. The Company carefully evaluates all proposed development sites and
makes a selection based on a variety of criteria, including: the number and age
of children living in proximity to the site; family income data; incidence of
two-wage earner and single parent families; traffic patterns; wage and fixed
cost structure; competition; price elasticity; family education data; local
licensing requirements; and real estate costs. The Company historically has had
significant success in the new centers it has opened.
The Company plans to continue to expand the number of grade levels offered by
its existing schools. Upon conversion to the Chesterbrook Academy format,
current preschools and child care centers initially offer grade levels through
kindergarten or first grade, with further expansion planned. The Company also is
expanding the grades offered by its other schools. In some locations, this
expansion requires the construction of additions to current facilities or
development of a replacement facility.
Acquisition activity in 1996 and the first quarter of 1997 consisted of the
following:
. In February 1996, the acquisition of five preschools in northern and
central Virginia.
. In November 1996, the acquisition of two preschools in North Carolina.
. In December 1996, the acquisition of the Oak Ridge School, an elementary
school in Coto de Caza (Orange County), California.
. In December 1996, the acquisition of the Evergreen Academy elementary
school and preschool in the Seattle, Washington area.
. In January 1997, the acquisition of six preschools in Florida.
. In March 1997, the Company signed an agreement to acquire the two
elementary and one preschool of Rainbow Bridge, Inc. located in San
Jose, California. The acquisition is expected to close April 1, 1997.
At the closing of the Florida acquisition in January 1997, Nobel also
purchased a 20% interest in a new elementary school in Florida. Also, Nobel
entered into a joint venture agreement with the sellers to build five additional
elementary schools in Florida in which Nobel will have an 80% interest.
Together with current and planned developmental activity, these acquisitions
strengthen Nobel's presence in Virginia and North Carolina, and establish
entries into the Florida, Southern California and the Pacific Northwest markets.
6
<PAGE>
INDUSTRY AND COMPETITION
Annual spending in education is estimated to exceed $630 billion annually in
the United States or approximately 10% of gross domestic product. Estimates of
spending in education for preprimary grades (preschools and child care) are $30
billion while estimates of spending for kindergarten through eighth grade
("K 8") are $200 billion. Spending is projected to continue to grow through a
combination of increasing per pupil expenditures and increasing school
enrollments.
It is estimated there are 90,000 schools in the $30 billion preschool/child
care segment with $25 billion spent in the private sector, of which $10 billion
is spent in the for-profit segment. Likewise, it is estimated there are 85,000
schools in the $200 billion K-8 segment with an estimated $15 billion spent in
the private sector, of which $650 million is spent in the for-profit segment.
The public school market is estimated to be 110,000 schools in total, of which
76,000 are elementary, 23,000 are secondary and 11,000 are combined schools.
The private school market is estimated to be 26,000 schools, of which 15,500 are
elementary, 2,500 are secondary and 8,800 are combined. Of the 26,000 schools
in the private school market, an estimated 20,500 are religiously affiliated and
5,500 are secular. Of the 5,500 secular schools, less than 1,000 are for-profit
schools.
Between 1985 and 1995, it is estimated that the public school K-8 grade
enrollment increased 19.8% from 27.03 million students to 32.38 million students
while the private school K-8 grade enrollments increased 5.6% from 4.19 million
students to 4.43 million students over the same time period. The U.S.
Department of Education projects public school and private school K-8 enrollment
growth between 1996 and 2006 to slow to 2%, a 700,000 enrollment increase in
public schools and a 100,000 enrollment increase in private schools,
respectively. While this increase may not seem large, there is significant
concern that the nation's already overcrowded schools are ill-prepared to handle
it. It is estimated that in excess of 4,000 new K-8 schools must be built to
relieve current overcrowding and handle the growth. Also, this growth will vary
significantly in different regions of the United States. States such as
California, Florida, Washington, Oregon and Arizona are projected to high growth
in the 10% range. These are targeted states in the Company's expansion plans.
During the 1996 elections, education was the politically "hot issue" in
national and state contests. The broad public debate has shifted from whether
our existing K-12 system has failed in terms of performance to which reform
movements promise the best and quickest improvements.
Taxpayers have experienced high costs in education expenditures without
positive results. According to a 1995 Gallup poll, 71% of Americans give the
nation's schools a grade of C, D or F generally and 54% give their own schools a
low grade as well. Quality is low; yet, the average annual cost of educating a
Kindergarten through 12/th/ grade student in the United States has risen to over
$6,000 in 1995. Dismal student achievement, a growing minority gap in school
completion rates and student misbehavior causing unsafe school environments are
three commonly mentioned quality measurements that are lacking. Also, corporate
America has become increasingly frustrated by insufficiently equipped students
produced by the nation's public school systems.
Education reform movements in the United States are posing alternatives to the
public schools. These include charter schools, private management of public
schools, vouchers, home schooling and private schools. The Company's strategy
is to provide parents a quality alternative through Nobel's privately owned and
operated schools utilizing a proven curriculum in a safe and challenging
environment.
7
<PAGE>
For school age children, the Company competes with other for-profit private
schools, with non-profit schools and, in a sense, with public school systems.
The Company is not aware of any for-profit competitor which currently competes
beyond a regional level. However, the Company anticipates that, given the
perceived potential of the education market, well-financed competition may
emerge, including possible competition from the large for-profit child care
companies. The Company believes that the structure of these larger companies
may make it difficult for them to implement and develop programs which are based
upon curriculum-intensive goals, which would require significant cultural
changes.
The preschool/child care market is a $30 billion highly fragmented industry,
with diverse competition from both public and private sectors. Approximately 8
million children are enrolled in 90,000 centers/schools, of which less than nine
percent are managed by for-profit chains. Revenues of the 20 largest child
care/preschool providers represent less than five percent of total segment
revenues. Also seeking enrollments of pre-school age children are in-home
individual child care providers and corporations that provide child care for
their employees.
Only one out of seven early care/education programs is rated good or excellent
by the Carnegie Corporation report; four out of five programs fail quality
standards. The Company believes that persons in its target market -- parents
seeking curriculum-based programs for their children -- seek services not
provided by child care providers without a curriculum base. Nobel believes
these parents desire to give their child the best educational advantage
available, since, as educators have found, the learning process should start
earlier, preferably somewhere between the ages of two and three. The Company
offers a national curriculum based program with excellent standards.
The demand for quality preschools is increasing. More than 60% of mothers
with children under six years of age are in the workplace. Both single parents
and dual income families are on the rise. From 1980 to 1990, the percentage of
dual income families rose from 50% to 60%. From 1970 to 1992, the percentage of
married mothers who worked full time increased 16% to 37%. Combined,
approximately 80% of U.S. families are either dual income or single parent
households.
While price is an important factor in competition in both the school age and
preschool markets, the Company believes that other competitive factors also are
important, including: professionally developed educational programs, well
equipped facilities, trained teachers and a broad range of ancillary services,
including transportation and infant care. Particularly in the preschool market,
many of these services are not offered by the Company's competition.
REGULATION
Schools and preschools are subject to a variety of state and local regulations
and licensing requirements. These regulations and licensing requirements vary
greatly from jurisdiction to jurisdiction. Governmental agencies generally
review the safety, fitness and adequacy of the buildings and equipment, the
ratio of staff personnel to enrolled children, the dietary program, the daily
curriculum, compliance with health standards and the qualifications of the
Company's personnel.
8
<PAGE>
INSURANCE
The Company currently maintains comprehensive general liability, workers'
compensation, automobile liability, property, excess umbrella liability and
student accident insurance. The policies provide for a variety of coverage and
are subject to various limits. Companies involved in the education and care of
children, however, may not be able to obtain insurance for the total risks
inherent in their operations. In particular, general liability coverage can
have sublimits per claim for child abuse. Since 1994, the Company has been able
to increase significantly the sublimit applicable to such coverage. There can
be no assurance that in future years the Company will not again become subject
to lower limits.
SERVICE MARKS
The Company has registered various service marks, including Chesterbrook
Academy(R), Merryhill Country School(R) and The Rocking Horse Child Care
Center(R), in the United States Patent and Trademark Office. The Company
believes that certain of its service marks have substantial value in its
marketing in the respective areas in which its schools operate.
SEASONALITY
Nobel's elementary and middle schools historically have lower operating
revenues in the summer due to lower summer enrollments. Summer revenues of
preschools tend to remain more stable or, in some cases, increase. The Company
has sought to improve summer results through camps and other programs.
EMPLOYEES
On March 20, 1996, the Company employed approximately 3,000 persons,
approximately 935 of which were employed on a part-time basis. Management
believes that its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES.
At December 31, 1996, the Company operated 108 schools, preschools and child
care centers (hereafter, "schools") in 13 states. At March 15, 1997, the
number of schools totaled 118, located in 14 states.
The Company's schools generally are located in suburban settings. At March
15, 1997, the Company's schools are geographically located as follows: 33 in
California, 17 in Pennsylvania, 9 in New Jersey, 12 in Virginia, 7 in Illinois,
9 in Indiana, 17 in North Carolina, 2 in South Carolina, 6 in Florida, 2 in
Washington and 1 each in Maryland, Delaware, Maine and Louisiana.
The Company owns the land and buildings for 13 of the schools it operates.
All such properties are subject to mortgages on the real property. In addition,
one school is run by a majority-owned subsidiary and operated jointly with a
sponsoring employer. This subsidiary leases the buildings from a third party
and operates them under a ground lease from the employer. The remaining 105
schools are leased under long-term leases which are typically triple-net leases
requiring the Company to pay all applicable real estate taxes, utility expenses
and insurance costs. These leases usually contain inflation related rent
escalators.
9
<PAGE>
The Company owns the land and building of five properties in Florida and
Georgia; four of such properties are leased to tenants with an option to
purchase and one such property, which the Company intends to sell, is
nonoperational.
The Company leases 10,786 square feet of space for its corporate offices in
Media, Pennsylvania. The lease expires in the year 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
above will not have a material adverse effect on the Company's consolidated
financial position or results of operations. The significance of these matters
on the Company's future operating results and cash flows depends on the level of
future results of operations and cash flows as well as on the timing and
amounts, if any, of the ultimate outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION.
The table below sets forth the quarterly high and low sales prices for the
Company's common stock as reported by The National Association of Securities
Dealers (NASD) for each quarter during the period from January 1, 1995 through
December 31, 1996 and for the first quarter to date in 1997. Sales prices prior
to September 28, 1995 are adjusted to reflect the 1 for 4 reverse stock split of
the Company effected on such date.
High Low
1995
First Quarter...... $ 7 $ 4
Second Quarter..... 8 1/4 6
Third Quarter...... 15 3/4 7 1/4
Fourth Quarter..... 17 10 3/4
1996
First Quarter...... $17 5/8 13 5/8
Second Quarter..... 18 1/4 13 3/4
Third Quarter...... 15 1/4 9 1/4
Fourth Quarter..... 14 9 1/2
1997
First Quarter (as of 3/26/97) 12 5/8 7 7/8
HOLDERS.
At March 15, 1997, there were approximately 650 holders of record of shares of
common stock.
DIVIDEND POLICY.
The Company has never paid a dividend on its common stock and does not expect
to do so in the foreseeable future. Although the payment of dividends is at the
discretion of the Board of Directors, the Company intends to retain its earnings
in order to finance its ongoing operations and to develop and expand its
business. The Company's credit facility with its lenders prohibits the Company
from paying dividends on its common stock or making other cash distributions
without the lenders' consent. Further, in connection with the private placement
of the Series C Convertible Preferred Stock to Edison Venture Fund II, L.P., the
Company is prohibited from paying cash dividends on its common stock, unless the
dividend is permitted under the Company's bank agreement and the amount of the
dividend is less than or equal to 50% of operating income less income tax.
The Company's Series A Preferred Stock bears a dividend of 8% per annum,
payable quarterly. Dividends totaling $108,419 were paid in 1996.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data of the
Company. This data should be read in conjunction with the Company's Financial
Statements and the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(in thousands except per share data)
OPERATING DATA:
Revenue......................................... $58,909 $44,154 $34,372 $32,594 $33,498
School operating expenses....................... 49,079 35,908 28,161 26,543 27,036
School operating profit......................... 9,831 8,246 6,211 6,051 6,462
General and administrative
expenses....................................... 4,190 3,396 2,696 2,555 2,946
Litigation expense.............................. - 500 200 - -
Operating income (loss)......................... 5,641 4,350 3,315 3,496 3,516
Interest expense................................ 2,004 1,840 1,223 1,718 1,729
Other (income) expense.......................... (483) (126) 107 (39) (117)
Minority interest............................... 95 86 83 88 63
Income before income taxes...................... 4,025 2,550 1,902 1,729 1,841
Income tax (benefit) expense.................... 1,562 (1,356) (438) 21 36
Net income before extraordinary item............ 2,463 3,906 2,340 1,708 1,805
Extraordinary Item.............................. - 62 - - -
Net income...................................... 2,463 3,844 2,340 1,708 1,805
Preferred Dividends............................. 109 184 199 107 -
Net income available to
Common Stockholders............................ 2,354 3,660 2,141 1,601 1,805
EBITDA (earnings before interest, taxes,
depreciation and amortization expense)......... $ 8,240 $ 5,902 $ 4,188 $ 4,591 $ 4,811
Primary earnings per share (post split):
- ---------------------------------------
Net income before extraordinary item............ $0.34 $ 0.69 $0.53 $0.40 $ 0.48
Extraordinary item.............................. - $ (0.01) - - -
------- ------- ------- ------- -------
Net income...................................... $0.34 $ 0.68 $0.53 $0.40 $ 0.48
======= ======= ======= ======= =======
Fully diluted earnings per share (post split):
- ---------------------------------------------
Net income before extraordinary item............ $0.34 $ 0.64 $0.46 $0.38 $ 0.48
Extraordinary item.............................. - $ (0.01) - - -
------- ------- ------- ------- -------
Net income...................................... $0.34 $ 0.63 $0.46 $0.38 $ 0.48
======= ======= ======= ======= =======
Year ended December 31,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Working Capital (deficit)....................... $(1,351) $ (831) $(4,197) $(3,114) $(3,996)
Goodwill........................................ 25,601 17,274 8,888 8,923 9,278
Total assets.................................... 56,833 44,937 23,234 22,613 24,226
Short-term debt and current
portion of long-term debt...................... 3,376 1,371 1,768 905 1,523
Long-term debt.................................. 14,225 20,272 7,846 12,545 17,733
Stockholders' equity (deficit) $32,323 $16,121 $ 8,298 $ 3,732 $ (279)
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal year 1996 compared to fiscal year 1995.
As of December 31, 1995 the Company operated 101 elementary schools,
preschools and child care centers (sometimes collectively referred to herein as
"schools"). At December 31, 1996, the Company operated 108 schools. At March
20, 1997, the Company operated 118 schools and owned a 20% interest in one
elementary school.
During 1996, the Company acquired the assets or stock of companies owning ten
schools. These acquisitions included: five preschools in Virginia (School's
Out, Inc. and related companies); two preschools in North Carolina, operating as
the MacGregor Creative Schools; two schools located in Seattle, Washington,
operating as Evergreen Academy; and one school in Coto de Caza, California,
operating as Oak Ridge Private School. In addition, during 1996, the Company
opened seven new schools, two of which were replacement schools. Leases of six
non-core schools located in South Carolina expired and were not renewed, as
planned in the 1992 restructuring of the Company.
In early January 1997, the Company acquired six preschools in Florida,
operating as Another Generation, and a 20% interest in an elementary school in
Ft. Lauderdale, Florida. The Company also opened two new schools, one in New
Jersey and one in North Carolina, in March 1997.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the years ended December 31, 1996 and 1995
into three categories, Baseline Schools (defined as all schools opened as of
December 31, 1993), Acquired Schools and New Schools (defined as schools
acquired or newly opened since December 31, 1993):
<TABLE>
<CAPTION>
% of % of 1996-1995
1996 Revenue 1995 Revenue Variance ($)
---- ------- ---- ------- ------------
<S> <C> <C> <C> <C> <C>
BASELINE SCHOOLS
Revenues $32,115,443 100.00% $32,379,813 100.00% $ (264,370)
Operating Profit $ 6,754,000 21.03% $ 6,695,236 20.68% $ 58,764
----------- ------ ----------- ------ -----------
ACQUIRED SCHOOLS
Revenue $17,958,065 100.00% $ 7,102,124 100.00% $10,855,941
Operating Profit $ 2,044,162 11.38% $ 855,474 12.05% $ 1,188,688
----------- ------ ----------- ------ -----------
NEW SCHOOLS
Revenues $ 8,835,880 100.00% $ 4,672,430 100.00% $ 4,163,450
Operating Profit $ 1,032,497 11.69% $ 695,173 14.88% $ 337,324
----------- ------ ----------- ------ -----------
Total Net Revenues $58,909,388 100.00% $44,154,367 100.00% $14,755,021
=========== ====== =========== ====== ===========
Total School $ 9,830,659 16.69% $ 8,245,883 18.68% $ 1,584,776
Operating Profit =========== ====== =========== ====== ===========
</TABLE>
13
<PAGE>
In 1996, Baseline Schools showed a $264,370 revenue decline. This was caused
by a combination of the divestiture of six South Carolina schools in 1996 and
one Florida school in 1995 creating a $712,358 revenue reduction, partially
offset by a $447,988 increase in the remaining schools. Despite the revenue
decrease, the operating profit from Baseline Schools increased $58,764, as the
previously identified divested schools generated losses in 1995. Operating
margins of the Baseline Schools remained consistent at 21% in both 1996 and
1995.
In 1996, Acquired Schools as a group generated a $10,855,941 increase in
revenues compared to 1995. Operating profits of Acquired Schools increased
$1,188,688 in 1996 compared to 1995. Both the revenue and operating profit
increases were caused by the 1996 twelve month full year impact of the three
acquisitions made during 1995 plus the partial year impact of two acquisitions
made in 1996. Operating profit margins reduced slightly to 11.4% in 1996 from
12% in 1995. This reduction was caused by several factors: (1) since two of
the 1995 acquisitions were made on September 1, 1995, the Company avoided the
traditionally lower margin summer months, which was not the case in 1996 and (2)
the 1995 acquisition of nine schools located in Indianapolis generated a
$101,000 operating loss in 1996 compared to a $55,000 profit in 1995. When the
Company acquired these Indianapolis schools, it had anticipated increased
enrollment levels and reduced personnel expenses. This has not been achieved to
date. The Company is actively addressing these issues and expects improvement
in 1997. Removing the negative impact of Indianapolis, operating margins of
Acquired Schools would have increased to 14.7% in 1996 from an adjusted (without
Indianapolis) operating margin of 13.4% in 1995. Operating margins in Acquired
Schools have the added burden of amortization expense of goodwill. Goodwill
amortization related to Acquired Schools totaled $372,000 and $64,000 in the
years ended 1996 and 1995, respectively. Operating margins in Acquired Schools
before the amortization of goodwill totaled 13.45% and 12.94% for the years
ending 1996 and 1995, respectively. When making acquisitions, the Company takes
steps to increase operating margins of Acquired Schools over a twelve to thirty-
six month period, as it implements cost controls, systems and marketing
strategies.
In 1996 New Schools generated a $4,163,450 revenue increase compared to 1995.
This growth is from the combination of the maturing of the eleven preschools
that opened in 1994 and 1995 and the first-year impact of the seven new schools
(four preschools, two elementary and one middle school) opened in 1996.
Operating profit increased $337,324 in 1996 from 1995 despite a $272,230 loss
from the seven 1996 New Schools. As New Schools opened in 1994 and 1995
matured, their operating profit improved by $609,554. Operating profit margins
of New Schools reduced to 11.7% in 1996 from 14.9% in 1995 mainly due to the
$272,230 loss from the seven 1996 New Schools which compared to a $57,355 loss
for the seven 1995 new preschools.
The magnitude of the operating loss from the New Schools opened in 1996 is
increased by the mix of these schools. Generally, the Company experiences
smaller initial start up losses in preschools than elementary or middle schools.
It has also been the Company's experience to reach profitability in new
preschools in six to nine months compared to elementary or middle schools which
can take twelve to twenty-four months to become profitable.
14
<PAGE>
Overall, in 1996 the Company's total revenues increased $14,755,021 and
operating profits increased $1,584,776, compared to 1995. Meanwhile, operating
profit margins decreased from 18.7% in 1995 to 16.7% in 1996 as explained above.
General and administrative expenses increased $793,810 or 23% to $4,189,750
for the year ended December 31, 1996; however, as a percentage of revenue,
general and administrative expenses decreased from 7.7% of revenues in 1995 to
7.1% of revenues in 1996. The Company enjoyed efficiencies from its growth
through acquisitions. Management is continuing to build the foundation needed
for growth of the Company and anticipates maintaining the current level of such
general and administrative expenses as a percent of revenues.
Operating income increased $1,290,966 or 29% to $5,640,909 for the year ended
December 31, 1996. The increase is a result primarily of the increase in school
operating profit. In 1995, the Company recorded $500,000 in litigation expense
related to a claim by former officers of the Company which has been settled. As
a percent of revenue, operating income decreased slightly from 9.8% for the year
ended December 31, 1995 to 9.6% for the year ended December 31, 1996, which is a
result of the decrease in school operating profit margins described above.
Net cash provided by operating activities increased to $4,775,059 in 1996
compared to $4,037,239 in 1995 which was an 18% increase. Another key measure
of the Company's cash generating ability is its EBITDA (earnings before
interest, taxes, depreciation and amortization expenses). EBITDA increased to
$8,239,000 in 1996 from $5,902,000 in 1995 which was a 40% increase. EBITDA is
not a measure of performance, under generally accepted accounting principles,
however the Company and the investment community consider it a key indicator.
Interest expense increased $164,829 or 9% to $2,004,392 for the year ended
December 31, 1996, which was due to increased debt relating to the acquisitions
and new school development.
Other income increased $356,923 or more than 250% to $482,647 which was due to
interest income earned on the proceeds of the private placement of approximately
$11,600,000 in March 1996.
Pretax income increased $1,474,389 or 58% to $4,024,685 for the year ended
December 31, 1996 as compared to the prior year. The increase is a result of
(1) an increase in operating profit as a result of the growth of the Company and
(2) interest income related to the approximately $11,600,000 private placement.
Income tax expense increased $2,917,383 to $1,561,793 for the year ended
December 31, 1996. The increase in taxes was due to the Company being fully
taxed in 1996 as compared to recording a tax benefit in 1995 of $2,105,400.
This credit was based upon the adoption of SFAS 109 in 1992 and the subsequent
reduction of the Company's valuation allowance due to its more recent historical
profitable operating performance and its projections for the future.
Consequently, 1996 is the first year the Company is fully taxable. The Company
anticipates this trend to continue.
Net income decreased $1,380,994 or 36% to $2,462,892 for the twelve months
ended December 31, 1996 as a result of the Company reversing the valuation
allowance in 1995 and recording taxes in 1996 at a 38.8% rate as described
above. If pretax net income in 1995 were taxed at an effective rate of 38.8%, on
a pro forma basis, net income would have increased $990,055 or 62%. Fully
diluted earnings per share, on the same pro forma basis, would have increased
from $.25 per share in 1995 to $.34 per share in 1996, or a 36% increase.
15
<PAGE>
Fully diluted earnings per share decreased from $.63 per share for the year
ended December 31, 1995 to $.34 for the year ended December 31, 1996. Common
shares and shares equivalents on a fully diluted base increased 1,133,662 or
18.5% from 6,129,121 for the year ended December 31, 1995 to 7,262,783 for the
year ended December 31, 1996, as a result of raising equity capital and issuing
stock in connection with acquisitions.
Fiscal year 1995 compared to fiscal year 1994.
As of December 31, 1994, the Company operated 68 schools. During the year
ended December 31, 1995, the Company acquired in both assets and stock
transactions, 27 operating schools, and three schools under development, which
consisted of (1) eight schools operated by Carefree Learning Centers, and three
under development, located in Pennsylvania, (2) ten schools operated by Educo,
Inc., located in Maryland, Virginia, North Carolina and South Carolina and (3)
nine schools operated by Children Today, Inc., located in Indiana. In addition,
the Company opened seven new schools in various locations and divested one
school in Florida. As of December 31, 1995, the Company operated a total of 101
schools.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins in 1995 and 1994 into three categories of
Baseline Schools, Acquired Schools and New Schools:
<TABLE>
<CAPTION>
% of % of 1995-1994
1995 Revenue 1994 Revenue Variance ($)
---- ------- ---- ------- -----------
<S> <C> <C> <C> <C> <C>
BASELINE SCHOOLS
Revenues $32,379,813 100.00% $32,448,399 100.00% $ (69,187)
Operating Profit $ 6,695,236 21.01% $ 6,037,123 18.61% $ 658,236
----------- ------ ----------- ------ ----------
ACQUIRED SCHOOLS
Revenues $ 7,102,124 100.00% $ 0 0.00% $7,102,124
Operating Profit $ 885,474 12.05% $ 0 0.00% $ 885,474
----------- ------ ----------- ------ ----------
NEW SCHOOLS
Revenues $ 4,672,430 100.00% $ 1,923,102 100.00% $2,749,328
Operating Profit $ 695,173 14.88% $ 173,841 9.04% $ 521,332
----------- ------ ----------- ------ ----------
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Net Revenues $44,154,367 100.00% $34,371,501 100.00% $9,782,866
=========== ====== =========== ====== ==========
Total School $ 8,245,883 18.68% $ 6,210,964 18.07% $2,034,919
Operating Profit =========== ====== =========== ====== ==========
</TABLE>
In 1995, Baseline Schools showed a $69,187 decline compared to 1994. This
decline was caused by the divestiture of non-core southeastern centers in late
1994 reducing revenues by $442,432 partially offset by a $373,245 increase in
the remaining schools. Despite the revenue decline, the operating profit from
Baseline Schools increased $658,236 as the previously identified centers
generated losses in 1994. Operating margins improved significantly in 1995 to
21% from 18.6% in 1994 primarily due to the divestiture of the southeastern
centers.
In 1995, Acquired Schools generated $7,102,124 in revenues, operating profits
of $885,474 and operating profit margins of 12.94%. Operating margins of
Acquired Schools have the added burden of amortization expense of goodwill.
Operating margins before amortization of goodwill was 13%. There were no
Acquired Schools in 1994.
In 1995, New Schools generated a $2,749,328 increase in revenues compared to
1994. This growth is from the combination of the maturing of the four
preschools opened in 1994 and the first year impact of the seven preschools
opened in 1995. Operating profit increased $521,332 in 1995 from 1994 despite a
$57,355 loss for the seven 1995 new preschools developed. As the four new
preschools opened in 1994 increased their operating profits by $578,687.
Operating profit margins of New Schools increased to 14.9% in 1995 from 9% in
1994 mainly due to the significant improvement of the four 1994 New Schools
which generated operating margins of 24.5% in 1995.
Overall, in 1995, the Company's total revenues increased $9,782,866, operating
profits increased $2,034,919 and operating profit margins increased to 18.7%
from 1994 as explained above.
General and administrative expenses decreased as a percent of revenues from
7.84% in 1994 to 7.7% in 1995. The percentage decrease is due to efficiencies
resulting from growing the base of the Company. General and administrative
expense increased $699,864 or 26%. This increase was related primarily to the
increase in staff as a result of the acquisitions.
During the twelve months ended December 31, 1995, the Company recorded a
$500,000 litigation expense which was the result of the outcome of the lawsuit
by former management. The United States Court of Appeals for the Third Circuit
ruled in favor of Julie Sell and Michael Bright and against the Company. The
Company paid the judgment plus attorney fees and interest in September 1995,
totaling $580,000. In March 1996, the Company settled certain other proceedings
against the Company brought by Douglas Carneal, its former Chairman, and made a
payment of $170,000 to Mr. Carneal in connection with such settlement. The
Company had sufficient reserves for the settlement, thus additional expense was
not recorded.
Operating income increased $1,035,055 or 31% from $3,314,888 for the year
ended December 31, 1994 to $4,349,943 for the year ended December 31, 1995. The
increase is a result primarily of increased school operating profit as detailed
above.
17
<PAGE>
Net cash provided by operating activities increased to $4,037,239 in 1996
compared to $2,897,905 in 1994 which was a 39% increase. The Company's EBITDA
(earnings before interest, taxes, depreciation and amortization expenses)
increased to $5,902,000 in 1995 from $4,188,000 in 1994 which was a 41%
increase. EBITDA is not a measure of performance, under generally accepted
accounting principles, however the Company and the investment community consider
it a key indicator.
Interest expense increased $616,592 or 50% from $1,222,971 for the year ended
December 31, 1994 to $1,839,563 for the year ended December 31, 1995. The
increase in interest is due to higher debt levels associated with the
acquisitions which include $6,000,000 of subordinated debt at 14% and 8.5%
mortgage loans on the Carefree properties.
Other income and expense showed income of $125,724 for the year ended December
31, 1995 compared to expense of $106,960 for the year ended December 31, 1994,
an increase of $232,694. The increase was related to (1) increased interest
income on cash balances, (2) adjustments of rent accruals related to the
cancellation of several leases in the Southeast and (3) decreased costs of
Southeast centers which were divested.
Pretax income increased $648,830 or 34% from $1,901,466 for the twelve months
ended December 31, 1994 to $2,550,296 for the same period in 1995. The increase
was due primarily to an increase in schools' operating profit as a result of the
growth of the Company.
In 1992, the Company changed its method of accounting for income taxes through
the adoption of SFAS 109. In 1992 and 1993, a valuation allowance of $3,700,000
had been recorded relating to the net operating loss. In 1994, the Company
reduced the valuation allowance and recognized $510,300 of the deferred tax
asset. The 1994 estimate recorded was based on the analysis of the positive
operating performance of the prior two years and projected taxable income of
1994 and 1995. In 1995, based on three years of positive net income and the
analysis of projections for the years 1996 though 1999, the Company removed the
remaining valuation allowance. Accordingly, such amounts were recorded as a
credit to income tax expense.
On August 31, 1995, the Company completed the refinancing of its existing
principal debt facilities as described in Footnote 6 to the Company's
Consolidated Financial Statements. As a result of the refinancing, the Company
expensed the remaining unamortized loan origination fees related to the prior
debt facilities as an extraordinary item, totaling $62,000 after the tax effect.
Net income before preferred dividends increased $1,504,110 or 64% from
$2,339,776 for the year ended December 31, 1994 to $3,843,886 for the year ended
December 31, 1995.
Dividends totaling $184,114 and $198,555 were paid on the Company's Series A
Preferred Stock for the twelve months ended December 31, 1995 and 1994,
respectively. During 1995, 543,000 shares of the Series A Preferred Stock were
converted to 638,568 shares of common stock.
Fully diluted earnings per share increased from $.46 per share (adjusted for
the 1:4 reverse stock split) for the year ended December 31, 1994 to $.63 for
the year ended December 31, 1995. Common shares and shares equivalents on a
fully diluted base increased 1,092,119 or 22% from
18
<PAGE>
5,037,002 for the year ended December 31, 1994 to 6,129,121 for the year ended
December 31, 1995, as a result of raising equity capital and issuing stock in
connection with acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Management is currently pursuing a three-pronged growth strategy to expand the
Company which includes (1) internal growth of existing schools through the
expansion of certain facilities, (2) new school development in both existing and
new markets and (3) strategic acquisitions. During 1997, the Company intends to
fund its growth strategy and its cash needs through (1) the $10,000,000
available balance of its revolving line of credit, (2) the use of site
developers to build schools and lease them to the Company, (3) the $15,000,000
commitment from AEI, and (4) issuance of subordinated indebtedness or shares of
common stock to sellers in acquisition transactions. If the need arises, the
Company may also effect additional debt or equity financings.
The Company anticipates that its existing available principal credit
facilities, cash generated from operations, continued support of site developers
to build and lease schools and funds from AEI will be sufficient to satisfy the
working capital needs of the Company and the building of new schools in the near
term future.
The Company is continuing to look for quality acquisition candidates.
Depending on the size of future acquisitions, the Company may need to seek funds
from additional debt or equity placements.
The Company has historically funded its growth and cash needs through bank
borrowings, cash flow from operations and the proceeds of equity private
placements. On March 5, 1996, the Company raised net proceeds of $11.6 million
through the private placement of 1,000,000 shares of its Common Stock. The
Company has used and is using such proceeds (1) to build new schools, (2) to
make strategic acquisitions and (3) for general working capital purposes. In
December 1996, the Company entered into a Multi-Site Sale Leaseback Agreement
with AEI Fund Management, Inc. Under that agreement, AEI agreed to purchase from
Nobel in sale/leaseback transactions up to $15,000,000 worth of parcels through
the end of 1999 (subject in each case to AEI's standard credit, site and other
due diligence review). The agreement also provides that AEI will provide Nobel
with land acquisition and construction loan financing for each project.
In November 1996, the Company entered into the Fourth Amendment of its Loan
and Security Agreement with its senior lender, which increased the Company's
line of credit from $7,500,000 to $10,000,000. In addition, the bank extended
the maturity of the revolving line of credit one year to 1999 and both term
loans to 2001. The bank also increased the flexibility of the Company's ability
to open new schools and complete acquisitions without bank consent.
At December 31, 1996, the Company's loans from its senior lender consisted of:
a $7,500,000 term loan ("Term Loan I"), of which $6,450,000 was outstanding; a
$6,000,000 term loan ("Term Loan I"), of which $5,320,000 was outstanding; and,
a $10,000,000 line of credit, none of which was outstanding. The Term Loan I
bears interest at 8-1/2% and requires quarterly principal payments as follows:
$200,000 each quarter from December 1, 1995 through September 1, 1996; $250,000
each quarter from December 1, 1996 through September 1, 1999; and $300,000 each
quarter from December 1, 1999 through September 1, 2001. The Term Loan II,
which was extended on April 6, 1996, bears interest at 8% and requires quarterly
principal payments as follows: $200,000 each
19
<PAGE>
quarter through September 1, 1996; $280,000 each quarter from December 1, 1996
through September 1, 1999; $350,000 each quarter through June 1, 2001, with the
remaining balance due on September 1, 2001. The revolving line of credit bears
interest at a LIBOR based performance rate and matures September 1, 1999. As of
December 30, 1996, $10.0 million was available to the Company under this line of
credit.
On March 20, 1997, the Company entered into the Fifth Amendment of its Loan
and Security Agreement with its primary lender which, among other changes,
increased the permitted number of new school construction projects on the
Company's balance sheet to ten annually, and permitted the Company to own at any
time seven tracts of land being held for school development with an aggregate
$3,500,000 purchase price. This amendment gives the Company greater flexibility
to pursue its growth strategy.
The Company generally seeks to accomplish development of new schools without
significant expenditures of cash by entering into arrangements with real estate
developers to build new schools. The Company commits to enter into a long-term
lease for a new school from the third party owner. The Company also has
available $15,000,000 from AEI to build new schools through sale/leaseback
transactions.
In 1997, the Company plans to convert approximately six of its child care
centers to Chesterbrook Academy schools. When a conversion takes place, the
Company upgrades the curriculum and equipment, retrains the teachers and changes
signage. The Company estimates the capitalized cost of a conversion to be
$30,000 to $40,000 per location. The Company anticipates that cash generated
from operations and its line of credit will be sufficient to fund the cost of
the conversions.
Additionally in 1997, the Company will begin to upgrade its management
information system to link the schools to the corporate office as well as to
other schools. Management anticipates that the process will take several years
and has projected that it may spend approximately $750,000 on this project in
1997.
Total cash and cash equivalents increased $1,536,995 from $3,714,560 at
December 31, 1995 to $5,251,555 at December 31, 1996. The net increase was due
primarily to (1) the raising of $11,600,000 through a private placement of
equity and (2) cash flow from operations totaling $4,700,000. Cash used in
Investing Activities is as follows: (1) acquisitions of various schools
totaling $5,400,000, (2) approximately $8,000,000 for building new schools and
acquisition of land parcels for future development, (3) $1,400,000 for the
purchase of land and buildings related to school acquisitions, (4) $460,000 for
conversion of centers to Chesterbrook Academy schools, and (5) $2,800,000 for
capital expenditures. These were offset by proceeds from the sale of property
and equipment of approximately $8,700,000. In addition, the Company's cash
provided by Financing Activities was offset by scheduled principal payments of
approximately $2,000,000 and the prepayment of approximately $3,500,000 of
mortgages on sale of property.
Net cash flow from operations increased $737,820 or 18% from $4,037,239 as of
December 31, 1995 to $4,775,059 as of December 31, 1996. The increase is
primarily the result of a decrease in net income of $1,380,994 offset by an
increase in depreciation and amortization of $698,293 and the use of the
deferred tax asset of $1,206,894.
20
<PAGE>
The working capital deficit increased $519,943 from $831,042 at December 31,
1995 to $1,350,985 at December 31, 1996. The increase is a result of an
increase in the Company's current portion of long term debt of $1,760,899 of
which $500,000 is related to an acquisition and $1,260,899 is related to the
Company refinancing the $6,000,000 14% subordinated debt with a second term loan
with scheduled principal payments. The increase in debt was offset by an
increase of current assets totaling $1,166,092.
TRENDS
Looking forward into 1997, the Company sees a major reform taking place in the
education market. The Company plans to capitalize on the growing need for
improved quality education. In 1996 and 1997, the Company built new elementary
and middle schools which incur larger initial losses in the first year as
compared to a preschool but offers higher margins in the later years. The
Company plans to open five to six elementary schools in 1997, and continue such
development on an accelerated pace.
A significant portion of the Company's 1995 and 1996 growth was through
acquisitions. In one of the acquisitions, located in Indianapolis, several of
the schools are performing under expectations, which is creating losses in that
region, and it is taking longer than anticipated to improve several of the
schools. Management is evaluating several alternatives to return those schools
to acceptable operating levels.
In California, the Company has felt competitive pressures for teachers. The
state has committed to lowering the student/teacher ratio in kindergarten,
first, and second grades of its public schools. This commitment has created a
higher demand for teachers as school districts seek to fill new positions.
While several of the Company's teachers left the Company to work for public
schools, the Company is taking aggressive steps to attract and maintain quality
teachers. Enrollment was negatively impacted by these developments.
INFLATION
The Company has not been significantly affected by inflation.
INSURANCE
Companies involved in the education and care of children may not be able to
obtain insurance for the total risks inherent in their operations. In
particular, general liability coverage can have sublimits per claim for child
abuse. Since 1995, the Company has been able to increase significantly the
sublimit applicable to such coverage. There can be no assurance that in future
years the Company will not again become subject to lower limits.
CAPITAL EXPENDITURES
In 1997, the Company plans to convert six of its existing Rocking Horse Child
Care Centers to Chesterbrook Academy schools. Capital expenditure requirements
for each conversion are estimated to be $30,000 to $35,000 per school, with
total costs projected to be $210,000. Cash flows from operations and the line
of credit are anticipated to be sufficient to cover the costs. In addition, the
Company plans to spend approximately $3,500,000 on capital expenditures in the
remaining schools.
21
<PAGE>
The Company is continuously maintaining and upgrading the property and
equipment of each school. During 1996, the Company spent $2,800,000 on capital
expenditures which included upgrading playgrounds, purchasing new equipment and
technology and books, making purchases relating to new school startup and
improving the equipment and facilities of some of the acquisitions.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997 the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997 (earlier application is not permitted).
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary financial information specified by this
Item, together with the Reports of the Company's independent accountants
thereon, are included in this Annual Report on Form 10-K on pages F-1 through F-
26 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
A. J. Clegg 57 Chairman of the Board of Directors, President
and
Chief Executive Officer; Director (since 1992)
John R. Frock 53 Executive Vice President-Corporate Development;
Assistant Secretary; Director (since 1992)
Brian C. Zwaan 38 Executive Vice President and Chief Financial
Officer
D. Scott Clegg 34 Executive Vice President - Operations
Yvonne DeAngelo 39 Vice President - Administration and Finance;
Secretary
B. Robin Eglin 40 Vice President - Real Estate Development
Barbara Z. Presseisen 60 Vice President - Education
Edward Chambers 60 Director (since 1988)
Peter H. Havens 42 Director (since 1991)
Janet L. Katz 50 Director (since 1994)
Morgan R. Jones 57 Director (since 1991)
John H. Martinson 49 Director (since 1994)
Eugene G. Monaco 69 Director (since 1995)
</TABLE>
The following description contains certain information concerning the
foregoing persons:
A.J. Clegg. Mr. Clegg was named Chairman of the Board and Chief Executive
Officer of the Company on May 29, 1992. Since 1989, Mr. Clegg has also served
on the Advisory Board of Drexel University and, in 1996, was named as a member
of the Board of Trustees of Drexel University. Since June 1990, Mr. Clegg has
also served as the Chairman and CEO of JBS Investment Banking, Ltd., which
provides investment management and consulting services to businesses and
formerly provided services to the Company through an Administrative Services
Agreement. Mr. Clegg's responsibilities for JBS Investment Banking, Ltd. do not
require material amounts of his time. In 1979, he formed Empery Corporation, an
operator of businesses in the cable television and printing industries, and held
the offices of Chairman, President and CEO during his tenure (1979-1993). In
addition, Mr. Clegg served as Chairman and CEO of TVC, Inc. (1983-1993), a
distributor of cable
23
<PAGE>
television components; and Design Mark Industries (1988-1993), a manufacturer of
electronic senswitches. Mr. Clegg has also served on the board of directors of
Ferguson International Holdings, PLC, a United Kingdom company, from March 1990
to April 1991; and was Chairman and CEO of Globe Ticket and Label Company from
December 1984 to February 1991.
John R. Frock. Mr. Frock was named Executive Vice President - Corporate
Development on August 1, 1994. Mr. Frock was elected to the Board of Directors
of the Company on May 29, 1992. In March 1992, Mr. Frock became the President
and Chief Operating Officer of JBS Investment Banking, Ltd., which provided
investment management and consulting services to businesses (which included
Nobel). During the past five years, Mr. Frock also served as the Chairman and
Chief Executive Officer of Avant Guarde Enterprises, Ltd.; President and Chief
Operating Officer of SBF Communications Graphics, a business forms printer
located in Philadelphia, PA; President of Globe Ticket and Label Company; and
President of the Graphics Group of Empery Corporation.
Brian C. Zwaan. Mr. Zwaan joined Nobel as Chief Financial Officer in December
1996. Prior to joining Nobel, Mr. Zwaan was Senior Vice President of Summit
Bancorp, managing commercial operations in Southeastern Pennsylvania focusing on
middle market corporations with revenues between $15 million and $250 million.
Mr. Zwaan has over 16 years experience in the finance and accounting industries,
including areas of strategic planning, acquisition underwriting and integration,
budget management and sales and marketing. He is a licensed CPA in the state of
Pennsylvania.
D. Scott Clegg. Mr. Clegg was named Vice President - Operations for the
Merryhill Country Schools division in June 1993 and Vice President - Operation,
with responsibility for nationwide operations in early 1996. He was formerly
Vice President of New Business Development at JBS Investment Banking, Ltd. Mr.
Clegg also served as General Manager and Chief Operating Officer of Dynasil
Corporation of America, a public company, and also served as a member of
Dynasil's Board of Directors.
Yvonne DeAngelo. Ms. DeAngelo was appointed Vice President - Finance and
Administration in December 1995. She had served as Controller since March 1989.
Ms. DeAngelo has also served as Secretary since May 1992. Before joining Nobel
Education Dynamics, Inc., she served as Senior Auditor for Coopers and Lybrand
from 1986 to 1989.
B. Robin Eglin. Mr. Eglin was named Vice President - Real Estate Development in
April 1995. Mr. Eglin was formerly Vice President of Carefree Learning Centers,
Inc. and Keystone Real Estate Development Company, Inc., wholly-owned for-profit
subsidiaries of Pennsylvania Blue Shield, where he was in charge of all real
estate, finance and accounting activities. Mr. Eglin joined Carefree in 1989.
Barbara Z. Presseisen. Dr. Presseisen was named Vice President - Education in
June 1996. Dr. Presseisen served in several positions over 24 years at
Research for Better Schools, one of the ten regional educational laboratories
sponsored by the U.S. Department of Education, located in Philadelphia,
Pennsylvania. In her most recent capacity, Director of National Networking, she
worked with several major school districts on staff development and program
improvement, as well as coordinated training and conferences on curriculum and
student achievement with other laboratories and a number of professional
associations and universities. Dr. Presseisen has authored a number of books and
research reports, and has been an invited lecturer at many national and
24
<PAGE>
regional programs. Most recently, prior to joining Nobel, Dr. Presseisen
consulted on educational design and product development for the Walt Disney
Company from December 1995 to June 1996.
Edward H. Chambers. Mr. Chambers has served as Executive Vice President -
Finance and Administration of Wawa, Inc. since March 1988. During the period
April 1984 through March 1988, he served as President and Chief Executive
Officer, and as a director, of Northern Lites, Ltd., an owner and operator of
quick-service restaurants operating pursuant to a franchise from D'Lites of
America, Inc. From 1982 to July 1984, Mr. Chambers was President - Retail
Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service
restaurants. He is also a director of Davco, Inc., a franchisee of Wendy's
International, Inc. and a director of Riddle Memorial Hospital.
Peter H. Havens. Mr. Havens has been Executive Vice President of Bryn Mawr Bank
Corporation since May 1995 overseeing the Trust Division. From 1982 through May
1995, Mr. Havens served as manager of Kewanee Enterprises, a private investment
firm located in Bryn Mawr, Pennsylvania. He is also Chairman of the Board of
Directors of Petroferm, Inc. and a director of Bryn Mawr Bank Corporation,
Ursinus College and Independence Seaport Museum.
Morgan R. Jones. Mr. Jones has been a partner in the law firm Drinker Biddle &
Reath, Philadelphia, Pennsylvania since 1970, and is presently Chairman of the
firm. Mr. Jones also serves on the Board of Directors of Mack Printing
Companies, Inc.
Janet Lea Katz. Ms. Katz has both a Masters and a Doctorate in Education from
Columbia University and is currently serving as the building administrator at
Bogert School in Upper Saddle River, New Jersey. Ms. Katz has held various
positions throughout her career in education, including speech arts teacher,
coordinator and therapist for speech and language programs for elementary school
and research assistant for the study of learning disabilities at Columbia
University, and is presently the curriculum coordinator for Upper Saddle River
Schools, Upper Saddle River, New Jersey, as well as the building administrator
at Bogert School.
John Martinson. Mr. Martinson is Managing Partner of Edison Venture Fund which
he founded in 1986. He also serves on the Board of Directors of the National
Venture Capital Association, Dendrite International, Inc. and eleven private
companies.
Eugene G. Monaco. Mr. Monaco has both a J.D. from Temple Law School and M.S. in
Mechanical Engineering from the University of Delaware and, from January 1, 1990
until his retirement in late 1995, served as a Judge for the Delaware County
District Court. He also served as an Instructor in Kinematics and Dynamics at
Drexel University, a Lecturer in child abuse at Penn State University, and was
the Chief Negotiator for the Rose Tree Media School Board. He also served as
Assistant District Attorney in Media, Pennsylvania and Engineering Negotiator
for Westinghouse Electric for 32 years.
John Martinson serves on the Board as the designee of Edison Venture Fund II,
L.P., the majority holder of the Series C Convertible Preferred Stock, which was
issued in August 1994.
A. J. Clegg's son, D. Scott Clegg, is the Executive Vice President -
Operations of the Company.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION TABLES
The following tables contain compensation data for the Chief Executive Officer
and each other executive officer of the Company whose salary and bonus in 1996
aggregated to at least $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-----------------------------------------------------------------------------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND COMPENS STOCK OPTIONS/ COMPENS
PRINCIPAL POSITION YEAR SALARY BONUS/1/ ATION/2/ AWARDS SARS/3/ ATION/4/
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A.J. CLEGG 1996 $201,465 $ 0 $ 0 0 $3,332
Chairman, President and 1995 160,014 $96,000 $ 0 45,000 2,052
Chief Executive Officer /5, 6/ 1994 57,851 39,978 $ 0 0
JOHN R. FROCK 1996 $112,119 $ 0 $13,840 0 $1,587
Executive Vice President /7/ 1995 98,082 $33,750 13,549 /8/ /8/ 746
1994 32,539 14,055 14,950 0
D. SCOTT CLEGG 1996 $102,816 $ 0 $ 0 30,000 $1,245
Executive Vice President 1995 82,087 $29,400 $ 0 5,000 127
- Operations 1994 73,238 13,320 $ 0 0 127
B. ROBIN EGLIN 1996 $101,018 $ 0 $13,841 0 $1,086
Vice President - Real 1995 72,322 $10,380 3,000
Estate Development /9/ $19,500 $ 756
</TABLE>
(1) Bonuses are reported with respect to the fiscal year earned, although paid
in the following year. No bonuses were paid to the named executives for
1996; however, in January 1997, these executives received additional stock
option grants.
(2) The amounts reported for John R. Frock consisted of (i) $7,800, $7,800 and
$3,082 for automobile expenses in 1996, 1995 and 1994, respectively, and
(ii) $5,760, $5,511 and $895 for health insurance in 1996, 1995 and 1994,
respectively. The amounts reported for B. Robin Eglin consisted of (i)
$7,800 and $5,850, for automobile expenses in 1996 and 1995, respectively,
and (ii) $6,041 and $4,530 for health insurance in 1996 and 1995,
respectively. While other named executives enjoy certain similar
perquisites, for fiscal year 1996, perquisites and other personal benefits
for such executive officers did not exceed the lesser of $50,000 or 10% of
any such executive officer's salary and bonus and accordingly have been
omitted from the table as permitted by the rules of the Securities and
Exchange Commission.
(3) Options granted to A.J. Clegg were granted on December 18, 1995; options
granted to D. Scott Clegg were granted on November 18, 1995 and June 21,
1996, respectively; options granted to B. Robin Eglin were granted on
December 18, 1995. All such options vest in increments of one-third of the
total number of options granted on the first, second and third anniversary
dates of the date of grant.
26
<PAGE>
(4) Other compensation in 1996: for A.J. Clegg consisted of $2,290 for life
insurance and $1,042 for employer matching 401(k) plan contributions; for
John R. Frock consisted of $984 for life insurance and $603 for employer
matching 401(k) plan contributions; for D. Scott Clegg consisted $365 for
life insurance and $880 for employer matching 401(k) plan contributions; and
for B. Robin Eglin consisted of $540 for life insurance and $546 for
employer matching 401(k) plan contributions.
(5) In August 1994, A.J. Clegg was hired as an employee of the Company in the
position of Chairman and Chief Executive Officer. Prior to this time, Mr.
Clegg was the Chairman and Chief Executive Officer of JBS Investment
Banking, Ltd. ("JBS"). On May 29, 1992, pursuant to a private placement
offering, the Company entered into a three year Administrative Services
Agreement with JBS, pursuant to which JBS provided management and advisory
services to the Company and received certain management fees. The fixed fee
portion of this agreement was terminated in August 1994 when Mr. Clegg
joined the Company as a full time employee. During 1995 and 1994,
respectively, the Company paid fees to JBS approved by the Board totaling
$8,289 and $200,374 for the services of JBS personnel, which included A.J.
Clegg, John R. Frock and four other persons. Mr. Clegg joined the Company
as a full time employee on August 1, 1994.
(6) On March 1, 1995, the Board of Directors approved an increase in Mr. Clegg's
base salary of $20,000, from $160,014 to $180,014. Mr. Clegg voluntarily
declined taking such increase in 1995.
(7) John R. Frock joined the Company as a full time employee on August 1, 1994.
(8) The Company made a Restricted Stock Award to Mr. Frock under the 1995 Stock
Incentive Plan of 25,000 shares of Common Stock on March 19, 1996. However,
these shares were never issued, and the Company and Mr. Frock subsequently
agreed to the cancellation of such award. Further, on December 18, 1995,
the Company granted Mr. Frock an option to purchase 25,000 shares of common
stock, which option was canceled in March 1996.
(9) B. Robin Eglin joined the Company in April 1995.
27
<PAGE>
OPTIONS/STOCK APPRECIATION RIGHTS GRANTED IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM
INDIVIDUAL GRANTS (10 YRS.)/1/
----------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS GRANTED EXERCISE AT 0% AT 5% AT 10%
OPTION/ TO ALL OR BASE ANNUAL ANNUAL ANNUAL
NAME OF SARS EMPLOYEES IN PRICE PER EXPIRATION GROWTH GROWTH GROWTH
EXECUTIVE GRANTED/ 2/ 1996 /3/ SHARE DATE RATE RATE RATE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A. J. Clegg 0 0.00% n/a n/a $0 $ 0 $ 0
John R. Frock 0 0.00% n/a n/a $0 $ 0 $ 0
D. Scott Clegg 30,000 51.72% $14.25 6/21/06 $0 $268,853 $681,325
B. Robin Eglin 0 0.00% n/a n/a $0 $ 0 $ 0
</TABLE>
- ---------
(1) The potential realizable values are based on an assumption that the stock
price of the shares of Common Stock of the Company appreciate at the annual
rate shown (compounded annually) from the date of grant until the end of the
option term. These values do not take into account amounts required to be
paid as income taxes under the Internal Revenue Code of 1986, as amended,
and any applicable state laws, or option provisions providing for
termination of an option following termination of employment,
nontransferability, or vesting over periods of up to three years. These
amounts are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's estimate
of future stock price growth of the shares of the Company's Common Stock.
(2) Options granted D. Scott Clegg were granted on June 21, 1996 upon his
promotion to Executive Vice President - Operations and vest in increments of
one-third of the total number of options granted on the first, second and
third anniversary dates of the date of grant.
(3) During 1996, the Company granted to employees options to purchase an
aggregate of 58,000 shares of Common Stock.
<TABLE>
<CAPTION>
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS EXERCISED IN 1996
AND VALUE OF OPTIONS AT
DECEMBER 31, 1996
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
EXERCISED IN 1996 1996 DECEMBER 31, 1996
--------------------------------------------------------------------------------------
NAME OF EXECUTIVE SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISEABLE EXERCISABLE UNEXERCISEABLE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A. J. Clegg 0 0 15,000 30,000 $ 0 $0
John R. Frock 0 0 0 0 $ 0 $0
D. Scott Clegg 0 0 7,917 33,333 $39,075 $0
B. Robin Eglin 0 0 1,000 2,000 $ 0 $0
---------------------------------------------------------------------------------------
</TABLE>
None of the above named executive officers held any stock appreciation rights at
December 31, 1996.
28
<PAGE>
COMPENSATION OF DIRECTORS
The Company pays director (other than A. J. Clegg) an annual retainer of
$6,000 which is paid quarterly and pays members of committees of the Board
(other than A. J. Clegg) $750 per meeting for each committee meeting attended.
(John Frock's compensation reported in the Summary Compensation Table does not
include such fees.)
The Company's 1995 Stock Incentive Plan provides that as of March 31, 1996 and
each subsequent March 31 that the Plan is in effect, each individual serving as
a director of the Company, who is not an officer or employee thereof, will be
granted a nonqualified stock option to purchase 500 shares of Common Stock if
the individual served as a director for the entire previous fiscal year and the
Company's pre-tax income for such fiscal year increased at least 20% from the
prior fiscal year. Pursuant to the Plan, each of Messrs. Chambers, Havens,
Jones and Martinson and Ms. Katz received an option to purchase 500 shares of
Common Stock on March 31, 1996, and each of Messrs. Chambers, Havens, Jones,
Martinson and Monaco and Ms. Katz received an option to purchase 500 shares of
Common Stock on March 31, 1997.
EXECUTIVE SEVERANCE PLAN
In March 1997, the Company adopted an Executive Severance Pay Plan (the
"Plan"). The Plan covers each of the four executive officers named in the table
on page 26, as well as four other officers and key executives of the Company,
and persons who succeed to the positions held by such executives and such other
additional employees or positions as determined by written resolution of the
Board from time to time (collectively, the "Eligible Executives"). Under the
Plan, if the employment of an Eligible Executive with the Company terminates
following a Change of Control (as defined in the Plan) of the Company, under
specified circumstances, the Eligible Executive will be entitled to receive the
severance benefit specified in the Plan. The amount payable to an Eligible
Executive would equal (a) the Eligible Executive's salary for a period of months
equal to six plus the number of years of service of the Eligible Executive as of
the date of termination (or two times the number of years of service, if he or
she has completed at least three years of service as of the termination date),
subject to a maximum of 18 months' pay, plus (b) the bonus which would have been
payable to the Eligible Executive for the year in which employment was
terminated pro rated based on the number of months of employment in the year of
termination.
AGREEMENTS WITH EXECUTIVE OFFICER
The Company and John R. Frock are parties to a Noncompete Agreement which
provides that the Company will make a payment to Mr. Frock following his
termination for any reason if, within 30 days of his termination date, Mr. Frock
delivers a letter to the Company agreeing not to engage in specified activities
in competition with the Company for four years. The amount of such payment will
equal $85,000 if the termination date is prior to December 1, 1997, $170,000 if
the termination date is on or after December 1, 1997 and on or before November
30, 1998, and $255,000 if the termination date is after November 30, 1998. The
Company and Mr. Frock are also parties to a Contingent Severance Agreement which
provides that if Mr. Frock's employment is terminated because (i) the Company
terminates Mr. Frock's employment without Cause (as defined in the agreement) or
(ii) Mr. Frock resigns following a Change of Control (as defined in the
agreement), within 20 days following the date of termination, the Company must
make a severance payment to Mr. Frock. The amount of such payment would be
calculated in the same manner as a payment under the Noncompete Agreement. The
Company will not under any circumstance be required to make a payment to Mr.
Frock under both the Noncompete Agreement and the Contingent Severance
Agreement.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table shows information concerning the beneficial ownership of
the Company's Common Stock as of February 15, 1997 by each director, by each
executive officer named in the Summary Compensation Table appearing elsewhere in
this Annual Report, by all directors and executive officers as a group, and by
each person who is known to the Company to be the beneficial owner of more than
5% of the Company's Common Stock. The number of shares beneficially owned by
each person is determined under the rules of the Securities and Exchange
Commission and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the person has sole or shared voting power or
investment power and also any shares which the person has the right to acquire
within 60 days of February 15, 1997 through the exercise of any stock option or
right or conversion of any convertible security or otherwise. As of February
15, 1997, the Edison Venture Fund II, L.P., Allied Capital Corporation and
affiliated funds, and A. J. Clegg were the only persons or group of persons
known to the Company as beneficially owning more than 5% of the outstanding
Common Stock of the Company. The Edison Venture Fund II, L.P. has its principal
executive office at 997 Lenox Drive #3, Lawrenceville, New Jersey 08648. Allied
Capital Corporation and affiliated funds have their principal executive offices
at 1666 K St., N.W., Suite 901, Washington, DC 20006. A. J. Clegg's address is
c/o Nobel Education Dynamics, Inc., Rose Tree Corporate Center II, 1400 North
Providence Road, Suite 3055, Media, Pennsylvania 19063.
<TABLE>
<CAPTION>
Number of Shares of Percent
Common Stock of
Name of Beneficial Owner Beneficially Owned Class (1)
- ------------------------ ------------------ ---------
<S> <C> <C> <C>
A. J. Clegg 569,352 (2) 9.04%
Edward H. Chambers 22,730 (3) *
John R. Frock 27,200 (4) *
Peter H. Havens 12,609 (5) *
Morgan R. Jones 10,599 (6) *
Janet Katz 29,900 (7) *
John Martinson 629,532 (8) 9.74%
Eugene Monaco 1,000 *
D. Scott Clegg 7,917 (9) *
B. Robin Eglin 1,000 (10) *
Edison Venture Fund II, L.P. 629,032 (11) 9.74%
Allied Capital Corporation 575,000 (12) 8.98%
All directors and executive 1,314,881 (13) 18.76%
officers as a group
(13 persons)
* Less than 1%. [See notes on following page]
</TABLE>
30
<PAGE>
(1) The numbers set forth above reflect the percentage of outstanding Common
Stock currently owned by each holder listed and the percentage of
outstanding Common Stock which would be owned by each such holder giving
effect to the conversion of all shares of Preferred Stock and exercise of
all options and warrants held by such holder, but not to such conversion or
exercise by any other person.
(2) Of these shares, 100,806 shares are issuable upon conversion of Series C
Preferred Stock of the Company, 20,161 shares are issuable upon the exercise
of warrants and 15,000 are issuable upon exercise of currently exercisable
stock options. In addition, Mr. Clegg is also the beneficial owner of an
additional 430,885 shares owned of record by, or issuable upon the exercise
of securities of the Company owned of record by, JBS Investment Banking,
Ltd., a privately held corporation of which Mr. Clegg is a director, officer
and controlling stockholder, as follows: 103,000 shares of Common Stock
owned of record by JBS; 187,500 shares issuable upon the exercise of
warrants held by JBS; and 140,385 shares of Common Stock issuable upon the
conversion of the Company's Series A Preferred Stock owned of record by JBS.
JBS may also be deemed to be the beneficial owner of these 430,885 shares.
Mr. Clegg is also the beneficial owner of 2,500 shares of Common Stock owned
by his spouse. This does not include shares beneficially owned by Mr.
Clegg's adult children (including Scott Clegg, an officer of the Company),
as to which he disclaims beneficial ownership.
(3) Consists of 14,750 shares of Common Stock which Mr. Chambers has the right
to purchase upon the exercise of currently exercisable options, 1,470 shares
of Common Stock issuable upon the conversion of the Company's Series A
Preferred Stock, and 6,510 shares of Common Stock held by Mr. Chambers.
(4) Consists of 14,700 shares of Common Stock issuable upon the conversion of
the Company's Series A Preferred Stock and 12,500 shares of Common Stock
held by Mr. Frock.
(5) Consists of 7,250 shares of Common Stock which Mr. Havens has the right to
purchase upon the exercise of currently exercisable options, 3,234 shares of
Common Stock issuable upon the conversion of the Company's Series A
Preferred Stock held by Mr. Havens, and 2,125 shares of Common Stock held by
Mr. Havens.
(6) Consists of 10,099 shares of Common Stock held by Mr. Jones and 500 shares
of Common Stock which Mr. Jones has the right to purchase upon the exercise
of currently exercisable options. Does not include shares owned by Mr.
Jones's spouse and adult children as to which he disclaims beneficial
ownership.
(7) Consists of 29,400 shares of Common Stock issuable upon the conversion of
the Company's Series A Preferred Stock held by Ms. Katz and 500 shares of
Common Stock which Ms. Katz has the right to purchase upon the exercise of
currently exercisable options.
(8) Mr. Martinson is a managing partner of Edison Partners II, the general
partner of Edison Venture Fund II, L.P.. By virtue of his position as
managing partner, Mr. Martinson may under the SEC's rules also be deemed a
beneficial owner of the shares owned by Edison Venture Fund II, L.P. (See
footnote 11.) Mr. Martinson disclaims beneficial ownership of such shares.
Mr. Martinson also holds currently exercisable options to purchase 500
shares of Common Stock.
(9) Consists of 7,917 shares of Common Stock which Mr. Clegg has the right to
purchase upon the exercise of currently exercisable options.
(10) Consists of 1,000 shares of Common Stock which Mr. Eglin has the right to
purchase upon the exercise of currently exercisable options.
(11) Consists of 524,193 shares of Common Stock issuable upon the conversion of
the Company's Series C Preferred Stock held by the Edison Venture Fund II,
L.P. and 104,839 shares issuable upon the exercise of warrants held by the
Edison Venture Fund II, L.P. By virtue of his position as managing partner
of Edison Venture Fund II, L.P., Mr. Martinson may under the SEC's rules
also be deemed a beneficial owner of these shares.
(12) Consists of an aggregate of 265,958 shares of Common Stock upon the
conversion of the Company's Series D Preferred Stock and 309,043 issuable
upon the exercise of warrants held by Allied Capital Corporation, Allied
Capital Corporation II, Allied Investment Corporation and Allied Investment
Corporation II.
(13) Consists of shares shown as beneficially held by all natural persons in
this table, and an additional 2,792 shares of Common Stock which an
executive officer not named in the table has the right to purchase upon the
exercise of currently exercisable options and 250 shares owned by such
executive officer.
31
<PAGE>
Preferred Stock
The following table shows information concerning the beneficial ownership of
the Company's Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock as of February 15, 1997 by each director, by each executive
officer named in the Summary Compensation Table appearing elsewhere in this
Annual Report, and by all directors and executive officers as a group. Directors
and executive officers omitted from a section of the following table do not
beneficially own shares of the series of Preferred Stock to which such section
relates.
<TABLE>
<CAPTION>
Number of Shares of Percent
Name of Common Stock of
Security Name of Beneficial Owner Beneficially Owned Class
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Edward H. Chambers 5,000 0.44%
Preferred A. J. Clegg 477,500 (1) 42.12%
Stock John R. Frock 50,000 4.41%
Peter H. Havens 11,000 0.97%
Janet Katz 100,000 8.82%
All directors and executive 643,500 56.76%
officers as a group
(11 persons)
- --------------------------------------------------------------------------------
Series C A. J. Clegg 403,226 16.13%
Preferred Edison Venture Fund II, L.P. 2,096,774 83.87%
Stock John Martinson 2,096,774 (2) 83.87%
All directors and executive 2,500,000 (2) 100.00%
officers as a group
(11 persons)
- --------------------------------------------------------------------------------
Series D Allied Capital Corporation 1,063,830 (3) 100.00%
Preferred All directors and executive 0
Stock officers as a group
(11 persons)
- --------------------------------------------------------------------------------
</TABLE>
(1) Mr. Clegg is the beneficial owner of these 477,500 shares of Series A
Preferred Stock owned of record by JBS Investment Banking, Ltd., as he is a
director, officer and controlling stockholder of JBS Investment Banking,
Ltd.
(2) John Martinson is a managing partner of Edison Partners II, the general
partner of Edison Venture Fund II, L.P. By virtue of his position as
managing partner, Mr. Martinson may also under the SEC's rules be deemed a
beneficial owner of the 2,096,774 shares of Series C Preferred Stock owned
by Edison Venture Fund II, L.P. Mr. Martinson disclaims beneficial ownership
of such shares.
(3) Shares are owned by Allied Capital Corporation, Allied Capital Corporation
II, Allied Investment Corporation and Allied Investment Corporation II.
32
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1996, legal services were rendered to the Company by Drinker
Biddle & Reath, of which Morgan R. Jones, a director of the Company, is a
partner and Chairman. Fees paid to this firm in 1996 were $128,015. The
Company expects this firm to continue to provide such services in 1997.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
Page
----
(1) Financial Statements.
Report of Independent Accountants..................F-1
Consolidated Balance Sheets........................F-2
Consolidated Statements of Income..................F-3
Consolidated Statements of Stockholders' Equity....F-4
Consolidated Statements of Cash Flows..............F-5
Notes to Consolidated Financial Statements.........F-7
(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted as not applicable or not
required under the instructions contained in Regulation S-X or the information
is included elsewhere in the financial statements or notes thereto.
(B) REPORTS ON FORM 8-K.
On January 21, 1997, the Company filed a Report on Form 8-K reporting the
closing of its acquisition of all of the outstanding common stock of five
corporations under common control which owned six preschools operating under the
name Another Generation.
(C) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K.
Exhibit
Number Description of Exhibit
2.1 Asset Purchase Agreement dated as of February 2, 1996 by and among Stony
Point Learning Center, Inc., School's Out, Inc., Cascades Childcare, Inc.
and Pump Road Child Care, Inc. and Linda Nash and Stephen Nash and the
Registrant. (Filed as Exhibit 4A to the Registrant's Current Report on
Form 8-K dated February 16, 1996, date of earliest event reported
February 2, 1996, and incorporated herein by reference.)
2.2 Asset Purchase Agreement dated as of February 2, 1996 by and among
Loudoun Children's Center, Inc. and Linda Nash and Stephen Nash and the
Registrant. (Filed as Exhibit 4A to the Registrant's Current Report on
Form 8-K dated February 16, 1996, date of earliest event reported
February 2, 1996, and incorporated herein by reference.)
3.1 Registrant's Certificate of Incorporation, as amended and restated.
(Filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, and incorporated herein by
reference.)
34
<PAGE>
3.2 Registrant's Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
Registrant's Current Report on Form 8-K filed on June 14, 1993 and
incorporated herein by reference.)
3.3 Registrant's Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
Registrant's Quarterly Report on Form 10-Q with respect to the quarter
ended June 30, 1994 and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's
Current Report on Form 8-K filed on September 11, 1995, date of earliest
event reported August 25, 1995, and incorporated herein by reference.)
3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, and incorporated herein by reference.)
4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security
Agreement") among the Registrant, certain subsidiaries of the Registrant
and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the
Registrant's Current Report on Form 8-K filed on September 11, 1995, date
of earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment
and Modification dated July 2, 1996 to the Loan and Security Agreement.
(Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, and incorporated herein by
reference.)
4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and
Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference.)
4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and
Security Agreement.
4.5 Term Note dated August 30, 1995 in the principal sum of $7,500,000
payable to the order of Summit Bank. (Filed as Exhibit 4G to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.6 Line Note dated August 30, 1995 in the principal sum of $7,500,000
payable to the order of Summit Bank. (Filed as Exhibit 4H to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.7 New Term Note dated November 1, 1996 in the principal sum of $6,000,000
payable to the order of Summit Bank.
35
<PAGE>
The Registrant has omitted certain instruments defining the rights of
holders of long-term debt in cases where the indebtedness evidenced by
such instruments does not exceed 10% of the Registrant's total assets.
The Registrant agrees to furnish a copy of each of such instruments to
the Securities and Exchange Commission upon request.
10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended.
(Filed as Exhibit 10(1) to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987
(the "Form S-1") and incorporated herein by reference.)
10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as
Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March
31, 1988 and incorporated herein by reference.)
10.3 1995 Stock Incentive Plan of the Registrant. (Filed as Exhibit 4.6 to
the Registrant's Registration Statement on Form S-8 (Registration
Statement No. 33-64701) filed on December 1, 1995 and incorporated herein
by reference.)
10.4 Stock Purchase Agreement between the Registrant and various investors
dated April 2, 1990. (Filed as Exhibit 10(q) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991 and incorporated
herein by reference.)
10.5 Stock and Warrant Purchase Agreement between the Registrant and various
investors, dated April 13, 1992. (Filed as Exhibit 10(r) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991 and incorporated herein by reference.)
10.6 Registration Rights Agreement dated May 28, 1992 among the Registrant,
JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd.
(Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K
dated June 11, 1992, date of earliest event reported May 28, 1992, and
incorporated herein by reference.)
10.7 Saltzman Partners' Agreement dated May 28, 1992 among the Registrant, JBS
Investment Banking, Ltd., and Saltzman Partners. (Filed as Exhibit 4(b)
to the Registrant's Current Report on Form 8-K dated June 11, 1992, date
of earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.8 Warrant Subscription Agreement dated May 28, 1992 between Registrant and
Pennsylvania Merchant Group Ltd. (Filed as Exhibit 4(c) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.9 Stock Purchase Agreement dated May 28, 1992 between Registrant and a
limited number of accredited investors at $0.50 per share totaling
3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
36
<PAGE>
10.10 Shareholder's Agreement dated May 28, 1992 between Registrant and JBS
Investment Banking, Ltd. (Filed as Exhibit 2(a) to the Registrant's
Current Report on Form 8-K dated June 11, 1992, date of earliest event
reported May 28, 1992, and incorporated herein by reference.)
10.11 Amendment No. 1 to Shareholders' Agreement dated May 28, 1992 by and
among JBS Investment Banking, Ltd., Nobel and Saltzman Partners. (Filed
as Exhibit 4(ag) to the Registrant's Quarterly Report on Form 10-Q with
respect to the quarter ended June 30, 1994 and incorporated herein by
reference.)
10.12 Series 1 Warrants for shares of Common Stock issued to Edison Venture
Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit
4(ad) to the Registrant's Quarterly Report on Form 10-Q with respect to
the quarter ended June 30, 1994 and incorporated herein by reference.)
10.13 Registration Rights Agreement between Registrant and Edison Venture Fund
II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(af) to
the Registrant's Quarterly Report on Form 10-Q with respect to the
quarter ended June 30, 1994 and incorporated herein by reference.)
10.14 Amendment dated February 23, 1996 to Registration Rights Agreement
between Registrant and Edison Venture Fund II, L.P. and Edison Venture
Fund II-PA, L.P. (Filed as Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.)
10.15 Investment Agreement dated as of August 30, 1995 by and among the
Registrant, certain subsidiaries of the Registrant and Allied Capital
Corporation and its affiliated funds. (Filed as Exhibit 4A to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
10.16 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied
Capital Corporation to purchase up to 92,173 shares (pre-reverse stock
split) of the Common Stock of the Registrant. (Filed as Exhibit 4C to
the Registrant's Current Report on Form 8-K dated September 11, 1995,
date of earliest event reported August 25, 1995, and incorporated herein
by reference.)
Exhibit 10.16 is one in a series of four Common Stock Purchase Warrants issued
pursuant to the Investment Agreement dated as of August 30, 1995 that are
identical except for the Warrant No., the original holder thereof and the number
of shares of Common Stock of the Registrant for which the Warrant may be
exercised, which are as follows:
Number of Shares
(pre-reverse stock split)
of Common Stock
Warrant No. Holder (subject to adjustment)
- ------------- -------------------------------- -----------------------
2 Allied Capital Corporation II 142,932
3 Allied Investment Corporation 92,713
37
<PAGE>
4 Allied Investment Corporation II 50,220
10.17 Registration Rights Agreement dated August 30, 1995 by and among the
Registrant and Allied Capital and its affiliated funds, and amendment
thereto dated February 23, 1996. (Filed as Exhibit 4D to the Registrant's
Current Report on Form 8-K dated September 11, 1995, date of earliest
event reported August 25, 1995, and incorporated herein by reference.)
10.18 Amendment dated February 23, 1996 to Registration Rights Agreement dated
August 30, 1995 by and among the Registrant and Allied Capital and its
affiliated funds. (Filed as Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.)
10.19 Form of subscription agreement entered into between Registrant and
certain customers of Gilder, Gagnon, Howe & Co. relating to the offer and
sale by the Company of 1,000,000 shares of its common stock. (Filed as
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.)
10.20 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and
Summary Plan Description, Issued February, 1997.
10.21 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z.
Presseisen.
10.22 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and
the Registrant.
10.23 Contingent Severance Agreement dated as of March 11, 1997 between John R.
Frock and the Registrant.
11 Statement re-computation of per share earnings dated year ended December
31, 1996, and made a part hereof.
21 List of subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
Certain schedules (and similar attachments) to Exhibits 2.1, 2.2, 4.1 and 4.2
have not been filed. The Registrant will furnish supplementally a copy of any
omitted schedules or attachments to the Commission upon request.
(d) FINANCIAL STATEMENT SCHEDULES.
None.
38
<PAGE>
QUALIFICATION BY REFERENCE
Information contained in this Annual Report on Form 10-K as to a
contract or other document referred to or evidencing a transaction referred to
is necessarily not complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to this Annual Report or
incorporated herein by reference, all such information being qualified in its
entirety by such reference.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 NOBEL EDUCATION DYNAMICS, INC.
By: /s/ A. J. Clegg
--------------------
A. J. Clegg
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Position Date
/s/ A. J. Clegg Chairman of the Board, March 28, 1997
----------------- President and Chief
A. J. Clegg Executive Officer and Director
/s/ Brian C. Zwaan Executive Vice President, March 28, 1997
-------------------- Chief Financial Officer
Brian C. Zwaan (Principal Financial Officer)
/s/ Yvonne DeAngelo Vice President - Finance March 28, 1997
--------------------- and Administration
Yvonne DeAngelo (Principal Accounting Officer)
--------------------- Director March 28, 1997
Edward H. Chambers
/s/ John R. Frock Executive Vice President March 28, 1997
------------------- and Director
John R. Frock
------------------- Director March 28, 1997
Peter H. Havens
40
<PAGE>
/s/ Morgan R. Jones Director March 28, 1997
---------------------
Morgan R. Jones
/s/ Janet L. Katz Director March 28, 1997
-------------------
Janet L. Katz
/s/ John H. Martinson Director March 28, 1997
-----------------------
John H. Martinson
/s/ Eugene G. Monaco Director March 28, 1997
----------------------
Eugene G. Monaco
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
the Board of Directors of
Nobel Education Dynamics, Inc.:
We have audited the accompanying consolidated financial statements of Nobel
Education Dynamics, Inc. and subsidiaries as listed in Item 14 (a) of this Form
10-K. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nobel Education
Dynamics, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1997, except
for Note 16 as to which the
date is March 20, 1997
F-1
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1995 1996
- ------ ------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 5,251,555 $ 3,714,560
Accounts receivable, less allowance for doubtful
accounts of $103,009 in 1996 and 1995 779,075 727,097
Other accounts receivable - 573,237
Prepaid rent 734,463 609,401
Prepaid insurance and other 622,106 613,784
Deferred taxes 890,934 873,962
----------- -----------
Total Current Assets 8,278,133 7,112,041
----------- -----------
Property and equipment, at cost 26,166,293 21,220,004
Accumulated depreciation (6,843,183) (5,355,699)
----------- -----------
19,323,110 15,864,305
Property and equipment held for sale (Southeast) 1,111,412 1,307,497
Note receivable 425,000 425,000
Cost in excess of net assets acquired 25,601,028 17,273,626
Deposits and other assets 1,977,951 1,837,871
Deferred taxes 116,854 1,117,000
----------- -----------
Total Assets $56,833,488 $44,937,340
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current portion of long-term obligations $ 2,847,308 $ 1,086,409
Current portion of subordinated debt 529,348 285,253
Current portion of capital lease obligations 71,456 49,897
Accounts payable and other current liabilities 4,464,957 4,608,549
Unearned income 1,716,049 1,709,670
Escrow Payable - 203,305
----------- -----------
Total Current Liabilities 9,629,118 7,943,083
----------- -----------
Revolving Line of Credit (unused portion $10,000,000) - -
Long-term obligations 10,807,498 11,392,590
Capital lease obligations 290,095 323,199
Deferred gain on sale/leaseback 47,322 55,312
Minority interest in consolidated subsidiary 318,359 223,881
Long-term subordinated debt 3,417,656 8,878,605
----------- -----------
Total Liabilities 24,510,048 28,816,670
----------- -----------
Commitments and Contingencies (Notes 2, 5, 8, and 15)
Stockholders' Equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, issued and
outstanding 4,697,542 in 1996 and 5,505,150 in 1995 ($5,633,712 and
$6,441,320 aggregate liquidation preference at December 31, 1996 and
1995, respectively) 4,697 5,505
Common stock, $.001 par value, 50,000,000 shares authorized, issued and
outstanding 5,831,055 in 1996 and 4,095,094 in 1995 5,831 4,095
Additional paid-in capital 37,665,713 21,818,344
Common Stock issuable (Educo), 312,500 shares - 2,000,000
Accumulated deficit (5,352,801) (7,707,274)
----------- -----------
Total Stockholders' Equity 32,323,440 16,120,670
----------- -----------
Total Liabilities and Stockholders' Equity $56,833,488 $44,937,340
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $58,909,388 $44,154,367 $34,371,501
----------- ----------- -----------
Operating expenses:
Personnel costs 26,777,022 19,664,455 15,285,330
Center operating costs 8,755,337 6,640,288 5,482,016
Insurance, taxes, rent and other 11,335,866 8,091,531 6,329,865
Depreciation and amortization 2,210,504 1,512,210 1,063,326
----------- ----------- -----------
49,078,729 35,908,484 28,160,537
----------- ----------- -----------
School operating profit 9,830,659 8,245,883 6,210,964
----------- ----------- -----------
General and administrative expenses 4,189,750 3,395,940 2,696,076
Litigation claim - 500,000 200,000
----------- ----------- -----------
Operating income 5,640,909 4,349,943 3,314,888
----------- ----------- -----------
Interest expense 2,004,392 1,839,563 1,222,971
Other (income) expense (482,647) (125,724) 106,960
Minority interest in income of
consolidated subsidiary 94,479 85,808 83,491
----------- ----------- -----------
Income before income taxes 4,024,685 2,550,296 1,901,466
Income tax (benefit) expense 1,561,793 (1,355,590) (438,300)
----------- ----------- -----------
Net income before extraordinary item 2,462,892 3,905,886 2,339,766
----------- ----------- -----------
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit - 62,000 -
----------- ----------- -----------
Net income 2,462,892 3,843,886 2,339,766
Preferred stock dividends 108,419 184,114 198,555
----------- ----------- -----------
Net income available to
common stockholders $ 2,354,473 $ 3,659,772 $ 2,141,211
=========== =========== ===========
Primary earnings per share
Net income before extraordinary item $ 0 .34 $ 0.69 $ 0.53
Extraordinary item - (0.01) -
----------- ----------- -----------
Net income $ 0.34 $ 0.68 $ 0.53
=========== =========== ===========
Fully diluted earnings per share
Net income before extraordinary item $ 0.34 $ 0.64 $ 0.46
Extraordinary item - (0.01) -
----------- ----------- -----------
Net income $ 0.34 $ 0.63 $ 0.46
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Common
Preferred Stock Common Stock Paid-In Stock Accumulated
Shares Amount Shares Amount Capital Issuable Deficit Total
---------- ------------ ------------ ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1994 2,484,320 $ 2,484 15,418,063 $ 15,418 $17,222,137 - $(13,508,257) $ 3,731,782
========= =========== =========== ======== =========== =========== ============ ===========
Stock Options Exercised - - 27,000 27 25,285 - - 25,312
Issuance of Preferred Stock
less transaction costs 2,500,000 2,500 - - 2,397,500 - - 2,400,000
Preferred Dividends - - - - - - (198,555) (198,555)
Net Income - - - - - - 2,339,766 2,339,766
--------- ----------- ----------- -------- ----------- ----------- ------------ -----------
December 31, 1994 4,984,320 $ 4,984 15,445,063 $ 15,445 $19,644,922 $ - $(11,367,046) $ 8,298,305
========= =========== =========== ======== =========== =========== ============ ===========
Stock Options Exercised - - 150,000 150 112,443 - - 112,593
Warrants exercised - - 100,000 100 49,900 - - 50,000
Common shares issuable - - - - - $ 2,000,000 - 2,000,000
Issuance of Preferred Stock 1,063,830 1,064 - - $ 1,998,936 - - 2,000,000
Conversion of Preferred
Stock (543,000) (543) 638,568 639 (96) - - -
One-for-four reverse stock
split - - (12,238,537) (12,239) 12,239 - - -
Preferred Dividends - - - - - - (184,114) (184,114)
Net Income - - - - - - 3,843,886 3,843,886
--------- ----------- ----------- -------- ----------- ----------- ------------- -----------
December 31, 1995 5,505,150 $ 5,505 4,095,094 $ 4,095 $21,818,344 $ 2,000,000 $ (7,707,274) $16,120,670
========= =========== =========== ======== =========== =========== ============ ===========
Stock Options and Warrants
Exercised and - - 63,750 64 500,325 - - 500,389
related tax benefit
Common Shares Issuable - - 312,500 313 1,999,687 (2,000,000) - -
Common Shares Issued - - 122,270 122 1,739,878 - - 1,740,000
Private Placement of
Common Stock, net of
transaction costs - - 1,000,000 1,000 11,606,908 - - 11,607,908
Conversion of Preferred
Stock (807,608) (808) 237,441 237 571 - - -
Preferred Dividend - - - - - - (108,419) (108,419)
Net Income - - - - - - 2,462,892 2,462,892
--------- ----------- ----------- -------- ----------- ----------- ------------ -----------
December 31, 1996 4,697,542 $ 4,697 5,831,055 $ 5,831 $37,665,713 - ($5,352,801) $32,323,440
========= =========== =========== ======== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income $ 2,462,892 $ 3,843,886 $ 2,339,766
------------ ------------ -----------
Adjustment to Reconcile
Net Income
to Net Cash Provided by
Operating Activities:
Depreciation and
amortization 2,137,110 1,512,210 1,063,326
Depreciation related to
non-operating centers 73,394 82,007 90,646
Provision for losses on
accounts receivable 87,306 96,867 119,212
Provision for deferred
taxes 1,206,894 - -
Minority interest in
income 94,479 85,808 83,491
Early extinguishment of debt - 88,571 -
Reversal of tax valuation
allowance - (1,480,672) (510,300)
Deferred gain amortization (7,990) (7,991) (7,991)
Changes in Assets and
Liabilities Net of Acquisitions
(increase) decrease in:
Accounts receivable (139,286) (128,245) (331,452)
Prepaid assets (74,206) (187,848) 12,817
Other assets and
liabilities (243,385) (175,813) (69,585)
Unearned income (133,129) 46,329 (19,040)
Accounts payable and
accrued expenses (689,020) 262,130 127,015
------------ ------------ -----------
Total Adjustments 2,312,167 193,353 558,139
Net Cash Provided by
Operating Activities 4,775,059 4,037,239 2,897,905
------------ ------------ -----------
Cash Flows from Investing
Activities:
Capital expenditures (12,775,541) (2,051,664) (1,372,384)
Proceeds from sale of
property and equipment 8,636,151 251,225 463,760
Payment for acquisitions
net of cash acquired (4,968,528) (9,101,443) (210,161)
Other - (146,315) -
------------ ------------ ------------
Net Cash Used in Investing
Activities (9,107,918) (11,048,197) (1,118,785)
------------ ------------ -----------
Cash Flows from Financing
Activities:
Proceeds from term loan 6,000,000 7,500,000 -
Proceeds from subordinated
debt - 6,000,000 -
Proceeds from real estate
mortgage - 3,567,300 -
Proceeds from other debt 1,500,000 3,671,697 -
Transaction costs related
to issuance of debt and
stock - (1,090,771) (100,000)
Proceeds from issuance
of common stock 11,607,908 162,593 25,312
Dividends paid to
minority stockholders - - (230,726)
Repayment of long-term
debt (7,022,874) (11,699,432) (4,025,322)
Repayment of capital
lease obligation (49,897) (55,641) (62,484)
Proceeds from issuance
of preferred stock - 2,000,000 2,500,000
Dividends paid to
preferred stockholders (108,419) (184,114) (198,555)
Repayment of
subordinated debt (6,333,533) - -
Proceeds from exercise
of stock options 276,669 - -
------------ ------------ -----------
Net Cash Provided by (Used
in) Financing Activities 5,869,854 9,871,632 (2,091,775)
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 1,536,995 2,860,674 (312,655)
Cash and cash equivalents
at beginning of year 3,714,560 853,886 1,166,541
------------ ------------ -----------
Cash and cash $5,251,555 $ 3,714,560 $ 853,886
equivalents at ========== =========== ===========
end of year
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES FOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash
Flow Information
Cash paid during year for:
Interest $ 1,973,531 $1,823,882 $1,228,431
----------- ---------- -----------
Income taxes 434,498 137,423 64,721
----------- ----------- ----------
Noncash financing and investing activities
Tax benefit related to exercise of
stock options and warrants 223,720 - -
Acquisitions
Fair value of tangible assets acquired 842,016 6,847,961 190,000
Cost in excess of net assets acquired 8,978,398 8,727,293 -
Cash acquired (573,237) (29,630) -
Liabilities assumed (684,936) (934,181) -
Notes issued (1,853,713) (3,310,000) -
Escrow held - (200,000) -
Common shares issued (1,740,000) (2,000,000) -
----------- ----------- ----------
Total cash paid $ 4,968,528 $ 9,101,443 $ 190,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Company Background:
-----------------------------------------------------------------
Nobel Education Dynamics, Inc. (the "Company") was founded in 1982 and commenced
operations in 1984. The Company operates private pre-schools, elementary
schools and middle schools located primarily in California, the Mid-Atlantic
states, Illinois, Indiana, Maine, Washington and Florida.
Principles of Consolidation and Basis of Presentation:
- -----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and majority-owned subsidiary. All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principals
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fiscal Year:
- -----------
The Company's fiscal year ends the last Friday in December. There were 52 weeks
in fiscal 1996 and 1995 and 53 weeks in fiscal 1994.
Recognition of Revenues and Preopening Expenses:
- -----------------------------------------------
Revenue is recognized as the services are performed. Expenses associated with
opening new centers are charged to expense as incurred.
Cash and Cash Equivalents:
- -------------------------
The Company considers cash on hand, cash in banks, and cash investments with
maturities of three months or less when purchased as cash and cash equivalents.
The Company maintains funds in accounts in excess of FDIC insurance limits;
however, the Company minimizes the risk by maintaining deposits in high quality
financial institutions. At December 31, 1996, $250,000 in cash was restricted
(held in escrow) relating to the Company's January 1997 acquisition.
F-7
<PAGE>
Property and Equipment:
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets as follows:
Buildings 40 years
Leasehold improvements The shorter of the leasehold
period or useful life
Furniture and equipment 3 to 10 years
Maintenance, repairs and minor renewals are expensed as incurred. Upon
retirement or other disposition of buildings and furniture and equipment, the
cost of the items, and the related accumulated depreciation are removed from the
accounts and any gain or loss is included in operations.
Cost in Excess of Net Assets Acquired:
- -------------------------------------
In 1996 the Company adopted a policy to amortize goodwill related to
acquisitions over 30 years for preschools and 40 years for elementary schools.
Prior to June 1996, all acquisition-related goodwill was amortized over 40
years. Management has evaluated the life cycles of similar schools and
determined that these lives are consistent with an historical range for private
elementary education, including schools of the Company's subsidiaries Merryhill
Schools, Inc. and Educo, Inc., both of which have been operating over 30 years.
In evaluating potential acquisitions of child care centers, management considers
not only the current child care operations but also the outlook for these
centers as elementary schools. The excess of purchase price over net assets
acquired is amortized on a straight-line basis.
Amortization expense amounted to $650,996, $341,662 and $253,514 for the years
ended December 31, 1996, 1995 and 1994, respectively. Accumulated amortization
at December 31, 1996 and 1995 was $2,289,599 and $1,638,603, respectively.
Effective January 1, 1996, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." The provisions of
SFAS No. 121 require the Company to review its long-lived assets for impairment
on an exception basis whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through future cash
flows. If it is determined that an impairment loss has occurred based on
expected future cash flows, then the loss is recognized in the income statement
and certain disclosures regarding the impairment are made in the financial
statements. The adoption of SFAS No. 121 had no material effect on the
Company's 1996 consolidated financial statements. (See Note 5 related to
Property and Equipment Held for Sale.)
Income Taxes:
- ------------
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The effect on deferred taxes of a change in tax rate is recognized in income in
the period of enactment. A
F-8
<PAGE>
valuation allowance is recorded based on the uncertainty regarding the ultimate
realizability of deferred tax assets.
Reverse Stock Split:
- --------------------
On September 22, 1995, the stockholders approved a one-for-four reverse stock
split of the Company's common stock. The Company effected the reverse split on
September 28, 1995. For every four shares of common stock, each stockholder
received one share of common stock. All historical share and per share amounts
have been restated to reflect retroactively the reverse stock split (except for
the consolidated statement of stockholders' equity).
Earnings Per Share:
- ------------------
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. On a primary and
fully-diluted basis, shares outstanding are adjusted to assume conversion of the
non-interest bearing convertible preferred stock from the date of issue.
The number of shares used for computing primary and fully diluted earnings per
share after the impact of the 4:1 reverse split was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Primary 6,961,079 5,398,731 4,019,675
Fully diluted 7,262,783 6,129,121 5,037,002
</TABLE>
Stock-Based Compensation
- ------------------------
Compensation costs attributable to stock option and similar plans are recognized
based on any difference between the quoted market price of the stock on the date
of the grant over the amount the employee is required to pay to acquire the
stock (the intrinsic value method under Accounting Principles Board Opinion 25).
Such amount, if any, is accrued over the related vesting period, as appropriate.
In October 1995, the FASB (Financial Accounting Standards Board) issued SFAS No.
123, "Accounting for Stock-Based Compensation," effective for fiscal years
beginning after December 15, 1995. The Statement encourages employers to
account for stock compensation awards based on their fair value on their date of
grant. Entities may choose not to apply the new accounting method but, instead,
disclose in the notes to the financial statements the pro forma effects on net
income and earnings per share as if the new method had been applied. The
Company adopted the disclosure-only approach of the Standard effective January
1, 1996.
F-9
<PAGE>
Concentrations of Credit Risk
- -----------------------------
The Company provides its services to the parents and guardians of the children
attending the schools. The Company does not extend credit for an extended period
of time, nor does it require collateral. Exposure to losses on receivables is
principally dependent on each person's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses.
Recently Issued Accounting Standard
- -----------------------------------
In March 1997 the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997 (earlier application is not permitted).
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
Reclassifications:
- -----------------
Certain prior year amounts have been reclassified in the current year for
comparative purposes.
(2) Acquisitions:
------------
During the twelve months ended December 31, 1996 and 1995 the Company completed
various acquisitions, all of which are accounted for using the purchase method,
which are described below. The results of operations for all acquisitions are
included in in the Consolidated Statement of Income beginning in the year
acquired.
1996 Acquisitions:
- -----------------
Acquisition of Virginia Preschools:
- ----------------------------------
Pursuant to an acquisition agreement dated February 2, 1996, the Company
acquired all the assets of four Virginia corporations, each of which operates a
preschool in Virginia. The purchase price consisted of (i) $3,200,000 in cash,
(ii) a five-year note in the principal amount of $336,680 bearing interest at
the rate of 7% per annum and (iii) a cash earn-out payment of $25,000 paid in
October 1996. The Company also entered into a five year non-compete agreement
that requires monthly payments of $1,667 through February 2001. Also on
February 2, 1996, the Company acquired the assets of a fifth Virginia preschool
for 96,192 shares of the Company's common stock (valued at $1,500,000 for
financial statement purposes), and a cash earn-out payment of $12,500 paid in
October 1996. As a result of the combined transactions, the Company recorded
goodwill in the amount of approximately $5,108,000, which will be amortized over
forty years.
Acquisition of MacGregor Creative Schools, Oak Ridge Private School and
- -----------------------------------------------------------------------
Evergreen Academy:
- -----------------
In the fourth quarter of 1996, the Company completed the acquisition of stock or
assets of three companies. On November 11, 1996, the Company acquired the
assets of MacGregor Creative Schools located in Cary, North Carolina. MacGregor
Creative Schools consist of two preschools with
F-10
<PAGE>
aggregate revenues of $2.6 million and capacity of 408 children. The Company
recorded goodwill of approximately $2,459,000 as a result of this transaction,
to be amortized over thirty years. On December 27, 1996 the Company acquired the
assets of Oak Ridge Private School, an elementary school located in Coto de
Caza, California. Oak Ridge Private School has revenues of approximately
$500,000 and potential licensed capacity of 198 children. The Company recorded
goodwill of approximately $280,000 as a result of this transaction, to be
amortized over 35 years. On December 23, 1996, the Company acquired the stock of
Montessori House, Inc., which owns Evergreen Academy located in Seattle,
Washington. Evergreen Academy consists of one elementary/middle school and one
preschool with aggregate revenues of $2.3 million and licensed capacity of 400
children. A portion of the purchase price for this transaction was paid on
January 2, 1997. The Company recorded goodwill of approximately $950,000 as a
result of this transaction, to be amortized over 35 years. The purchase prices
of these three transactions totaled approximately $2.560 million in cash,
$780,000 in subordinated notes, $240,000 in stock (26,078 shares) and
approximately $300,000 in assumed liabilities.
1995 Acquisitions:
- -----------------
Acquisition of Educo, Inc.:
- --------------------------
On September 1, 1995 the Company acquired all of the outstanding shares of
common stock of Educo, Inc. Educo, Inc. is an operation of 10 schools and
preschools located in Maryland, Virginia, North Carolina and South Carolina.
The purchase price for the stock consisted of (i) $2,000,000 in cash and (ii) an
agreement to issue and deliver to the former stockholders of Educo, Inc. ("Educo
Stockholders") an aggregate of 312,500 shares of the Company's Common Stock on
or after January 15, 1996.
In connection with the acquisition of Educo, Inc., the Company guaranteed the
value of the 312,500 shares issued to the Educo Stockholders at the fair market
value of the shares ($6.40 per share) as of the date of execution of the
purchase agreement provided certain conditions are met. Specifically, if an
Educo Stockholder sells shares in a bona fide brokers' transaction during the
period (18 months) that the Company keeps effective a registration statement
with respect to such shares, the Company would pay the difference between
guaranteed value and, if less, the actual sales prices (excluding commissions
and fees); provided that the Educo Stockholders do not sell in the aggregate
more than 17,500 shares during any 30 days period during such period.
In conjunction with the acquisition, the Company entered into an agreement with
the former manager of Educo (one of the Educo stockholders) to provide
consulting services over a period of 10 years. Under the agreement, the Company
will pay annual fees in the amount of $58,224.
Acquisition of Corydon Schools:
- ------------------------------
On August 25, 1995, the Company acquired from Corydon Day Care Center, Inc.
("Corydon"), nine of its preschools located in the Indianapolis, Indiana area
(the "Centers") and substantially all of the assets (other than real estate)
used by Corydon in the business of operating the Centers. The Company also
acquired a leasehold interest in the buildings and the land upon which the
Centers are located. The purchase price for the business and assets acquired
from Corydon consisted of (i) $1,050,000 in cash and (ii) a subordinated
promissory note in the principal amount of $1,125,000 collateralized by a
security interest in certain assets located at the centers.
F-11
<PAGE>
Acquisition of Carefree Learning Centers:
- ----------------------------------------
On March 10, 1995, the Company acquired from Carefree Learning Centers, Inc.
("Carefree"), a subsidiary of Medical Service Association of Pennsylvania, doing
business as Pennsylvania Blue Shield ("Pennsylvania Blue Shield"), Carefree's
child day care business and operations and substantially all of its other
assets, other than real estate, used in the operation of Carefree's business.
The child care business purchased from Carefree consists of eight preschools in
operation at the time of closing, and three preschools under construction or in
the pre-development stage at such time, all of which are located in
Pennsylvania.
The purchase price for the business and assets acquired from Carefree consisted
of (i) $500,000 in cash, (ii) a subordinated promissory note of the Company in
the principal amount of approximately $1,585,000 and (iii) the assumption of
certain other liabilities of Carefree in the amount of approximately $365,000.
Concurrently with the acquisition of Carefree's business, the Company entered
into an agreement of sale with Pennsylvania Blue Shield, pursuant to which the
Company acquired in May 1995 (i) the land and buildings on which four of the
learning centers currently in operation and acquired from Carefree are located,
and (ii) the land and buildings at which one of the child day care centers
acquired from Carefree was at the time under construction. At the closing, the
purchase price paid for this real estate consisted of (i) approximately
$1,500,000 in cash, (ii) subordinated promissory notes of the Company in the
aggregate principal amount of approximately $600,000 and (iii) the assumption by
the Company of certain other liabilities. The real estate was subsequently sold
in March 1996 for approximately book value. In connection with this sale, the
Company is leasing those properties back from the various buyers. No gain or
loss was recognized on this sale/leaseback transaction. All future commitments
have been included in Note 8.
Unaudited Pro Forma Information:
- --------------------------------
The operating results of all acquisitions are included in the Company's
consolidated results of operations from the date of acquisition. The following
pro forma financial information assumes the acquisitions which closed during
1996 and 1995 all occurred at the beginning of 1995. These results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisitions been made at the beginning of
1995, or of the results which may occur in the future. Further, the information
gathered from some acquired companies are estimates since some acquirees did not
maintain information on a period comparable with the Company's fiscal year-end.
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
------------ -----------
<S> <C> <C>
Revenues $64,293,108 $59,196,547
Net Income 2,770,635 $ 3,867,574
Earning per share
Primary $ 0.38 $ 0.64
Fully Diluted $ 0.38 $ 0.60
</TABLE>
F-12
<PAGE>
1995 proforma results include the $2,105,400 tax benefit from the reversal of
the valuation allowance in accordance FAS 109.
(3) Cash Equivalents:
----------------
The Company has an agreement with its primary bank that allows the bank to act
as the Company's principal in making daily investments with available funds in
excess of a selected minimum account balance. This investment amounted to
$3,040,405 and $3,470,873 at December 31, 1996 and 1995, respectively. In 1996
and 1995, the Company's funds were invested in money market accounts which
exceed federally insured limits. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents as such deposits are
maintained in high quality financial institutions.
(4) Property and Equipment:
----------------------
The balances of major property and equipment classes, excluding property and
equipment held for sale in conjunction with the Southeast restructuring, were as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land $ 4,105,494 $ 2,675,423
Buildings 8,935,791 8,986,500
Assets under capital lease obligations 912,781 912,781
Leasehold improvements 4,477,198 2,382,420
Furniture and equipment 7,722,898 5,769,390
Construction in progress 12,131 493,490
----------- -----------
26,166,293 21,220,004
Accumulated depreciation (6,843,183) (5,355,699)
----------- -----------
$19,323,110 $15,864,305
=========== ===========
</TABLE>
Depreciation expense was $1,559,507, $1,150,087 and $809,818 for the years 1996,
1995 and 1994, respectively. Amortization of capital leases included in
depreciation expense amounted to $14,640 in each of the years 1996, 1995, and
1994. Accumulated amortization of capital leases amounted to $446,295,
$431,655, and $417,015 for the years ended 1996, 1995 and 1994, respectively.
(5) Property and Equipment Held for Sale (Southeast):
------------------------------------------------
In 1990 management initiated a restructuring plan which consisted of selling
operations which did not fit with its long term strategic goals and emphasizing
new center development in the Mid-Atlantic region (Delaware, New Jersey, North
Carolina, Pennsylvania and Virginia) and California. As a result, the Company
recorded a $4.9 million restructuring charge in 1990 and an additional $4.8
million in 1991.
F-13
<PAGE>
The restructuring plan initiated in 1990 resulted thus far in the disposition of
48 centers located in Florida, Georgia and South Carolina, and divestiture of
seven centers in Georgia and Florida developed for the Company but not operated.
Remaining Property and Equipment Held for Sale:
- ----------------------------------------------
Management has estimated the market price of its remaining six properties being
held for sale based on recent center sales, investment banker analysis, and the
Company's current marketing strategy.
Below is a schedule of activity of property and equipment held for sale and
related depreciation for the years ended 1996 and 1995:
Property and Equipment at Cost:
- ------------------------------
<TABLE>
<CAPTION>
Beginning Ending
Balances Balances
<S> <C> <C> <C> <C>
12/31/95 Additions Disposals 12/31/96
----------- --------- --------- ----------
Land $ 562,531 - (50,000) $ 512,531
Buildings 2,106,489 15,304 (358,030) 1,763,763
FFE 550,723 1,109 (177,414) 374,418
----------- --------- --------- ----------
$ 3,219,743 $ 16,413 ($585,444) $2,650,712
Accumulated
Depreciation ($865,870) (83,841) 234,575 ($715,136)
--------- --------- ----------
Net book value 2,353,873 1,935,576
Reserve (1,046,376) (824,164)
----------- ----------
Estimated net
realizable value $ 1,307,497 $1,111,412
=========== ==========
Beginning Ending
Balances Balances
12/31/94 Additions Disposals 12/31/95
----------- --------- --------- ----------
Land $ 562,531 - - $ 562,531
Buildings 2,104,094 2,395 - 2,106,489
FFE 626,792 11,871 (87,940) 550,723
----------- --------- --------- ----------
$ 3,293,417 $ 14,266 ($87,940) $3,219,743
Accumulated
Depreciation ($841,373) (102,568) 78,071 ($865,870)
----------- --------- --------- ----------
Net book value $ 2,452,044 $2,353,873
Reserve (1,185,396) (1,046,376)
----------- ---------
Estimated net
realizable value $ 1,266,648 $1,307,497
=========== ==========
</TABLE>
The change in reserve for restructuring includes the loss from disposition of
property and equipment as well as other assets and costs associated with
maintaining closed centers.
F-14
<PAGE>
(6) DEBT:
----
Debt consisted of the following:
December 31,
-------------------------
1996 1995
---- ----
Long Term Obligations:
- ---------------------
Term Loan $ 6,450,000 $ 7,300,000
Term Loan II 5,320,000 -
1st mortgages, due in varying installments
over three to twenty years with
fixed interest rates ranging from 11% to 12%. 1,002,263 4,943,911
Notes payable to vendors for property and
equipment with fixed interest rates
varying from 10.0% to 17.5%. 153,859 72,388
Note payable to seller of Montessori
House, Inc. 519,458 -
Notes payable to sellers from various
acquisitions, due in varying installments
over three to fifteen years with fixed
interest rates varying from 8% to 12%. 124,256 162,700
Other 84,970 -
----------- -----------
Total Long Term Obligations $13,654,806 $12,478,999
Less Current Portion (2,847,308) (1,086,409)
----------- -----------
$10,807,498 $11,392,590
=========== ===========
Subordinated Debt:
- -------------------------------------------------
14% Subordinated Debentures - $ 6,000,000
Subordinated Debt Agreements, due in varying
installments over five to ten years with fixed
interest rates varying from 7% to 8%. $ 3,947,004 3,163,858
----------- -----------
Total Long Term Subordinated Debt 3,947,004 9,163,858
Less Current Portion (529,348) (285,253)
----------- -----------
$ 3,417,656 $ 8,878,605
=========== ===========
F-15
<PAGE>
Debt:
- ----
On August 31, 1995, the Company completed a $23,000,000 refinancing (the
"Refinancing") which consisted of the placement of: (1) a $7,500,000 revolving
line of credit and a $7,500,000 term loan (the "Senior Term Loan I"), both
financed through Summit Bank (formerly First Valley Bank); (2) $6,000,000 of
subordinated debentures with Allied Capital Corporation and affiliated entities
(collectively, "Allied"); (3) 1,063,830 shares of Series D Convertible Preferred
Stock sold to Allied for a purchase price of $2,000,000; and (4) Warrants sold
to Allied to acquire an aggregate of 309,042 shares of the Company's Common
Stock, subject to certain adjustments under antidilution provisions, for a
purchase price of $100. Proceeds of the Refinancing were used as follows:
$11,104,101 to repay the Company's existing principal debt facilities;
$2,000,000 for the acquisition of Educo, Inc.; approximately $1,000,000 to pay
transaction fees and approximately $1,500,000 to provide additional cash to the
Company. The Refinancing resulted in an extraordinary loss of $62,000 related
to the write-off of the unamortized loan origination fees in 1995.
On April 4, 1996, the Company retired the outstanding $6 million subordinated
debentures to Allied described above, which bore interest at 14%, with the
proceeds of a second term loan ("Senior Term Loan II") with Summit Bank whose
principal amount was originally $6 million.
On November 1, 1996, the Company entered into the Fourth Amendment to the Loan
Agreement which increased the Company's revolving line of credit from $7,500,000
to $10,000,000 and extended the maturity dates of the Senior Term Loan I for one
year to September 2001 and the Company's revolving line of credit to September
1999. In addition, the Fourth Amendment gives the Company greater flexibility
as to the number of schools it may build and the criteria of the acquisitions it
may complete without bank approval.
The $10,000,000 revolving line of credit bears interest at an annual rate which
is LIBOR performance based and matures on September 1, 1999. There is also a
usage fee at a rate of 1/4 of 1% of the average daily unused portion of the
line. The balance of the revolving line of credit at December 31, 1996 was zero
with $10,000,000 available.
The Senior Term Loan I bears interest at an annual rate of 8.5%. Principal
payments are due quarterly, $200,000 each quarter from December 1, 1995 through
September 1, 1996, $250,000 each quarter from December 1, 1996 through September
1, 1999 and $300,000 each quarter from December 1, 1999 through September 1,
2001.
The Senior Term Loan II bears interest at an annual rate of 8% and requires
quarterly principal payments of $200,000 through September 1996. Thereafter,
quarterly payments of $280,000 are due through September 1, 1999 at which time
the quarterly payments increase to $350,000 through June 1, 2001 with the
remaining balance due on September 1, 2001.
The revolving line of credit and Senior Term Loans are collateralized by liens
in favor of Summit Bank on the Company's real and personal properties and all
future assets acquired. All loans to the Company from Summit Bank are cross-
collateralized and cross-defaulted.
Subordinated debt totaling $3,947,004 at December 31, 1996 includes $975,000
related to the acquisition of the Corydon schools, $1,903,605 related to the
acquisition of the Carefree schools, $480,000 related to the
F-16
<PAGE>
acquisition of the MacGregor Creative Schools, $288,399 related to the
acquisition of the Virginia schools and $300,000 related to the acquisition of
the Evergreen Academy schools.
The Company's debt agreements contain restrictive covenants regarding the
payment of common stock dividends and the maintenance of ratios related to debt
to earnings before interest, taxes, depreciation and amortization.
Maturities of long-term obligations are as follows: $3,376,656 in 1997,
$2,912,001 in 1998, $3,044,198 in 1999, $6,228,963 in 2000, $657,644 in 2001 and
$1,382,348 in 2002 and thereafter.
(7) Accounts Payable and Other Current Liabilities:
----------------------------------------------
Accounts payable and other current liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Accounts payable $ 887,555 $ 853,218
Accrued payroll and
related items 1,189,157 859,901
Accrued rent 420,444 444,359
Accrued property taxes 1,065,021 765,625
Other accrued expense 902,780 1,685,446
---------- ----------
$4,464,957 $4,608,549
========== ==========
</TABLE>
(8) Lease Obligations:
-----------------
Future minimum rentals, for the real properties utilized by the Company and its
subsidiaries, by year and in the aggregate, under the Company's capital leases
and noncancelable operating leases, excluding leases assigned, consisted of the
following at December 31, 1996:
F-17
<PAGE>
Operating Leases
----------------
<TABLE>
<CAPTION>
Centers
to be Continuing
Divested Centers Total
--------- ----------- -----------
<S> <C> <C> <C>
1997 $ 47,380 $ 8,758,353 $ 8,805,733
1998 47,380 8,048,061 8,095,441
1999 47,380 7,126,205 7,173,585
2000 47,380 6,535,804 6,583,184
2001 47,380 6,097,390 6,144,770
2002 and thereafter 343,505 37,428,200 37,771,705
-------- ----------- -----------
Total minimum lease
obligations $580,405 $73,994,013 $74,574,418
======== =========== ===========
</TABLE>
Capital Leases
--------------
<TABLE>
<CAPTION>
<S> <C>
1997 $115,222
1998 115,735
1999 112,777
2000 102,171
2001 25,636
--------
Total minimum lease obligations $471,541
========
Less amount representing interest 109,990
--------
Present value of capital lease obligations 361,551
--------
Less current portion 71,456
--------
$290,095
========
</TABLE>
Most of the above leases contain annual rental increases based on changes in
consumer price indexes, which are not reflected in the above schedule. Rental
expense for all operating leases was $8,112,516, $5,828,786 and $4,444,735 in
1996, 1995 and 1994, respectively. These leases are typically triple-net leases
requiring the Company to pay all applicable real estate taxes, utility expenses
and insurance costs.
Since the initiation of the Southeast restructuring (see Note 5), the Company
entered into agreements to assign or sublease leases for five centers under
development and nine centers which were operating. The fourteen assigned leases
have remaining terms from four years to fourteen years. Under the agreements,
the Company is contingently liable if the assignee is in default under the
lease. Contingent future rental payments under the assigned leases are as
follows:
F-18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1997 $ 724,567
1998 688,125
1999 673,733
2000 656,657
2001 595,023
2002 and thereafter 2,933,535
</TABLE>
On December 23, 1996 the Company entered into a multi-site sale leaseback
agreement with AEI Fund Management, Inc. (AEI). AEI agreed to purchase from the
Company, via sale/leaseback transaction, up to $15 million worth of proposed
parcels, following the construction of Company schools, through December 30,
1999. Each parcel is subject to AEI's standard credit, site and due diligence
review. The Company is to give AEI no less than sixty days notice and a
development package for the decision. The Company has not yet entered into any
sale/leaseback agreements under this agreement.
(9) Stockholders' Equity:
--------------------
Preferred Stock:
- ---------------
In connection with the Refinancing (see Note 6), on August 31, 1995, the Company
issued 1,063,830 shares of the Company's Series D Convertible Preferred Stock
for a purchase price of $2,000,000. The Series D Preferred Stock is convertible
to Common Stock at a conversion rate, subject to adjustment, of 1/4 share of
Common Stock for each share of Series D Convertible Preferred Stock. Holders of
Series D are not entitled to dividends, unless dividends are declared on the
Company's Common Stock. Upon liquidation, the holders of shares of Series D
Convertible Preferred Stock are entitled to receive, before any distribution or
payment is made upon any Common Stock, $1.88 per share plus any unpaid
dividends.
On August 22, 1994, the Company completed a private placement of an aggregate of
2.5 million shares of Series C Convertible Preferred Stock and the Series 1
Warrants and Series 2 Warrants discussed below under "Common Stock Warrants" for
an aggregate purchase price of $2,500,000. The Series C Preferred Stock is
convertible into Common Stock at conversion rate, subject to adjustment, of 1/4
share of Common Stock for each share of Series C Convertible Preferred Stock.
Holders of shares of Series C Convertible Preferred Stock are not entitled to
dividends unless dividends are declared on the Company's Common Stock. Upon
liquidation, the holders of shares of Series D Convertible Preferred Stock are
entitled to receive, before any distribution or payment is made upon Common
Stock, $1.00 per share plus any unpaid dividends. As of December 31, 1996 and
1995, 2,500,000 shares were outstanding.
On July 20, 1993, the Company completed a private placement of 2,484,320 shares
of its Series A Convertible Preferred Stock at a purchase price of $1.00 per
share. The Series A Preferred Stock is convertible into Common Stock at a
conversion rate, subject to adjustment, of .2940 shares of Common Stock for each
share of Series A Preferred Stock. The Series A Preferred Stock is redeemable
by the Company at any time after the fifth anniversary of its issuance at a
redemption price of $1.00 per share plus cumulative unpaid dividends. The
Preferred Stock is not redeemable at the option of the holders. Upon
liquidation, the holders of shares of Series A Preferred Stock are entitled to
receive, before any distribution or payment is made upon any Common Stock, $1.00
per share plus all accrued and unpaid dividends. As of December 31, 1996 and
1995, 1,133,712 and 1,941,320 shares were outstanding, respectively. Each
share of Series A Preferred Stock entitles the holder to an $.08 per share
annual dividend.
F-19
<PAGE>
Each share of Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock entitles the holder to a number of votes equal to the number of
full shares of Common Stock into which such share is convertible. Except as
otherwise required by law, holders of Preferred Stock vote together with the
Common Stock, and not as a separate class, in the election of directors and on
each other matter submitted to a vote of the stockholders.
Private Placement of Common Stock:
- ---------------------------------
On March 5, 1996, the Company raised approximately $11,600,000 through the
issuance of 1,000,000 shares of common stock at $12 per share. The Company is
using and has used the funds to pay debt, acquire schools and for general
corporate purposes.
Common Stock Warrants:
- ---------------------
In connection with the Refinancing (see Note 6) on August 31, 1995, the Company
issued to Allied warrants to acquire an aggregate of 309,042 shares of the
Company's Common Stock.
On August 22, 1994, the Company issued Series 1 Warrants for the purchase of up
to 125,000 shares of the Company's Common Stock and Series 2 Warrants for the
purchase of up to 125,000 shares of the Company's Common Stock. The Series 1
Warrants are exercisable at $4.00 per share, subject to adjustment. The Series
1 Warrants expire on August 19, 2001. The Series 2 Warrants have terminated
pursuant to their terms, because the fair market value of the Company's Common
Stock exceeded $12.00 per share for 20 consecutive business days prior to
December 31, 1996.
In May 1992, the Company raised $2,000,000 before transaction costs from the
private sale of 1,000,000 shares of common stock. In connection with the
private placement, the Company issued warrants to purchase 275,000 shares of the
Company's Common Stock. The warrants are exercisable at $2.00 per share and
expire on May 29, 1997.
1995 Stock Incentive Plan
- -------------------------
On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan.
This plan reserves up to an aggregate of 375,000 shares of common stock of the
Company for issuance in connection with stock grants, incentive stock options
and non-qualified stock options. The purpose of the plan is to attract and
retain quality employees. All options granted to date have been non-qualified
stock options which vest over three years, except options issued to directors,
which fully vest six months following date of grant.
1988 Stock Option and Stock Grant Plan:
- --------------------------------------
During 1988, the Company established the 1988 stock option and stock grant plan.
This plan reserves up to an aggregate of 125,000 shares of common stock of the
Company for issuance in connection with stock grants, incentive stock options
and non-qualified stock options.
1986 Stock Option and Stock Grant Plan:
- --------------------------------------
During 1986, the Company established a stock option and stock grant plan, which
was amended in 1987. The 1986 Plan, as amended, reserves up to an aggregate of
216,750 shares of common stock
F-20
<PAGE>
of the Company for issuance in connection with stock grants and upon the
exercise of incentive stock options and non-qualified stock options.
The number of options granted under the Stock Option and Stock Grant Plans is
determined from time to time by the Compensation Committee of the Board of
Directors. Incentive stock options are granted at market value or above, and
non-qualified stock options are granted at a price fixed by the Compensation
Committee at the date of grant. Options are exercisable for up to ten years
from date of grant.
Option activity (adjusted for the 4:1 reverse split) with respect to the 1995,
1988 and 1986 plans was as follows:
<TABLE>
<CAPTION>
Outstanding Options
- ----------------------------
<S> <C> <C> <C> <C>
Number Range
------- --
Balance, January 1, 1994 86,800 $ 3.00 to $13.00
------- ------- -- ------
Granted - - -
Canceled (275) $ 3.00 to $ 4.00
Exercised (6,750) $ 3.75
------- -------
Balance, December 31, 1994 79,775 $ 3.00 to $13.00
------- ------- -- ------
Granted 102,950 $11.625
Canceled - - -
Exercised (37,500) $ 3.00 to $ 4.00
------- ------- -- ------
Balance, December 31, 1995 145,225 $ 3.00 to $13.00
------- ------- -- ------
Granted 60,500 $ 10.50 to $15.81
Canceled (28,175) $11.625
Exercised (28,750) $ 4.00 to $ 6.00
------- ------- -- ------
Balance, December 31, 1996 148,800 $ 3.00 to $15.81
======= ======= == ======
</TABLE>
At December 31, 1996, 269,813 shares remain available for options or stock
grants under the 1995, 1988 and 1986 plans and 77,483 options were exercisable
under such plans.
In 1991, the Board of Directors granted 50,000 stock options outside the above
plans in connection with a consulting agreement with the Company's former
President. In 1986, the Board of Directors granted 18,125 options outside the
above plans to a former officer of the Company. At December 31, 1996 and 1995,
55,250 and 65,250 of such options remained outstanding, respectively.
The Company has adopted the disclosure only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the Company's Stock Option Plan. Had compensation cost
for the Company's Stock Option Plan been determined based on the fair value at
the grant date for awards in 1996 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net income and net income per share would have been
decreased to the pro forma amounts indicated below:
1996 1995
---------- ----------
F-21
<PAGE>
Net Income - as reported $2,462,892 $3,843,886
Net Income - pro forma 2,365,038 3,840,839
Net Income per share - as reported $ 0.34 $ 0.68
Net Income per share - pro forma $ 0.34 $ 0.68
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995:
Expected dividend yield 0%
Expected stock price volatility 52.2%
Risk-free interest rate 5.49-6.64%
Expected life of options 3 years
Activity (adjusted for the 4:1 reverse split) with respect to warrants
outstanding at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Number Range
-------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1994 305,000 $2.00
------- -----
Granted 125,000 $4.00
------- -----
Canceled - - -
Exercised - - -
Balance, December 31, 1994 430,000 $2.00 to $4.00
------- ----- -- -----
Granted 309,042 $7.52
Canceled - - -
Exercised (25,000) $2.00
------- -----
Balance, December 31, 1995 714,042 $2.00 to $7.52
------- ----- -- -----
Granted - - -
Canceled - - -
Exercised (25,000) $4.13 -
------- -----
Balance, December 31, 1996 689,042 $2.00 to $7.52
------- ----- -- -----
</TABLE>
(10) Other (Income) Expense:
----------------------
Other (income) expense consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Interest income $(470,164) $(141,637) $(76,721)
Rental income (143,355) (194,312) (70,288)
Depreciation related
to rental properties 73,394 82,007 93,815
</TABLE>
F-22
<PAGE>
Other projects - 29,574 15,585
Costs related to centers
held for sale 57,478 98,644 144,569
--------- --------- --------
$(482,647) $(125,724) $106,960
========= ========= ========
(11) Related-Party Transactions:
--------------------------
Legal services were rendered to the Company by Drinker Biddle & Reath, of which
a director of the Company is a partner. The Company expects this firm to
continue to provide such services during 1997. Fees paid to the firm in 1996,
1995 and 1994 totaled $128,015, $703,622 and $129,367, respectively.
A. J. Clegg, the Chairman and Chief Executive Officer of the Company, was also
the Chairman and Chief Executive Officer of JBS Investment Banking, Ltd.
("JBS"). In August, 1994, Mr. Clegg relinquished his duties at JBS and joined
the Company as Chairman and Chief Executive Officer. In the years ended
December 31, 1995 and 1994, the Company paid to JBS fees totaling, $11,554 and
$200,374, respectively.
(12) Income Taxes:
-------------
Current tax provision:
1996 1995 1994
---------- ----------- ---------
Federal $ 61,693 $ 33,755 $ 47,000
States 293,206 91,327 25,000
---------- ----------- ---------
$ 354,899 $ 125,082 $ 72,000
Deferred tax provision $1,206,894 (1,480,672) (510,300)
---------- ----------- ---------
$1,561,793 $(1,355,590) $(438,300)
========== =========== =========
F-23
<PAGE>
The difference between the actual income tax rate and the statutory U.S. federal
income tax rate is attributable to the following:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate 34% 34% 34%
State taxes, net of federal
tax benefit 3% 5% 1%
Benefit from realization of
net operating losses - (39%) (38%)
Reduction in valuation allowance - (58%) (27%)
Goodwill and other 2% 5% 7%
---- ---- ----
39% (53%) (23%)
==== ==== ====
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
-------------
Deferred Deferred Deferred
Tax Tax Tax
Assets Assets Assets
(Liabilities) (Liabilities) (Liabilities)
------------- ------------- -------------
<S> <C> <C> <C>
Depreciation $ (383,348) $ (240,639) $ (371,787)
Provision for center closings and
other restructurings 379,099 1,269,913 1,712,547
Net operating losses 801,424 720,496 1,716,213
General business credits - 27,650 27,650
AMT credit carryforward 89,509 125,816 8,400
Other 121,104 87,726 46,256
---------- ---------- -----------
Net deferred tax asset 1,007,788 1,990,962 3,139,279
Valuation allowance - - (2,628,979)
---------- ---------- -----------
Total deferred taxes $1,007,788 $1,990,962 $ 510,300
========== ========== ===========
</TABLE>
In 1994, based on the Company's analysis of the last two years of significant
positive operating performance and expected future taxable income, the Company
reduced the valuation allowance by $510,300. In 1995, based on three years of
positive net income and the analysis of projections for the
F-24
<PAGE>
years 1996 through 1999, the Company removed the remaining valuation allowance.
Accordingly, such amounts were recorded as a credit to income tax expense in the
respective periods.
The net operating loss totaling $2,357,501 begins to expire in the year 2000.
(13) Employee Benefit Plans:
----------------------
Effective January 1, 1994, the Company adopted a 401(k) Plan whereby eligible
employees may elect to enroll after one year of service. The Company will match
25% of an employee's contribution to the Plan of up to 6% of the employee's
salary. This Plan replaced the existing similar 401(k) Plan at Merryhill as of
January 31, 1994. Nobel's matching contributions under the Plan and prior
Merryhill Plan were $73,958, $60,904 and $60,617 for the years ended December
31, 1996, 1995 and 1994, respectively.
(14) Fair Value of Financial Instruments:
-----------------------------------
The fair value of financial instruments approximates carrying value. The
following methods and assumptions were considered by the Company in determining
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet approximates fair value.
Debt: The estimated fair value of the Company's debt as a whole was based
on the discounted cash flows of all debt instruments.
(15) Commitments and Contingencies:
-----------------------------
The Company is currently in dispute with a landlord over the payment of certain
taxes related to leases of centers estimated to be approximately $70,000. At
this time, the Company believes that no taxes are due. However, there are no
certainties regarding the outcome of the dispute.
The Company is engaged in other legal actions arising in the ordinary course of
its business. The Company believes that the ultimate outcome of all such
matters above will not have a material adverse effect on the Company's
consolidated financial position. The significance of these matters on the
Company's future operating results and cash flows depends on the level of future
results of operations and cash flows as well as on the timing and amounts, if
any, of the ultimate outcome.
The Company carries fire and other casualty insurance on its centers and
liability insurance in amounts which management believes is adequate for its
operations. As is the case with other entities in the education and preschool
industry, the Company cannot effectively insure itself against certain risks
inherent in its operations. Some forms of child abuse have sublimits per claim
in the general liability coverage.
F-25
<PAGE>
(16) Subsequent events
-----------------
Acquisition of Another Generation Enterprises Inc.:
- --------------------------------------------------
On January 7, 1997, the Company purchased the stock of Another Generation
Enterprises Inc. and certain related corporations, which own six preschools
located in Broward County and Palm Beach County, Florida with a capacity of
1,200 children and annual aggregate revenues of approximately $6 million. The
aggregate purchase price for the stock totaled $4,543,000, with $3,643,000 in
cash, $750,000 in notes and approximately $150,000 in assumed liabilities.
Also on January 7, 1997, the Company purchased a 20% interest in the Sagemont
School located in Weston, Florida from the principal owners of Another
Generation Enterprises, Inc. The Sagemont School is an elementary school with a
capacity of 340 which opened in the Fall of 1997. The Company also formed a
joint venture with such persons to develop five additional elementary schools in
Florida, each of which the Company will own 80%.
Acquisition of Rainbow Bridge:
- -----------------------------
On March 5, 1997, the Company executed an agreement to purchase the Rainbow
Bridge Schools located in San Jose, California. Rainbow Bridge is a school
system consisting of two elementary/middle schools and one preschool. Rainbow
Bridge Schools have historically produced revenue of approximately $5.6 million
and have a capacity to educate 950 children. The Company anticipates closing
the transaction on April 1, 1997, subject to standard closing conditions.
Loan Amendment:
- --------------
On March 20, 1997, the Company entered into the Fifth Amendment of its Loan and
Security Agreement with its primary lender which, among other changes, increased
the permitted number of new school construction projects on the Company's
balance sheet to ten annually, and permitted the Company to own at any time
seven tracts of land with a maximum $3,500,000 purchase price. This amendment
gives the Company greater flexibility to pursue its growth strategy.
F-26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Asset Purchase Agreement dated as of February 2, 1996 by and among Stony
Point Learning Center, Inc., School's Out, Inc., Cascades Childcare, Inc.
and Pump Road Child Care, Inc. and Linda Nash and Stephen Nash and the
Registrant. (Filed as Exhibit 4A to the Registrant's Current Report on
Form 8-K dated February 16, 1996, date of earliest event reported
February 2, 1996, and incorporated herein by reference.)
2.2 Asset Purchase Agreement dated as of February 2, 1996 by and among
Loudoun Children's Center, Inc. and Linda Nash and Stephen Nash and the
Registrant. (Filed as Exhibit 4A to the Registrant's Current Report on
Form 8-K dated February 16, 1996, date of earliest event reported
February 2, 1996, and incorporated herein by reference.)
3.1 Registrant's Certificate of Incorporation, as amended and restated.
(Filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, and incorporated herein by
reference.)
3.2 Registrant's Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
Registrant's Current Report on Form 8-K filed on June 14, 1993 and
incorporated herein by reference.)
3.3 Registrant's Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
Registrant's Quarterly Report on Form 10-Q with respect to the quarter
ended June 30, 1994 and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's
Current Report on Form 8-K filed on September 11, 1995, date of earliest
event reported August 25, 1995, and incorporated herein by reference.)
3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, and incorporated herein by reference.)
4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security
Agreement") among the Registrant, certain subsidiaries of the Registrant
and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the
Registrant's Current Report on Form 8-K filed on September 11, 1995, date
of earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment
and Modification dated July 2, 1996 to the Loan and Security Agreement.
(Filed
F-27
<PAGE>
as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference.)
4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and
Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference.)
4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and
Security Agreement.
4.5 Term Note dated August 30, 1995 in the principal sum of $7,500,000
payable to the order of Summit Bank. (Filed as Exhibit 4G to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.6 Line Note dated August 30, 1995 in the principal sum of $7,500,000
payable to the order of Summit Bank. (Filed as Exhibit 4H to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.7 New Term Note dated November 1, 1996 in the principal sum of $6,000,000
payable to the order of Summit Bank.
The Registrant has omitted certain instruments defining the rights of
holders of long-term debt in cases where the indebtedness evidenced by
such instruments does not exceed 10% of the Registrant's total assets.
The Registrant agrees to furnish a copy of each of such instruments to
the Securities and Exchange Commission upon request.
10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended.
(Filed as Exhibit 10(1) to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987
(the "Form S-1") and incorporated herein by reference.)
10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as
Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March
31, 1988 and incorporated herein by reference.)
10.3 1995 Stock Incentive Plan of the Registrant. (Filed as Exhibit 4.6 to
the Registrant's Registration Statement on Form S-8 (Registration
Statement No. 33-64701) filed on December 1, 1995 and incorporated herein
by reference.)
10.4 Stock Purchase Agreement between the Registrant and various investors
dated April 2, 1990. (Filed as Exhibit 10(q) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991 and incorporated
herein by reference.)
10.5 Stock and Warrant Purchase Agreement between the Registrant and various
investors, dated April 13, 1992. (Filed as Exhibit 10(r) to the
Registrant's Annual
F-28
<PAGE>
Report on Form 10-K for the year ended December 31, 1991 and incorporated
herein by reference.)
10.6 Registration Rights Agreement dated May 28, 1992 among the Registrant,
JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd.
(Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K
dated June 11, 1992, date of earliest event reported May 28, 1992, and
incorporated herein by reference.)
10.7 Saltzman Partners' Agreement dated May 28, 1992 among the Registrant, JBS
Investment Banking, Ltd., and Saltzman Partners. (Filed as Exhibit 4(b)
to the Registrant's Current Report on Form 8-K dated June 11, 1992, date
of earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.8 Warrant Subscription Agreement dated May 28, 1992 between Registrant and
Pennsylvania Merchant Group Ltd. (Filed as Exhibit 4(c) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.9 Stock Purchase Agreement dated May 28, 1992 between Registrant and a
limited number of accredited investors at $0.50 per share totaling
3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.10 Shareholder's Agreement dated May 28, 1992 between Registrant and JBS
Investment Banking, Ltd. (Filed as Exhibit 2(a) to the Registrant's
Current Report on Form 8-K dated June 11, 1992, date of earliest event
reported May 28, 1992, and incorporated herein by reference.)
10.11 Amendment No. 1 to Shareholders' Agreement dated May 28, 1992 by and
among JBS Investment Banking, Ltd., Nobel and Saltzman Partners. (Filed
as Exhibit 4(ag) to the Registrant's Quarterly Report on Form 10-Q with
respect to the quarter ended June 30, 1994 and incorporated herein by
reference.)
10.12 Series 1 Warrants for shares of Common Stock issued to Edison Venture
Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit
4(ad) to the Registrant's Quarterly Report on Form 10-Q with respect to
the quarter ended June 30, 1994 and incorporated herein by reference.)
10.13 Registration Rights Agreement between Registrant and Edison Venture Fund
II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(af) to
the Registrant's Quarterly Report on Form 10-Q with respect to the
quarter ended June 30, 1994 and incorporated herein by reference.)
10.14 Amendment dated February 23, 1996 to Registration Rights Agreement
between Registrant and Edison Venture Fund II, L.P. and Edison Venture
Fund II-PA, L.P. (Filed as Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.)
F-29
<PAGE>
10.15 Investment Agreement dated as of August 30, 1995 by and among the
Registrant, certain subsidiaries of the Registrant and Allied Capital
Corporation and its affiliated funds. (Filed as Exhibit 4A to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
10.16 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied
Capital Corporation to purchase up to 92,173 shares (pre-reverse stock
split) of the Common Stock of the Registrant. (Filed as Exhibit 4C to
the Registrant's Current Report on Form 8-K dated September 11, 1995,
date of earliest event reported August 25, 1995, and incorporated herein
by reference.)
10.17 Registration Rights Agreement dated August 30, 1995 by and among the
Registrant and Allied Capital and its affiliated funds, and amendment
thereto dated February 23, 1996. (Filed as Exhibit 4D to the
Registrant's Current Report on Form 8-K dated September 11, 1995, date of
earliest event reported August 25, 1995, and incorporated herein by
reference.)
10.18 Amendment dated February 23, 1996 to Registration Rights Agreement dated
August 30, 1995 by and among the Registrant and Allied Capital and its
affiliated funds. (Filed as Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.)
10.19 Form of subscription agreement entered into between Registrant and
certain customers of Gilder, Gagnon, Howe & Co. relating to the offer and
sale by the Company of 1,000,000 shares of its common stock. (Filed as
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.)
10.20 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and
Summary Plan Description, Issued February, 1997.
10.21 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z.
Presseisen.
10.22 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and
the Registrant.
10.23 Contingent Severance Agreement dated as of March 11, 1997 between John R.
Frock and the Registrant.
11 Statement re-computation of per share earnings dated year ended December
31, 1996, and made a part hereof.
21 List of subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
F-30
<PAGE>
EXHIBIT 4.4
FIFTH AMENDMENT AND MODIFICATION TO
-----------------------------------
LOAN AND SECURITY AGREEMENT
---------------------------
THIS FIFTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the
"Amendment") is made effective as of the _____ day of March, 1997, by and among
NOBEL EDUCATION DYNAMICS, INC. ("Nobel"), BLUEGRASS REAL ESTATE COMPANY, INC.
("Bluegrass"), IMAGINE EDUCATIONAL PRODUCTS, INC. ("Imagine"), MERRYHILL
SCHOOLS, INC. ("Merryhill"), EDUCO, INC. ("Educo"), NEDI, INC. ("NEDI"),
MONTESSORI HOUSE, INC. ("Montessori"), ANOTHER GENERATION ENTERPRISES, INC.
("Another Generation") (collectively, the "Obligors") and SUMMIT BANK, formerly
known as First Valley Bank ("Bank").
BACKGROUND
----------
A. By a Loan and Security Agreement among Obligors, Children's Park,
Incorporated, Rocking Horse Management Corporation and Bank dated August 30,
1995 (as amended by those certain amendments dated September 1, 1995, April 4,
1996, July 23, 1996 and November 1, 1996, the "Loan Agreement"), Bank agreed,
inter alia, to extend to Obligors a (i) revolving line of credit in the original
- ----- ----
principal amount of up to Ten Million Dollars ($10,000,000.00) (the "Line"),
(ii) term loan in the original principal amount of Seven Million Five Hundred
Thousand Dollars ($7,500,000.00) (the "Term Loan"), and (iii) term loan in the
original principal amount of Six Million Dollars ($6,000,000.00) (the "New Term
Loan"). Subsequent to the execution of the Loan Agreement, Children's Park,
Incorporated and Rocking Horse Management Corporation merged into Nobel with
Nobel being the surviving entity.
B. Obligors' obligations to repay the sums advanced under the (i) Line is
evidenced by that certain Line Note from Obligors to Bank dated November 1, 1996
in the face amount of Ten Million Dollars ($10,000,000.00) (the "Line Note"),
(ii) Term Loan is evidenced by that certain Term Note from Obligors to Bank
dated August 30, 1995 in the original principal amount of Seven Million Five
Hundred Thousand Dollars ( $7,500,000.00) (as amended, the "Term Note"), and
(iii) New Term Loan is evidenced by that certain New Term Note from Obligors to
Bank dated April 4, 1996 in the original principal amount of Six Million Dollars
($6,000,000.00) (as amended, the "New Term Note").
C. Obligors and Bank desire to further amend the Loan Agreement in
accordance with the terms and conditions hereof.
D. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. PERMITTED INDEBTEDNESS. Section 6.2 of the Loan Agreement is amended
---------------------- -----------
by adding the following subsection (d):
--------------
"(d) Indebtedness to AEI Fund Management, Inc. ("AEI") in an amount
not to exceed Seven Million Five Hundred Thousand Dollars
<PAGE>
($7,500,000.00) in the aggregate to be used to finance the construction
of new educational facilities of Obligors, provided that no Event of
Default or event which with the giving of notice or the passage of time
or both would become an Event of Default shall have occurred and the
incurrence of such obligations will not cause an Event of Default. All
obligations of Obligors to AEI shall be secured only by mortgage liens
and UCC-1 fixture filings against the property and improvements in
respect of which AEI is providing construction financing. Prior to
each financing with AEI, Obligors shall provide to Bank a description
of the properties being financed by AEI, the terms of such financing
and copies of all documents in connection therewith."
2. INVESTMENT ACCOUNT. Notwithstanding anything to the contrary
------------------
contained in the Loan Agreement, Bank consents to the transfer by Nobel of an
amount not to exceed Nine Million Five Hundred Thousand Dollars ($9,500,000.00)
to an account maintained by NEDI with Smith Barney, account number 532-14483-17-
187. NEDI acknowledges and agrees that such account, together with all
securities and other assets therein, all substitutions and replacements therefor
and all proceeds thereof are part of the Collateral and are subject to the
Securities Pledge Agreement from NEDI to Bank and the agreement among Bank,
Smith Barney and NEDI regarding such account.
3. FINANCIAL COVENANTS. Section 7 of the Loan Agreement shall be amended
------------------- ---------
as follows:
(a) Sections 7.1, 7.2 and 7.3 are hereby deleted in their entirety.
-------------------------
(b) The following financial covenants are hereby added to Section 7:
---------
(i) Total Funded Indebtedness To EBITDA. Obligors shall
-----------------------------------
maintain a ratio of Total Funded Indebtedness to EBITDA of
not greater than 4.0 to 1.0. as of the end of each fiscal
quarter of Obligors, calculated on a rolling four (4)
quarter basis.
(ii) Total Funded Senior Indebtedness to EBITDA. Obligors shall
------------------------------------------
maintain a ratio of Total Funded Senior Indebtedness to
EBITDA of not greater than 3.0 to 1.0. as of the end of each
fiscal quarter of Obligors, calculated on a rolling four (4)
quarter basis.
As used herein, the following terms shall have the following
meanings:
"Total Funded Senior Indebtedness" shall mean the Total Funded
Indebtedness of Obligors minus the Subordinated Indebtedness of
Obligors then outstanding.
"EBITDA" shall mean the earnings of Obligors for any given
period, plus the aggregate amounts deducted in determining such
earnings in respect of
2
<PAGE>
(i) Interest Expense, (ii) income taxes, (iii) depreciation and
(iv) amortization, all as determined in accordance with GAAP.
"Total Funded Indebtedness" shall mean the sum of all Bank
Indebtedness, Indebtedness owed to AEI, Subordinated Indebtedness
and Capitalized Lease Obligations outstanding at any given time.
4. ADDITIONAL OBLIGORS. From and after the date hereof, Montessori and
-------------------
Another Generation shall each be an "Obligor" under the Loan Agreement and shall
be bound by all of the terms and conditions thereof. Unless otherwise
specifically restated for Montessori and Another Generation hereunder, all
representations, warranties and covenants under the Loan Agreement shall be
deemed to be the representations, warranties and covenants of Montessori and
Another Generation as if Montessori and Another Generation were originally named
as an "Obligor" under the Loan Agreement. All references to Obligors in the
Loan Agreement and the other Loan Documents shall hereafter also be deemed a
reference to Montessori and Another Generation.
5. SECURITY. As security for the full and timely payment and performance
--------
of all Bank Indebtedness, Montessori and Another Generation hereby grant to Bank
a security interest in all of the following:
(a) All of such parties' present and future accounts, contract rights,
chattel paper, instruments and documents and all other rights to the payment of
money whether or not yet earned, for services rendered or goods sold, consigned,
leased or furnished by such parties or otherwise, together with (i) all goods
(including any returned, rejected, repossessed or consigned goods), the sale,
consignment, lease or other furnishings of which shall be given or may give rise
to any of the foregoing, (ii) all of such parties' rights as a consignor,
consignee, unpaid vendor or other lienor in connection therewith, including
stoppage in transit, set-off, detinue, replevin and reclamation, (iii) all
general intangibles related thereto, (iv) all guaranties, mortgages, security
interests, assignments, and other encumbrances on real or personal property,
leases and other agreements or property securing or relating to any accounts,
(v) choses-in-action, claims and judgments, (vi) any return or unearned
premiums, which may be due upon cancellation of any insurance policies, and
(vii) all products and proceeds of any of the foregoing.
(b) All of such parties' present and future inventory (including but
not limited to goods held for sale or lease or furnished or to be furnished
under contracts for service, raw materials, work-in-process, finished goods and
goods used or consumed in such parties' business) whether owned, consigned or
held on consignment, together with all merchandise, component materials,
supplies, packing, packaging and shipping materials, and all returned, rejected
or repossessed goods sold, consigned, leased or otherwise furnished by such
parties and all products and proceeds of any of the foregoing.
(c) All of such parties' present and future general intangibles
(including but not limited to tax refunds and rebates, manufacturing and
processing rights, designs, patent rights and applications therefor, trademarks
and registration or applications therefor, tradenames, brand names, logos,
inventions, copyrights and all applications and registrations therefor),
licenses, permits, approvals, software and computer programs, license rights,
royalties, trade secrets, methods, processes, know-how, formulas, drawings,
specifications, descriptions, label designs, plans,
3
<PAGE>
blueprints, patterns and all memoranda, notes and records with respect to any
research and development, and all product and proceeds of any of the foregoing.
(d) All of such parties' present and future machinery, equipment,
furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other articles
of tangible personal property of every type together with all parts,
substitutions, accretions, accessions, attachments, accessories, additions,
components and replacements thereof, and all manuals of operation, maintenance
or repair, and all products and proceeds of any of the foregoing.
(e) All of such parties' present and future general ledger sheets,
files, records, customer lists, books of account, invoices, bills, certificates
or documents of ownership, bills of sale, business papers, correspondence,
credit files, tapes, cards, computer runs and all other data and data storage
systems, whether in the possession of such parties or any service bureau.
(f) All letters of credit now existing or hereafter issued naming such
parties as beneficiaries or assigned to such parties, including the right to
receive payment thereunder, and all documents and records associated therewith.
(g) All deposits, funds, instruments, documents, policies and evidence
and certificates of insurance, securities, chattel paper and other assets of
such parties or in which such parties have an interest and all proceeds thereof,
now or at any time hereafter on deposit with or in the possession or control of
Bank or owing by Bank to such parties or in transit by mail or carrier to Bank
or in the possession of any other Person acting on Bank's behalf, without regard
to whether Bank received the same in pledge, for safekeeping, as agent for
collection or otherwise, or whether Bank has conditionally released the same,
and in all assets of such parties in which Bank now has or may at any time
hereafter obtain a lien, mortgage or security interest for any reason.
(h) All stocks, bonds, treasury securities, commercial paper, mutual
funds and other investments or securities of any nature now or hereafter
acquired by such parties, and all interest, dividends and other proceeds
thereof.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS. Montessori and Another
-----------------------------------------
Generation hereby join in and ratify and confirm all of the representations and
warranties in the Loan Agreement and agree to be bound by and to comply with all
of the covenants set forth herein.
7. NEW FACILITIES. Section 6.27 of the Loan Agreement is hereby amended
-------------- ------------
to read, in its entirety, as follows:
"6.27 New Facilities. During any fiscal year, Obligors shall not
--------------
establish more than ten (10) newly constructed educational facilities
which they, or any of them, will own or which will otherwise appear as
an asset on any Obligor's balance sheet ("Owned Facilities"). In
addition to the foregoing, Obligors may acquire and hold from time to
time up to seven (7) parcels of vacant land (the "Vacant Land"),
provided, however, the aggregate purchase price of the Vacant Land at
any time held by Obligors shall not exceed Three Million Five Hundred
Thousand Dollars ($3,500,000.00)."
4
<PAGE>
8. FURTHER ASSURANCES. Obligors covenant and agree to execute and deliver
------------------
to Bank or to cause to be executed and delivered at the sole cost and expense of
Obligors, from time to time, any and all other documents, agreements,
statements, certificates and information as Bank shall reasonably request to
evidence or effect the terms hereof, the Loan Agreement, as amended, or any of
the other Loan Documents, or to enforce or to protect Bank's interest in the
Collateral, including, without limitation, Allonges to each of the promissory
notes in connection with the Loan Agreement adding Montessori and Another
Generation as Obligors thereunder. All such documents, agreements, statements,
etc., shall be in form and content acceptable to Bank in its sole discretion.
9. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors do hereby:
--------------------------------------
(a) ratify, confirm and acknowledge that the Loan Agreement, as
amended, and the other Loan Documents continue to be and are valid, binding and
in full force and effect;
(b) covenant and agree to perform all obligations of Obligors
contained herein and under the Loan Agreement, as amended, and the other Loan
Documents;
(c) acknowledge and agree that Obligors have no defense, set-off,
counterclaim or challenge against the payment of any sums owing under Loan
Documents, the enforcement of any of the terms of the Loan Agreement, as
amended, or the other Loan Documents;
(d) acknowledge and agree that all representations and warranties of
Obligors contained in the Loan Agreement and/or the other Loan Documents, as
amended, are true, accurate and correct on and as of the date hereof as if made
on and as of the date hereof;
(e) represent and warrant that no Event of Default (as defined in the
Loan Agreement or any of the other Loan Documents) or event which with the
giving of notice or passage of time or both would constitute such an Event of
Default exists and all information described in the foregoing Background is
true, accurate and complete;
(f) acknowledge and agree that nothing contained herein and no actions
taken pursuant to the terms hereof is intended to constitute a novation of the
Loan Agreement or any of the other Loan Documents, and does not constitute a
release, termination or waiver of any of the rights or remedies granted to the
Bank therein, which rights and remedies are hereby ratified, confirmed, extended
and continued as security for the obligations of Obligors to Bank under the Loan
Agreement and the other Loan Documents, including, without limitation, this
Amendment; and
(g) acknowledge and agree that any Obligor's failure to comply with or
perform any of its covenants, agreements or obligations contained in this
Amendment shall constitute an Event of Default under the Loan Agreement and each
of the Loan Documents.
10. COSTS AND EXPENSES. Upon execution of this Amendment, Obligors shall
------------------
pay to Bank, all costs and expenses incurred by Bank in connection with the
review, preparation and negotiation of this Amendment and all documents in
connection therewith, including, without limitation, all of Bank's attorneys'
fees and costs.
11. INCONSISTENCIES. To the extent of any inconsistency between the
---------------
terms, conditions and provisions of this Amendment and the terms, conditions and
provisions of the Loan
5
<PAGE>
Agreement or the other Loan Documents, the terms, conditions and provisions of
this Amendment shall prevail. All terms, conditions and provisions of the Loan
Agreement and the other Loan Documents not inconsistent herewith shall remain in
full force and effect and are hereby ratified and confirmed by Obligors.
12. CONSTRUCTION. All references to the Loan Agreement therein or in
------------
any other Loan Documents shall be deemed to be a reference to the Loan Agreement
as amended hereby.
13. NO WAIVER. Nothing contained herein and no actions taken pursuant to
---------
the terms hereof are intended to nor shall they constitute a waiver by the Bank
of any rights or remedies available to Bank at law or in equity or as provided
in the Loan Agreement or the other Loan Documents.
14. BINDING EFFECT. This Amendment shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and assigns.
15. GOVERNING LAW. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
16. HEADINGS. The headings of the sections of this Amendment are inserted
--------
for convenience only and shall not be deemed to constitute a part of this
Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date first above written.
NOBEL EDUCATION DYNAMICS, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
BLUEGRASS REAL ESTATE
COMPANY, INC.
By:____________________________________
Name/Title:____________________________
Attest:________________________________
Name/Title:____________________________
[SIGNATURES CONTINUED NEXT PAGE]
6
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
IMAGINE EDUCATIONAL PRODUCTS,
INC.
By:____________________________________
Name/Title:____________________________
Attest:________________________________
Name/Title:____________________________
MERRYHILL SCHOOLS, INC.
By:___________________________________
Name/Title:___________________________
Attest:_______________________________
Name/Title:___________________________
EDUCO, INC.
By:___________________________________
Name/Title:___________________________
Attest:_______________________________
Name/Title:___________________________
NEDI, INC.
By:___________________________________
Name/Title:___________________________
Attest:_______________________________
Name/Title:___________________________
MONTESSORI HOUSE, INC.
By:___________________________________
Name/Title:___________________________
Attest:_______________________________
Name/Title:___________________________
[SIGNATURES CONTINUED NEXT PAGE]
7
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
ANOTHER GENERATION ENTERPRISES,
INC.
By:___________________________________
Name/Title:___________________________
Attest:_______________________________
Name/Title:___________________________
SUMMIT BANK, formerly known as
First Valley Bank
By:___________________________________
Donald H. McCarty
Regional Vice President
8
<PAGE>
EXHIBIT 4.7
TERM NOTE
---------
Blue Bell, Pennsylvania
Dated: April 4, 1996
$6,000,000.00
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned
("Borrower") hereby promises to pay to the order of FIRST VALLEY BANK ("Bank"),
the principal sum of Six Million Dollars ($6,000,000.00), together with interest
thereon upon the following terms:
1. Term Note. This Note is the "New Term Note" as defined in that certain
----------
Second Amendment and Modification to Loan and Security Agreement dated of even
date herewith, amending that certain Loan and Security Agreement dated August
30, 1995 between Borrower and Bank (such Loan and Security Agreement, as the
same has been and may hereafter be amended, supplemented or restated from time
to time, being the "Loan Agreement") and, as such, shall be construed in
accordance with all terms and conditions thereof. Capitalized terms not defined
herein shall have such meaning as provided in the Loan Agreement. This Note is
entitled to all the rights and remedies provided in the Loan Agreement and the
Loan Documents and is secured by all collateral as described therein.
2. Interest Rate. Interest on the unpaid principal balance hereof will
--------------
accrue from the date of advance until final payment thereof at a fixed, per
annum rate equal to eight percent (8%).
3. Default Interest. Upon the occurrence and during the continuance of an
-----------------
Event of Default, at the option of Bank after ten (10) days notice to Borrower,
interest will accrue on the outstanding principal amount hereof at a per annum
rate which is three percent (3%) in excess of the otherwise applicable non-
default rate of interest set forth in Section 2 above (the "Default Rate").
---------
4. Post Judgment Interest. Any judgment obtained for sums due hereunder or
-----------------------
under the Loan Documents will accrue interest at the Default Rate until paid.
5. Computation. Interest will be computed on the basis of a year of three
------------
hundred sixty (360) days and paid for the actual number of days elapsed.
<PAGE>
6. Principal and Interest Payments.
----------------------------------
(a) Interest. Borrower will pay interest in arrears on the principal balance
---------
hereof monthly at the applicable rate set forth in Section 2 above, on the
---------
first day of each calendar month commencing on May 1, 1996.
(b) Principal. Borrower will pay the outstanding principal balance hereof as
----------
follows:
(i) two (2) installments of Two Hundred Thousand Dollars ($200,000.00) each,
on June 1, 1996 and September 1, 1996;
(ii) twelve (12) equal and consecutive quarterly installments of Two Hundred
Eighty Thousand Dollars ($280,000.00) each, on the first day of each
calendar quarter commencing on December 1, 1996 and continuing through and
ending September 1, 1999;
(iii) three (3) equal and consecutive quarterly installments of Three Hundred
Fifty Thousand Dollars ($350,000.00) each, on the first day of each
calendar quarter commencing on December 1, 1999 and continuing through
and ending June 1, 2000; and
(iv) one (1) final payment of the remaining principal balance hereof, plus all
accrued and unpaid interest thereon and all other sums due and owing in
connection therewith on September 1, 2000.
7. Place of Payment. Principal and interest hereunder shall be payable as
-----------------
provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
8. Default; Remedies. Upon the occurrence of an Event of Default, Bank, at
------------------
its option and without notice to Borrower, may declare immediately due and
payable the entire unpaid balance of principal and all other sums due by
Borrower hereunder and under the other Loan Documents, together with interest
accrued thereon at the applicable rate specified above to the date of the Event
of Default and thereafter at the Default Rate. Payment thereof may be enforced
and recovered in whole or in part at any time and from time to time by one or
more of the remedies provided to Bank in this Note or in the Loan Documents or
as otherwise provided at law or in equity, all of which remedies are cumulative
and concurrent.
9. Waivers. Borrower and all endorsers, jointly and severally, waive
--------
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note, except for notices, if any, as are expressly required
to be delivered by Bank to Borrower under the Loan Agreement.
10. Miscellaneous. If any provisions of this Note shall be held invalid or
--------------
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon
2
<PAGE>
Borrower and upon Borrower's successors and assigns and shall benefit Bank and
its successors and assigns. The prompt and faithful performance of all of
Borrower's obligations hereunder, including without limitation, time of payment,
is of the essence of this Note.
11. Joint and Several Liability. All agreements, conditions, covenants and
----------------------------
provisions of this Note shall be the joint and several obligation of each
Borrower.
12. CONFESSION OF JUDGMENT. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
-----------------------
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER THE OCCURRENCE OF AN
EVENT OF DEFAULT UNDER THE LOAN AGREEMENT IN ANY ACTION BROUGHT AGAINST BORROWER
ON THIS NOTE OR THE LOAN DOCUMENTS AT THE SUIT OF BANK, WITH OR WITHOUT
COMPLAINT OR DECLARATION FILED, WITHOUT STAY OF EXECUTION, AS OF ANY TERM OR
TIME, AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST BORROWER FOR THE ENTIRE
UNPAID OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AND ALL OTHER SUMS TO BE PAID
BY BORROWER TO OR ON BEHALF OF BANK PURSUANT TO THE TERMS HEREOF OR OF THE LOAN
DOCUMENTS AND ALL ARREARAGES OF INTEREST THEREON, TOGETHER WITH ALL COSTS AND
OTHER EXPENSES AND AN ATTORNEY'S COLLECTION COMMISSION OF FIFTEEN PERCENT (15%)
OF THE AGGREGATE AMOUNT OF THE FOREGOING SUMS, BUT IN NO EVENT LESS THAN
$5,000.00; AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT
SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY
EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL
PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER. BORROWER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE EXECUTION AND DELIVERY OF
THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE ENTRY
OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL
BECOME A LIEN ON ALL REAL PROPERTY OF BORROWER IN THE COUNTY WHERE SUCH JUDGMENT
IS ENTERED AND THAT EXECUTION MAY IMMEDIATELY BE ISSUED ON THE JUDGMENT TO
GARNISH, LEVY ON OR ATTACH ANY PERSONAL PROPERTY OF BORROWER.
3
<PAGE>
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has caused
this Note to be duly executed the day and year first above written.
NOBEL EDUCATION DYNAMICS, INC.
By:__________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
BLUEGRASS REAL ESTATE COMPANY, INC.
By:__________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
IMAGINE EDUCATIONAL PRODUCTS, INC.
By:__________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
CHILDREN'S PARK, INCORPORATED
By:__________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
4
<PAGE>
[SIGNATURES CONTINUED FROM THE PRECEDING PAGE]
MERRYHILL SCHOOLS, INC.
By:________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
ROCKING HORSE MANAGEMENT CORPORATION
By:________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
EDUCO, INC.
By:________________________________
John R. Frock, Executive Vice President
(CORPORATE SEAL)
5
<PAGE>
EXHIBIT 10.20
NOBEL EDUCATION DYNAMICS, INC.
EXECUTIVE SEVERANCE PAY
PLAN STATEMENT
AND
SUMMARY PLAN DESCRIPTION
Issued March, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
<TABLE>
<CAPTION>
<S> <C> <C>
PART 1. DEFINITIONS..................................... 1
(S)1.1 Board.................................. 1
(S)1.2 Change in Control...................... 1
(S)1.3 Company................................ 2
(S)1.4 Eligible Employee...................... 2
(S)1.5 Employer............................... 3
(S)1.6 Monthly Pay............................ 3
(S)1.7 Plan................................... 3
(S)1.8 Plan Administrator..................... 3
(S)1.9 Plan Statement......................... 3
(S)1.10 Plan Year.............................. 4
(S)1.11 Termination Event...................... 4
(S)1.12 Years of Service....................... 4
PART 2. PARTICIPATION................................... 4
(S)2.1 Commencement of Participation.......... 4
(S)2.2 Eligibility for Severance Benefits..... 4
PART 3. SEVERANCE BENEFITS; FUNDING..................... 6
(S)3.1 Severance Benefits..................... 6
(S)3.2 Plan Not Funded........................ 7
(S)3.3 Limitations Concerning Excess Parachute
Payments............................... 7
PART 4. FORM AND TIMING OF SEVERANCE PAYMENTS........... 8
(S)4.1 Severance Allowance.................... 8
(S)4.2 Bonus.................................. 8
(S)4.3 Payments After Death................... 8
PART 5. OTHER PLAN FEATURES............................. 8
(S)5.1 Assignment of Benefit Prohibited....... 8
(S)5.2 Claims and Controversies............... 8
(S)5.3 Amendment or Termination of Plan....... 10
PART 6. ADDITIONAL INFORMATION.......................... 10
(S)6.1 Type of Plan........................... 10
(S)6.2 Plan Sponsor........................... 10
(S)6.3 Plan Administrator..................... 10
(S)6.4 Service of Legal Process............... 10
(S)6.5 Governing Law.......................... 11
(S)6.6 Severability........................... 11
(S)6.7 Entire Agreement....................... 11
(S)6.8 Successor Employer..................... 11
</TABLE>
-i-
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
EXECUTIVE SEVERANCE PAY
PLAN STATEMENT
AND
SUMMARY PLAN DESCRIPTION
Effective as of January 1, 1997, Nobel Education Dynamics, Inc. (the
"Company"), a Delaware corporation, has established the "Nobel Education
Dynamics, Inc. Executive Severance Pay Plan" (hereinafter referred to as the
"Plan") for the benefit of eligible employees. The terms of the Plan are set
forth in this document and they entirely supersede and replace all prior rules
and policies regarding severance benefits. This document is intended to give
participants an easily understood explanation of the major features of the Plan.
The Plan provides severance benefits on account of a termination event
with respect to an eligible employee. All payments will be made from the
general corporate assets of the Company or an affiliated employer. The payments
will not be contingent directly or indirectly upon the retirement of an
employee.
PART 1. DEFINITIONS
When the following terms are used in this document with initial
capital letters, they shall have the following meanings:
(S)1.1 Board - the Board of Directors of the Company.
-----
(S)1.2 Change in Control - a "Change in Control" shall be deemed to
-----------------
have taken place if:
(a) any person, including a group, becomes the beneficial owner of
shares of the Company having 50 percent or more of the total number of votes
that may be cast for the election of directors of the Company;
(b) any person, including a group, becomes the beneficial owner of
shares of the Company having 25 percent or more of the total number of votes
that may be cast for the election of directors of the Company, unless such
person's acquisition of such percentage of stock has been approved by at least
two-thirds of the directors in office on the date immediately preceding the date
such percentage ownership is first attained (other than Excluded Members);
(c) there occurs any cash tender or exchange offer for shares of the
Company, merger or other business combination, or sale of assets, or any
combination of the
<PAGE>
foregoing transactions, and as a result of or in connection with any such event
persons who were directors of the Company before the event shall cease to
constitute a majority of the Board or of the board of directors of any successor
to the Company; or
(d) at any date ("Reference Date"), 50 percent or more of the members
of the Board consists of persons other than (i) persons who were members of the
Board two years prior to the Reference Date (other than Excluded Members) and
(ii) Approved Members.
For purposes of subsections (b) and (d) above, (i) an "Approved
Member" shall mean any director (other than an Excluded Member) whose election
by the Board or nomination for election by the stockholders of the Company was
approved by a vote of at least two-thirds of the directors in office on the date
of approval who either were directors (A) on the date two years prior to the
Reference Date or (B) who had previously become Approved Members; and (ii) an
"Excluded Member" is any director (A) designated or nominated by, or affiliated
with, a person who has entered into an agreement with the Company to effect a
transaction described in subsection (c) above, or (B) who initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 under the Securities Exchange Act of 1934 (the
"Exchange Act")) or other actual or threatened solicitation of proxies or
contests by or on behalf of a person other than the Board (a "Proxy Contest"),
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest.
As used in this Section 1.2, the terms "person" and "beneficial owner"
have the same meanings as such terms under section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder.
(S)1.3 Company - Nobel Education Dynamics, Inc., a Delaware
-------
corporation.
(S)1.4 Eligible Employee - the following employees who hold the
-----------------
position indicated, or should such employee cease to be employed in such
position prior to a Change in Control, the employee who succeeds to such
position, as well as such other additional employees or positions as determined
by written resolution of the Board from time to time: A.J. Clegg, Chairman,
Chief Executive Officer, and President; John R. Frock, Executive Vice President
- - Corporate Development; Brian Zwaan, Chief Financial Officer and Executive Vice
President; D. Scott Clegg, Executive Vice President - Operations; Yvonne
DeAngelo, Vice President - Finance & Administration; Robin Eglin, Vice President
- - Real Estate Development; Barry S. Swirsky, General Counsel; and Barbara
Presseisen, Vice President - Education.
-2-
<PAGE>
(S)1.5 Employer - the Company and any corporation which is a member
--------
of a controlled group (as defined in section 414(c) of the Internal Revenue Code
of 1986, as amended (the "Code")) which includes the Company.
(S)1.6 Monthly Pay - one-twelfth of your highest base salary rate
-----------
(excluding bonus payments, overtime and any other extra payments) from the
Employer which is in effect in the calendar year in which a Change in Control
occurs (annualized on the basis of a 52-week year). The calculation of your
Monthly Pay is made on a pre-tax basis.
(S)1.7 Plan - the severance pay plan of the Company established for
----
the benefit of Eligible Employees. (As used herein, "Plan" refers to the
program established by the Company and not the document pursuant to which the
Plan is maintained. That document is referred to herein as the "Plan
Statement.") The Plan shall be referred to as the "Nobel Education Dynamics,
Inc. Executive Severance Pay Plan."
(S)1.8 Plan Administrator - the Company's Compensation Committee as it
------------------
is constituted on the date preceding the date of a Change in Control; provided,
however, that should a majority of the members of such Committee refuse to so
serve following a Change in Control, the Plan Administrator shall be a person or
committee appointed by the Board and approved by at least 51 percent of the Plan
participants; and further provided, that should the Company and 51 percent of
the Plan participants fail to agree on such a successor Plan Administrator, the
Plan Administrator shall be appointed by the arbitrators acting pursuant to
Section 5.2(c). The Plan Administrator shall have the responsibility, power,
authority and discretion to supervise and control the operation of the Plan in
accordance with the terms of the Plan Statement. The Plan Administrator shall
be the "named fiduciary" of the Plan within the meaning of section 402 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). If the
Plan Administrator is a committee, a majority of the members of such committee
shall constitute a quorum for the transaction of business related to the Plan.
All resolutions or other actions taken by such committee at any meeting shall be
by vote of the majority of members of such committee. Resolutions may be
adopted or other action taken without a meeting upon written consent signed by
all members of such committee.
(S)1.9 Plan Statement - this document entitled "Nobel Education
--------------
Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan
Description" as adopted by the Company, effective as of January 1, 1997, as the
same may be amended from time to time thereafter.
-3-
<PAGE>
(S)1.10 Plan Year - the 12-consecutive month period beginning on any
---------
January 1 and ending on the following December 31.
(S)1.11 Termination Event - an event described in Section 2.2(b).
-----------------
(S)1.12 Years of Service - the number of 12-month periods
----------------
beginning on your first day of work with the Employer and ending on the date a
Termination Event occurs; provided, however, if you incur a break in service of
longer than two months in any such 12-month period, such 12-month period shall
not count as a Year of Service. If you work at least 10 months in any such 12-
month period, you will receive credit for one Year of Service. Partial Years of
Service shall be disregarded.
PART 2. PARTICIPATION
(S)2.1 Commencement of Participation - You become a participant in
-----------------------------
the Plan on the date you become an Eligible Employee, or January 1, 1997,
whichever is later.
(S)2.2 Eligibility for Severance Benefits -
----------------------------------
(a) In General. You are eligible to receive severance benefits under
----------
the Plan if you experience a Termination Event on or after the date you become a
participant in the Plan.
(b) Termination Event. Except as provided in Section 2.2(c), a
-----------------
Termination Event occurs if, prior to the date which is the number of months
following the date of a Change in Control equal to six plus the number of months
of Monthly Pay you would be entitled to under Section 3.1(a), you cease to be
employed by the Employer for any of the reasons set forth in (1), (2) or (3)
below:
(1) the Employer terminates your employment; or
(2) you terminate employment with the Employer as a
result of any of the following events occurring
after a Change in Control:
(A) your position is materially adversely
changed from the description of your
position in Appendix A attached hereto;
(B) you are assigned duties and responsibilities
that are
-4-
<PAGE>
inconsistent, in a material respect, with
the scope of duties and responsibilities
associated with the description of your
position in Appendix A attached hereto;
(C) your compensation plan is reduced as
compared to your compensation plan
immediately before the Change in Control; or
(D) the Employer requires you to be based at
any office which is more than 25 miles
further from your residence on the date such
requirement is imposed than the Employer's
location on the day before a Change in
Control (other than travel reasonably
required in the performance of your
responsibilities); or
(3) prior to the date which is one month following the
date of a Change in Control, you terminate
employment with the Employer for any reason (or
give the Employer notice thereof).
(c) Terminations Not Qualifying as Termination Events -
-------------------------------------------------
Notwithstanding Section 2.2(b), you are not eligible to receive severance
benefits under the Plan if one of the following applies:
(1) your employment with the Employer is involuntarily
terminated due to your act or acts of dishonesty
which you intended to result in your personal
enrichment;
(2) prior to the occurrence of an event described in
Sections 2.2(b)(2)(A)-(D), your employment with the
Employer is involuntarily terminated due to your
documented willful and deliberate insubordination;
(3) your employment with the Employer is involuntarily
terminated because you have been convicted of a
felony; or
-5-
<PAGE>
(4) (A)your employment with the Employer is terminated,
but prior to the date which is seven days after
such termination, you are offered employment by
the buyer of the entire (or substantially all of
the) business of the Company following a sale or
divestiture by the Company of such business, on
terms which if such employment continued with the
Employer, would not give you the right to
Severance benefits under Section 2.2(b)(2), and
you do not accept such employment, and (B) such
successor has assumed all Plan liabilities as
required by Section 6.8; or
(5) any other voluntary or involuntary termination not
described in Section 2.2(b).
PART 3. SEVERANCE BENEFITS; FUNDING
(S)3.1 Severance Benefits - If you experience a Termination Event,
------------------
your severance benefits are as follows, subject to Section 3.3:
(a) Severance Allowance. The Employer will pay you a severance
-------------------
allowance equal to your Monthly Pay multiplied by six plus:
----
(1) if you have not completed three Years of Service as
of the date a Termination Event occurs, your
Monthly Pay multiplied by the number of Years of
Service you have completed as of the date a
Termination Event occurs; or
(2) if you have completed at least three Years of
Service as of the date a Termination Event occurs,
your Monthly Pay multiplied by two times the number
of Years of Service you have completed as of the
date a Termination Event occurs, up to a maximum of
12 (i.e., an aggregate maximum severance allowance
----
equal to your Monthly Pay multiplied by 18).
-6-
<PAGE>
(b) Bonus. The Employer will pay you the bonus, if any, that you
-----
would have received had you been employed by the Employer on the day on which,
absent this provision, you would have had to have been employed to receive a
bonus for the bonus period in which the Termination Event occurs, prorated for
the portion of the bonus period occurring prior to your Termination Event.
(c) Vacation Days. The Employer will pay you the cash-value of the
-------------
vacation days to which you are entitled, but which you have not used, on the day
before the Termination Event occurs.
(d) Medical and Group Term Life Insurance. The Employer will provide
-------------------------------------
you the medical insurance and group term life insurance that you were entitled
to on the day before a Change in Control occurs, for a period beginning with the
date a Termination Event occurs and continuing over the number of months of
Monthly Pay determined under subsection (a) (i.e., a maximum of 18 months).
----
(S)3.2 Plan Not Funded - The Employer will not make any contributions
---------------
to fund this Plan. Any severance payments made pursuant to the Plan will be
paid out of the general funds of the Employer, and as a participant, you will
not have any secured or preferred interest by way of trust, escrow, lien or
otherwise in any specific assets. As a participant, your rights shall be solely
those of an unsecured general creditor of the Employer.
(S)3.3 Limitations Concerning Excess Parachute Payments. This Section
------------------------------------------------
shall be interpreted and applied to limit amounts otherwise payable to an
Eligible Employee under the Plan only to the extent required to avoid any
material risk of the imposition of excise taxes on the Eligible Employee under
section 4999 of the Code, or the disallowance of a deduction to the Employer
under section 280G(a) of the Code. Notwithstanding any other provision of the
Plan, severance benefits payable under Section 3.1 of the Plan, to the extent
they are parachute payments (as defined in section 280G(b)(2) of the Code),
shall be modified to the extent necessary so that the aggregate present value
(as defined in section 280G(d)(4) of the Code) of such parachute payments
payable under the Plan and any other parachute payments (as defined in section
280G(b)(2) of the Code) payable pursuant to any other plan or agreement between
the Eligible Employee and the Employer shall be at least one dollar less than
three times the Eligible Employee's base amount (as defined in section
280G(b)(3) of the Code).
-7-
<PAGE>
PART 4. FORM AND TIMING OF SEVERANCE PAYMENTS
(S)4.1 Severance Allowance - Your severance allowance under Section
-------------------
3.1(a) will normally be paid to you in a lump sum payment within 30 days
following a Termination Event. The Plan Administrator may, however, (i) delay
the lump sum payment to a date no more than three months following a Termination
Event, or (ii) modify the method of payment to installments coincident with
normal payroll cycles, if the Plan Administrator, in its sole discretion,
determines that the Company's cash resources are insufficient to make a lump sum
payment. In no event, however, shall the Plan Administrator delay payment or
modify the method of payment solely on account of your request to do so.
(S)4.2 Bonus - Your bonus, if any, under Section 3.1(b) will be paid
-----
to you in a lump sum payment on the date the bonus would have been paid to you
had you remained employed by the Employer.
(S)4.3 Payments After Death - If severance allowance (under Section
--------------------
3.1(a)) and/or bonus (under Section 3.1(b)) remains unpaid at your death, the
remaining amount will be paid in a lump sum to the beneficiary you most recently
designated with respect to the Plan. In the event no such beneficiary has been
designated or survives you, your most recent beneficiary designation with
respect to the group term life insurance provided by the Employer shall govern.
PART 5. OTHER PLAN FEATURES
(S)5.1 Assignment of Benefit Prohibited - No severance benefits under
--------------------------------
this Plan shall be subject in any manner to anticipation, alienation, assignment
(either at law or in equity), encumbrance, garnishment, levy, execution or other
legal or equitable process.
(S)5.2 Claims and Controversies - Benefits will be paid from the Plan
------------------------
to you, your personal representative or beneficiary only after a proper written
claim for the benefits has been filed with the Plan Administrator. If you
believe you may be entitled to benefits, or if you are in disagreement with any
determination that has been made, follow the following procedure:
(a) Making a Claim. Your claim must be written and must be
--------------
delivered to the Plan Administrator. Within 30 days after you deliver your
claim, you will receive a decision. If your claim is wholly or partially
denied, you will receive a written notice specifying: (i) the reasons for
denial; (ii) the Plan provisions on which the denial is based; and (iii) any
additional information needed from you in connection with the claim and the
reason such information is needed. You also will
-8-
<PAGE>
receive a copy of paragraph (b) below concerning your right to request a review.
(b) Requesting Review of a Denied Claim. You may request that a denied
-----------------------------------
claim be reviewed. Your request for review must be written and must be
delivered to the Plan Administrator within 60 days after you receive the written
notice that your claim was denied. Your request for review may (but is not
required to) include issues and comments you want considered in the review. You
may examine pertinent Plan documents by asking the Plan Administrator. Within
30 days after you deliver your request for review, you will receive a decision.
The decision will be in writing and will specify the Plan provisions on which it
is based.
(c) Arbitration. In the event any controversy or claim arising out of
-----------
or relating to the Plan or the breach, termination or validity thereof is not
resolved pursuant to subsection (a) or subsection (b), such controversy or claim
shall be settled by arbitration by three arbitrators in accordance with the
Center for Public Resources, Inc. Non-Administered Arbitration Rules, and
judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof.
(d) In General. This Section 5.2 shall be the sole method in which
----------
controversies or claims under this Plan shall be determined. All decisions on
claims and on review of denied claims under subsections (a) and (b) will be made
by the Plan Administrator. The Plan Administrator may, in its discretion, hold
one or more hearings. If you do not receive a decision within the specified
time, you should assume your claim was denied or re-denied on the date the
specified time expired. You may have an attorney or other representative act on
your behalf. The Plan Administrator shall have the sole discretion to carry out
its duties under the Plan, to construe and interpret the provisions of the Plan,
and to determine all questions concerning benefit entitlements, including the
power to construe and determine disputed or doubtful terms. To the maximum
extent permissible under law, the Plan Administrator's determinations on all
such matters shall be final and binding on all persons involved.
If your claim is denied under Section 5.2(a), and approved on appeal
under Section 5.2(b) or pursuant to arbitration under Section 5.2(c), the
Company (i) will pay your legal fees associated with the claim, appeal and
arbitration, (ii) will pay you interest on the severance benefits payable under
subsections (a), (b) and (c) of Section 3.1, at the prime rate stated in The
---
Wall Street Journal on the date of your Termination Event, and over the period
- -------------------
ending on the date payment is made and beginning (A) with respect to benefits
payable
-9-
<PAGE>
pursuant to Section 3.1(a) and (c), on the date of your Termination Event, and
(B) with respect to any bonus payable pursuant to Section 3.1(b), on the date
the bonus would have been paid to you had you continued to be employed by the
Employer, and (iii) will reimburse you or your beneficiary(ies) for, and pay to
your beneficiary(ies) any medical and group term life insurance benefits,
respectively, which would have been reimbursed or paid had your medical and
group term life insurance benefits been provided in accordance with Section
3.1(d) on and after the date of your Termination Event.
(S)5.3 Amendment or Termination of Plan - The Company, by written
--------------------------------
action of the Board, reserves the right to amend the Plan and the provisions of
the Plan Statement or to terminate the Plan at any time, provided that no such
amendment or termination shall impair your rights under the Plan if a Change in
Control occurs before the date of such amendment or termination. If either of
these actions is taken, you will be notified.
PART 6. ADDITIONAL INFORMATION
(S)6.1 Type of Plan - The Plan is a severance pay welfare benefit plan
------------
which is intended to be a plan solely covering a select group of management or
highly compensated employees within the meaning of section 201(2) of ERISA and
the regulations issued thereunder. The Plan is not a pension benefit plan.
(S)6.2 Plan Sponsor - The name of the employer sponsoring the Plan and
------------
its federal employer identification number ("EIN") are:
Nobel Education Dynamics, Inc.
Rose Tree Corporate Center II
1400 North Providence Road
Suite 3055
Media, PA 19063
Telephone: (610-691-8200)
EIN: 22-2465204
(S)6.3 Plan Administrator - The Plan is administered by the Plan
------------------
Administrator. Communications addressed to the Plan Administrator should be
sent to the address listed in Section 6.2.
(S)6.4 Service of Legal Process - The General Counsel of the Company,
------------------------
or should there be no General Counsel, the President of the Company, is
designated as agent for service of legal process against the Plan.
-10-
<PAGE>
(S)6.5 Governing Law - The law of the Commonwealth of Pennsylvania
-------------
shall be the controlling state law in all matters relating to the Plan and shall
apply to the extent it is not preempted by the ERISA.
(S)6.6 Severability - If any provision of the Plan Statement shall be
------------
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision, and the Plan Statement shall be construed and
enforced as if such provision had not been included.
(S)6.7 Entire Agreement - This Plan Statement contains the entire
----------------
agreement by the Employer with respect to the subject matter hereof. No
modification or claim of waiver of any of the provisions hereof shall be valid
unless in writing and signed by the party against whom such modification or
waiver is sought to be enforced.
(S)6.8 Successor Employer - In the event of the dissolution, merger,
------------------
consolidation, or reorganization of the Company, or the sale of the entire (or
substantially all of the) business of the Company, the Plan shall be continued
by the Company's successor. The successor shall assume all Plan liabilities and
shall have the powers, duties and responsibilities of the Company under the
Plan.
IN WITNESS WHEREOF, Nobel Education Dynamics, Inc. has caused this
Plan Statement to be duly executed this ____ day of ________________________,
1997.
Attest: NOBEL EDUCATION DYNAMICS, INC.
_________________________ By:______________________________
Secretary President
[Corporate Seal]
-11-
<PAGE>
APPENDIX A
Chief Executive Officer
Chief executive officer, with final authority in making all decisions regarding
the Company and its subsidiaries, subject to any required approval of the
Company's board of directors.
Executive Vice President; Chief Financial Officer
Reports directly to the president, chairman and/or chief executive officer.
Manages all financial operations of the Company and subsidiaries, including
accounting, treasury, financing, payroll, internal reporting and external
reporting. Manages human resource function and MIS department. Manages
relations with lenders, investment bankers and stock analysts. Evaluates
financial impact of acquisitions and new center development, granting approval
where appropriate. Manages annual Five Year Business Plan process/assist in
Long Range Strategic Planning. Member of the Company's executive management
team.
Executive Vice President - Corporate Development
Reports directly to the president, chairman and/or chief executive officer and
charged with implementation of growth plans of Company through new school
development and acquisitions plus appropriate divestitures. Vice President of
Real Estate Development and General Counsel report to this position. Member of
the Company's executive management team.
Executive Vice President - Operations
Reports directly to the president, chairman and/or chief executive officer and
charged with responsibility for the financial performance and quality of all
school operations nationwide. This includes day-to-day operations of all
company locations, as well as the successful opening of all new school projects
and successful transition of all acquisitions. Coordinates all marketing
programs. Bottom-line responsibility for all operations as well as the
operations G&A/Budget function. The following positions report directly to the
COO/EVP: Vice President of Operations and for each geographic territory
Regional Managers, not reporting to an operations Vice President. Member of the
Company's executive management team.
-12-
<PAGE>
Vice President - Education
Reports directly to the president, chairman and/or chief executive officer and
charged with overseeing all matters that pertain to the quality of education
programs offered by the Company. Responsible for setting and maintaining
standards and policies related to educational issues of both internal and
external concern and overseeing such adherence within the schools. Member of
the Company's executive management team.
Vice President - Real Estate Development
Responsible for all activities relating to new school development and the
appropriate budgeting commitments. Member of the Company's executive management
team.
Vice President - Administration and Finance
Reports to chief financial officer. Oversees accounting and payroll functions
(accounts payable, cash management, accounts receivable, general ledger and
payroll). Responsibilities include closing books and records monthly, weekly
operations reporting, monthly management report of operations, quarterly and
annual external (SEC) reporting (10-K's, 10-Q's and financial portions of 8-K),
acquisition analysis, financial due diligence and transition. Additional
responsibilities are insurance and tax analysis, assist in formulating and
producing annual budgets, quarterly forecasts and Strategic Five Year Plan,
oversight of internal audit function, stock transactions and annual meeting
vote. Member of the Company's executive management team.
General Counsel
Responsible for all legal affairs of the Company and its subsidiaries.
Participates in business decisions regarding corporate development including new
school development, acquisitions and divestitures. Member of the Company's
executive management team.
-13-
<PAGE>
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement is dated as of June 4, 1996, between Nobel
Education Dynamics, Inc., a Delaware corporation ("Employer") and Barbara Z.
Presseisen, an individual. residing at 1943 Pine Street, Philadelphia, PA 19103
("Executive").
Background
Executive wishes to be employed as Vice President of Education of Employer,
and to be responsible for the functions and duties assigned to this position,
and Employer wishes to assure itself of the services of Executive, and, upon the
conditions hereinafter provided, Executive and Employer are prepared to enter
into this employment agreement.
Terms
Now, Therefore, in consideration of the premises and mutual covenants and
obligations hereinafter set forth, intending to be legally bound hereby, the
parties hereto agree as follows:
1. Employment; Scope of Duties.
1.1 Subject to and upon the terms and conditions set forth herein,
Employer hereby employs Executive in the capacity of Vice President of
Education, and Executive hereby accepts such employment and agrees to render her
services exclusively to Employer, its subsidiaries and affiliates, in such
capacity or similar capacity, and faithfully, diligently and to the best of her
ability. Executive will perform those duties and responsibilities as may from
time to time reasonably be specified by Employer. Such duties and
responsibilities will initially include, without limitation, those duties set
forth in Exhibit A attached hereto.
1.2 Executive will devote her full business and professional time, energy
and skill exclusively to the service of Employer, its subsidiaries and
affiliates and to the promotion of its interests in accordance with the duties
assigned to her by Employer hereunder and will not render services of a
business, professional or commercial nature to any other person or firm, whether
for compensation or otherwise; provided, however, that the foregoing shall not
be construed as preventing Executive from (a) making investments in other
businesses or enterprises which do not provide services which are in competition
with those provided by Employer, provided such investments do not require the
provision of other than incidental services by Executive to the operation or
affairs of such businesses or enterprises or (b) serving on the board of
community and nonprofit organizations which do not provide services which are in
competition with those provided by Employer; provided further that, in the case
of both clauses (a) and (b), the provision thereof will not interfere with the
performance of Executive's duties hereunder. Executive shall serve, without
additional compensation, as an officer of Employer and its subsidiaries or
affiliates, if duly elected as such. If Executive is duly elected and she
consents to serve as a director of Employer or its subsidiaries or affiliates,
she shall not be entitled to any additional compensation.
<PAGE>
2. Term. The term of Executive's employment will commence on June 17, 1996
and end on June 18, 1999, unless and until terminated earlier pursuant to the
provisions of this Agreement (said period during which Executive is employed
full time pursuant to this Agreement is hereinafter referred to as the
"Employment Period").
3. Compensation. As compensation and consideration for Executive's services
and responsibilities under this Agreement, Employer will pay Executive, and
Executive will accept, the compensation and benefits set forth in this Section
3.
3.1 Base Salary. Employer shall pay to Executive a gross salary at the
-----------
annual rate of Eighty-Five Thousand Dollars ($85,000) (hereinafter "Base
Salary"), payable at such intervals as Employer pays the salaries of its
executive employees generally (currently every two weeks), but not less
frequently than monthly. It is understood that nothing contained herein shall
prevent Employer from increasing the compensation provided herein to be paid to
Executive, either permanently or for a limited period, or of providing
additional compensation to Executive based upon the earnings or business
successes of Employer if Employer, in its sole discretion, deems it advisable to
do so in order to recognize and fairly compensate Executive for the value of her
services to Employer; but nothing contained herein shall in any manner obligate
Employer to make any such increase or provide any such additional compensation.
Executive's salary will be reviewed each year in February and any increase
earned will become effective on March 1.
3.2 Bonuses. Executive shall be eligible for an annual bonus according to
-------
a bonus plan to be established annually by Employer, in its sole discretion,
such plan to incorporate projects determined by Employer's Chief Executive
Officer in conjunction with Executive as part of Employer's annual business
planning process; provided that each bonus plan shall allow Executive to earn up
to 30% of Executive's Base Salary based on achievement of individual objectives
and 10% of Executive's Base Salary based on the overall performance of Employer
(for a total of up to 40% of Executive's Base Salary). Bonuses shall be
calculated on a fiscal year basis, and shall be prorated for partial years. The
bonus plan for the 1996 fiscal year is attached hereto as Exhibit B. The bonus
with respect to any fiscal year shall be payable within 30 days of the date that
Employer receives from its auditors such auditor's report on its financial
statements for such fiscal year and shall not be payable to Executive, nor be
deemed to have accrued, unless she is employed by Employer on the date of
scheduled payment.
3.3 Stock Options. On the first day of the Employment Period, Employer
-------------
will grant to Executive the option (the "Option") to purchase 2,000 shares of
Employer's Common Stock, such grant to be pursuant to and subject to the terms
of Employer's standard form of Non-Qualified Stock Option Agreement ("Stock
Option Agreement") attached hereto as Exhibit C. The Option shall be subject to
a three-year vesting schedule, with the Option becoming exercisable with respect
to one-third of the shares subject to the Option on each of the first, second
and third anniversary dates of the first day of the Employment Period if the
conditions set forth in the Stock Option Agreement have been satisfied. The
exercise price under the Option will equal the mean between the highest and
lowest quoted selling price of Employer's common stock on the NASDAQ Small Cap
Market on the
2
<PAGE>
first day of the Employment Period. In the future, Executive will
be eligible for grants of additional stock options based on performance at the
sole discretion of Employer's Board of Directors (or the Compensation Committee
of the Board of Directors).
3.4 Car Allowance. Executive will be provided a $6,000 per year car
-------------
allowance to cover all car expenses, including gasoline (provided that, in the
case of trips to a destination which is 100 miles or more from Employer's
corporate headquarters, Executive will be reimbursed for the cost of gasoline
relating to the trip). Such car allowance shall be paid proportionately in each
pay period.
3.5 Vacation. Executive will be entitled to three (3) weeks vacation per
--------
year (unless and until Employer's policies specify additional vacation based on
longevity of service). All vacation periods requested must be approved by
Executive's manager. Vacation is on a "use or lose" basis, which means that
carryover from year to year will not be permitted. Vacation balances will be
forfeited if not used by the applicable anniversary date of the first day of the
Employment Period.
3.6 Sick Leave. Executive will be paid for all reasonable sick days.
----------
3.7 Other Benefits. Executive shall be entitled to participate in all
--------------
group health, group life insurance, disability, hospital, medical plans and
retirement plans according to Employer's policies for executive management
personnel (or as may be decided by Employer if said items are discretionary with
Employer). Such plans currently include:
(a) 100% payment by Employer of medical insurance (which currently is
provided by US Healthcare's HMO plan) (dental coverage is currently available
for an extra premium payable by Executive);
(b) the Nobel Education Dynamics 401(k) Savings Plan (in which
Executive will become eligible to participate upon the first open enrollment
period occurring after one year of service); provided that participation may be
limited by Federal laws relating to the participation level of lower wage
earners;
(c) tuition reimbursement (the current features of which include the
requirement that courses be job-related and pre-approved, that reimbursement is
limited to a specified maximum amount and that a minimum grade be achieved as a
condition to reimbursement);
(d) term life insurance equal to $10,000 plus one times Executive's
Base Salary;
(e) a short-term disability insurance that extends coverage for a
period of 26 weeks at a rate of 65% of Executive's Base Salary with a maximum
weekly benefit of $325.
4. Reimbursement of Expenses. Executive shall be allowed reasonable business
expenses in connection with the performance of her duties hereunder upon
submission by Executive of vouchers or itemized statements thereof prepared in
compliance with such rules relating thereto as Employer
3
<PAGE>
may from time to time adopt (which rules may include the requirement that the
Executive receive advance approval of such expenses) and as may be required in
order to permit such payments as proper deductions to Employer under the
Internal Revenue Code and the rules and regulations adopted pursuant thereto now
or hereafter in effect.
5. Facilities. Executive shall be entitled to an office appropriate to her
position and such secretarial services as are reasonably necessary to the
performance of her duties.
6. Photographs. Employer shall have the right to photograph Executive during
the course of Executive's employment or at such other times when not at work, by
camera, film, television, tape radio or other yet developed media, or record
Executive in formal or informal conversation, interview, training sessions,
etc., any of which may be in the format of a pre-planned program or in a
spontaneous interview. Such photographs, replicas, tapes, films, etc., maybe
used by Employer or its affiliates or its advertising agency for commercial
purpose, on labels, training films or other media at Employer's sole discretion.
Executive's image, its replica, in whole or portions thereof, may be used.
Executive maybe photographed individually or in a group. Executive's
compensation fully stated herein, includes full and complete payment for all of
the above and Executive hereby waives any further compensation, royalties, etc.,
and further agrees to forebear from taking any action, legal or otherwise,
against Employer or its affiliated companies with respect to the foregoing.
7. Termination.
7.1 Early Termination of Employment Period. Notwithstanding Section 2,
--------------------------------------
the Employment Period shall sooner terminate upon the close of business on the
earliest to occur of the dates specified below:
(a) the date of death of Executive;
(b) the date upon which Employer shall have given Executive written
notice of the termination of her employment hereunder for "disability" (as
defined in Section 7.2); and
(c) the date upon which Employer shall have given to Executive written
notice of the termination of her employment for "cause" (as defined in Section
7.3).
7.2 Definition of "Disability". For purposes of this Agreement, the term
--------------------------
"disability" shall mean that she cannot substantially perform her duties
hereunder and either (i) such condition results in her being unable to
substantially perform her duties hereunder for a period of 60 days in any 365
day period or (ii) in the opinion of a physician of recognized local standing
Executive is so disabled or incapacitated and she is unlikely to recover from
such condition in a period of less than 60 days. Determination of disability and
the date thereof shall be reasonably made by Employer, relying on certificates
of physicians, and Employer's decision shall be conclusive and binding, in the
absence of fraud. If the Board of Directors of the Company so requests,
Executive will submit to an examination by such a physician to determine whether
the criteria set forth in this paragraph are satisfied. If
4
<PAGE>
Executive refuses to cooperate in submitting to an examination as requested by
Employer, Executive shall immediately be deemed "disabled" for the purposes of
this Agreement.
7.3 Definition of "Cause". For purposes of this Agreement, the term
---------------------
"cause" shall include, but not be limited to, any one of the following
conditions or any one of the following events:
(a) Executive's habitual intoxication or drug addiction;
(b) violation of Employer's policies with respect to harassment
(sexual or otherwise);
(c) refusal or failure by Executive to perform such reasonable duties
as may reasonably be delegated or assigned to her, consistent with her position,
by Employer;
(d) failure to devote her entire full week business to the duties of
the position as provided herein, except permitted vacation periods and/or
sickness leave;
(e) continuing inattention or neglect by Executive of her duties
hereunder, which inattention is not the result of illness or accident;
(f) willful or wanton misconduct or negligence by Executive in
connection with the performance of her duties;
(g) the material breach of any provisions of this Agreement;
(h) the commission by Executive of a felony or participation in any
fraud;
(i) dishonesty detrimental to the best interest of the Company or any
of its affiliates; and
(j) involvement in any matter which could, in the Company's sole
opinion, cause prejudice or embarrassment to the Company's business.
provided, that, in the case of clauses (c), (d), (e) or (g) of this Section 7.3,
there shall not be "cause" unless Employer has first given Executive written
notice specifying in reasonable detail the circumstances on which Employer
believes there is "cause" for termination and Executive has failed to remedy the
same with 15 days after the date of such notice or unless the condition or event
is not subject to cure.
7.4 Effect of Early Termination on Compensation. If the Employment Period
-------------------------------------------
is terminated as provided in Section 7.1 (including by reason of Executive's
death), Executive shall be entitled to receive only the compensation set forth
in Section 3 accrued but unpaid as of the date of termination and all benefits
shall terminate as of such date (except to the extent otherwise provided
5
<PAGE>
by law). Under no circumstances shall Executive be entitled to any compensation
except as set forth in this Section 7.4, including without limitation any
severance pay or termination indemnity. Employer shall pay any funds provided
for in this Section 7.4 to Executive, her estate or legal representative, as the
case may be.
8. Expiration of Employment Period. On termination of the Employment Period,
neither party shall be under any obligation to renew Executive's employment with
Employer and, unless otherwise agreed by both parties in writing, any continued
employment of Executive by Employer shall be on an "at will" basis.
Notwithstanding any of the foregoing to the contrary, Executive's covenants
under Section 10 shall continue so long as she is employed by Employer and for
any additional periods specified therein.
9. Executive Representations. Executive represents and warrants to Employer
that she is not a party to or bound by any agreement, arrangement or
understanding, written or otherwise, which prohibits or in any manner restricts
her ability to enter into and fulfill her obligations under this Agreement
and/or to be employed by and serve Employer in an executive capacity. Executive
will indemnify and hold harmless Employer from any claims, liabilities, damages,
costs or expenses (including legal fees) resulting from third-party claims of
any such conflict or breach.
10. Certain Covenants of Executive.
10.1 Records. All records of the accounts of customers and any other
-------
records and books relating in any manner whatsoever to the customers or business
of Employer, whether prepared by Executive or otherwise coming into her
possession, shall be the exclusive property of Employer regardless of who
actually purchased the original book or record. All such books and records shall
be immediately returned to Employer by Executive on any termination of her
employment for whatever reason.
10.2 Intellectual Property. All rights in and to any and all inventions,
---------------------
ideas, techniques, methods, developments, works, improvements and other forms of
intellectual property (including, without limitation, all matters relating to
curriculum and curriculum techniques) ("Intellectual Property"), whether or not
patentable, which Executive (either alone or in conjunction with others)
conceives, makes, obtains or reduces to product or commences so to do during her
employment with Employer are and shall be the property of Employer. The
foregoing shall not apply to Intellectual Property unrelated to any subject
matter of actual or potential concern or interest to Employer or any of its
affiliates which are not conceived, made, obtained or reduced to product in the
course of Executive's employment or with the use of the time, material or
facilities of Employer or any of its affiliates. Executive will make full and
prompt disclosure to Employer of all Intellectual Property and, at Employer's
request and expense but without additional compensation to Executive during her
employment hereunder and with reasonable compensation thereafter, will at any
time or times execute and deliver such foreign and domestic patent, trademark or
copyright applications, assignments and other papers and take such other action
(including without limitation testifying in any legal proceedings) as Employer
considers necessary to vest, perfect, defend or maintain Employer's rights
6
<PAGE>
in and to such Intellectual Property. The provisions of this Section 10.2 shall
survive the termination, for any reason, of this Agreement.
10.3 Nondisclosure of Confidential Information.
-----------------------------------------
(a) Executive shall not, during the period that Executive is employed
by Employer or provides consulting services to Employer or thereafter, unless
authorized to do so in writing by Employer, directly or indirectly disclose or
permit to be known to, or used for the benefit of, any person, corporation or
other entity (outside of the employ of Employer), or herself, any confidential
information acquired by her during the course of or as an incident to her
employment or association with Employer, whether or not pursuant to this
Agreement. For the purposes of this Section 10.3, the term confidential
information shall include, but not be limited to, all trade secrets,
confidential or proprietary knowledge or information with respect to the conduct
or details of Employer's business including, but not limited to, lists of
customers or suppliers of Employer's business, pricing strategies, business
files and records, trade secrets, curriculum, processes, costs, designs,
marketing methods or any other financial, educational, curricular or other
information about Employer's business or curriculum not in the public domain.
The term "confidential information" shall not include any information which (i)
is generally available to the public as of the date hereof, (ii) becomes
generally available to the public after the date hereof, provided that such
public disclosure did not result, directly or indirectly, from any act, omission
or fault of Executive, or (iii) becomes available to Executive after the date of
termination of her employment with Employer on a non-confidential basis from a
source other than Employer or its agents, provided that such source is not bound
to Employer or its representatives by agreement, fiduciary duty or otherwise not
to disclose such information.
(b) All confidential information described in Section 10.1 shall be
the exclusive property of Employer, and Executive shall use her best efforts to
prevent any publication or disclosure thereof. Upon termination of Executive's
employment with Employer, Executive shall return to Employer all documents,
records, reports, writings and other similar documents containing confidential
information, including copies thereof, then in her possession or control.
(c) All correspondence, memoranda, notes, records, reports, plans and
other papers and items delivered to Executive by Employer shall be the property
of Employer, and Executive will deliver all copies thereof to Employer on
termination of this Agreement or on earlier request.
10.4 Nonsolicitation. Executive will not during the period that Executive
---------------
is employed by Employer or provides consulting services to Employer and for an
additional period of two years thereafter (a) employ any employee who was on the
payroll of Employer as of the date of Employee's separation or within one year
prior thereto or (b) cause or solicit, directly or indirectly, the resignation
of any person employed by Employer on the date of Employee's separation.
10.5 Restrictive Covenant. During the period that Executive is employed
--------------------
by Employer or provides consulting services to Employer and for an additional
period of two years thereafter,
7
<PAGE>
Executive will not, directly or indirectly, own, manage, operate, control, be
employed by, participate in, or be connected in any manner with the ownership,
management, operation, or control of any for-profit business or other for-profit
operation which owns, manages or provides educationally related services to
private schools or preschools or child care centers (other than private schools
restricted to post-High School education) located within 25 miles of any private
school or preschool or child care center operated or planned by the Company or
any of its subsidiaries or affiliates.
10.6 Survival. The provisions of this Section 10 shall survive the
--------
termination, for any reason, of the Employment Period and of this Agreement, and
shall continue, in the case of Sections 10.2 and 10.3, without termination, and,
in the case of Sections 10.4 and 10.5, for the period contemplated therein
(including any extended period as provided in Section 10.7).
10.7 Remedies. Executive acknowledges that if she breaches her promises
--------
set forth in this Section 10, Employer will suffer irreparable damages, the
amount of which will be impossible to ascertain and which cannot be reasonably
or adequately compensated in an action of law. Accordingly, Employer shall be
entitled, if it so elects, to institute and prosecute proceedings in any court
of competent jurisdiction, either at law or in equity, to obtain damages for any
breach or to enforce specific performance of the provisions or to enjoin
Executive from committing any act in breach of this Agreement. The remedies
granted to Employer in this Agreement are cumulative and are in addition to
remedies otherwise available to Employer at law or in equity. If Employer is
obliged to resort to the courts for the enforcement of a covenant of Executive
contained in Section 10.3, 10.4 or 10.5 such covenant shall be extended for a
period of time equal to the period of such breach, which extended period will
commence on the later to occur of (i) the date on which the original
(unextended) term of such covenant is scheduled to terminate or (ii) the date of
the final court order (without further right of appeal) enforcing such covenant.
11. Arbitration of Certain Disputes.
11.1 In the event of any dispute as to the ability of Employer to
terminate Executive's employment pursuant to Section 7.1, the parties shall
submit such dispute to be settled by arbitration before a panel of three
arbitrators in Philadelphia, Pennsylvania, conducted in accordance with the
rules of the American Arbitration Association ("AAA"). A determination by a
majority of the panel shall be binding upon and enforceable against each party.
Judgment upon an award made as a result of any such arbitration proceeding may
be entered in any court having competent jurisdiction.
11.2 Employer and Executive shall each choose one arbitrator and the
arbitrators selected by the parties shall then select the third arbitrator. If
the arbitrators selected by the parties fail to select the third arbitrator
within ten business days of notification of their appointment, the third
arbitrator shall be selected by the AAA. The arbitrator designated by the
party-appointed arbitrators shall be the Chairman of the arbitration panel. If
an arbitrator dies, refuses to act, or becomes incapable, unfit, or incompetent
to act before hearings are complete and an award is rendered, a successor
arbitrator shall be selected according to the provisions set forth above
governing the selection of the arbitrator being replaced.
8
<PAGE>
11.3 Except for the obligations to arbitrate disputes relating to the
ability of Employer to terminate Executive's employment pursuant to Section 7.1,
none of the rights or remedies provided in this Agreement shall be deemed an
exclusive remedy or otherwise limit either party's right to pursue any remedy
provided by law.
12. Miscellaneous
12.1 Binding Effect. This Agreement shall become effective as of the date
--------------
hereof and, from and after that time, shall extend to and be binding upon
Executive, her personal representative or representatives and testate or
intestate distributees, and upon Employer and its successors and assigns;
provided that this Agreement shall be assignable by Employer to an affiliate or
any person, firm or corporation which may become a successor in interest to
Employer in the business presently operated by it or which may acquire all or
substantially all of Employer's assets or a majority of Employer's voting
capital stock. The term "affiliate" used in this Agreement shall mean any
entity that directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with Employer, or is a successor
of Employer. This Agreement may not be assigned by Executive.
12.2 Survival of Certain Provisions. It is expressly understood by the
------------------------------
parties to this Agreement that certain provisions, rights, and obligations
pursuant to this Agreement, are expressly meant to survive the termination of
the Employment Period and the termination of this Agreement and shall be given
full effect pursuant to their terms.
12.3 Consent to Jurisdiction; Waiver of Time Restrictions. Each party
----------------------------------------------------
hereto (i) agrees that any and all actions or proceedings hereunder or relating
in any way to this Agreement (other than a matter covered by Section 11) shall
be brought only in the United States District Court for the Eastern District of
Pennsylvania; (ii) consents to in personam jurisdiction and venue in the United
States District Court for the Eastern District of Pennsylvania; (iii) waives the
right to contest the subject matter and in personam jurisdiction and venue in
the United States District Court for the Eastern District of Pennsylvania on any
ground; and (iv) agrees that service of process upon it can be made by certified
mail, return receipt requested, to his or its address referred to in Section
12.4 and agrees promptly to notify the other party hereto of any change of such
address. Notwithstanding the foregoing, in the event it is determined that the
United States District Court for the Eastern District of Pennsylvania should
lack subject matter jurisdiction for any reason, each party hereto agrees that
any and all actions or proceeding hereunder or relating in any way to this
Agreement shall be brought only in the Court of Common Pleas of Delaware County,
Pennsylvania, and consents to in personam jurisdiction and venue in such court
and waives the right to contest the subject matter and in personam jurisdiction
and venue in such court on any ground. Further, each party waives all time
restrictions on discovery relating to any action to enforce any covenant set
forth in Section 10.
12.4 Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be delivered by hand or be sent by
certified mail or overnight courier addressed
9
<PAGE>
to Executive at her address set forth in the first paragraph of this Agreement
and to Employer at Nobel Education Dynamics, Inc., Rose Tree Corporate Center
II, 1400 North Providence Road, Media, PA 19063, Attn. President, with a copy to
-----
Nobel Education Dynamics, at the same address, Attn: General Counsel, or to such
other address as either of such parties may designate in a written notice served
upon the other party in the manner provided herein. Any such notice shall become
effective upon being mailed or, in the case of delivery by hand or overnight
courier, upon receipt.
12.5 Governing Law. This Agreement is made and delivered in the
-------------
Commonwealth of Pennsylvania and shall be construed and enforced in accordance
with the laws of the Commonwealth of Pennsylvania, without giving effect to
principles of conflicts of law.
12.6 Prevailing Party. Should any party default in performance of any of
----------------
the terms and conditions of this Agreement which results in a lawsuit for
damages, specific performance or other remedy, the prevailing party in such law
suit shall be entitled to its reasonable attorneys' fees and court costs from
the nonprevailing party. For the purposes of this Section 12.6, in any action
with respect to the enforcement of a covenant set forth in Section 10, Employer
shall be deemed to have prevailed if any such covenant is enforced in part, even
if the applicable court exercises its discretion to limit or reduce the duration
or scope thereof or enforces only certain of such covenants.
12.7 Entire Agreement; Modifications. This instrument contains the entire
-------------------------------
agreement of the parties relating to the subject matter hereof, and there are no
agreements, representations or warranties not herein set forth. This Agreement
supersedes any prior written or oral agreement or understanding relating to the
subject matter hereof. No modification of this Agreement shall be valid unless
in writing and signed by the parties hereto. A waiver of the breach of any term
or condition of this Agreement shall not be deemed to constitute a waiver of any
subsequent breach of the same or any other term or condition.
12.8 Severability; Savings Clause. If any term or provision of this
----------------------------
Agreement or the application thereof to any person or circumstance shall, to any
extent, be held invalid or unenforceable by a court of competent jurisdiction,
the remainder of this Agreement or the application of any such term or provision
to persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Agreement shall be valid and enforceable to the fullest extent permitted by
law. If any of the provisions contained in this Agreement shall for any reason
be held to be excessively broad as to duration, scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be valid and
enforceable to the extent compatible with the applicable law or the
determination by a court of competent jurisdiction.
12.9 Attorney Review. Executive acknowledges that this Agreement will have
----------------
important legal consequences and imposes significant requirement on Executive,
including the obligation to refrain from certain activities after the
termination of her employment or consultancy with Employer. Accordingly,
Executive acknowledges that Employer has recommended that she retain legal
counsel to review this Agreement and that she has been provided with adequate
time to obtain such review.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement the date
and year first written above.
NOBEL EDUCATION DYNAMICS, INC.
By:________________________________________
A. J. Clegg
Chairman, President and Chief Executive Officer
EXECUTIVE:
_____________________________
Barbara Z. Presseisen
11
<PAGE>
EXHIBIT A
Partial List of Duties and Responsibilities
-------------------------------------------
1) The quality of the education programs at Nobel.
2) Chair the Education Advisory Board and bring to the Board experienced
outside educators to collaborate with Nobel's internal educators.
3) Set the standards and policies for the education component of Nobel
and managing the adherence to these standards and policies.
4) Manage the curriculum conversions and principal/teacher re-training
for Nobel's conversions from childcare centers to preschools.
5) Oversee the implementation of Nobel's education programs and evaluate
of the programs via the achievement levels of our students.
6) Determine the appropriate methods and testing programs to determine
achievement levels of our students.
7) Be cognizant of the state-of-the-art in education; methods, tools and
technologies.
8) Be cognizant of the various education reform movements and methods
such as charter schools, vouchers, privatization, management
organizations, etc..
9) Maintain and expand our NIPSA accreditation. Investigate other
accreditation agencies. Represent Nobel Education at NIPSA meetings.
10) Promote of Nobel Education's reputation and programs via participation
in selected education and financial conferences, guest lecturing and
articles in appropriate journals.
11) Coordinate the internship and the Nobel training programs with
UOP/Wharton, and possible other universities.
12) Parent and teacher training seminars.
13) Quantify parents and teacher satisfaction via periodic surveys.
14) Track of Nobel student successes post-Nobel.
15) Collaborate with the appropriate experts of companies in establishing
and implementing after-school, weekend and summer student tutorial
programs.
16) Participate as part of the overall Nobel Education executive team.
17) Prepare each year of an "Educational" department budget, which must be
approved by the CEO.
<PAGE>
EXHIBIT B
1996 BONUS PLAN
for Vice President of Education
In fiscal year 1996, Executive will be governed by the following bonus plan,
which shall be prorated for the portion of the 1996 fiscal year in which
employed (June 17, 1996 through December 31, 1996):
Executive shall receive 10% of her base salary (pro-rated) if the Company
achieves its pretax income plan in 1996, which is $4,587,000 (to be adjusted for
acquisitions).
Executive shall receive an additional bonus of up to an additional 30% of her
base salary (pro-rated) for achieving specific tasks or projects successfully in
fiscal year 1996 as defined below:
1. Establish and chair an effective Education Advisory Board of inside and
outside educators, whose responsibilities it is to review Nobel's
curriculums, educational tools, methods and technologies for adequacy
and proper advancement relative to the state-of-the-art.
2. Properly train teachers and principals in the "Merryhill type"
curriculums and procedures for each of Nobel's conversions of childcare
centers to preschools, and properly integrate teachers and principals of
Nobel acquired schools and childcare centers into the Nobel education
programs.
3. Become active in NIPSA and maintain and expand Nobel's base of
accreditation into eastern schools.
4. Establish an effective internship with UOP/Wharton that will provide
meaningful results to both the interns and Nobel; and begin similar
programs with other universities.
5. Establish an effective training program (with UOP) to teach selected
teachers the requirements of managing a for-profit Nobel school.
6. Establish a student tutorial program to allow Nobel to provide after-
school, weekend and summer-time tutoring to Nobel students and also to
students outside the Nobel system.
Five percent of base salary (pro-rated) will be provided for each project
satisfactorily completed, as determined in the sole discretion of the CEO of
Nobel, such determination to be reasonable.
<PAGE>
EXHIBIT 10.22
NONCOMPETE AGREEMENT
THIS NONCOMPETE AGREEMENT is dated as of March 11, 1997 by and between John
R. Frock, an individual residing in Upper Gwynedd, Pennsylvania ("Executive")
and Nobel Education Dynamics, Inc. (the "Company"), a Delaware corporation.
Background
Executive is currently Executive Vice President of the Company. Executive
currently does not have any obligation to refrain from competing with the
Company following the termination of his employment with the Company (other than
to the extent that any such activities may generally be prohibited by the
applicable law (e.g., by laws which would prohibit use of the Company's trade
secrets)). By this Agreement, the Company desires to provide incentive to
Executive not to engage in any competitive activities with the Company for a
period of four years following the termination of his employment with the
Company.
Now, Therefore, in consideration of the covenants set forth herein, and
intending to be legally bound hereby, the parties agree as follows:
Terms
1. Payment.
(a) Conditions of Payment. The Company will pay to Executive the
---------------------
Noncompete Payment (defined below) if, within 30 days following the date of
termination of his employment with the Company ("Termination Date") for any
reason whatsoever (including, without limitation, termination by the Company
with or without cause, resignation or retirement of Executive, or Executive's
disability) Executive gives a notice ("Notice Letter") to the Company stating
that he agrees to all of the covenants set forth in Exhibit A of this Agreement.
Such notice shall be in substantially the form of Exhibit B. Payment of the
Noncompete Payment shall be made in cash within 15 days of the date of the
Company's receipt of such notice from Executive. Notwithstanding the foregoing,
the Company shall not be required to pay the Noncompete Payment if it pays to
Executive the Severance Payment (as such term is defined in the Contingent
Severance Agreement dated March 11, 1997 between the Company and Executive).
(b) Amount of Payment. The Noncompete Payment shall equal $85,000 if
-----------------
the Termination Date is prior to December 1, 1997, $170,000 if the Termination
Date is on or after December 1, 1997 and on or before November 30, 1998, and
$255,000 if the Termination Date is after November 30, 1998.
2. Miscellaneous.
2.1 Remedies. Executive acknowledges that if he delivers a Notice
--------
Letter to the Company and subsequently breaches his promises set forth in
Exhibit A hereto, Employer will suffer irreparable damages, the amount of which
will be impossible to ascertain and which cannot be
<PAGE>
reasonably or adequately compensated in an action of law. Accordingly, Employer
shall be entitled, if it so elects, to institute and prosecute proceedings in
any court of competent jurisdiction, either at law or in equity, to obtain
damages for any breach or to enforce specific performance of the provisions or
to enjoin Executive from committing any act in breach of this Agreement. The
remedies granted to Employer in this Agreement are cumulative and are in
addition to remedies otherwise available to Employer at law or in equity.
2.2 Waiver of Breach. The waiver by the Company of a breach of any
----------------
provision of this Agreement by Executive shall not operate or be construed as a
waiver of any other or subsequent breach by Executive of such or any other
provision.
2.3 Notices. All notices and other communications required or
-------
permitted hereunder shall be in writing and shall be deemed to be properly given
if transmitted by messenger, overnight courier service, first class certified
mail (return receipt requested) or telecopy (which is confirmed), in each case
postage or other charges prepaid, addressed to the other party at the address
shown below. Any party may change such address by notice given in such manner.
All notices shall be effective (i) if sent by messenger or overnight courier
service, when delivered and (ii) if sent by mail, three days after posting.
If to the Company:
Nobel Education Dynamics, Inc.
Rose Tree Corporate Center II
1400 North Providence Road
Suite 3055
Attn: Chief Executive Officer
If to Executive:
Mr. John Frock
216 Stefan Road
North Wales, PA 19454
2.4 Severability. If any term or provision of this Agreement or the
------------
application thereof to any person or circumstance shall, to any extent, be held
invalid or unenforceable by a court of competent jurisdiction, the remainder of
this Agreement or the application of any such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each term and provision of this Agreement
shall be valid and enforceable to the fullest extent permitted by law. If any
of the provisions contained in this Agreement shall for any reason be held to be
excessively broad, it shall be construed by limiting and reducing it, so as to
be valid and enforceable to the extent compatible with the applicable law or the
determination by a court of competent jurisdiction.
2
<PAGE>
2.5 Governing Law. The implementation and interpretation of this
-------------
Agreement shall be governed by and enforced in accordance with the laws of the
Commonwealth of Pennsylvania.
2.6 Binding Effect and Assignability. The rights and obligations of
--------------------------------
both parties under this Agreement shall inure to the benefit of and shall be
binding upon their heirs, successors and assigns, but shall not be assigned
without the written consent of both parties.
2.7 Entire Agreement. This instrument constitutes the entire
----------------
agreement with respect to the subject matter hereof between the parties hereto
and replaces and supersedes as of the date hereof any and all prior oral or
written agreements and understandings between the parties hereto. This
Agreement may only be modified by an agreement in writing executed by both
Executive and the Company.
IN WITNESS WHEREOF, the undersigned have executed this agreement the date
and year written above.
Nobel Education Dynamics, Inc.
By:_________________________
A. J. Clegg
Chairman, President and CEO
and
By:__________________________
Name:_______________________,
for Compensation Committee
_____________________________
John R. Frock
3
<PAGE>
EXHIBIT A
Covenants of Executive Effective Upon Giving of a Notice Letter
1. Restrictive Covenant. During the period commencing with the date of
--------------------
termination of his employment with the Company and continuing for a period of
four years (such four-year period, the "Restrictive Period"), Executive will
not, directly or indirectly, be employed by, or perform consulting services in
excess of an average of 15 hours per week for, any for-profit business which
owns private schools or preschools or child care centers (other than private
schools restricted to post-eighth grade education) located within five miles of
any private school or preschool or child care center operated by the Company or
any of its subsidiaries or affiliates. Executive shall not be deemed to violate
the foregoing if he performs services for an entity which owns private schools
or preschools or child care centers but is not personally involved in such
business.
2. Nonsolicitation. Executive will not during the Restrictive Period
---------------
cause or solicit, directly or indirectly, the resignation of any person employed
by Employer on the date of Employee's separation.
<PAGE>
EXHIBIT B
[date]
Nobel Education Dynamics, Inc.
Rose Tree Corporate Center II
1400 North Providence Road
Suite 3055
Media, PA 19063
Gentlemen:
By this letter, I hereby notify you that I agree to be bound by each of the
covenants set forth in Exhibit A of the Noncompete Agreement dated as of March
11, 1997 between you and me. Accordingly, you are obligated to pay to me
$_________ on or before the date 15 days following your receipt of this letter.
Very truly yours,
John R. Frock
<PAGE>
EXHIBIT 10.23
CONTINGENT SEVERANCE AGREEMENT
THIS CONTINGENT SEVERANCE AGREEMENT is dated as of March 11, 1997 by and
between John R. Frock, an individual residing in Upper Gwynedd, Pennsylvania
("Executive") and Nobel Education Dynamics, Inc. (the "Company"), a Delaware
corporation.
Background
Executive is currently Executive Vice President of the Company. The
Company believes that retention of Executive is important to the continued
growth and success of the Company. Accordingly, the Company desires to provide
incentive to Executive to continue his employment with the Company and, to such
end, desires to enter into this Agreement with Executive providing for payment
of severance to Executive under certain circumstances.
Now, Therefore, in consideration of the covenants set forth herein, and
intending to be legally bound hereby, the parties agree as follows:
Terms
1. Severance Payment.
1.1 Conditions of Payment. The Company shall pay to Executive in cash the
---------------------
Severance Payment (defined below) on or before the date 20 days following the
date of termination of Executive's employment ("Termination Date"), if
Executive's employment terminates by reason of (a) the Company's termination of
such employment without Cause (defined below) or (b) Executive's resignation
from such employment following a Change of Control (defined below).
Notwithstanding the foregoing, the Company shall not be required to pay the
Severance Payment if it pays to Executive the Noncompete Payment (as such term
is defined in the Noncompete Agreement dated March 11, 1997 between the Company
and Executive).
1.2 Amount of Payment. The Severance Payment shall equal $85,000 if the
-----------------
Termination Date is prior to December 1, 1997, $170,000 if the Termination Date
is on or after December 1, 1997 and on or before November 30, 1998, and $255,000
if the Termination Date is after November 30, 1998.
1.3 Definition of "Cause". For purposes of this Agreement, the term
---------------------
"Cause" shall mean that any one of the following:
(a) Executive's habitual intoxication or drug addiction; or
(b) the conviction by Executive of a felony or any crime involving
fraud; or
(c) habitual gross neglect by Executive of the duties reasonably
assigned to him and consistent with his position as Executive Vice President of
Corporate Development and the failure of Executive to cure the same within 30
days of receipt of notice from the Company specifying in reasonable detail the
nature of Executive's conduct
<PAGE>
1.4 Definition of "Change of Control". For the purposes of this
---------------------------------
Agreement, the term "Change of Control" shall mean:
(a) A. J. Clegg ceases to be both the Chief Executive Officer and a
director of the Company; or
(b) Executive ceases to be a director of the Company, and such
cessation is not voluntary; or
(c) any person (as such term is used in Section 13 of the Securities
Exchange Act of 1934 ("Exchange Act") and the rules and regulations thereunder
and including any "affiliate" or "associate" of such person (as such terms are
defined in Rule 12b-2 under the Exchange Act), and any person acting in concert
with such person) directly or indirectly acquires or otherwise becomes entitled
to vote more than 50 percent of the voting power entitled to be cast at
elections for directors of the Company.
2. Arbitration.
2.1 Submission to Arbitration. In the event of any dispute as to the
-------------------------
obligation of Employer to pay the Severance Payment, the parties shall submit
such dispute to be settled by arbitration before a panel of three arbitrators in
Philadelphia, Pennsylvania, conducted in accordance with the rules of the
American Arbitration Association ("AAA"). Cost of any arbitration shall be paid
by the Company. A determination by a majority of the panel shall be binding
upon and enforceable against each party. Judgment upon an award made as a
result of any such arbitration proceeding may be entered in any court having
competent jurisdiction.
2.2 Selection of Arbitrators. Employer and Executive shall each choose
------------------------
one arbitrator and the arbitrators selected by the parties shall then select the
third arbitrator. If the arbitrators selected by the parties fail to select the
third arbitrator within ten business days of notification of their appointment,
the third arbitrator shall be selected by the AAA. The arbitrator designated by
the party-appointed arbitrators shall be the Chairman of the arbitration panel.
If an arbitrator dies, refuses to act, or becomes incapable, unfit, or
incompetent to act before hearings are complete and an award is rendered, a
successor arbitrator shall be selected according to the provisions set forth
above governing the selection of the arbitrator being replaced.
3. Miscellaneous.
3.1 Independent of Other Severance. Amounts payable hereunder are
------------------------------
independent of, and shall not be reduced by, amounts payable under any other
severance arrangements with the Company, including, without limitation, the
Company's Executive Severance Pay Plan. (This Section 3.1 does not affect the
effect of the second sentence of Section 1.1.)
2
<PAGE>
3.2 Waiver of Breach. The waiver by the Company of a breach of any
----------------
provision of this Agreement by Executive shall not operate or be construed as a
waiver of any other or subsequent breach by Executive of such or any other
provision.
3.3 Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be deemed to be properly given if
transmitted by messenger, overnight courier service, first class certified mail
(return receipt requested) or telecopy (which is confirmed), in each case
postage or other charges prepaid, addressed to the other party at the address
shown below. Any party may change such address by notice given in such manner.
All notices shall be effective (i) if sent by messenger or overnight courier
service, when delivered and (ii) if sent by mail, three days after posting.
If to the Company:
Nobel Education Dynamics, Inc.
Rose Tree Corporate Center II
1400 North Providence Road
Suite 3055
Attn: Chief Executive Officer
If to Executive:
Mr. John Frock
216 Stefan Road
North Wales, PA 19454
3.4 Severability. If any term or provision of this Agreement or the
------------
application thereof to any person or circumstance shall, to any extent, be held
invalid or unenforceable by a court of competent jurisdiction, the remainder of
this Agreement or the application of any such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each term and provision of this Agreement
shall be valid and enforceable to the fullest extent permitted by law. If any
of the provisions contained in this Agreement shall for any reason be held to be
excessively broad, it shall be construed by limiting and reducing it, so as to
be valid and enforceable to the extent compatible with the applicable law or the
determination by a court of competent jurisdiction.
3.5 Governing Law. The implementation and interpretation of this
-------------
Agreement shall be governed by and enforced in accordance with the laws of the
Commonwealth of Pennsylvania.
3.6 Binding Effect and Assignability. The rights and obligations of both
--------------------------------
parties under this Agreement shall inure to the benefit of and shall be binding
upon their heirs, successors and assigns, but shall not be assigned without the
written consent of both parties.
3
<PAGE>
3.7 Entire Agreement. This instrument constitutes the entire agreement
----------------
with respect to the subject matter hereof between the parties hereto and
replaces and supersedes as of the date hereof any and all prior oral or written
agreements and understandings between the parties hereto. This Agreement may
only be modified by an agreement in writing executed by both Executive and the
Company.
IN WITNESS WHEREOF, the undersigned have executed this agreement the date
and year written above.
Nobel Education Dynamics, Inc.
By:_________________________
A. J. Clegg
Chairman, President and CEO
and
By:__________________________
Name:_______________________,
for Compensation Committee
_____________________________
John R. Frock
4
<PAGE>
Exhibit 11
Statement Re-computation of Per Share Earnings
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---- ----
Net Income per common share, primary:
<S> <C> <C>
Net Income $2,462,892 $3,843,886
Less: Preferred Dividends 108,419 184,114
---------- ----------
Net Income Available to Common Shareholders 2,354,473 3,659,772
Average Shares Outstanding 5,545,605 4,688,335
Common stock equivalents-Convertible Preferred 1,415,474 710,396
---------- ----------
Adjusted Average Shares Outstanding 6,961,079 5,398,731
========== ==========
Net Income per common share $ 0.34 $ 0.68
========== ==========
Net Income per common share, fully diluted:
Net Income $2,462,892 $3,843,886
Average Shares Outstanding Outstanding 5,545,605 4,688,335
Shares issuable on conversion of preferred stock 1,717,178 1,440,786
---------- ----------
Average shares outstanding assuming full dilution 7,262,783 6,129,121
========== ==========
Fully diluted earnings per share $ 0.34 $ 0.63
========== ==========
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF NOBEL EDUCATION DYNAMICS, INC.
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Bluegrass Real Estate, Inc. Pennsylvania
Merryhill Schools, Inc. California
Educo, Inc. Maryland
Another Generation Enterprises, Inc. Florida
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Nobel Education Dynamics, Inc. (formerly the Rocking Horse Child Care Centers of
America, Inc.) and subsidiaries on Form S-3 (File Nos. 333-3793, 333-3797 and
33-73496) and Form S-8 (File Nos. 33-21859, 33-44888 and 33-64701) of our report
dated February 10, 1997, except for Note 16, as to which the date is March 20,
1997, on our audits of the consolidated financial statements for Nobel Education
Dynamics, Inc. and subsidiaries as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994, which report is included in this
Annual Report on Form 10-K.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 5,252 3,714
<SECURITIES> 0 0
<RECEIVABLES> 779 727
<ALLOWANCES> (103) (103)
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,278 7,112
<PP&E> 26,166 21,220
<DEPRECIATION> (6,843) (5,356)
<TOTAL-ASSETS> 56,833 44,937
<CURRENT-LIABILITIES> 9,629 7,943
<BONDS> 0 0
0 0
5 6
<COMMON> 6 4
<OTHER-SE> 37,666 23,818
<TOTAL-LIABILITY-AND-EQUITY> 56,833 44,937
<SALES> 58,909 44,154
<TOTAL-REVENUES> 58,909 44,154
<CGS> 49,079 35,908
<TOTAL-COSTS> 53,269 39,804
<OTHER-EXPENSES> (483) (126)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,004 1,840
<INCOME-PRETAX> 4,025 2,550
<INCOME-TAX> 1,561 (1,356)
<INCOME-CONTINUING> 2,463 3,906
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 62
<CHANGES> 0 0
<NET-INCOME> 2,463 3,846
<EPS-PRIMARY> 0.34 0.68
<EPS-DILUTED> 0.34 0.63
</TABLE>
