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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
[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
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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 107 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>
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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.
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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 $964,111 or 64%. 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.
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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 $ 855,474 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>
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<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.
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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
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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
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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.
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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.
22
<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 0
JOHN R. FROCK 1996 $112,119 $ 0 $13,840 0 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 0 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 0 $1,086
Vice President - Real 1995 72,322 $19,500 $10,380 0 3,000 $ 756
Estate Development /9/
</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>
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 Amendment to 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this amendment
to the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 10, 1997 NOBEL EDUCATION DYNAMICS, INC.
By: /s/ A. J. Clegg
--------------------
A. J. Clegg
Chairman of the Board, President
and Chief Executive Officer
40
<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 1996 1995
- ------ ------------- -------------
<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
