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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997
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 24, 1998, 6,121,365 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 20, 1998 was approximately $37,961,765 (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 the directors, executive officers and
stockholders who have filed a Schedule 13D or 13G with the Company which
reflects ownership of at least 10% of the outstanding common stock or have the
right to designate a member of the board of directors, and no other persons.
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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TABLE OF CONTENTS
Item
No. Page
PART I
1. Business.................................................... 1
2. Properties.................................................. 9
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security Holders......... 10
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters............................. 11
6. Selected Financial Data..................................... 13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
8. Financial Statements and Supplementary Data................. 26
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 26
PART III
10. Directors and Executive Officers of the Registrant........ 27
11. Executive Compensation.................................... 31
12. Security Ownership of Certain Owners and Management....... 39
13. Certain Relationships and Related Transactions............ 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................... 44
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PART I
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company's 1998 outlook and all other statements in this report other than
historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company
believes that its assumptions are reasonable, it cautions that there are
inherent difficulties in predicting the impact of certain factors, especially
those affecting the acceptance of the Company's newly developed schools and
performance of recently acquired businesses, which could cause actual results to
differ materially from predicted results.
ITEM 1. BUSINESS.
GENERAL
Nobel Education Dynamics, Inc.'s business mission is to be the leader in the
United States in providing affordable private education from preschool through
eighth grade for the children of middle-income working families. The Company
has been identified as a market leader "Education Management Organization" (EMO)
for preschool through eighth grade. (EMO is a term used in the investment
community to describe companies which manage education businesses for profit in
multiple sites.) The Company's operations include preschools, elementary
schools and middle schools, and several child care centers, throughout the
United States, all operating as part of the "Nobel Learning Community." To
attain its objectives, Nobel builds on its experience and expertise both in
education and preschool/child care. As an "education company", the Company's
strategy is to offer practical solutions to a segment of the education problem
in the United States.
Nobel operates nationwide, with 130 preschools, schools and centers in 13
states as of March 23, 1998. In California, Nobel operates the Merryhill
Country Schools, which is a private school system of 30 preschools, elementary
schools and middle schools. Nationwide, Nobel operates preschools, schools and
centers under various names in Pennsylvania, New Jersey, Virginia, Florida,
Maryland, North Carolina, South Carolina, Illinois, Nevada, Oregon, Washington
and Indiana. School names include Chesterbrook Academy, Evergreen Academy and
Another Generation. Nobel also owns a 20% interest in an elementary school in
Florida.
Management is currently pursuing a three-pronged strategy to take advantage of
the significant growth opportunities in the private education market:
. internal growth at existing schools, including expansions of campus
facilities
. new school development in both existing and new markets
. strategic acquisitions
To facilitate this strategy, Nobel is applying the strengths of its
curriculum-based programs to distinguish itself from its competition. The
strategy also entails geographical clustering of Nobel's preschools to (i)
increase market awareness, (ii) provide a lower risk method for expansion into
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elementary and middle schools by providing a feeder population and (iii) gain
operating efficiencies in both management and costs.
Nobel targets its schools and preschools to meet the needs of middle-income
working parents. Most of Nobel's schools, preschools and child care centers are
open from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up. In
most locations, programs are available for children starting at six weeks of
age. For basically the same price as standard child care, parents can leave
children of various ages at a Nobel school knowing they will receive a quality
education during the greater part of the day and be engaged in well-supervised
activities the remainder.
To complement its programs, the Company also operates (i) before and after
school programs and (ii) summer camps (both sports and educational) at its
various school facilities. Nobel also seeks to add other services and products
which will add ancillary income and improve overall operating margins.
The Company's financial strength has improved dramatically since 1992, when
there was a change in management. Strategies of new management have included a
change of the Company's focus to education from child care, strengthening of the
Company's financial condition, divestiture of centers in mature markets and,
after the Company's financial stabilization, expansion into growth areas. With
the implementation of these new strategies, the equity of the Company has
increased from a negative net worth of $3.8 million on December 31, 1991 to
positive net worth of $31.6 million as of December 31, 1997.
The Company's corporate office is located at Rose Tree Corporate Center II,
1400 North Providence Road, Suite 3055, Media, PA 19063. Its telephone number
is (610) 891-8200; its world wide web address is www.nobeleducation.com or
www.educating.com.
EDUCATIONAL PHILOSOPHY AND IMPLEMENTATION
The educational philosophy of the Nobel Learning Community is based on a sound
research foundation, innovative instructional techniques and quality practice,
and proprietary curricula developed by experienced educational personnel.
Nobel's programs stress the development of the whole child and are based on
concepts of integrated and age-appropriate learning. The curricula recognize
that each child develops according to his or her own abilities and timetable,
but also seek to prepare every student for achievement in accordance with
national content standards and goals. Every child's educational needs are
considered upon entrance into a Nobel school, and progress is regularly
monitored in terms of both the curriculum's objectives and the learner's
cognitive, social, emotional, and physical skill development. The result is the
opportunity for every Nobel student to develop a strong foundation in academic
learning, positive self-esteem, and emotional and physical well-being.
Since 1995, the Company has adapted the Merryhill curriculum for
implementation in its other schools through the conversion of most of its child-
care centers on the East Coast and in the Mid-West. In implementing the
conversions, Nobel conducted staff training sessions to prepare teachers to
present the curriculum-based program in the pre-school as well as at elementary
grade levels. The schools instituted instructional techniques and assessment
practices and adopted
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particular content materials in the various subject areas. Also, at conversion,
the schools' computer technology was upgraded.
Under the direction of Nobel's Vice President - Education, the Company
circulates regular "curriculum updates," a publication to assist staff in
planning their daily and weekly programs with current and effective
instructional practices and materials. The Company has also established multi-
media products for a "Learning Lending Library" collection. The library, which
is managed out of the Company's corporate office, is available to all Nobel
schools for student and teacher development and parent interest. Many of these
resources support the Company's curriculum.
In 1996, the Company launched its National Education Advisory Board. Under
the direction of the Vice President - Education, the Board includes five
nationally-known educators each of whom advises Nobel on his or her particular
area of expertise: Dr. Zalman Usiskin of the University of Chicago
(Mathematics); Dr. Cathy Collins Block of Texas Christian University (Reading
and Language Arts); Dr. John N. Mangieri of the Institute for Effective
Management (Educational Administration); Dr. Arthur L. Costa of the University
of California at Sacramento (Curriculum and Teacher Development); and Dr. Drew
H. Gitomer of Educational Testing Service (Testing and Evaluation). The Board
helps oversee curriculum development in the Company's schools, advise on the
most renowned teaching methods, and assist in finding the best instructional
materials and practices to help students learn effectively and efficiently.
Board members are also available to work on special projects and services that
enhance the Company's school programs.
The Company maintains that small class sizes are a basic ingredient of quality
education. Nobel's educational philosophy is based on personalized instruction
that leads to a student's active involvement in learning and understanding. The
program for the Company's schools is a strong skills-based, comprehensive
curriculum that is implemented in ways that attract the learner's curiosity,
enhance students' various learning styles, and employ processes that contribute
to lifelong achievement. Academic areas addressed include reading readiness and
reading, spelling, writing, handwriting, mathematics, science, social studies,
visual and graphic arts, music, physical education and health, and foreign
language. Computer literacy and study skills are interrelated into the program,
as appropriate, in all content areas. The schools employ state-of-the-art
technologies, such as interactive CD-ROMs coordinated with classroom content and
networking capacity. Most schools in the Nobel Learning Community introduce a
second language between the ages of two and three and continue that instruction
into the pre-K, kindergarten and school age programs.
The Company offers sports activities and supplemental programs, which include
day field trips coordinated with the curriculum to such places as zoos,
libraries, museums and theaters, and, at the middle schools, overnight trips to
such places as Yosemite, California and Washington, D.C. Schools also arrange
classroom presentations by parents and other volunteers, as well as organize
youngsters as presenters to community groups and organizations. To enhance
better the child's physical, social, emotional and intellectual growth, schools
are encouraged to provide fee-based experiences specifically tailored to
particular families' interest in such ancillary activities as dance, gymnastics,
and music lessons.
The Company's programs are implemented by experienced principals and directors
and their faculties. They foster open communication, teamwork and the attention
to detail required to provide
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a superior service. School directors work closely with regional and corporate
management, particularly in the regular assessment of program quality. In 1996,
the groundwork was laid for a Company-wide Quality Assurance Program and, early
in 1997, a Director of Quality Assurance was appointed to assess systematically
each Nobel school and to provide a procedure for internal accreditation. Nobel's
Quality Assurance Program sets standards consistent with the external, national
accreditation systems in which the Company participates with such organizations
as the National Association for the Education of Young Children (NAEYC), the
National Independent Private School Association (NIPSA), and the Commission for
International and Trans-Regional Accreditation (CITA). The Program also provides
a formal means to recognize and reward Nobel Learning Community educators for
their outstanding performance and achievement. Similarly, the Program also
furnishes guidance for the continued training and staff development of teaching
personnel, using both internal trainers and external consultants.
Nobel has begun development of a comprehensive tutorial program to be
implemented in several of its schools. The program will consist of both a
remedial and an enrichment experience in two major content areas: reading and
mathematics. Each content component includes a diagnostic and an instructional
service that can be delivered in three grade ranges (K - 2, 3 - 5, and 6 - 8).
The Company expects to complete development of the diagnostic and instructional
materials in reading in all three ranges in 1998 and to implement pilot tryouts
at least in the K - 2 range in select schools. The development of the diagnostic
and instructional materials in mathematics is expected to be completed in 1998
in all three grade ranges. Nobel plans to implement further piloting and
development of full tutoring services and marketing in 1999.
As of March 20, 1998, the aggregate licensed capacity at the Company's 130
schools and centers was approximately 20,000 children.
OPERATIONS / SCHOOL SYSTEMS
In order to maintain uniform standards, each school and center shares
consistent educational goals and operating procedures. To respond to local
demands, principals are encouraged to tailor curriculums, within Nobel's
standards, to meet regional needs. Management visits all schools and centers on
a regular basis to review program and facility quality.
Each school and center is staffed with a principal or director, teachers and
teaching assistants. Principals and directors are supervised by executive
directors, who report to either the Vice President - Eastern Operations or the
Vice President - Western Operations. The principal or director is critical to
the success of the school and is provided with ongoing training. Principals and
directors have responsibility for: (i) maintaining the quality of educational
services delivered at their schools, (ii) recommending pricing strategy based
upon school location and local area demographics, (iii) personnel management,
(iv) sales and marketing strategy for their locations and (v) fiscal management.
Principals and directors submit financial reports to the Company's corporate
office and to appropriate district and regional managers each week. These
reports include data on current enrollment, labor costs and cash receipts.
Corporate office personnel then review each report and prepare weekly combined
reports by district, region and for the Company in total. Weekly or
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monthly tuition rates and utilization rates are continually monitored. Each
school and center is measured on a monthly basis versus its individual business
plan. Nobel is in the process of evaluating several state-of-the-art computer
systems which would assist the principals in operating schools and provide
management with enhanced operational information.
The Company generally hires experienced individuals and attempts to promote
from within. Employment applicants are thoroughly reviewed with background
checks made to verify accurate employment history and establish background,
reputation and character. After hiring, the faculty is reviewed and evaluated
annually both through formal evaluation and market surveys. All principals and
directors are eligible for incentive compensation based on the profitability of
their schools.
MARKETING AND CUSTOMERS
The Company's management believes that Nobel has a unique position in the
marketplace and has implemented a marketing strategy to capitalize on this
niche. Nobel strives to differentiate itself from child care providers. In
contrast with mere custodial child care, Nobel's programs stress educational
development through proven curriculum programs, beginning at the preschool level
and continuing through upper grades.
The Company generates the majority of new enrollments from its reputation in
the community and word-of-mouth recommendations of parents. Further, the
Company is geographically clustering its preschools to increase local market
awareness and to provide a feeder population for Nobel elementary and middle
schools. The Company also markets its services through display ads, listings in
local print and radio media and through distribution of promotional materials in
residential areas. Marketing campaigns are conducted in the winter, spring and
fall, primarily at the local level by the Company's school directors and
principals. In addition, the various regional offices conduct marketing
programs, such as mass mailings and media advertising.
NEW CENTER AND SCHOOL DEVELOPMENT; ACQUISITIONS
Management expects an increasing portion of Nobel's growth for the next few
years to continue to be through the opening of new schools and preschools and
strategic acquisitions of existing schools and preschools.
New school development offers an attractive growth opportunity for Nobel to
expand into both new and existing markets. Proposed development sites are
presented to the Company through a network of developers across the United
States. After site selection, the Company engages a developer or contractor to
build a facility to the Company's specifications. Nobel currently works with
several developers who purchase the land, build the facility and enter into a
long-term lease with Nobel for the premises. Alternatively, Nobel purchases
land itself, constructs the building with its own or borrowed funds and then
seeks to enter into a sale and lease back transaction with an investor.
In 1997 and first quarter 1998, Nobel opened 14 new schools and preschools.
The Company plans to open approximately six to eight new schools and preschools
in 1998 and eight to ten new schools and preschools in 1999. The Company's
development plans are dependent on the continued availability of such developer
and financing arrangements.
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Typically, new schools are single-story stand alone structures located near
residential neighborhoods on sites of acreage appropriate to the nature of the
school. The Company carefully evaluates all proposed development sites and
makes a selection based on a variety of criteria, including: the number and age
of children living in proximity to the site; family income data; incidence of
two-wage earner and single parent families; traffic patterns; wage and fixed
cost structure; competition; price elasticity; family education data; local
licensing requirements; and real estate costs.
The Company plans to continue to expand the number of grade levels offered by
its existing schools. Upon conversion, current preschools and child care
centers initially offer grade levels through kindergarten or first grade, with
further expansion planned. The Company also is expanding the grades offered by
its other schools. In some locations, this expansion requires the construction
of additions to current facilities or development of a replacement facility.
Acquisition activity in 1997 and the first quarter of 1998 consisted of the
following:
.In January 1997, the acquisition of six preschools in Florida.
.In March 1997, the acquisition of two elementary and one preschool located
in San Jose, California.
.In September 1997, the acquisition of two preschools and one elementary
school in Las Vegas, Nevada.
.In March 1998, the acquisition of one elementary school located in Lake
Oswego, Oregon.
.In March 1998, the acquisition of one elementary school located in
Seattle, Washington.
At the closing of the January 1997 Florida acquisition, Nobel also purchased a
20% interest in a new elementary school in Florida, and Nobel entered into a
joint venture agreement with the sellers to develop five additional elementary
schools in Florida in which Nobel will have an 80% interest.
INDUSTRY AND COMPETITION
Annual spending in education is estimated to exceed $630 billion annually in
the United States or approximately 10% of gross domestic product. Estimates of
spending in education for preprimary grades (preschools and child care) are $30
billion while estimates of spending for kindergarten through eighth grade
("K - 8") are $200 billion. Spending is projected to continue to grow through a
combination of increasing per pupil expenditures and increasing school
enrollments.
It is estimated there are 90,000 schools in the $30 billion preschool/child
care segment with $25 billion spent in the private sector, of which $10 billion
is spent in the for-profit segment. Likewise, it is estimated there are 85,000
schools in the $200 billion K - 8 segment with an estimated $15 billion spent in
the private sector, of which $650 million is spent in the for-profit segment.
The public school market is estimated to be 110,000 schools in total, of which
76,000 are elementary, 23,000 are secondary and 11,000 are combined schools.
The private school market is estimated to be 26,000 schools, of which 15,500 are
elementary, 2,500 are secondary and 8,000 are
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combined. Of the 26,000 schools in the private school market, an estimated
20,500 are religiously affiliated and 5,500 are secular. Of the 5,500 secular
schools, less than 1,000 are for-profit schools.
Between 1985 and 1995, it is estimated that the public school K - 8 grade
enrollment increased 19.8% from 27.03 million students to 32.38 million students
while the private school K - 8 grade enrollments increased 5.6% from 4.19
million students to 4.43 million students over the same time period. The U.S.
Department of Education projects public school and private school K - 8
enrollment growth between 1996 and 2006 to slow to 2%, a 700,000 enrollment
increase in public schools and a 100,000 enrollment increase in private schools,
respectively. While this increase may not seem large, there is significant
concern that the nation's already overcrowded schools are ill-prepared to handle
it. It is estimated that in excess of 4,000 new K - 8 schools must be built to
relieve current overcrowding and handle the growth. Also, this growth will vary
significantly in different regions of the United States. States such as
California, Florida, Washington and Oregon are projected to experience high
growth. These states are targeted in the Company's expansion plans.
During the 1996 elections, education was the politically "hot issue" in
national and state contests. The broad public debate has shifted from whether
our existing K - 12 system has failed in terms of performance to which reform
movements promise the best and quickest improvements.
Taxpayers have experienced high costs in education expenditures without
positive results. According to a 1995 Gallup poll, 71% of Americans give the
nation's schools a grade of C, D or F generally and 54% give their own schools a
low grade as well. Quality is low; yet, the average annual cost of educating a
Kindergarten through 12/th/ grade student in the United States has risen to over
$6,000 in 1995. Dismal student achievement, a growing minority gap in school
completion rates and student misbehavior causing unsafe school environments are
three commonly mentioned quality measurements that are lacking. Also, corporate
America has become increasingly frustrated by insufficiently equipped students
produced by the nation's public school systems.
Education reform movements in the United States are posing alternatives to the
public schools. These include charter schools, private management of public
schools, vouchers, home schooling and private schools. The Company's strategy
is to provide parents a quality alternative through Nobel's privately owned and
operated schools utilizing a proven curriculum in a safe and challenging
environment.
For school age children, the Company competes with other for-profit private
schools, with non-profit schools and, in a sense, with public school systems.
The Company anticipates that, given the perceived potential of the education
market, well-financed competition may emerge, including possible competition
from the large for-profit child care companies. Currently, the only for-profit
competitor of which Nobel is aware that competes beyond a regional level is
Children's World, a subsidiary of Aramark Corporation. The Company believes
that the structure of the large for-profit child care companies may make it
difficult for them to implement and develop programs which are based upon
curriculum-intensive goals, which would require significant cultural changes.
The preschool/child care market is a $30 billion highly fragmented industry,
with diverse competition from both public and private sectors. Approximately
eight million children are enrolled
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in 90,000 centers/schools, of which less than nine percent are managed by for-
profit chains. Revenues of the 20 largest child care/preschool providers
represent less than five percent of total segment revenues. Also seeking
enrollments of pre-school age children are in-home individual child care
providers and corporations that provide child care for their employees.
Only one out of seven early care/education programs is rated good or excellent
by the Carnegie Corporation report; four out of five programs fail quality
standards. The Company believes that persons in its target market -- parents
seeking curriculum-based programs for their children -- seek services not
provided by child care providers without a curriculum base. Nobel believes
these parents desire to give their child the best educational advantage
available, since, as educators have found, the learning process should start
earlier, preferably somewhere between the ages of two and three. The Company
offers a national curriculum based program with excellent standards.
The demand for quality preschools is increasing. More than 60% of mothers
with children under six years of age are in the workplace. Both single parents
and dual income families are on the rise. From 1980 to 1990, the percentage of
dual income families rose from 50% to 60%. From 1970 to 1992, the percentage of
married mothers who worked full time increased 16% to 37%. Combined,
approximately 80% of U.S. families are either dual income or single parent
households.
While price is an important factor in competition in both the school age and
preschool markets, the Company believes that other competitive factors also are
important, including: professionally developed educational programs, well
equipped facilities, trained teachers and a broad range of ancillary services,
including transportation and infant care. Particularly in the preschool market,
many of these services are not offered by the Company's competition.
REGULATION
Schools and preschools are subject to a variety of state and local regulations
and licensing requirements. These regulations and licensing requirements vary
greatly from jurisdiction to jurisdiction. Governmental agencies generally
review the safety, fitness and adequacy of the buildings and equipment, the
ratio of staff personnel to enrolled children, the dietary program, the daily
curriculum, compliance with health standards and the qualifications of the
Company's personnel.
INSURANCE
The Company currently maintains comprehensive general liability, workers'
compensation, automobile liability, property, excess umbrella liability and
student accident insurance. The policies provide for a variety of coverage and
are subject to various limits. Companies involved in the education and care of
children, however, may not be able to obtain insurance for the total risks
inherent in their operations. In particular, general liability coverage can
have sublimits per claim for child abuse. Since 1994, the Company has been able
to increase significantly the sublimit applicable to such coverage. There can
be no assurance that in future years the Company will not again become subject
to lower limits.
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SERVICE MARKS
The Company has registered various service marks, including Chesterbrook
Academy(R), Merryhill Country School(R) and The Rocking Horse Child Care
Center(R), in the United States Patent and Trademark Office. The Company
believes that certain of its service marks have substantial value in its
marketing in the respective areas in which its schools operate.
SEASONALITY
Nobel's elementary and middle schools historically have lower operating
revenues in the summer due to lower summer enrollments. Summer revenues of
preschools tend to remain more stable or, in some cases, increase. The Company
is seeking to improve summer results through camps and other programs.
EMPLOYEES
On March 24, 1998, the Company employed approximately 3,630 persons,
approximately 1,180 of which were employed on a part-time basis. Management
believes that its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES.
At December 31, 1997, the Company operated 129 schools, preschools and child
care centers (hereafter, "schools") in 13 states. At March 24, 1998, the
number of schools totaled 130, located in 13 states.
The Company's schools generally are located in suburban settings. At March
23, 1998, the Company's schools are geographically located as follows: 37 in
California, 19 in North Carolina, 17 in Pennsylvania, 13 in Virginia, 9 each in
Indiana and New Jersey, 7 in Illinois, 6 in Florida, 5 in Nevada, 3 in
Washington, 2 each in South Carolina and Oregon and 1 in Maryland.
The Company owns the land and buildings for eight of the schools it operates.
All such properties are subject to mortgages on the real property. In addition,
one school is run by a majority-owned subsidiary and operated jointly with a
sponsoring employer. This subsidiary leases the buildings from a third party
and operates them under a ground lease from the employer. The remaining schools
are leased under long-term leases which are typically triple-net leases
requiring the Company to pay all applicable real estate taxes, utility expenses
and insurance costs. These leases usually contain inflation related rent
escalators.
The Company owns the land and building of three properties in Florida and
Maine, all of which are leased. The Company also from time to time purchases
undeveloped land for future development. At December 31, 1997, the Company
owned one such property in North Carolina.
The Company leases 13,837 square feet of space for its corporate offices in
Media, Pennsylvania.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
above will not have a material adverse effect on the Company's consolidated
financial position or results of operations. The significance of these matters
on the Company's future operating results and cash flows depends on the level of
future results of operations and cash flows as well as on the timing and
amounts, if any, of the ultimate outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION.
The Company's common stock trades on The Nasdaq Stock Market under the symbol
NEDI. "The Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic
securities market comprised of competing market makers whose trading is
supported by a communications network linking them to quotation dissemination,
trade reporting, and order execution systems. This market also provides
specialized automation services for screen-based negotiations of transactions,
on-line comparison of transactions, and a range of information services tailored
to the needs of the securities industry, investors and issuers. The Nasdaq
Stock Market consists of two distinct market tiers: the Nasdaq National
Market/(R)/ (on which the Company's common stock trades) and the Nasdaq SmallCap
Market/SM/. The Nasdaq Stock market is operated by The Nasdaq Stock Market,
Inc., a wholly-owned subsidiary of the National Association of Securities
Dealers, Inc.
The table below sets forth the quarterly high and low sales prices for the
Company's common stock as reported by Nasdaq for each quarter during the period
from January 1, 1996 through December 31, 1997 and for the first quarter to date
in 1998.
High Low
1996
First Quarter.................. $17 5/8 13 5/8
Second Quarter................. 18 1/4 13 3/4
Third Quarter.................. 15 1/4 9 1/4
Fourth Quarter................. 14 9 1/2
1997
First Quarter.................. 12 5/8 7 7/8
Second Quarter................. 10 3/8 7 1/2
Third Quarter.................. 9 3/4 8 1/4
Fourth Quarter................. 9 7/16 4 1/2
1998
First Quarter (as of 3/24/98).. 9 1/4 4 7/8
HOLDERS.
At March 15, 1998, there were approximately 600 holders of record of shares of
common stock.
DIVIDEND POLICY.
The Company has never paid a dividend on its common stock and does not expect
to do so in the foreseeable future. Although the payment of dividends is at the
discretion of the Board of Directors, the Company intends to retain its earnings
in order to finance its ongoing operations and to develop and expand its
business. The Company's credit facility with its lenders prohibits the Company
from paying dividends on its common stock or making other cash distributions
without
11
<PAGE>
the lenders' consent. Further, in connection with the private placement
of the Series C Convertible Preferred Stock to Edison Venture Fund II, L.P., the
Company is prohibited from paying cash dividends on its common stock, unless the
dividend is permitted under the Company's bank agreement and the amount of the
dividend is less than or equal to 50% of operating income less income tax.
The Company's Series A Preferred Stock bears a dividend of 8% per annum,
payable quarterly. Dividends totaling $102,000 were paid in 1997.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data of the
Company. This data should be read in conjunction with the Company's Financial
Statements and the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands except per share data)
OPERATING DATA:
Revenue...................................... $80,980 $58,909 $44,154 $34,372 $32,594
School operating expenses.................... 69,858 48,871 35,762 28,032 26,514
School operating profit...................... 11,122 10,038 8,392 6,340 6,080
New School development....................... 401 208 146 129 29
General and administrative
expenses................................... 5,973 4,190 3,396 2,696 2,555
Restructuring expense........................ 2,959 - - - -
Litigation expense........................... - - 500 200 -
Operating income............................. 1,789 5,641 4,350 3,315 3,496
Interest expense............................. 2,047 2,004 1,840 1,223 1,718
Other (income) expense....................... (158) (483) (126) 107 (39)
Minority interest............................ 86 95 86 83 88
Income (loss) before income taxes............ (186) 4,025 2,550 1,902 1,729
Income tax (benefit) expense................. 250 1,562 (1,356) (438) 21
Net income before extraordinary item......... (436) 2,463 3,906 2,340 1,708
Extraordinary Item........................... 449 - 62 - -
Net (loss) income............................ (885) 2,463 3,844 2,340 1,708
Preferred Dividends.......................... 102 109 184 199 107
Net income available to
common stockholders......................... (987) 2,354 3,660 2,141 1,601
EBITDA (earnings before interest, taxes,
depreciation and amortization expense)..... $ 5,099 $ 8,240 $ 5,902 $ 4,188 $ 4,591
Basic earnings per share (post split):
- -------------------------------------
Net income (loss) before extraordinary item.. $ (0.09) $0.42 $ 0.79 $0.57 $ 0.41
Extraordinary item........................... (0.07) - $ (0.01) - -
------- ------- ------- ------- -------
Net income (loss)............................ $ (0.16) $0.42 $ 0.78 $0.57 $ 0.41
======= ======= ======= ======= =======
Dilutive earnings per share (post split):
- ----------------------------------------
Net income before extraordinary item......... $ (0.09) $0.34 $ 0.64 $0.46 $ 0.38
Extraordinary item........................... (0.07) - $ (0.01) - -
------- ------- ------- ------- -------
Net income................................... $ (0.16) $0.34 $ 0.63 $0.46 $ 0.38
======= ======= ======= ======= =======
<CAPTION>
Year ended December 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working Capital (deficit).................... $(7,946) $(1,351) $ (831) $(4,197) $(3,114)
Goodwill..................................... 37,439 25,601 17,274 8,888 8,923
Total assets................................. 74,398 56,833 44,937 23,234 22,613
Short-term debt and current
portion of long-term debt.................. 2,712 3,376 1,371 1,768 905
Long-term debt............................... 28,470 14,225 20,272 7,846 12,545
Stockholders' equity (deficit) 31,636 $32,323 $16,121 $ 8,298 $ 3,732
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal year 1997 compared to fiscal year 1996.
As of December 31, 1996 the Company operated 107 elementary schools,
preschools and child care centers (sometimes collectively referred to herein as
"schools"). At December 31, 1997 and at March 23, 1998, the Company operated
129 schools and owned a 20% interest in one elementary school.
During 1997, the Company acquired the assets or stock of companies owning 17
schools. These acquisitions include: six preschools in Florida and a 20%
interest in an elementary schools; two preschools and one elementary school in
Las Vegas, Nevada; and two elementary and three preschools located in San Jose,
California. Also considered for the purposes hereof as being acquired in 1997
are one elementary school in Southern California and a preschool and elementary
school in Seattle, Washington acquired at the end of December 1996. In
addition, the Company opened 12 new schools in 1997, of which eight were
preschools and four were elementary schools (two of which were replacement
schools). During 1997, the Company closed seven schools whose leases expired.
In March 1998, the Company acquired two elementary schools located in Lake
Oswego, Oregon and Seattle, Washington.
14
<PAGE>
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the years ended December 31, 1997 and 1996
into three categories: Baseline Schools, Schools Acquired Within the Year and
New School Development.
<TABLE>
<CAPTION>
% of % of 1997-1996
1997 Revenue 1996 Revenue Variance ($)
--------- --------- --------- --------- ------------
BASELINE SCHOOLS (1)
<S> <C> <C> <C> <C> <C>
Revenues $59,567,521 100.00% $49,977,099 100.00% $ 9,590,422
Operating Profit $10,175,792 17.08% $ 9,312,466 18.63% $ 863,326
----------- ------ ----------- ------ -----------
SCHOOLS ACQUIRED WITHIN THE YEAR (2)
Revenue $14,231,683 100.00% $ 3,437,079 100.00% $10,794,604
Operating Profit $ 2,345,054 16.48% $ 775,073 22.55% $ 1,569,981
----------- ------ ----------- ------ -----------
NEW SCHOOL DEVELOPMENT (3)
Revenues $ 7,180,958 100.00% $ 5,495,210 100.00% $ 1,685,748
Operating Profit (Loss) $ (409,610) -5.70% $ 585,935 10.66% $ (995,545)
----------- ------ ----------- ------ -----------
Total Revenues $80,980,162 100.00% $58,909,388 100.00% $22,070,774
=========== ====== =========== ====== ===========
School Operating Profit Before
Amortization of Goodwill =========== ======== =========== ======== =============
$12,111,236 14.96% $10,673,474 18.12% $ 1,437,762
=========== ====== =========== ====== ===========
Less Amortization of Goodwill $ (988,973) 1.22% $ (635,215) 1.08% $ (353,758)
Net Operating Profit $11,122,263 13.74% $10,038,259 17.04% $ 1,084,004
=========== ====== =========== ====== ===========
</TABLE>
(1) Baseline Schools is defined as all schools, except schools included for the
year in Schools Acquired Within the Year or New School Development (see
footnotes (2) and (3)). (Schools which were acquired in 1996 are included
in "Baseline Schools" for 1997 results and "Schools Acquired Within the
Year" for 1996 results. Schools which were first opened in 1995 are
included in "Baseline Schools" for 1997 results and "New Development" for
1996 results.)
(2) Schools Acquired Within the Year is defined as (i) schools acquired in 1996
for 1996 results and (ii) schools acquired in 1997 for 1997 results.
(3) New School Development is defined as schools which have not been opened for
two full fiscal years (i.e., schools opened in 1995 or 1996, for 1996
results and (ii) schools opened in 1996 or 1997, for 1997 results).
Revenues in the Baseline Schools increased $9,590,422 or 19.19% from 1996 to
1997. The increase is a result of the combination of several factors, including
(1) an increase in revenues of $6,172,511 related to acquisitions completed in
1996, (2) a $4,635,670 increase related to New Schools opened in 1995, (3) an
increase of revenues of $642,895 in schools other than Merryhill and South
Carolina, offset by (4) a decrease in Merryhill enrollment resulting in a
$1,003,492 decrease in revenues and (5) a decrease of $857,162 related to the
revenues of six schools closed in South Carolina in 1996. Operating profit of
the Baseline Schools increased $863,326 or 9.27% as a result
15
<PAGE>
of (1) a $1,383,422 increase in operating profit related to the schools acquired
in 1996, (2) a $849,514 increase related to the operating profit of the 1995 New
Schools offset by (3) a $948,875 decrease related to the decrease in the
Merryhill schools and by (4) a $420,735 decrease in the remaining schools.
The Company experienced both a decline in enrollment and operating profit of
the Merryhill Schools located in California. The Company believes that the
decrease is primarily due to the effect of the California public school
initiative to decrease student/teacher class size ratios in Kindergarten to
third grade classes and a weak summer program. The public school initiative
affected Merryhill in several ways: (1) teacher turnover increased, (2)
enrollment decreased and (3) with efforts to attract replacement teachers and
retain existing teachers, average teacher salary increased. In addition to the
effect of the initiative, rent expense in some of the Merryhill Schools is
increasing because of recently built replacement schools, which expanded
capacity. The Company has taken several steps to improve the situation. In the
fourth quarter of 1997, the Company hired a Vice President of Western Operations
and a Summer Camp Manager. The Company restructured operations management by
adding experienced Executive Directors and other management personnel and
reducing responsibility of each Executive Director to a maximum of ten schools.
In 1997, the Company acquired seventeen schools with total revenues and school
operating profits of $14,231,683 and $2,345,054, respectively. This is an
increase in acquisition activity totaling $10,794,604 in revenues and $1,569,981
in operating profit compared to schools acquired in 1996. In 1996, the Company
acquired seven schools with revenue of $3,437,079 and operating profit of
$775,073. The operating profit margins of schools acquired decreased 6.07% from
22.55% in 1996 to 16.48% in 1997. The decrease in the margins of the schools
acquired is related primarily to the lack of summer programs at some of these
elementary schools. The elementary schools acquired in 1997 did not typically
have strong summer programs. The Company initiated summer programs, but it
takes time for enrollment to build.
Revenues related to the New Schools built in 1996 and 1997 totaled $7,180,958
in 1997 or an increase of $1,685,748 or 31% compared to 1995 and 1996. In 1997,
the Company built 12 schools and in 1996 the Company built seven schools.
Operating loss totaled $409,610 in 1997 compared to operating income of $585,935
in 1996. The increase in the loss is a result of the mix in the type of schools
opened and the timing of the openings. Elementary and middle schools take
longer to become profitable compared to preschools. In 1997, the Company opened
four elementary/middle schools as compared to three in 1996. Elementary schools
typically take 24 to 36 months to become profitable compared to 18 to 24 months
in a preschool.
Overall, in 1997 the Company's total revenues increased $22,070,774 or 37.5%
and school operating profits increased $1,437,762, compared to 1996. Meanwhile,
school operating profit margins (after goodwill) decreased from 17.04% in 1996
to 13.73% in 1997 as explained above.
New School development costs nearly doubled, increasing $193,022 or 93% to
$400,622 in the year ended December 31, 1997, primarily because of the increase
in the number of schools opened. The Company opened eight preschools and four
elementary/middle schools for a total of twelve schools as compared to four
preschools and three elementary/middle schools for a total of seven in 1996.
Additionally, elementary/middle schools typically have higher start up costs
than preschools.
16
<PAGE>
Start up costs average $225,000 for an elementary school and $125,000 for a
preschool. Start up and development costs include personnel, marketing and
supplies.
General and administrative expenses increased $1,783,037 or 42.56% to
$5,972,787 for the year ended December 31, 1997. The increase is attributable
to the increase in the Company's infrastructure to support its revenue growth.
In 1997, the Company added a Chief Financial Officer, a Vice President of
Marketing, a Human Resources Manager, a Vice President of Eastern Operations, a
Vice President of Western Operations, a Summer Camp Manager, a Training Manager,
several Executive Directors and other support staff. In addition, the Company
selected and launched an Education Advisory board to oversee and assist in
curriculum development. As a percentage of revenue, general and administrative
expenses increased only slightly from 7.11% of revenues in 1996 to 7.38% of
revenues in 1997. 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.
In 1997, the Company recorded a restructuring charge totaling $2,959,781
related to a combination of factors. Of the $2,959,781, $2,000,000 is related
to the write-off of the goodwill recorded in connection with the acquisition of
the nine schools located in Indianapolis, $789,000 was related to the write down
of the book value and an accrual for lease obligations of several non-performing
schools held for sale or that are scheduled to close when their leases expire,
and $170,781 is related to the restructuring of management that took place in
1997 and early 1998. The schools in Indianapolis are currently for sale.
As a result of the factors mentioned above, operating income decreased
$3,851,836 or 68% to $1,789,073 for the year ended December 31, 1997 compared to
the same period in 1996. Adjusted operating income, defined as operating income
before the restructuring charge, totaled $4,748,854 in 1997, which represents a
decrease of $892,055 or 15.8% compared to the prior year.
Year to date 1997 EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization), totaled $5,099,203 which was $3,140,378 or 38%
below the prior year. As a percentage of revenue, EBITDA for the year ended
December 31, 1997 equaled 6.3% versus 14.0% for the year ended December 31,
1996. Adjusted EBITDA (defined as EBITDA before the restructuring charge)
equaled $8,058,984 which was $180,597 or 2% below $8,239,509 for the year ended
December 31, 1996. As a percentage of revenues, adjusted EBITDA equaled 10.0%
for the year ended December 31, 1997 as compared to 13.9% for the prior year.
The decrease as a percentage of revenues is a result of lower operating margins
and higher general and administrative expense. EBITDA is not a measure of
performance under generally accepted accounting principles, however the Company
and the investment community consider it an important indicator.
Interest expense increased slightly by $42,230 or 2.11% for the year ended
December 31, 1997 compared to 1996. While the principal amount of indebtedness
outstanding under the Company's senior loan facilities increased in the fourth
quarter, this increase was offset by a decrease in the interest rate, as a
result of amendments to the loan documents governing the Company's principal
debt facilities. Debt increased as a result of the acquisition of the Las Vegas
schools and new school development which occurred during 1997. Cash raised
through the private placement of common
17
<PAGE>
stock was used in the first half of 1997 to complete the acquisitions of Another
Generation and Rainbow Bridge schools.
Other income decreased $324,168 or 67% for the year ended December 31, 1997
totaling $158,479 compared to 1996 of $482,647. The decrease is primarily
related to the decrease in interest income. During 1996, the Company raised
$11,600,000 of net proceeds through a private issuance of common stock. The
Company earned interest on these funds during the second half of 1996. The cash
was used for acquisitions and the building of new schools during the later part
of 1996 and early 1997.
Loss before taxes totaled $185,561 for the year ended December 31, 1997 which
represents a $4,210,246 or 105% decrease compared to the prior year. The
decrease is attributed to (1) the $2,959,781 restructuring charge and (2) an
increase in general and administrative expenses of $1,783,037. Although the
revenue base supported the general and administrative expense increase, the
operating profit did not increase by the same percentage because of the reasons
discussed above. Adjusted net income totaled $2,774,219 which represents a
$1,250,466 or 31% decrease compared to the prior year.
The provision for income taxes totaled $250,016 for the year ended December
31, 1997. The Company was in a pretax loss position. However, the Company
recorded income taxes, primarily relating to non-deductible goodwill
amortization and state and local taxes. (In the acquisition of the stock of a
company, purchase accounting applies for accounting purposes; but, for tax
purposes, the Company inherits the historic basis of the purchased company in
its assets, without any good will.) The Adjusted income tax provision (income
tax before the restructuring charge) equaled $1,165,172 which represent a 42%
tax rate. This represented a decrease of $396,621 or 25% compared to $1,561,793
for the year ended December 31, 1996. The tax rate in 1996 was 39%.
In 1997, the Company recorded a $449,000 extraordinary expense. In December
1997, the Company refinanced its principal debt facility which combined the Term
Loans with scheduled principal payments and the existing Revolving Line of
Credit into Revolving Credit and Term Facilities which extends principal payment
to begin in the year 2001. The change in the terms enables the Company to use
cash from operations and the unused portion of the line for growth through
acquisitions and New School development. Because the new loan facility terms
vary significantly from the existing credit facility, the Company was required
to write off the deferred financing costs which were being amortized over the
term of the original loan.
In the fourth quarter of 1997, the Company adopted FASB No. 128 "Earnings Per
Share" which changed the earnings per share calculation. The Company restated
the prior year calculation as required. Basic Earnings Per Share before the
Extraordinary Item equaled ($0.09) for the year ended December 31, 1997 as
compared to $0.42 at December 31, 1996, which resulted in a $0.51 decrease per
share. Basic Earnings (Loss) per Share equaled ($0.16) for the year ended 1997
as compared to $0.42 for the year ended December 31, 1996 or a $0.58 decline.
Adjusted Basic Earnings per Share (before the restructuring charge and
extraordinary item) equaled $0.25 for the year ended December 31, 1997 as
compared to $0.42 for 1996 which represents a $0.17 decrease. Dilutive Earnings
(Loss) per Share before the Extraordinary Item equaled ($0.09) for 1997 as
compared to $0.34 for 1996, or a $0.43 decrease. Adjusted Dilutive Earnings per
Share equaled $0.22 in 1997 as compared to $0.34 in 1996 or a $0.12 per share
decrease.
18
<PAGE>
Fiscal year 1996 compared to fiscal year 1995.
As of December 31, 1995 the Company operated 101 schools. At December 31,
1996, the Company operated 107 schools.
During 1996, the Company acquired the assets or stock of companies owning
seven schools. These acquisitions included: five preschools in Virginia and two
preschools in North Carolina. (In late December 1996, the Company also acquired
two schools located in Seattle, Washington and one school in Coto de Caza,
California; however, for purposes hereof, these are treated as being acquired in
1997.) In addition, during 1996, the Company opened seven new schools, two of
which were replacement schools. Leases of six non-core schools located in South
Carolina expired and were not renewed, as planned in the 1992 restructuring of
the Company.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the years ended December 31, 1996 and 1995
into three categories, Baseline Schools, Schools Acquired Within the Year and
New School Development.
<TABLE>
<CAPTION>
% of % of 1996-1995
1996 Revenue 1995 Revenue Variance ($)
------------ --------- ------------ --------- -------------
BASELINE SCHOOLS (1)
<S> <C> <C> <C> <C> <C>
Revenues $49,977,099 100.00% $32,382,813 100.00% $17,594,286
Operating Profit $ 9,312,466 18.63% $ 7,009,873 21.65% $ 2,302,593
----------- ------ ----------- ------ -----------
SCHOOLS ACQUIRED WITHIN
THE YEAR (2)
Revenue $ 3,437,079 100.00% $ 7,102,124 100.00% $(3,665,045)
Operating Profit $ 775,073 22.55% $ 855,474 12.05% $ (80,401)
----------- ------ ----------- ------ -----------
NEW SCHOOL DEVELOPMENT (3)
Revenues $ 5,495,210 100.00% $ 4,672,430 100.00% $ 822,780
Operating Profit $ 585,935 10.66% $ 859,291 18.39% $ (273,356)
----------- ------ ----------- ------ -----------
Total Revenues $58,909,388 100.00% $44,157,367 100.00% $14,752,021
=========== ====== =========== ====== ===========
School Operating Profit
Before Amortization of ============ ======== ============ ======== =============
Goodwill
$10,673,474 18.12% $ 8,724,638 19.76% $ 1,948,836
=========== ====== =========== ====== ===========
Less Amortization of
Goodwill $ (635,215) (1.08)% $ (332,685) (0.75)% $ (302,530)
Net Operating Profit $10,038,259 17.04% $ 8,391,953 19.01% $ 1,646,306
=========== ====== =========== ====== ===========
</TABLE>
(1) Baseline Schools is defined as all schools, except schools included for the
year in Schools Acquired Within the Year or New School Development (see
footnotes (2) and (3)). (Schools which were acquired in 1995 are included
in "Baseline Schools" for 1996 results and "Schools Acquired Within the
Year" for 1995 results. Schools which were first opened in 1994 are
included in "Baseline Schools" for 1996 results and "New Development" for
1995 results.) [footnotes continued on next page]
19
<PAGE>
(2) Schools Acquired Within the Year is defined as (i) schools acquired in 1995
for 1995 results and (ii) schools acquired in 1996 for 1996 results.
(3) New School Development is defined as schools which have not been opened for
two full fiscal years (i.e., schools opened in 1995 or 1996, for 1996
results and (ii) schools opened in 1994 or 1995, for 1995 results).
Revenues of the Baseline Schools increased $17,594,286 or 54% from 1995 to
1996. The increase is a result of several factors including (1) revenues
related to the 1995 acquisition totaling $14,400,356, (2) revenues related to
the 1994 New Schools totaling $3,141,705 and (3) a slight increase in the
remaining schools of $52,225. The increase in the remaining schools was the
result of a combination of the divestiture of six South Carolina schools in 1996
and one Florida school in 1995 creating a $712,358 revenue decrease offset by a
$724,583 increase in the remaining schools which was a result of enrollment and
tuition increases. The operating profit of the Baseline Schools increased
$2,302,593 or 33% for the year ended December 31, 1996 compared to 1995. The
increase is a result of (1) $1,635,557 related to the acquisitions which
occurred in 1995, (2) $707,428 is related to the operating profit of the New
Schools opened in 1994 and (3) offset by a slight decrease of $40,392 which was
related to the remaining schools. The decrease in the remaining schools
operating profit is a result of an increase in personnel costs.
The operating profit margin of the Baseline Schools decreased 3.02% from
21.65% for the year ended 1995 to 18.63% for the year ended 1996. The decrease
in the operating margins is the result of losses associated with the 1995
acquisition of certain schools in the Indianapolis area, and lower margins of
schools acquired in the 1995 acquisition of Educo, Inc. The lower margins in
the acquisitions is a result primarily of lower than expected summer performance
in the Educo schools and a slower than anticipated turnaround of the
Indianapolis schools.
In 1996, the Company acquired seven schools with total revenues of $3,437,079
and operating profit of $775,073 for the year ended December 31, 1996. Five of
the seven schools (the Virginia acquisition) were acquired in February 1996 and
two of the schools located in North Carolina were acquired in November of 1996.
In 1995, the Company acquired 25 schools with revenues of $7,102,124 and
operating profit of $855,474 for the year ended December 31, 1995. The Company
acquired six Pennsylvania schools in March 1995 and acquired the ten Educo
schools and nine Indianapolis schools in September 1995. The operating margin
of the schools acquired in 1996 equaled 22.55% as compared to the operating
margins of the schools acquired in 1995 which equaled 12.05%. The 1995
acquisitions include the Indianapolis area schools which operated at a loss and
the Educo schools which operated at a 12% operating margin. When making
acquisitions, the Company takes steps to increase operating margins of Acquired
Schools over a 12 to 36 month period as it implements cost controls, systems and
marketing strategies.
In 1996 and 1995, the Company opened 14 new schools with revenues of
$5,495,210 and operating profit of $585,935 for the year ended December 31,
1996. In 1994 and 1995, the Company opened 11 new schools with revenues of
$4,672,430 and operating profit of $859,291 for the year ended December 31,
1995. The operating margins in 1996 of the schools opened in 1996 and 1995
equaled 10.66%. The operating margins in 1995 of the schools opened in 1995 and
1994 schools
20
<PAGE>
equaled 18.39%. The variance in the margins is a result of the mix and timing of
schools opened. In 1996, the Company opened three elementary/middle schools and
four preschools. In 1995 the Company opened seven preschools, and in 1994 the
Company opened four preschools. Generally, the Company experiences smaller
losses in opening preschools as compared to elementary/middle schools and is
able to reach profitability in the preschool in six to nine months as compared
to elementary/middle schools which can take 12 to 36 months to become
profitable.
Overall, in 1996 the Company's total revenues increased $14,752,021 and
operating profits increased $1,646,306, compared to 1995. Meanwhile, operating
profit margins decreased from 19.76% in 1995 to 18.12% 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 was 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 an important
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.
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 was the first year the Company was fully taxable. The
Company anticipates this trend to continue.
21
<PAGE>
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%.
LIQUIDITY AND CAPITAL RESOURCES
Management is continuing to pursue 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) consolidation through strategic acquisitions. The Company
currently intends to fund its growth strategy and its cash needs through (1) the
available balance of its $25,000,000 revolving line of credit, (2) the use of
site developers to build schools and lease them to the Company, and (3) 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, and continued
support of site developers to build and lease schools 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. The Company identifies growth markets through both
extensive demographic studies and an analysis of the existing educational
systems in the area. The Company seeks to grow through a cluster approach
whereby several preschools feed into an elementary school. In order for the
Company to continue its acquisition strategy, the Company will, in the current
year, require raising additional funds through debt or equity financing.
In 1997, the Company amended its credit agreement three times, the most
significant of which occurred in December. These amendments: (1) increased the
Company's borrowing capacity from $21,200,000 to $25,000,000, (2) changed the
prior fixed interest rates (applicable to term loans) to variable rates, (3)
provided that all revolving debt will convert to a term loan in January 2001,
(4) extended terms for an additional five years for the prior term loan and six
years for the prior revolving line of credit and (5) increased the number of
permitted new school construction projects.
On December 22, 1997, the Company entered into the Seventh Amendment and
Modification of its Loan and Security Agreement with its primary lender. The
Amendment replaced existing term loans and revolving loans with $25,000,000
Revolving and Term Facilities. Two facilities are established: a $3,000,000
facility (Revolving and Term Facility A) and a $22,000,000 facility (Revolving
and Term Facility B). Amounts outstanding under term loans at the time
restructuring were treated an initial outstanding balances under the new
Revolving and Term Facilities. Under the new arrangements, no principal
payments are required until January 1, 2001. Commencing on January 1, 2001, the
Company must pay outstanding principal balance of the Revolving and Term
Facilities in 60 equal monthly installments.
Interest on the unpaid principal balance of Revolving and Term Facility A
accrues at a variable interest rate ("Floating Rate") equal to the base rate of
Summit Bank plus 25 basis points (subject to reduction, based on performance).
Interest on the unpaid principal balance of Revolving and
22
<PAGE>
Term Facility B accrues at a variable interest rate equal to the Floating Rate
or a LIBOR-based rate (at the Company's option, chosen at the beginning of any
interest rate period).
The Company may elect to convert to a term loan portions of the Revolving and
Term Facility B in increments of $2,500,000. Such term loans would be payable
over sixty months.
At December 31, 1997, the principal amounts outstanding under the Revolving
and Term Facility B was $21,576,451, and no amounts were outstanding under the
Revolving and Term Facility A.
By postponing the dates of required principal payments under the Company's
loans, the Seventh Amendment has significantly improved the Company's cash flow
requirements under these loans. The restructuring allows the Company greater
flexibility in managing its cash flow and allows greater ability to use
available funds to grow the Company. Because of the significant change in the
repayment terms of the senior loan, in accordance with Emerging Issue Task Force
Issue 96-19 "Debtors Accounting for Modification of Debt Instrument", the
Company wrote off the financing fees related to the prior financing totaling
$775,000 on a pretax basis. The charge was recorded as an extraordinary item
and accordingly shown tax effected.
The Revolving and Term Facilities are collateralized by liens in favor of
Summit Bank on the Company's real and personal properties and all future assets
acquired.
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.
Total cash and cash equivalents decreased $2,647,000 from $5,252,000 at
December 31, 1996 to $2,605,000 at December 31, 1997. The net decrease was due
primarily to (1) cash used for acquisitions totaling approximately $10,145,000,
(2) approximately $9,337,000 used for the building of New Schools and
acquisition of land parcels and (3) repayment of long term debt of $9,683,000.
These decreases were offset by (1) an increase in cash flow from operations of
$2,573,000, (2) proceeds from the sale of property totaling $7,451,000 and (3)
proceeds from borrowings under the principal credit facility of $18,642,000.
Net cash flow from operations increased $2,573,000 or 54% from $4,775,000 as
of December 31, 1996 to $7,348,000 as of December 31, 1997. The increase is
primarily the result of a combination of factors: (1) a decrease in net income
of $3,347,000 offset by an increase in depreciation and amortization of
$1,101,000, (2) the addback of the restructuring charge of $2,960,000 and (3) an
increase in accounts payable of $2,400,000.
The working capital deficit increased $6,595,000 from $1,351,000 at December
31, 1996 to $7,946,000 at December 31, 1997. The increase is a result of a
decrease in cash of $2,646,000, an increase in subordinated debt of $2,032,000
and an increase in accounts payable and accrued liabilities of $3,516,000. Cash
raised through an equity private placement in 1996 was used for the acquisitions
completed in the first quarter of 1997. Included in the current portion of
subordinated debt is $2,100,000 payable relating to certain acquisitions, a
portion of which is payable in April 1998. Accounts payable and accrued
liabilities increased as a result of an increase in the deferred
23
<PAGE>
tax liability of $1,400,000, an increase related to the restructuring totaling
$960,000 and an increase in trade accounts payable totaling $720,000.
TRENDS
During the twelve months ended December 31, 1997, the Company experienced a
decrease in enrollment at its Merryhill schools, located in California, coupled
with a weaker summer program in several elementary schools. As discussed
herein, the Company believes that this decrease is primarily due to the effect
of California public schools' initiative to decrease student/teacher class size
ratios in Kindergarten to third grade classes. This initiative affected
Merryhill in several ways: (1) teacher turnover increased, (2) enrollment
decreased, and (3) with efforts to attract replacement teachers and retain
existing teachers, average teacher salaries increased. In addition to the
effect of the public school initiative, rent expense in some of the Merryhill
schools increased because of recently built replacement schools, which expanded
capacity. Fall enrollment for the 1997-1998 school year were down from the
previous year. This negatively affected the Company's near term earnings.
In an effort to improve the performance in Merryhill schools and improve the
summer programs, as well as Company-wide performance, the Company has taken
several key steps. The structure of operations management has changed, with the
Executive Director position replacing the Regional Manager and District Manager
positions. The number of schools reporting to each Executive Director has been
reduced so that each manager can spend more time in the schools. In addition,
the Company has hired a Vice President of Western Operations and an experienced
Summer Camp Business Manager. The Company is also searching for a President and
Chief Operating Officer. In the near term, additional overhead from this
management structure will have a negative impact on earnings; however, over the
long term, the Company believes this strategy will prove warranted.
In December 1997, the Company implemented its restructuring program which
includes (1) restructuring and expanding the operations management, (2)
evaluating the non-performing acquisitions for possible divestitures, and (3)
analyzing several schools which were located in non-strategic areas for possible
closure and divestiture.
In connection with the restructuring program, the Company recorded a $2.9
million charge which consisted of (1) $2,000,000 related to the write down of
goodwill of the non-performing schools located in Indianapolis which are for
sale, (2) $789,000 related to the write down of assets and accrual of lease
obligations of other schools not located in strategic markets which are for sale
or whose leases are expiring in 1998, and (3) $170,781 related to costs
associated with the restructuring of management.
The Company plans to respond to the growing need for improved quality
education. In 1996 and 1997, the Company built new elementary and middle
schools, which incur higher initial losses in the first year as compared to
newly constructed preschools. The Company plans to open four newly constructed
elementary schools in 1998, and continue development in 1999.
24
<PAGE>
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. The Company believes it has adequate
insurance coverage at this time. There can be no assurance that in future years
the Company will not again become subject to lower limits.
CAPITAL EXPENDITURES
In 1998, the Company will continue 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 projects
spending approximately $1,500,000 on this project in 1998 and approximately
$2,000,000 in 1999.
The Company is continuously maintaining and upgrading the property and
equipment of each school. During 1997, the Company spent approximately
$5,884,000 on capital expenditures, which included $1,800,000 on books,
computers, furniture, fixtures, equipment and technology for new schools and
$4,184,000 on upgrading the existing facilities with technology, books,
playground upgrades and leasehold improvements. The Company anticipates
spending approximately $7,000,000 in capital expenditures in 1998 relating to
equipment and technology for both new schools and existing facilities.
The Company also spent $9,337,000 in costs related to the building of three
new schools in 1997 of which two were sold in 1997 and the third was sold in
March 1998.
The Company anticipates cash flow from operations is sufficient to fund the
expenditures.
YEAR 2000 COMPLIANCE
As widely reported in the media, computer systems in business and home use may
experience problems arising from malfunctions in certain software and databases
in handling dates occurring on or after January 1, 2000. The Company believes
that the only computer systems that are critical to its operations are certain
accounting and payroll software. The Company licenses such software from two
outside vendors. Both of these vendors have publicized reports giving
assurances that the software used by the Company is "Year 2000 compliant". If
such assurances are not accurate, the Company could incur material costs and
material disruptions to its operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
25
<PAGE>
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company is currently evaluating the impact, if any, adoption of SFAS No. 131
will have on its financial statements; however the Company believes it is a one
segment company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary financial information specified by this
Item, together with the Reports of the Company's independent accountants
thereon, are included in this Annual Report on Form 10-K on pages F-1 through F-
24 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------------------------------------------------------------
<S> <C> <C>
A. J. Clegg 58 Chairman of the Board of Directors, President and
Chief Executive Officer; Director (since 1992)
John R. Frock 54 Executive Vice President-Corporate
Development; Assistant Secretary; Director (since
1992)
William E. Bailey 39 Vice President and Chief Financial Officer
Yvonne DeAngelo 40 Vice President - Administration and Finance;
Secretary
B. Robin Eglin 41 Vice President - Real Estate Development
Emily Louviere 53 Vice President - Western Operations
Barbara Z. Presseisen 61 Vice President - Education
Barbara Sell 48 Vice President - Eastern Operations
Barry S. Swirsky 41 General Counsel
Edward Chambers 61 Director (since 1988)
Peter H. Havens 43 Director (since 1991)
Janet L. Katz 51 Director (since 1994)
Morgan R. Jones 58 Director (since 1991)
John H. Martinson 50 Director (since 1994)
Eugene G. Monaco 70 Director (since 1995)
</TABLE>
The following description contains certain information concerning the
foregoing persons:
A.J. Clegg. Mr. Clegg was named Chairman of the Board and Chief Executive
Officer of the Company on May 29, 1992. Since 1989, Mr. Clegg has also served
on the Advisory Board of Drexel University and, in 1996, was named as a member
of the Board of Trustees of Drexel University. From June 1990 to December 1997
(but involving immaterial amounts of time since 1994), Mr. Clegg also served as
the Chairman and CEO of JBS Investment Banking, Ltd., which provides investment
management and consulting services to businesses and formerly provided services
to the Company through an Administrative Services Agreement. In 1979, he formed
Empery Corporation,
27
<PAGE>
an operator of businesses in the cable television and printing industries, and
held the offices of Chairman, President and CEO during his tenure (1979-1993).
In addition, Mr. Clegg served as Chairman and CEO of TVC, Inc. (1983-1993), a
distributor of cable television components; and Design Mark Industries (1988-
1993), a manufacturer of electronic senswitches. Mr. Clegg has also served on
the board of directors of Ferguson International Holdings, PLC, a United Kingdom
company, from March 1990 to April 1991; and was Chairman and CEO of Globe Ticket
and Label Company from December 1984 to February 1991.
John R. Frock. Mr. Frock was named Executive Vice President - Corporate
Development on August 1, 1994. Mr. Frock was elected to the Board of Directors
of the Company on May 29, 1992. In March 1992, Mr. Frock became the President
and Chief Operating Officer of JBS Investment Banking, Ltd., which provided
investment management and consulting services to businesses (which included
Nobel). During the past five years, Mr. Frock also served as the Chairman and
Chief Executive Officer of Avant Garde Enterprises, Ltd.; President and Chief
Operating Officer of SBF Communications Graphics, a business forms printer
located in Philadelphia, Pennsylvania; President of Globe Ticket and Label
Company; and President of the Graphics Group of Empery Corporation.
William E. Bailey. Mr. Bailey joined the Company as Vice President and Chief
Financial Officer in January 1998. Prior to joining the Company, Mr. Bailey was
Vice President / Controller for KinderCare Learning Centers, Inc. (a national
child care company) from 1993 to 1997, Corporate Controller from 1991 to 1993,
and Director of Planning and Analysis from June 1989 to October 1991.
Yvonne DeAngelo. Ms. DeAngelo was appointed Vice President - Finance and
Administration in December 1995. She had served as Controller since March 1989.
Ms. DeAngelo has also served as Secretary since May 1992. Before joining Nobel
Education Dynamics, Inc., she served as Senior Auditor for Coopers and Lybrand
from 1986 to 1989.
B. Robin Eglin. Mr. Eglin was named Vice President - Real Estate Development in
April 1995. Mr. Eglin was formerly Vice President of Carefree Learning Centers,
Inc. and Keystone Real Estate Development Company, Inc., wholly-owned for-profit
subsidiaries of Pennsylvania Blue Shield, where he was in charge of all real
estate, finance and accounting activities. Mr. Eglin joined Carefree in 1989.
Emily Louviere. Ms. Louviere joined the Company as Vice President - Western
Operations in November 1997. Ms. Louviere has over fourteen years of experience
in the education industry, including managing multi-site educational operations,
both preschool and elementary schools. Immediately prior to joining Nobel, from
November 1996 to November 1997, Ms. Louviere served as Regional Vice President
of Operations of Children's World. From October 1982 to March 1995, Ms.
Louviere held various positions, including District Manager, Region Manager and
Western Divisional Vice President at KinderCare, where she managed up to 400
schools with over $185 million in aggregate revenue.
Barbara Z. Presseisen. Dr. Presseisen was named Vice President - Education in
June 1996. Dr. Presseisen served in several positions over 24 years at Research
for Better Schools, one of the ten regional educational laboratories sponsored
by the U.S. Department of Education, located in
28
<PAGE>
Philadelphia, Pennsylvania. In her most recent capacity, Director of National
Networking, she worked with several major school districts on staff development
and program improvement, as well as coordinated training and conferences on
curriculum and student achievement with other laboratories and a number of
professional associations and universities. Dr. Presseisen has authored a number
of books and research reports, and has been an invited lecturer at many national
and regional programs. Most recently, prior to joining Nobel, Dr. Presseisen
consulted on educational design and product development for the Walt Disney
Company from December 1995 to June 1996.
Barbara Sell. Ms. Sell joined the Company in March 1997 as Vice President -
Eastern Operations. Ms. Sell has 23 years of experience in the early childhood
education field. Seventeen years of her career have been spent in operational
management, accomplishing such goals as development and operation of a corporate
child care division and managing an international child care division. Prior to
joining Nobel, Ms. Sell was employed by KinderCare Learning Centers, with whom
she was employed from 1979 through April 1996. Ms. Sell joined KinderCare in
1979 and held various positions, including District Manager, Region Manager and
Vice President of Operations for over 300 schools.
Barry S. Swirsky. Mr. Swirsky been the General Counsel of the Company since
September 1995. (serving as an officer since September 1997). Mr. Swirsky was
previously engaged in private legal practice advising corporations and other
business entities, primarily in corporate and securities matters. Mr. Swirsky
commenced his legal career as an associate with Reavis & McGrath in New York,
New York (since merged with Fulbright & Jaworski) (1981 to 1984), then was an
associate with Dechert Price & Rhoads in Philadelphia, Pennsylvania (1984 to
1992), and then counsel to Bray Berry Martin & Reardon and a shareholder of
Berry & Martin, P.C in Philadelphia, Pennsylvania (1992 to 1995). Mr. Swirsky
received his J.D. from Harvard Law School in 1981.
Edward H. Chambers. Mr. Chambers has served as Executive Vice President -
Finance and Administration of Wawa, Inc. since March 1988. During the period
April 1984 through March 1988, he served as President and Chief Executive
Officer, and as a director, of Northern Lites, Ltd., an owner and operator of
quick-service restaurants operating pursuant to a franchise from D'Lites of
America, Inc. From 1982 to July 1984, Mr. Chambers was President - Retail
Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service
restaurants. He is also a director of Davco, Inc., a franchisee of Wendy's
International, Inc. and a director of Riddle Memorial Hospital.
Peter H. Havens. Mr. Havens has been Executive Vice President of Bryn Mawr Bank
Corporation since May 1995 overseeing the Investment Management and the Trust
Division. From 1982 through May 1995, Mr. Havens served as manager of Kewanee
Enterprises, a private investment firm located in Bryn Mawr, Pennsylvania. He
is also Chairman of the Board of Directors of Petroferm, Inc. and a director of
Bryn Mawr Bank Corporation, Ursinus College and Independence Seaport Museum.
Morgan R. Jones. Mr. Jones has been a partner in the law firm Drinker Biddle &
Reath, Philadelphia, Pennsylvania since 1970, and is presently Chairman of the
firm.
Janet Lea Katz. Ms. Katz has both a Masters and a Doctorate in Education from
Columbia University and is currently serving as the curriculum coordinator for
Upper Saddle River Schools, Upper Saddle River, New Jersey, and the building
administrator at Bogert School in Upper Saddle River, New Jersey. Ms. Katz has
held various positions throughout her career in education,
29
<PAGE>
including speech arts teacher, coordinator and therapist for speech and language
programs for elementary school and research assistant for the study of learning
disabilities at Columbia University.
John Martinson. Mr. Martinson is Managing Partner of Edison Venture Fund which
he founded in 1986. He also serves on the Board of Directors of the National
Venture Capital Association, Best Software, Inc., Dendrite International, Inc.
and eight private companies.
Eugene G. Monaco. Mr. Monaco has both a J.D. from Temple Law School and M.S. in
Mechanical Engineering from the University of Delaware and, from January 1, 1990
until his retirement in late 1995, served as a Judge for the Delaware County
District Court. He also served as an Instructor in Kinematics and Dynamics at
Drexel University, a Lecturer in child abuse at Penn State University, and was
the Chief Negotiator for the Rose Tree Media School Board. He also served as
Assistant District Attorney in Media, Pennsylvania and Engineering Negotiator
for Westinghouse Electric for 32 years.
John Martinson serves on the Board as the designee of Edison Venture Fund II,
L.P., the majority holder of the Series C Convertible Preferred Stock, which
was issued in August 1994.
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Company's Compensation Committee is comprised of three outside directors
of the Company, currently Messrs. Chambers (Chairman), Havens and Monaco. At
least annually, the Compensation Committee reviews the compensation levels of
the Company's executive officers and certain other key employees and makes
recommendations to the Board of Directors regarding compensation of such
persons. In general, the Compensation Committee endeavors to base the
compensation of the executive officers on individual performance, performance
against established financial goals based on the Company's strategic plan, and
comparative compensation paid to executives of direct competitors and of non-
financial service companies.
The Compensation Committee's review of compensation, other than that of the
Chairman and Chief Executive Officer, is based on the recommendations of the
Company's internal compensation committee, which consists of A.J. Clegg
(Chairman) and John R. Frock (Executive Vice President). In 1997, the
Compensation Committee was involved in setting the compensation of the Chairman
and Chief Executive Officer, Executive Vice President - Development, Vice
President/Chief Financial Officer, Vice Presidents - Operations East and West,
Vice President - Real Estate Development, Vice President - Finance and
Administration, Vice President - Education, General Counsel, Vice President -
Marketing and Human Resources Manager.
Executive officers' compensation generally consists of base salary, which
comprises a significant portion of total compensation, bonuses, which are based
on the Company's performance and/or specific goals, fringe benefits and stock
options. All executive officers are reviewed annually for performance, and
salary changes are effective in March. Bonuses are distributed after the
results of the audit of the financial statements have been verified by the
Board.
In 1995, a salary structure for executive positions was established, based on
a survey performed in May 1995 by Towers and Perrin. Towers and Perrin met with
the Compensation Committee members and the Company's executive management to
learn about the Company's executives' responsibilities and developed competitive
compensation levels using published and private data sources covering companies
in the service and education industries, some of which are included in the peer
group in the five-year performance graph. In 1997, the Compensation Committee
established the executive officers' salaries based on the survey performed by
Towers and Perrin in 1995 and by reviewing current salary levels for similar
positions of direct competitors. The Compensation Committee believes that the
salaries of the executive officers are in line with salary ranges in the
companies that they reviewed. Increases in executive officers' compensation for
1997 were based on performance of the executive, as well as the performance of
the Company both in the current year and over time.
The Chairman and Chief Executive Officer's compensation commencing in March
1997 included an annual base salary of $240,000, a bonus plan tied to the
Company's net income as compared to the annual plan submitted to and approved by
the Board of Directors in December 1996 and customary fringe benefits. Mr.
Clegg's salary reflected a $20,000 increase over the prior year. The
31
<PAGE>
increase was based on the on the performance of the Company. Mr. Clegg received
no bonus for the twelve months ended December 31, 1997.
In 1997, bonuses for all executive officers were based on criteria which
include (1) how the Company did compared to plan and (2) in some cases,
completion of specific objectives based on the executive's individual areas of
responsibility. The Chairman's bonus was based on attaining the net income in
the 1997 business plan. The Vice President - Eastern Operations's bonus was
based on Eastern operations attaining the operating profit in the goal in the
1997 business plan.
The bonuses of the Executive Vice President - Development, Vice
President/Chief Financial Officer, Vice President - Real Estate Development,
Vice President - Education, Vice President - Marketing, Vice President - Finance
and Administration, and General Counsel were based on both the Company's
achieving certain pretax or income goals defined in the 1997 Business Plan and
specific goals relating to their individual areas of responsibility. In 1997,
the Company did not achieve financial goals which were set in the 1997 Business
Plan. Current executives whose bonuses were based on specific performance goals
agreed to forgo amounts payable under their bonus plan. No bonuses were paid to
current executives in 1997.
Compensation Committee
Mr. Edward Chambers
Mr. Peter Havens
Mr. Eugene Monaco
32
<PAGE>
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 1997
aggregated to at least $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------------------------
OTHER RESTRICTED SECURITIES ALL
ANNUAL STOCK UNDERLYING OTHER
NAME AND COMPENS- AWARDS OPTIONS/ COMPENS-
PRINCIPAL POSITION YEAR SALARY BONUS/1/ ATION/2/ SARS/3/ ATION/4/
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A.J. CLEGG 1997 $231,778 $ 0 0 40,000 $3,217
Chairman, President and 1996 208,465 0 0 0 3,332
Chief Executive Officer /5/ 1995 160,014 $96,000 0 45,000 2,052
JOHN R. FROCK 1997 $119,530 $ 0 $13,690 0 40,000 $1,645
Executive Vice President 1996 112,119 0 13,560 /6/ 0 1,587
1995 98,082 $33,750 13,549 0 /6/ 746
B. ROBIN EGLIN 1997 $108,106 $ 0 $13,988 0 20,000 $1,067
Vice President - Real 1996 101,018 0 13,841 0 0 1,086
Estate Development /7/ 1995 72,322 $19,500 10,380 0 3,000 756
Former Executive Officers
D. SCOTT CLEGG 1997 $119,530 $ 4,389 0 10,000 $ 644
Executive Vice President - 1996 102,816 0 0 30,000 1,245
Operations (former)/7/ 1995 82,087 $29,400 0 5,000 127
BRIAN C. ZWAAN 1997 $120,921 0 $ 102
Executive Vice President; 1996 $ 10,076 0 25,000
Chief Financial Officer
(former)/7/
</TABLE>
(1) Bonuses are reported with respect to the fiscal year earned, although paid
in the following year.
(2) The amounts reported for John R. Frock consisted of (i) $7,800 for
automobile expenses in each year, and (ii) $5,890, $5,760 and $5,511 for
health insurance in 1997, 1996 and 1995, respectively. The amounts reported
for B. Robin Eglin consisted of (i) $7,800, $7,800 and $5,850, for
automobile expenses in 1997, 1996 and 1995, respectively, and (ii) $6,188,
$6,041 and $4,530 for health insurance in 1997, 1996 and 1995, respectively.
While other named executives enjoy certain similar perquisites, for fiscal
year 1997, 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 and January
2, 1997; options granted to John R. Frock were granted on January 2, 1997;
options granted to B. Robin Eglin were granted on December 18, 1995 and
January 2, 1997; options granted to D. Scott Clegg were granted on November
18, 1995, June 21, 1996 and January 2, 1997; options granted to Brian C.
Zwaan were granted on December 23, 1996. 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, except the options
granted to Brian C. Zwaan which vested 10,000 shares, 10,000 shares and
5,000 shares, respectively, on the first, second and third anniversary dates
of the date of grant. See also footnote 8 for disclosure regarding certain
options granted to John Frock which were subsequently canceled.
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<PAGE>
(4) Other compensation in 1997: for A.J. Clegg consisted of $2,038 for life
insurance and $1,179 for employer matching 401(k) plan contributions; for
John R. Frock consisted of $1,008 for life insurance and $637 for employer
matching 401(k) plan contributions; for B. Robin Eglin consisted of $488 for
life insurance and $579 for employer matching 401(k) plan contributions; for
D. Scott Clegg consisted of $644 for employer matching 401(k) plan
contributions; and for Brian C. Zwaan consisted $102 for life insurance.
(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"). During 1995, the Company paid fees to JBS approved
by the Board totaling $8,289 for the consulting services of JBS personnel.
(6) 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.
(7) B. Robin Eglin joined the Company in April 1995. Scott Clegg's last day of
employment with the Company was in September 1997. Mr. Zwann joined the
Company on December 1996 and left the Company's employ in January 1998.
34
<PAGE>
OPTIONS/STOCK APPRECIATION RIGHTS GRANTED IN 1997
<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
SARS EMPLOYEES IN PRICE PER EXPIRATION GROWTH GROWTH GROWTH
NAME OF EXECUTIVE GRANTED/ 2/ 1997 /3/ SHARE DATE RATE RATE RATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A. J. Clegg 40,000 21.83% $10.375 1/2/07 $0 $260,991 $661,403
John R. Frock 40,000 21.83% $10.375 1/2/07 $0 $260,991 $661,403
B. Robin Eglin 20,000 10.92% $10.375 1/2/07 $0 $130,496 $330,702
D. Scott Clegg 10,000 5.46% $10.375 1/2/07 $0 $ 65,248 $165,351
Brian Zwaan 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 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 1997, the Company granted to employees options to purchase an
aggregate of 183,200 shares of Common Stock.
35
<PAGE>
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS EXERCISED IN 1997
AND VALUE OF OPTIONS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
EXERCISED IN 1997 OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
SHARES
ACQUIRED ON VALUE
NAME OF EXECUTIVE EXERCISE REALIZED EXERCISABLE UNEXERCISEABLE EXERCISABLE UNEXERCISEABLE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A. J. Clegg 0 0 43,333 41,667 $0 $0
John R. Frock 0 0 13,333 26,667 $0 $0
B. Robin Eglin 0 0 8,667 14,333 $0 $0
---------------------------------------------------------------------------------------
D. Scott Clegg 6,250 $5,375 0 0 $0 $0
Brian Zwaan 0 0 10,000 15,000 $0 $0
---------------------------------------------------------------------------------------
</TABLE>
None of the above named executive officers held any stock appreciation rights at
December 31, 1997.
COMPENSATION OF DIRECTORS
The Company pays directors (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 each March 31 that
the Plan is in effect, each individual serving as a director of the Company who
is not an officer or employee of the Company will be granted a nonqualified
stock option to purchase 2,000 shares of Common Stock (500 shares of Common
Stock for grants made on March 31, 1995 and March 31, 1996) 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. No options will be awarded in March 1998.
EXECUTIVE SEVERANCE PLAN
In March 1997, the Company adopted an Executive Severance Pay Plan (the
"Plan"). The Plan covers each of the three executive officers named in the
table on page 33, as well as seven 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
36
<PAGE>
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.
37
<PAGE>
STOCK PERFORMANCE
The following line graph compares the cumulative total stockholder return on
the Company's Common Stock with the total return of the Nasdaq Stock Market
(U.S. Companies) and an index of peer group companies for the period December
31, 1992 through December 31, 1997 as calculated by the Center for Research in
Security Prices (CRSP). The graph assumes that the value of the investment in
the Company's Common Stock and each index was $100 at December 31, 1992 and that
all dividends paid by the companies included in the indexes were reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
PERFORMANCE GRAPH FOR
NOBEL EDUCATION DYNAMICS, INC.
12/92 12/93 12/94 12/95 12/96 12/97
Nobel Education Dynamics, Inc. 100.0 87.5 112.5 425.0 250.0 126.6
Nasdaq Stock Market
(U.S. Companies) 100.0 114.8 112.2 158.7 195.2 239.5
Self-Determined Peer Group 100.0 150.2 157.3 240.2 399.3 484.3
The self determined peer group includes Children's Discovery Centers of America,
Inc.; ITT Educational Services, Inc.; La Petite Academy, Inc.; Youth Services
International, Inc., DeVry Inc.; Kindercare Learning Centers, Inc.; and Sylvan
Learning Systems, Inc.
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization of the
previous trading day.
C. If the monthly interval, used on the fiscal year-end, is not a trading day,
the preceding trading day is used.
D. No trading activity recorded for Nobel Education Dynamics, Inc. from 6-9-92
to 7-16-93.
38
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table shows information concerning the beneficial ownership of
the Company's Common Stock as of February 24, 1998 by each director, by each
executive officer named in the Summary Compensation Table appearing elsewhere in
this Annual Report (other than executive officers who are no longer employed by
the Company), by all directors and executive officers as a group, and by each
person who is known to the Company to be the beneficial owner of more than 5% of
the Company's Common Stock. The number of shares beneficially owned by each
person is determined under the rules of the Securities and Exchange Commission
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares
as to which the person has sole or shared voting power or investment power and
also any shares which the person has the right to acquire within 60 days of
February 24, 1997 through the exercise of any stock option or right or
conversion of any convertible security or otherwise. As of February 24, 1997,
the only persons or group of persons known to the Company as beneficially owning
more than 5% of the outstanding Common Stock of the Company were the following:
A. J. Clegg; Allied Capital Corporation and affiliated funds; Edison Venture
Fund II, L.P.; Gintel Asset Management, Inc.; and KU Learning, L.L.C. The
addresses of such holders of more 5% of the outstanding Common Stock is set
forth in the footnote relating to their holders.
Number of Shares of Percent
Common Stock of
Name of Beneficial Owner Beneficially Owned Class (1)
- ------------------------- -------------------- -----------
A. J. Clegg 575,876 (2) 8.96%
Edward H. Chambers 18,230 (3) *
John R. Frock 45,533 (4) *
Peter H. Havens 13,109 (5) *
Morgan R. Jones 11,100 (6) *
Janet Katz 30,400 (7) *
John Martinson 670,032 (8) 9.92%
Eugene Monaco 18,000 (9) *
B. Robin Eglin 9,667 (10) *
Allied Capital Corporation 575,000 (11) 8.59%
Edison Venture Fund II, L.P. 654,032 (12) 9.69%
Gintel Asset Management, Inc. 492,500 (13) 8.05%
KU Learning, L.L.C. 1,283,500 (14) 20.97%
All directors and executive 1,422,255 (15) 19.83%
officers as a group
(13 persons)
* Less than 1%. [See notes on following page]
39
<PAGE>
(1) The percentages of class set forth in the table reflect the percentage of
outstanding Common Stock currently owned by each holder listed and the
percentage of outstanding Common Stock which would be owned by each such
holder giving effect to the conversion of all shares of Preferred Stock and
exercise of all options and warrants held by such holder, but not to such
conversion or exercise by any other person.
(2) Of these shares, 179,301 shares are beneficially owned directly by Mr. Clegg
as follows: 15,000 shares of Common Stock owned of record by Mr. Clegg,
100,806 shares issuable upon conversion of Series C Preferred Stock of the
Company, 20,161 shares issuable upon the exercise of warrants and 43,334
issuable upon exercise of currently exercisable stock options. Mr. Clegg is
also the beneficial owner of 394,075 shares owned of record by, or issuable
upon the conversion of Series C Preferred stock of the Company owned of
record by, JBS Investment Banking, Ltd., a privately held corporation of
which Mr. Clegg is a director, officer and controlling stockholder, as
follows: 253,690 shares of Common Stock owned of record by JBS and 140,385
shares of Common Stock issuable upon the conversion of the Company's Series
A Preferred Stock owned of record by JBS. (JBS may also be deemed to be the
beneficial owner of these 394,075 shares.) Mr. Clegg is also the beneficial
owner of 2,500 shares of Common Stock owned by his spouse. This does not
include shares beneficially owned by Mr. Clegg's adult children, as to which
he disclaims beneficial ownership. A. J. Clegg's address is c/o Nobel
Education Dynamics, Inc., Rose Tree Corporate Center II, 1400 North
Providence Road, Suite 3055, Media, Pennsylvania 19063.
(3) Consists of 10,250 shares of Common Stock which Mr. Chambers has the right
to purchase upon the exercise of currently exercisable options, 1,470 shares
of Common Stock issuable upon the conversion of the Company's Series A
Preferred Stock, and 6,510 shares of Common Stock held by Mr. Chambers.
(4) Consists of 13,333 shares of Common Stock which Mr. Frock has the right to
purchase upon the exercise of currently exercisable options, 14,700 shares
of Common Stock issuable upon the conversion of the Company's Series A
Preferred Stock and 17,500 shares of Common Stock held by Mr. Frock.
(5) Consists of 7,750 shares of Common Stock which Mr. Havens has the right to
purchase upon the exercise of currently exercisable options, 3,234 shares of
Common Stock issuable upon the conversion of the Company's Series A
Preferred Stock held by Mr. Havens, and 2,125 shares of Common Stock held by
Mr. Havens.
(6) Consists of 10,100 shares of Common Stock held by Mr. Jones and 1,000 shares
of Common Stock which Mr. Jones has the right to purchase upon the exercise
of currently exercisable options. Does not include shares owned by Mr.
Jones's spouse and adult children as to which he disclaims beneficial
ownership.
(7) Consists of 29,400 shares of Common Stock issuable upon the conversion of
the Company's Series A Preferred Stock held by Ms. Katz and 1,000 shares of
Common Stock which Ms. Katz has the right to purchase upon the exercise of
currently exercisable options.
(8) Includes 15,000 shares held in account for Mr. Martinson's three minor
children, for which Mr. Martinson is custodian and 1,000 shares which Mr.
Martinson has the right to purchase upon the exercise of currently
exercisable options. Mr. Martinson is a managing partner of Edison Partners
II, the general partner of Edison Venture Fund II, L.P.. By virtue of his
position as managing partner, Mr. Martinson may under the SEC's rules also
be deemed a beneficial owner of the shares owned by Edison Venture Fund II,
L.P. (See footnote 12.) (These shares are also included in shares reflected
as owned by Mr. Martinson in the table.) Mr. Martinson disclaims beneficial
ownership of such shares.
(9) Consists of 500 shares of Common Stock which Mr. Monaco has the right to
purchase upon the exercise of currently exercisable options and 17,500
shares of Common Stock held by Mr. Monaco.
(10) Consists of 1,000 shares of Common Stock held by Mr. Eglin and 8,667 shares
of Common Stock which Mr. Eglin has the right to purchase upon the exercise
of currently exercisable options.
(11) Consists of an aggregate of 265,958 shares of Common Stock upon the
conversion of the Company's Series D Preferred Stock and 309,043 issuable
upon the exercise of warrants held by Allied Capital Corporation, Allied
Capital Corporation II, Allied Investment Corporation and Allied Investment
Corporation II. Allied Capital Corporation and affiliated funds have their
principal executive offices at 1666 K St., N.W., Suite 901, Washington, DC
20006.
40
<PAGE>
(12) Consists of 25,000 shares of Common Stock held by the Edison Venture Fund
II, L.P., 524,193 shares of Common Stock issuable upon the conversion of
the Company's Series C Preferred Stock held by the Edison Venture Fund II,
L.P. and 104,839 shares issuable upon the exercise of warrants held by the
Edison Venture Fund II, L.P. Mr. Martinson is a general partner of Edison
Partners II, L.P. which is the sole general partner of Edison Venture Fund
II, L.P. By virtue of such position, Mr. Martinson and other affiliates of
Edison Venture Fund II, L.P., may under the SEC's rules also be deemed a
beneficial owner of these shares. Such individuals disclaim beneficial
ownership of the shares beneficially owned by Edison Venture Fund II, L.P.,
except to the extent of their pecuniary interest therein. Edison Venture
Fund II, L.P. has its principal executive office at 997 Lenox Drive #3,
Lawrenceville, New Jersey 08648.
(13) Based on a Schedule 13G filed with the SEC on February 3, 1998. Gintel
Asset Management is the investment advisor to various investors and,
pursuant to contractual relationships with such investors, has the right to
vote and dispose of these shares. Robert M. Gintel, is Chief Executive
Officer and 100% shareholder of Gintel Asset Management, Inc., whose
business address is 6 Greenwich Office Park, Greenwich, CT 06831.
(14) Based on a Schedule 13D filed with the SEC on January 16, 1998. Shares are
beneficially owned by KU Learning, L.L.C. and its affiliates. The business
address of such persons is 844 Moraga Drive, Los Angeles, CA 90049
(15) Consists of shares shown as beneficially held by all natural persons in
this table, and an additional 5,850 shares owned by executive officers not
named in the table and 24,458 shares of Common Stock which such executive
officers have the right to purchase upon the exercise of currently
exercisable options.
41
<PAGE>
Preferred Stock
The following table shows information concerning the beneficial ownership of
the Company's Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock as of February 24, 1998 by each director, by each executive
officer named in the Summary Compensation Table appearing elsewhere in this
Annual Report, by all directors and executive officers as a group and by each
person who is known to the Company to be the beneficial owner of more than 5% of
any series of Preferred Stock. Directors and executive officers omitted from a
section of the following table do not beneficially own shares of the series of
Preferred Stock to which such section relates.
<TABLE>
<CAPTION>
Number of Shares
Name of of Common Stock Percent
Security Name of Beneficial Owner (1) Beneficially Owned of Class
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A Edward H. Chambers 5,000 0.49%
Preferred A. J. Clegg 477,500 (2) 46.42%
Stock John R. Frock 50,000 4.86%
Peter H. Havens 11,000 1.07%
Janet Katz 100,000 9.72%
Emanuel Shemin 101,487 9.87%
All directors and executive 543,500 52.83%
officers as a group (13 persons)
- ------------------------------------------------------------------------------------------
Series C A. J. Clegg 403,226 16.13%
Preferred Edison Venture Fund II, L.P. 2,096,774 83.87%
Stock John Martinson 2,096,774 (3) 83.87%
All directors and executive 2,500,000 (3) 100.00%
officers as a group (13 persons)
- ------------------------------------------------------------------------------------------
Series D Allied Capital Corporation 1,063,830 (4) 100.00%
Preferred All directors and executive 0
Stock officers
as a group (13 persons)
- ------------------------------------------------------------------------------------------
</TABLE>
(1) As reflected on the records of the Company's transfer agent, Mr. Shemin's
address is 800 South Ocean Blvd. LPH4, Boca Raton, FL 33432. Mr. Clegg's
address is c/o Nobel Education Dynamics, Inc., Rose Tree Corporate Center
II, 1400 North Providence Road, Suite 3055, Media, Pennsylvania 19063. Ms.
Katz's address is Edith J. Bogert School, 391 W. Saddle River Road, Upper
Saddle River, NJ 07458. Edison Venture Fund II, L.P. has its principal
executive office at 997 Lenox Drive #3, Lawrenceville, New Jersey 08648.
Allied Capital Corporation and affiliated funds have their principal
executive offices at 1666 K St., N.W., Suite 901, Washington, DC 20006.
(2) Mr. Clegg is the beneficial owner of these 477,500 shares of Series A
Preferred Stock owned of record by JBS Investment Banking, Ltd., as he is a
director, officer and controlling stockholder of JBS Investment Banking,
Ltd.
(3) John Martinson is a general partner of Edison Partners II, L.P. which is the
sole general partner of Edison Venture Fund II, L.P. By virtue of such
position, Mr. Martinson may under the SEC's rules also be deemed a
beneficial owner of these shares. Mr. Martinson disclaims beneficial
ownership of the shares beneficially owned by Edison Venture Fund II, L.P.,
except to the extent of his pecuniary interest therein.
(4) Shares are owned by Allied Capital Corporation, Allied Capital Corporation
II, Allied Investment Corporation and Allied Investment Corporation II.
42
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1997, legal services were rendered to the Company by Drinker Biddle &
Reath, of which Morgan R. Jones, a director of the Company, is a partner and
Chairman. Fees paid to this firm in 1997 were $35,509. The Company expects this
firm to continue to provide such services in 1998.
43
<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.
None.
(c) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K.
Exhibit
Number Description of Exhibit
3.1 Registrant's Certificate of Incorporation, as amended and restated.
(Filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, and incorporated herein by
reference.)
3.2 Registrant's Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
Registrant's Current Report on Form 8-K filed on June 14, 1993 and
incorporated herein by reference.)
3.3 Registrant's Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
Registrant's Quarterly Report on Form 10-Q with respect to the quarter
ended June 30, 1994 and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's
Current Report on Form 8-K filed on September 11, 1995, date of earliest
event reported August 25, 1995, and incorporated herein by reference.)
44
<PAGE>
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 Sixth Amendment and Modification dated May 5, 1997 to Loan and Security
Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, and incorporated herein
by reference.)
4.6 Seventh Amendment and Modification dated December 22, 1997 to Loan and
Security Agreement.
4.7 Revolving and Term Facility Note A dated December 22, 1997 in the
principal sum of $22,000,000 payable to the order of Summit Bank.
4.8 Revolving and Term Facility Note B dated December 22, 1997 in the
principal sum of $3,000,000 payable to the order of Summit Bank.
The Registrant has omitted certain instruments defining the rights of
holders of long-term debt in cases where the indebtedness evidenced by
such instruments does not exceed 10% of the Registrant's total assets.
The Registrant agrees to furnish a copy of each of such instruments to
the Securities and Exchange Commission upon request.
10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended.
(Filed as Exhibit 10(1) to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987
(the "Form S-1") and incorporated herein by reference.)
10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as
Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March
31, 1988 and incorporated herein by reference.)
45
<PAGE>
10.3 1995 Stock Incentive Plan of the Registrant, as amended.
10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock
Incentive Plan
10.5 Stock and Warrant Purchase Agreement between the Registrant and various
investors, dated April 14, 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 Stock Purchase Agreement dated May 28, 1992 between Registrant and a
limited number of accredited investors at $0.50 per share totaling
3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
46
<PAGE>
Exhibit 10.12 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
4 Allied Investment Corporation II 50,220
10.13 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.)
10.14 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.)
10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and
Summary Plan Description, Issued February, 1997. (Filed as Exhibit 10.20
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.)
10.16 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z.
Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated herein by
reference.)
10.17 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and
the Registrant. (Filed as Exhibit 10.22 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference.)
10.18 Contingent Severance Agreement dated as of March 11, 1997 between John R.
Frock and the Registrant. (Filed as Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.)
11 Statement re-computation of per share earnings dated year ended December
31, 1997, and made a part hereof.
21 List of subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
47
<PAGE>
27 Financial Data Schedule
Certain schedules (and similar attachments) to Exhibits 4.1 through 4.6 and
Exhibit 10.11 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.
48
<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.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1998 NOBEL EDUCATION DYNAMICS, INC.
By: /s/ A. J. Clegg
--------------------
A. J. Clegg
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Position Date
/s/ A. J. Clegg Chairman of the Board, March 30, 1998
- --------------------- President and Chief
A. J. Clegg Executive Officer and Director
/s/ William Bailey Vice President, March 30, 1998
- --------------------- Chief Financial Officer
William Bailey (Principal Financial Officer)
/s/ Yvonne DeAngelo Vice President - Finance March 30, 1998
- --------------------- and Administration
Yvonne DeAngelo (Principal Accounting Officer)
/s/ Edward H. Chambers Director March 30, 1998
- ----------------------
Edward H. Chambers
/s/ John R. Frock Executive Vice President March 30, 1998
- ---------------------- and Director
John R. Frock
/s/ Morgan R. Jones Director March 30, 1998
- ---------------------
Morgan R. Jones
50
<PAGE>
/s/ Janet L. Katz Director March 30, 1998
- ----------------------
Janet L. Katz
/s/ John H. Martinson Director March 30, 1998
- -----------------------
John H. Martinson
/s/ Eugene G. Monaco Director March 30, 1998
- ----------------------
Eugene G. Monaco
51
<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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 13, 1998, except
for Note 16 as to which the
date is March 26, 1998
F-1
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 2,605,219 $ 5,251,555
Accounts receivable, less allowance for doubtful
accounts of $133,421 in 1997 and $103,009 in 1996 1,091,442 779,075
Prepaid rent 1,045,820 734,463
Prepaid insurance and other 951,734 622,106
Deferred taxes - 890,934
------------ -----------
Total Current Assets 5,694,215 8,278,133
------------ -----------
Property and equipment, at cost 33,029,720 26,166,293
Accumulated depreciation (7,856,125) (6,843,183)
------------ -----------
25,173,595 19,323,110
Property and equipment held for sale 1,494,736 1,111,412
Note receivable - 425,000
Cost in excess of net assets acquired 37,439,000 25,601,028
Deposits and other assets 3,288,580 1,977,951
Deferred taxes 1,308,280 116,854
------------ -----------
Total Assets $ 74,398,406 $56,833,488
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Current portion of long-term obligations $ 150,443 $ 2,847,308
Current portion of subordinated debt 2,561,289 529,348
Current portion of capital lease obligations 81,438 71,456
Accounts payable and other current liabilities 7,980,441 4,464,957
Unearned income 2,866,131 1,716,049
------------ -----------
Total Current Liabilities 13,639,742 9,629,118
------------ -----------
Long-term obligations 22,497,019 10,807,498
Capital lease obligations 208,657 290,095
Deferred gain on sale/leaseback 39,330 47,322
Minority interest in consolidated subsidiary 404,850 318,359
Long-term subordinated debt 5,972,873 3,417,656
------------ -----------
Total Liabilities 42,762,471 24,510,048
------------ -----------
Commitments and Contingencies (Notes 2, 5, 8, and 15)
Stockholders' Equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, issued and
outstanding 4,593,542 in 1997 and 4,697,542 in 1996 $5,529,712 aggregate
liquidation preference at December 31, 1997 and in 1996 4,593 4,697
Common stock, $.001 par value, 20,000,000 shares authorized, issued and
outstanding 6,121,365 in 1997 and 5,831,055 in 1996 6,121 5,831
Treasury Stock, cost; 36,810 shares (375,000) -
Additional paid-in capital 38,339,599 37,665,713
Accumulated deficit ( 6,339,378) (5,352,801)
------------ -----------
Total Stockholders' Equity 31,635,935 32,323,440
------------ -----------
Total Liabilities and Stockholders' Equity $ 74,398,406 $56,833,488
============ ===========
</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,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $80,980,162 $58,909,388 $44,154,367
----------- ----------- -----------
Operating expenses:
Personnel costs 38,557,361 26,777,022 19,664,455
Center operating costs 11,931,743 8,755,337 6,640,288
Insurance, taxes, rent and other 16,130,653 11,128,266 7,945,461
Depreciation and amortization 3,238,142 2,210,504 1,512,210
----------- ----------- -----------
69,857,899 48,871,129 35,762,414
----------- ----------- -----------
School operating profit 11,122,263 10,038,259 8,391,953
----------- ----------- -----------
New school development 400,622 207,600 146,070
General and administrative expenses 5,972,787 4,189,750 3,395,940
Litigation claim - - 500,000
Restructuring expense 2,959,781 - -
----------- ----------- -----------
Operating income 1,789,073 5,640,909 4,349,943
----------- ----------- -----------
Interest expense 2,046,622 2,004,392 1,839,563
Other (income) expense (158,479) (482,647) (125,724)
Minority interest in income of
consolidated subsidiary 86,491 94,479 85,808
----------- ----------- -----------
Income before income taxes (185,561) 4,024,685 2,550,296
Income tax (benefit) expense 250,016 1,561,793 (1,355,590)
----------- ----------- -----------
Net income before extraordinary item (435,577) 2,462,892 3,905,886
----------- ----------- -----------
Extraordinary loss on early
extinguishment of debt,( net of
income tax benefit of $330,000
and $27,000 in 1997 and 1995, respectively) 449,000 - 62,000
----------- ----------- -----------
Net income (loss) (884,577) 2,462,892 3,843,886
Preferred stock dividends 102,000 108,419 184,114
----------- ----------- -----------
Net income (loss) available to
common stockholders (986,577) $ 2,354,473 $ 3,659,772
=========== =========== ===========
Basic (loss) earnings per share
Net (loss) income before extraordinary item $ ( 0.09) $ 0 .42 $ 0.79
Extraordinary item $ ( 0.07) - (0.01)
----------- ----------- -----------
Net (loss) income $ ( 0.16) $ 0.42 $ 0.78
=========== =========== ===========
Dilutive (loss) earnings per share
Net (loss) income before extraordinary item $ ( 0.09) $ 0.34 $ 0.64
Extraordinary item $ ( 0.07) - (0.01)
----------- ----------- -----------
Net (loss) income $ ( 0.16) $ 0.34 $ 0.63
=========== =========== ===========
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Treasury and
Preferred Stock Common Stock Additional Common
-------------------- ----------------------- 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, 1995 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 Dividends - - - - - - (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
========= ====== ========== ======== =========== =========== ============ ===========
Stock Options and Warrants
Exercised and - - 256,750 256 681,616 - - 681,872
related tax benefit
Conversion of Preferred Stock (104,000) (104) 33,560 34 70 - - -
Other - - (7,800) - - (7,800)
Treasury Stock (375,000) - (375,000)
Preferred Dividends - - - - - - (102,000) (102,000)
Net Loss - - - - - - (884,577) (884,577)
--------- ------ ---------- -------- ----------- ----------- ------------ -----------
December 31, 1997 4,593,542 $4,593 6,121,365 $ 6,121 $38,339,599 (375,000) ($6,339,378) $31,635,935
========= ====== ========== ======== =========== =========== ============ ===========
</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,
- -------------------------------------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (Loss) ($884,577) $2,462,892 $ 3,843,886
----------- ------------ ------------
Adjustment to Reconcile
Net Income
to Net Cash Provided by
Operating Activities:
Depreciation and
amortization 3,205,593 2,137,110 1,512,210
Depreciation related to
non-operating centers 32,549 73,394 82,007
Provision for losses on
accounts receivable 345,507 87,306 96,867
Provision for
restructuring 2,959,781 0 0
Provision for deferred
taxes (300,492) 1,206,894 0
Minority interest in
income 86,491 94,479 85,808
Early extinguishment of
debt 779,000 0 88,571
Reversal of tax
valuation allowance 0 0 (1,480,672)
Deferred gain
amortization (7,992) (7,990) (7,991)
Depreciation charged to
restructuring 0 0 0
Changes in Assets and
Liabilities Net of
Acquisitions (increase)
decrease in:
Accounts receivable (612,296) (139,286) (128,245)
Prepaid assets (640,985) (74,206) (187,848)
Other assets and
liabilities (228,149) (243,385) (175,813)
Unearned income 212,966 (133,129) 46,329
Accounts payable and
accrued expenses 2,400,522 (689,020) 262,130
----------- ------------ ------------
Total Adjustments 8,237,495 2,312,167 193,353
----------- ------------ ------------
Net Cash Provided by
Operating Activities 7,347,918 4,775,059 4,037,239
----------- ------------ ------------
Cash Flows from Investing
Activities:
Capital expenditures (15,220,996) (12,775,541) (2,051,664)
Proceeds from sale of
property and equipment 7,450,858 8,636,151 251,225
Payment for acquisitions
net of cash acquired (10,144,979) (4,968,528) (9,101,443)
Other 0 0 (146,315)
Net Cash Used in Investing
Activities (17,915,117) (9,107,918) (11,048,197)
----------- ------------ ------------
Cash Flows from Financing
Activities:
Proceeds from term loan 18,641,111 6,000,000 7,500,000
Proceeds from subordinated
debt 0 0 6,000,000
Proceeds from real estate
mortgage 0 0 3,567,300
Proceeds from other debt 0 1,500,000 3,671,697
Transaction costs related
to issuance of debt and stock 0 0 (1,090,771)
Proceeds from issuance of
common stock 0 11,607,908 162,593
Repayment of long term
debt (9,682,319) (7,022,874) (11,699,432)
Repayment of
subordinated debt (1,163,544) (6,333,533) 0
Repayment of capital
lease obligation (71,456) (49,897) (55,641)
Proceeds from issuance of
preferred stock 0 0 2,000,000
Dividends paid to preferred
stockholders (102,000) (108,419) (184,114)
Proceeds from exercise of
stock options 299,071 276,669 0
----------- ------------ ------------
Net Cash Provided by
Financing Activities 7,920,863 5,869,854 9,871,632
----------- ------------ ------------
Net increase (decrease) in
cash and cash equivalents (2,646,336) 1,536,995 2,860,674
Cash and cash equivalents
at beginning of year 5,251,555 3,714,560 853,886
----------- ------------ ------------
Cash and equivalents
at end of year 2,605,219 $5,251,555 $3,714,560
=========== ============ ============
</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,
- --------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash
Flow Information
Cash paid during year for:
Interest $ 2,004,957 $ 1,973,531 $1,823,882
Income taxes 727,991 434,498 137,423
----------- ----------- -----------
Noncash financing and investing activities
Tax benefit related to exercise of
stock options and warrants - 223,720 -
Acquisitions
Fair value of tangible assets
acquired 2,404,264 842,016 6,847,961
Cost in excess of net assets
acquired 14,843,403 8,978,398 8,727,293
Cash acquired - (573,237) (29,630)
Liabilities assumed (1,351,985) (684,936) (934,181)
Notes issued (5,750,703) (1,853,713) (3,310,000)
Escrow held - - (200,000)
Common shares issued - (1,740,000) (2,000,000)
----------- ----------- -----------
Total cash paid $10,144,979 $ 4,968,528 $ 9,101,443
=========== =========== ===========
</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, North Carolina, Virginia, Illinois, Indiana, Washington, Florida, Oregon
and Nevada.
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 1997, 1996 and 1995. On September 19, 1997, the Company changed the
fiscal year end to the last Friday in June closest to June 30 beginning in the
year 1998. Accordingly, the Company will report a six month stub period on June
30, 1998.
Recognition of Revenues:
- -----------------------
Revenue is recognized as the services are performed.
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.
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:
- -------------------------------------
The Company's policy is to amortize cost in excess of net assets acquired
related to acquisitions over 30 years for preschools and 40 years for elementary
schools. Management has evaluated the life cycles of similar schools and
determined that these lives are consistent with a historical range for private
elementary education, including schools of Merryhill Schools, Inc., a subsidiary
of the Company, and Educo, Inc., a subsidiary of the Company merged into the
Company in 1997, 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 $1,004,606, $650,996, and $341,662 for the
years ended December 31, 1997, 1996, and 1995, respectively. Accumulated
amortization at December 31, 1997 and 1996 was $3,170,262 and $2,289,599,
respectively.
The Company reviews 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 in accordance with
SFAS 121. 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. (See Note 5)
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 valuation allowance is recorded based on the
uncertainty regarding the ultimate realizability of deferred tax assets.
F-8
<PAGE>
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
reflect the reverse stock split (except for the consolidated statement of
stockholders' equity).
Earnings Per Share:
- ------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which established new standards for computations for
earnings per share. The Company adopted the new standard effective December 31,
1997 and restated the prior year calculation accordingly.
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. In the calculation
of dilutive earnings per share, shares outstanding are adjusted to assume
conversion of the Company's non-interest bearing convertible preferred stock if
they are dilutive. In the calculation of basic earnings per share, weighted
average number of shares outstanding are used as the denominator.
Earnings per share amounts have been restated in accordance with Statement of
financial Accounting Standards No. 128, "Earnings per Share". This restatement
resulted in no material change from amounts previously reported. Earnings per
share are computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Basic (loss) earnings per share:
Net (loss) income $ (884,577) $2,462,892 $3,843,886
Less Preferred Stock dividends 102,000 108,419 184,114
---------- ---------- ----------
Net Income available for Common Stock (986,577) 2,354,473 3,659,772
Average Common Stock outstanding 6,052,625 5,545,605 4,688,355
Basic (loss) earnings per share $ (0.16) $ 0.42 $ 0.78
Diluted (loss) earnings per share:
Net (loss) income available for common
stock and dilutive securities $ (986,577) $2,462,892 $3,843,886
Average Common Stock outstanding 6,052,625 5,545,605 4,688,355
Additional common shares resulting
from dilutive securities:
Options, Warrants and Convertible Preferred N/A 1,717,178 1,440,786
Stock ---------- ----------
Average Common Stock and dilutive
securities outstanding 6,052,625 7,262,783 6,129,121
Diluted earnings per share $ (0.16) $ 0.34 $ 0.63
</TABLE>
F-9
<PAGE>
Stock-Based Compensation
- ------------------------
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.
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.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified in the current year for
comparative purposes.
(2) Acquisitions:
------------
During the twelve months ended December 31, 1997 and 1996 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 the Consolidated Statement of Income beginning in the year acquired.
1997 Acquisitions:
- -----------------
Acquisition of Another Generation Enterprises Inc.
- --------------------------------------------------
On January 7, 1997, the Company purchased Another Generation Enterprises Inc.
and certain related corporations, which owned six preschools located in Broward
County and Palm Beach County, Florida with a capacity of 1,200 children and
annual aggregate revenues of approximately $5,600,000. 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.
F-10
<PAGE>
Also on January 7, 1997, the Company purchased a 19.99% 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 1996. 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 Schools
- -------------------------------------
On April 1, 1997, the Company acquired the Rainbow Bridge schools located in San
Jose, California. Rainbow Bridge schools include two private elementary and
middle schools and three preschools, with combined annual revenues of $5,600,000
and licensed capacity of 950. The purchase price of the acquisitions totaled
$5,500,000, $3,700,000 paid in cash and $1,800,000 paid in a note, plus an "earn
out" based on achievement of certain earnings targets which will be paid in
April 1998 by delivery of additional cash and an additional note.
Acquisition of Las Vegas Schools
- --------------------------------
On September 19, 1997, the Company purchased three schools located in Las Vegas,
Nevada, formerly operating as Hillpointe Elementary School and Warren Walker
Preschools, with current combined annual revenues of $2,600,000 and licensed
capacity of 670. The Hillpointe Elementary School is a new school which opened
in September 1997 and is operating at 40% of capacity. The purchase price of
the acquisition totaled approximately $3,800,000, $2,300,000 paid in cash,
$700,000 paid in notes and $800,000 in assumed liabilities.
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.
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 consisted of two preschools with 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 had revenues of approximately $500,000 and potential
licensed capacity of 198 children. On December 23, 1996,
F-11
<PAGE>
the Company acquired the stock of Montessori House, Inc., which owned 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 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.
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
1997 and 1996 all occurred at the beginning of 1996. 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
1996, 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)
1997 1996
------------ -----------
<S> <C> <C>
Revenues $83,731,963 $75,968,123
Net Income (Loss) before extraordinary item $ (564,001) $ 3,298,749
Earning per share
Basic $ (0.09) $ 0.58
Diluted $ (0.09) $ 0.45
</TABLE>
(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
$6,000,063 and $3,040,405 at December 31, 1997 and 1996, respectively. In 1997
and 1996, 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, were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Land $ 3,460,727 $ 4,105,494
Buildings 6,685,229 8,935,791
Assets under capital
lease obligations 912,781 912,781
Leasehold improvements 5,358,007 4,477,198
Furniture and equipment 10,592,585 7,722,898
Construction in progress 6,020,391 12,131
----------- -----------
33,029,720 26,166,293
Accumulated depreciation (7,856,125) (6,843,183)
----------- -----------
$25,173,595 $19,323,110
=========== ===========
</TABLE>
F-12
<PAGE>
Depreciation expense was $2,096,033, $1,559,507, and $1,150,087 for the years
1997, 1996 and 1995, respectively. Amortization of capital leases included in
depreciation expense amounted to $14,640 in each of the years 1997, 1996, and
1995. Accumulated amortization of capital leases amounted to $460,935,
$446,295, and $431,655, for the years ended 1997, 1996 and 1995, respectively.
(5) Restructuring and property and equipment held for sale
------------------------------------------------------
In the fourth quarter of 1997 the Company approved a restructuring plan which
included (1) reorganization of the geographic school districts, (2)
reorganization of the structure of operations management, (3) the decision to
close several schools and to write down the book value of the assets of schools
which are non-performing, (4) placing non-performing schools for sale and (5)
hiring of a Chief Operating Officer (President). In an effort to improve
Company performance, the Company restructured its existing operations
management. The Executive Director position replaced both the Regional Manager
and the District Manager positions. The number of schools for which each
manager is responsible has been reduced so that each can spend more time in the
schools.
In conjunction with the restructuring, the Company recorded a $2,959,781 charge
in December 1997. The restructuring charge included (1) a $2,000,000 write down
of the cost in excess of net assets acquired related to Indianapolis, (2)
$789,000 related to the closing of non-performing schools, and (3) $170,781
related to the costs associated with restructuring of the management team.
The 1996 amounts reflect certain properties located in the Southeast related to
a prior restructuring.
The write down of fixed assets and cost in excess of net assets acquired was
determined based on the estimated selling prices of these assets based on prior
experience from comparable situations and information provided by outside
brokers.
The balances of major property and equipment classes held for sale were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 219,389 $ 512,531
Buildings 741,046 939,600
Leasehold improvements 622,798 -
Furniture and equipment 1,029,933 374,418
Accumulated Depreciation (1,118,430) (715,137)
----------- -----------
$ 1,494,736 $ 1,111,412
</TABLE>
F-13
<PAGE>
(6) DEBT:
----
Debt consisted of the following:
December 31,
-------------------------
1997 1996
----------- -----------
Long Term Obligations:
- ---------------------
Term Loan $ - $ 6,450,000
Term Loan II - $ 5,320,000
Revolving and Term Credit Facility 21,573,450 -
1st mortgages, due in varying installments
over three to twenty years with
fixed interest rates ranging from 11% to 12%. 301,361 1,002,263
Notes payable to vendors for property and
equipment with fixed interest rates
varying from 10.0% to 17.5%. 119,355 153,859
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%. 288,319 124,256
Other 364,977 84,970
----------- -----------
Total long term obligations $22,647,462 $13,654,806
Less current portion (150,443) (2,847,308)
----------- -----------
$22,497,019 $10,807,498
=========== ===========
Subordinated Debt:
- -----------------
Subordinated debt agreements, due in varying
installments over five to ten years with fixed
interest rates varying from 7% to 8%. $ 8,534,162 $ 3,947,004
----------- -----------
Less Current Portion (2,561,289) (529,348)
----------- -----------
$ 5,972,873 $ 3,417,656
=========== ===========
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, both financed through Summit Bank
(the "Credit Agreement"); (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
F-14
<PAGE>
purchase price of $100. 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 under the Credit Agreement whose principal amount
was originally $6 million.
On November 1, 1996, the Company amended the Credit 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 loans.
In 1997, the Company amended its credit agreement three times, the most
significant of which occurred in December. These amendments: (1) increased the
Company's borrowing capacity from $21,200,000 to $25,000,000, (2) changed the
prior fixed interest rates (applicable to term loans) to variable rates, (3)
provided that all revolving debt will convert to a term loan in January 2001,
(4) extended terms for an additional five years for the prior term loan and six
years for the prior revolving line of credit and (5) increased the number of
permitted new school construction projects.
On December 22, 1997, the Company entered into the Seventh Amendment and
Modification of the Credit Agreement with its primary lender. The Amendment
replaced existing term loans and revolving loans with $25,000,000 Revolving and
Term Facilities. Two facilities are established: a $3,000,000 facility
(Revolving and Term Facility A) and a $22,000,000 facility (Revolving and Term
Facility B). Amounts outstanding under term loans at the time of the
restructuring were treated as initial outstanding balances under the new
Revolving and Term Facilities. Under the new arrangements, no principal
payments are required until January 1, 2001. Commencing on January 1, 2001, the
Company must pay outstanding principal balance of the Revolving and Term
Facilities in 60 equal monthly installments.
Interest on the unpaid principal balance of Revolving and Term Facility A
accrues at a variable interest rate ("Floating Rate") equal to the base rate of
Summit Bank plus 25 basis points (subject to reduction, based on performance).
Interest on the unpaid principal balance of Revolving and Term Facility B
accrues at a variable interest rate equal to the Floating Rate or a LIBOR-based
rate (at the Company's option, chosen at the beginning of any interest rate
period).
The Company may elect to convert to a term loan portions of the Revolving and
Term Facility B in increments of $2,500,000. Such term loans would be payable
over sixty months.
At December 31, 1997, the principal amounts outstanding under the Revolving and
Term Facility B was $21,576,451, and no amounts were outstanding under the
Revolving and Term Facility A.
By postponing the dates of required principal payments under the Company's
loans, the Seventh Amendment has significantly improved the Company's cash flow
requirements under these loans. The restructuring allows the Company greater
flexibility in managing its cash flow and allows greater ability to use
available funds to grow the Company. Because of the significant change in the
repayment terms of the senior loan, in accordance with Emerging Issue Task Force
Issue 96-19 "Debtors Accounting for Modification of Debt Instrument", the
Company wrote off the financing fees related to the prior financing totaling
$775,000 on a pretax basis. The charge was recorded as an extraordinary item
and accordingly shown tax effected.
Subordinated debt totaling $8,534,162 at December 31, 1997 includes $862,500
related to the acquisition of the Indianapolis schools, $1,695,416 related to
the acquisition of Carefree Learning
F-15
<PAGE>
Center schools, $384,000 related to the acquisition of the MacGregor Creative
Schools, $226,630 related to the acquisition of the Virginia schools, $249,110
related to the acquisition of the Evergreen Academy schools, $698,865 related to
the acquisition of the Nevada schools, $693,750 related to the acquisition of
Another Generation Schools, and $3,723,891 related to the acquisition of the
Rainbow Bridge 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: $2,711,732 in 1998,
$1,647,030 in 1999, $1,737,495 in 2000, $1,459,906 in 2001, $1,474,172 in 2002,
and $577,839 in 2003 and thereafter. The terms of the Company's credit facility
with Summit Bank, as amended, require principal payments commencing January 1,
2001. The amount of the principal payment required beginning January 1, 2001
will equal the quotient obtained by dividing the outstanding principal balance
on that date by 60. Also, prior to January 1, 2001, the Company can elect to
term out a portion of the existing principal balance in increments of $2,500,000
over sixty months.
The Company borrows and repays on the facilities from time to time, as cash
becomes available or is needed. Therefore, the maturities of the Revolving and
Term Credit Facilities have not been included in the above figures.
(7) Accounts Payable and Other Current Liabilities:
----------------------------------------------
Accounts payable and other current liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Accounts payable $1,507,630 $ 787,555
Reserve for closed centers 832,430 100,000
Accrued payroll and
related items 1,672,484 1,189,157
Accrued rent 562,910 420,444
Accrued property taxes 1,063,224 1,065,021
Other accrued expense 2,341,763 902,780
---------- ----------
$7,980,441 $4,464,957
========== ==========
</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 noncancellable operating leases, excluding leases assigned, consisted of the
following at December 31, 1997:
F-16
<PAGE>
Operating Leases
----------------
<TABLE>
<CAPTION>
Schools
Closed to be Continuing
Schools Divested Schools Total
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
1998 $115,888 $ 814,155 $ 12,144,485 $ 13,074,528
1999 115,888 696,569 11,148,359 11,960,816
2000 115,888 663,788 10,584,034 11,363,710
2001 115,888 641,205 10,122,609 10,879,702
2002 115,888 617,872 9,306,653 10,040,413
2003 and thereafter 289,720 4,259,600 66,165,302 70,714,622
Total minimum lease
obligations $869,160 $7,693,189 $119,471,442 $128,033,791
======== ========== ============ ============
</TABLE>
Capital Leases
--------------
<TABLE>
<CAPTION>
<S> <C>
1998 115,735
1999 112,777
2000 102,171
2001 25,637
--------
Total minimum lease obligations $356,320
========
Less amount representing interest 66,225
--------
Present value of capital lease obligations 290,095
--------
Less current portion 81,438
--------
$208,657
========
</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 $11,157,252, $8,112,516, and $5,828,786 in
1997, 1996 and 1995, respectively. These leases are typically triple-net leases
requiring the Company to pay all applicable real estate taxes, utility expenses
and insurance costs.
The Company entered into agreements to assign or sublease leases for five
centers under development and nine centers which were operating. The 14
assigned leases have remaining terms from four years to 14 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-17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1998 $ 688,125
1999 $ 673,733
2000 $ 656,657
2001 $ 595,023
2002 $ 589,474
2003 and thereafter $2,387,155
</TABLE>
(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. As of December 31, 1997 and 1996, 1,063,830 shares were outstanding.
On August 22, 1994, the Company completed a private placement of an aggregate of
2,500,000 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, 1997 and
1996, 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, 1997 and
1996, 1,029,712 and 1,133,712 shares were outstanding, respectively. Each
share of Series A Preferred Stock entitles the holder to an $.08 per share
annual dividend.
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.
F-18
<PAGE>
Private Placement of Common Stock:
- ---------------------------------
On March 5, 1996, the Company raised approximately $11,600,000 net proceeds
through the issuance of 1,000,000 shares of common stock at $12 per share.
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 and expire on
August 19, 2001. The Series 2 Warrants 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.
On May 28, 1997, Mr. Clegg exercised a warrant to purchase 187,500 shares at a
purchase price of $2.00 per share. Mr. Clegg paid the exercise price of the
warrant by delivery of 36,810 shares of Common Stock valued at $10.19 per share,
which was the fair market value of the Common Stock on the date of the exercise.
Accordingly, the Company recorded the shares acquired from Mr. Clegg as treasury
stock on the balance sheet.
1995 Stock Incentive Plan
- -------------------------
On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan.
On September 19, 1997, the stockholders approved an amendment to the 1995 Stock
Incentive Plan, including an increase in the number of shares of common stock
available for issuance under the Plan to 750,000. Under the Plan, common stock
may be issued 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 grants to date under the Plan (other than a certain
stock grant which was terminated) have been non-qualified stock options which
vest over three years (except that options issued to directors vest in full six
months following the 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 reserved 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, reserved up to an aggregate of
216,750 shares of common stock of the Company for issuance in connection with
stock grants, incentive stock options and non-qualified stock options.
The number of options granted under the 1995 Stock Incentive Plan is determined
from time to time by the Compensation Committee of the Board of Directors,
except for options granted to non-employee directors, which is determined by a
formula set forth in the Plan. Incentive stock options are granted at market
value or above, and non-qualified stock options are granted at a price fixed by
F-19
<PAGE>
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
Company's stock incentive plans and other employee options was as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------
Weighted
average
exercise
Number Range price
---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 79,775 $ 3.00 to $13.00 $ 4.57
-------- ------- -- ------ -------
Granted 102,950 $11.625 $11.625
Canceled - - - -
Exercised (37,500) $ 3.00 to $ 4.00 $ 3.75
-------- ------- -- ------ -------
Balance, December 31, 1995 145,225 $ 3.00 to $13.00 $ 9.78
======== ======= -- ====== =======
Granted 60,500 $ 10.50 to $15.81 $11.525
Canceled (28,175) $11.625 $11.625
Exercised (28,750) $ 4.00 to $ 6.00 $ 3.75
-------- ------- -- ------ -------
Balance, December 31, 1996 148,800 $ 3.00 to $15.81 $ 12.67
======== ======= == ====== =======
Granted 183,200 $ 7.88 to $10.50 $ 9.48
Canceled ( 54,575) $ 3.00 to $13.00 $ 11.50
Exercised ( 6,250) $ 3.50 to $13.50 $ 11.50
-------- ------- -- ------ -------
Balance, December 31, 1997 271,175 $ 3.00 to $16.50 $ 10.75
======== ======= == ====== =======
</TABLE>
At December 31, 1997 and 1996, 545,940 and 269,813 shares, respectively,
remained available for options or stock grants under the 1995 Stock Incentive
Plan and 77,191 options were exercisable under such Plan and earlier stock
option plans.
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 plans. Had compensation cost
for the Company's stock option plans 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:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Net (loss) income - as reported $ (884,577) $2,462,892 $3,843,886
Net (loss) income - pro forma (1,222,338) 2,365,038 3,840,839
Net (loss) income per share - as reported $ (0.16) $ 0.34 $ 0.68
Net (loss) income per share - pro forma $ (0.20) $ 0.34 $ 0.68
</TABLE>
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 1997 and 1996:
F-20
<PAGE>
<TABLE>
<S> <C>
Expected dividend yield 0%
Expected stock price volatility 45.7%
Risk-free interest rate 5.49-6.64%
Expected life of options 3 years
</TABLE>
Activity (adjusted for the 4:1 reverse split) with respect to warrants
outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Number Range
----------- -----
<S> <C> <C> <C> <C>
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
-------- ----- -- -----
Granted - - -
Canceled (5,000) $2.00 to $7.52
----- -- -----
Exercised (250,000) $2.00
-------- -----
Balance, December 31, 1997 434,042 $4.00 to $7.52
-------- ----- -- -----
</TABLE>
(10) Other (Income) Expense:
----------------------
Other (income) expense consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $(178,630) $(470,164) $(141,637)
Rental income (77,502) (143,355) (194,312)
Depreciation related
to rental properties 32,549 73,394 82,007
Other projects (2,119) - 29,574
Costs related to centers
held for sale 67,223 57,478 98,644
--------- --------- ---------
$(158,479) $(482,647) $(125,724)
========= ========= =========
</TABLE>
(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 1998. Fees paid to the firm in 1997,
1996 and 1995 totaled $35,509, $128,015, and $703,622, respectively.
F-21
<PAGE>
<TABLE>
<CAPTION>
(12) Income Taxes:
-------------
Current tax provision:
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal $ 26,007 $ 61,693 $ 33,755
States 194,501 293,206 91,327
-------- ---------- -----------
$220,508 $ 354,899 $ 125,082
Deferred tax provision 29,508 $1,206,894 (1,480,672)
-------- ---------- -----------
$250,016 $1,561,793 $(1,355,590)
======== ========== ===========
</TABLE>
The difference between the actual income tax rate and the statutory U.S. federal
income tax rate is attributable to the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate ($ 63,000) $1,364,000 $ 867,000
State taxes, net of federal
tax benefit $ 137,000 $ 119,000 $ 127,000
Benefit from realization of
net operating losses 0 0 ($996,000)
Reduction in valuation allowance 0 0 $(1,480,000)
Goodwill and other 176,000 79,000 127,000
---------- ---------- -----------
$ 250,000 $1,562,000 $(1,355,000)
========== ========== ===========
</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.
F-22
<PAGE>
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,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
Deferred Deferred Deferred
Tax Tax Tax
Assets Assets Assets
(Liabilities) (Liabilities) (Liabilities)
------------- ------------- -------------
<S> <C> <C> <C>
Depreciation ($576,474) $ (383,348) $ (240,639)
Provision for center closings and
other restructurings 1,635,031 379,099 1,269,913
Net operating losses 0 801,424 720,496
General business credits 0 0 27,650
AMT credit carryforward 94,587 89,509 125,816
Other 155,136 121,104 87,726
---------- ---------- ----------
Net deferred tax asset $1,308,280 $1,007,788 $1,990,962
========== ========== ==========
</TABLE>
In 1995, based on three years of positive net income and the analysis of
projections for the 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.
(13) Employee Benefit Plans:
----------------------
The Company has a 401(k) Plan whereby eligible employees may elect to enroll
after one year of service. The Company matches 25% of an employee's
contribution to the Plan of up to 6% of the employee's salary. Nobel's matching
contributions under the Plan and prior Merryhill Plan were $90,062, $73,958 and
$60,904 for the years ended December 31, 1997, 1996 and 1995, 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.
F-23
<PAGE>
(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.
(16) Subsequent Events
-----------------
Acquisitions
- ------------
In March 1998, the Company completed the acquisition of two elementary schools.
The Company acquired the assets of Touchstone Elementary School in Lake Oswego,
Oregon, which has a capacity for 150 students and revenues of $1,050,000. The
Company acquired the stock of Lake Forrest Park Montessori School, Inc., owner
of Lake Forrest Park Montessori School, in Seattle, Washington, which has a
capacity of 250 students and revenues of $1,150,000. The aggregate purchase
price for the two acquisitions equaled $1,307,600 in cash, $560,400 in
subordinated notes payable over five years and approximately $60,000 in assumed
liabilities. The acquisitions were recorded using the purchase method of
accounting.
Sale/Leaseback
- --------------
In February 1998, the Company entered into a sale/leaseback agreement in
connection with one of its Las Vegas campuses, located on Durango Road. The
Company sold the property for $4.4 million and simultaneously entered into a
fifteen year lease agreement. There was no gain or loss on the sale of the real
estate. Proceeds from the sale were used to reduce amounts outstanding under
the Revolving and Term Credit Facilities.
F-24
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Registrant's Certificate of Incorporation, as amended and restated.
(Filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, and incorporated herein by
reference.)
3.2 Registrant's Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
Registrant's Current Report on Form 8-K filed on June 14, 1993 and
incorporated herein by reference.)
3.3 Registrant's Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
Registrant's Quarterly Report on Form 10-Q with respect to the quarter
ended June 30, 1994 and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's
Current Report on Form 8-K filed on September 11, 1995, date of earliest
event reported August 25, 1995, and incorporated herein by reference.)
3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, and incorporated herein by reference.)
4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security
Agreement") among the Registrant, certain subsidiaries of the Registrant
and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the
Registrant's Current Report on Form 8-K filed on September 11, 1995, date
of earliest event reported August 25, 1995, and incorporated herein by
reference.)
4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment
and Modification dated July 2, 1996 to the Loan and Security Agreement.
(Filed 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 Sixth Amendment and Modification dated May 5, 1997 to Loan and Security
Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, and incorporated herein
by reference.)
Exhibit Index-1
<PAGE>
4.6 Seventh Amendment and Modification dated December 22, 1997 to Loan and
Security Agreement.
4.7 Revolving and Term Facility Note A dated December 22, 1997 in the
principal sum of $22,000,000 payable to the order of Summit Bank.
4.8 Revolving and Term Facility Note B dated December 22, 1997 in the
principal sum of $3,000,000 payable to the order of Summit Bank.
The Registrant has omitted certain instruments defining the rights of
holders of long-term debt in cases where the indebtedness evidenced by
such instruments does not exceed 10% of the Registrant's total assets.
The Registrant agrees to furnish a copy of each of such instruments to
the Securities and Exchange Commission upon request.
10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended.
(Filed as Exhibit 10(1) to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987
(the "Form S-1") and incorporated herein by reference.)
10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as
Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March
31, 1988 and incorporated herein by reference.)
10.3 1995 Stock Incentive Plan of the Registrant, as amended.
10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock
Incentive Plan
10.5 Stock and Warrant Purchase Agreement between the Registrant and various
investors, dated April 14, 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 Stock Purchase Agreement dated May 28, 1992 between Registrant and a
limited number of accredited investors at $0.50 per share totaling
3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.8 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.)
Exhibit Index-2
<PAGE>
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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 ? 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:
<TABLE>
<CAPTION>
Number of Shares
(pre-reverse stock split)
of Common Stock
Warrant No. Holder (subject to adjustment)
- ------------- -------------------------------- -----------------------
<S> <C> <C>
2 Allied Capital Corporation II 142,932
3 Allied Investment Corporation 92,713
4 Allied Investment Corporation II 50,220
</TABLE>
10.13 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.)
10.14 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.)
10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and
Summary Plan Description, Issued February, 1997. (Filed as Exhibit 10.20
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.)
Exhibit Index-3
<PAGE>
10.16 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z.
Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated herein by
reference.)
10.17 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and
the Registrant. (Filed as Exhibit 10.22 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference.)
10.18 Contingent Severance Agreement dated as of March 11, 1997 between John R.
Frock and the Registrant. (Filed as Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.)
11 Statement re-computation of per share earnings dated year ended December
31, 1997, 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 4.1 through 4. 6 and
Exhibit 10.11 have not been filed. The Registrant will furnish supplementally a
copy of any omitted schedules or attachments to the Commission upon request.
A copy of any of the foregoing exhibits may be obtained upon request to Nobel
Education Dynamics, Inc., 1400 North Providence Road, Suite 3055, Media, PA
19063, Attn: Investor Relations. Depending on the number of exhibits
requested, the Company may charge a reasonable fee based on its expense to
furnish the exhibits.
Exhibit Index-4
<PAGE>
FIFTH AMENDMENT AND MODIFICATION TO
-----------------------------------
LOAN AND SECURITY AGREEMENT
---------------------------
THIS FIFTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the
"AMENDMENT") is made effective as of the _____ day of March, 1997, by and among
NOBEL EDUCATION DYNAMICS, INC. ("NOBEL"), BLUEGRASS REAL ESTATE COMPANY, INC.
("BLUEGRASS"), IMAGINE EDUCATIONAL PRODUCTS, INC. ("IMAGINE"), MERRYHILL
SCHOOLS, INC. ("MERRYHILL"), EDUCO, INC. ("EDUCO"), NEDI, INC. ("NEDI"),
MONTESSORI HOUSE, INC. ("MONTESSORI"), ANOTHER GENERATION ENTERPRISES, INC.
("ANOTHER GENERATION") (collectively, the "OBLIGORS") and SUMMIT BANK, formerly
known as First Valley Bank ("BANK").
BACKGROUND
----------
A. By a Loan and Security Agreement among Obligors, Children's Park,
Incorporated, Rocking Horse Management Corporation and Bank dated August 30,
1995 (as amended by those certain amendments dated September 1, 1995, April 4,
1996, July 23, 1996 and November 1, 1996, the "LOAN AGREEMENT"), Bank agreed,
inter alia, to extend to Obligors a (i) revolving line of credit in the original
- ----- ----
principal amount of up to Ten Million Dollars ($10,000,000.00) (the "LINE"),
(ii) term loan in the original principal amount of Seven Million Five Hundred
Thousand Dollars ($7,500,000.00) (the "TERM LOAN"), and (iii) term loan in the
original principal amount of Six Million Dollars ($6,000,000.00) (the "NEW TERM
LOAN"). Subsequent to the execution of the Loan Agreement, Children's Park,
Incorporated and Rocking Horse Management Corporation merged into Nobel with
Nobel being the surviving entity.
B. Obligors' obligations to repay the sums advanced under the (i) Line is
evidenced by that certain Line Note from Obligors to Bank dated November 1, 1996
in the face amount of Ten Million Dollars ($10,000,000.00) (the "LINE NOTE"),
(ii) Term Loan is evidenced by that certain Term Note from Obligors to Bank
dated August 30, 1995 in the original principal amount of Seven Million Five
Hundred Thousand Dollars ( $7,500,000.00) (as amended, the "TERM NOTE"), and
(iii) New Term Loan is evidenced by that certain New Term Note from Obligors to
Bank dated April 4, 1996 in the original principal amount of Six Million Dollars
($6,000,000.00) (as amended, the "NEW TERM NOTE").
C. Obligors and Bank desire to further amend the Loan Agreement in
accordance with the terms and conditions hereof.
D. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. PERMITTED INDEBTEDNESS. SECTION 6.2 of the Loan Agreement is amended
---------------------- -----------
by adding the following subsection (d):
--------------
<PAGE>
"(d) Indebtedness to AEI Fund Management, Inc. ("AEI") in an amount
not to exceed Seven Million Five Hundred Thousand Dollars
($7,500,000.00) in the aggregate to be used to finance the
construction of new educational facilities of Obligors, provided that
no Event of Default or event which with the giving of notice or the
passage of time or both would become an Event of Default shall have
occurred and the incurrence of such obligations will not cause an
Event of Default. All obligations of Obligors to AEI shall be secured
only by mortgage liens and UCC-1 fixture filings against the property
and improvements in respect of which AEI is providing construction
financing. Prior to each financing with AEI, Obligors shall provide
to Bank a description of the properties being financed by AEI, the
terms of such financing and copies of all documents in connection
therewith."
2. INVESTMENT ACCOUNT. Notwithstanding anything to the contrary
------------------
contained in the Loan Agreement, Bank consents to the transfer by Nobel of an
amount not to exceed Nine Million Five Hundred Thousand Dollars ($9,500,000.00)
to an account maintained by NEDI with Smith Barney, account number 532-14483-17-
187. NEDI acknowledges and agrees that such account, together with all
securities and other assets therein, all substitutions and replacements therefor
and all proceeds thereof are part of the Collateral and are subject to the
Securities Pledge Agreement from NEDI to Bank and the agreement among Bank,
Smith Barney and NEDI regarding such account.
3. FINANCIAL COVENANTS. SECTION 7 of the Loan Agreement shall be amended
------------------- ---------
as follows:
(a) SECTIONS 7.1, 7.2 AND 7.3 are hereby deleted in their entirety.
-------------------------
(b) The following financial covenants are hereby added to SECTION 7:
---------
(i) TOTAL FUNDED INDEBTEDNESS TO EBITDA. Obligors shall maintain a
-----------------------------------
ratio of Total Funded Indebtedness to EBITDA of not greater than
4.0 to 1.0. as of the end of each fiscal quarter of Obligors,
calculated on a rolling four (4) quarter basis.
(ii) TOTAL FUNDED SENIOR INDEBTEDNESS TO EBITDA. Obligors shall
------------------------------------------
maintain a ratio of Total Funded Senior Indebtedness to EBITDA
of not greater than 3.0 to 1.0. as of the end of each fiscal
quarter of Obligors, calculated on a rolling four (4) quarter
basis.
As used herein, the following terms shall have the following
meanings:
"TOTAL FUNDED SENIOR INDEBTEDNESS" shall mean the Total Funded
Indebtedness of Obligors minus the Subordinated Indebtedness of
Obligors then outstanding.
2
<PAGE>
"EBITDA" shall mean the earnings of Obligors for any given period,
plus the aggregate amounts deducted in determining such earnings in
respect of (i) Interest Expense, (ii) income taxes, (iii)
depreciation and (iv) amortization, all as determined in accordance
with GAAP.
"TOTAL FUNDED INDEBTEDNESS" shall mean the sum of all Bank
Indebtedness, Indebtedness owed to AEI, Subordinated Indebtedness
and Capitalized Lease Obligations outstanding at any given time.
4. ADDITIONAL OBLIGORS. From and after the date hereof, Montessori and
-------------------
Another Generation shall each be an "OBLIGOR" under the Loan Agreement and shall
be bound by all of the terms and conditions thereof. Unless otherwise
specifically restated for Montessori and Another Generation hereunder, all
representations, warranties and covenants under the Loan Agreement shall be
deemed to be the representations, warranties and covenants of Montessori and
Another Generation as if Montessori and Another Generation were originally named
as an "OBLIGOR" under the Loan Agreement. All references to Obligors in the
Loan Agreement and the other Loan Documents shall hereafter also be deemed a
reference to Montessori and Another Generation.
5. SECURITY. As security for the full and timely payment and performance
--------
of all Bank Indebtedness, Montessori and Another Generation hereby grant to Bank
a security interest in all of the following:
(a) All of such parties' present and future accounts, contract rights,
chattel paper, instruments and documents and all other rights to the payment of
money whether or not yet earned, for services rendered or goods sold, consigned,
leased or furnished by such parties or otherwise, together with (i) all goods
(including any returned, rejected, repossessed or consigned goods), the sale,
consignment, lease or other furnishings of which shall be given or may give rise
to any of the foregoing, (ii) all of such parties' rights as a consignor,
consignee, unpaid vendor or other lienor in connection therewith, including
stoppage in transit, set-off, detinue, replevin and reclamation, (iii) all
general intangibles related thereto, (iv) all guaranties, mortgages, security
interests, assignments, and other encumbrances on real or personal property,
leases and other agreements or property securing or relating to any accounts,
(v) choses-in-action, claims and judgments, (vi) any return or unearned
premiums, which may be due upon cancellation of any insurance policies, and
(vii) all products and proceeds of any of the foregoing.
(b) All of such parties' present and future inventory (including but
not limited to goods held for sale or lease or furnished or to be furnished
under contracts for service, raw materials, work-in-process, finished goods and
goods used or consumed in such parties' business) whether owned, consigned or
held on consignment, together with all merchandise, component materials,
supplies, packing, packaging and shipping materials, and all returned, rejected
or repossessed goods sold, consigned, leased or otherwise furnished by such
parties and all products and proceeds of any of the foregoing.
(c) All of such parties' present and future general intangibles
(including but not limited to tax refunds and rebates, manufacturing and
processing rights, designs, patent rights and applications therefor, trademarks
and registration or applications therefor, tradenames, brand names, logos,
inventions, copyrights and all applications and registrations therefor),
licenses, permits,
3
<PAGE>
approvals, software and computer programs, license rights, royalties, trade
secrets, methods, processes, know-how, formulas, drawings, specifications,
descriptions, label designs, plans, blueprints, patterns and all memoranda,
notes and records with respect to any research and development, and all product
and proceeds of any of the foregoing.
(d) All of such parties' present and future machinery, equipment,
furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other articles
of tangible personal property of every type together with all parts,
substitutions, accretions, accessions, attachments, accessories, additions,
components and replacements thereof, and all manuals of operation, maintenance
or repair, and all products and proceeds of any of the foregoing.
(e) All of such parties' present and future general ledger sheets,
files, records, customer lists, books of account, invoices, bills, certificates
or documents of ownership, bills of sale, business papers, correspondence,
credit files, tapes, cards, computer runs and all other data and data storage
systems, whether in the possession of such parties or any service bureau.
(f) All letters of credit now existing or hereafter issued naming such
parties as beneficiaries or assigned to such parties, including the right to
receive payment thereunder, and all documents and records associated therewith.
(g) All deposits, funds, instruments, documents, policies and evidence
and certificates of insurance, securities, chattel paper and other assets of
such parties or in which such parties have an interest and all proceeds thereof,
now or at any time hereafter on deposit with or in the possession or control of
Bank or owing by Bank to such parties or in transit by mail or carrier to Bank
or in the possession of any other Person acting on Bank's behalf, without regard
to whether Bank received the same in pledge, for safekeeping, as agent for
collection or otherwise, or whether Bank has conditionally released the same,
and in all assets of such parties in which Bank now has or may at any time
hereafter obtain a lien, mortgage or security interest for any reason.
(h) All stocks, bonds, treasury securities, commercial paper, mutual
funds and other investments or securities of any nature now or hereafter
acquired by such parties, and all interest, dividends and other proceeds
thereof.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS. Montessori and Another
-----------------------------------------
Generation hereby join in and ratify and confirm all of the representations and
warranties in the Loan Agreement and agree to be bound by and to comply with all
of the covenants set forth herein.
7. NEW FACILITIES. SECTION 6.27 of the Loan Agreement is hereby amended
-------------- ------------
to read, in its entirety, as follows:
"6.27 NEW FACILITIES. During any fiscal year, Obligors shall not
--------------
establish more than ten (10) newly constructed educational facilities
which they, or any of them, will own or which will otherwise appear as
an asset on any Obligor's balance sheet ("OWNED FACILITIES"). In
addition to the foregoing, Obligors may acquire and hold from time to
time up to seven (7) parcels of vacant land (the "VACANT LAND"),
provided, however, the aggregate purchase price of the Vacant Land
4
<PAGE>
at any time held by Obligors shall not exceed Three Million Five
Hundred Thousand Dollars ($3,500,000.00)."
8. FURTHER ASSURANCES. Obligors covenant and agree to execute and
------------------
deliver to Bank or to cause to be executed and delivered at the sole cost and
expense of Obligors, from time to time, any and all other documents, agreements,
statements, certificates and information as Bank shall reasonably request to
evidence or effect the terms hereof, the Loan Agreement, as amended, or any of
the other Loan Documents, or to enforce or to protect Bank's interest in the
Collateral, including, without limitation, Allonges to each of the promissory
notes in connection with the Loan Agreement adding Montessori and Another
Generation as Obligors thereunder. All such documents, agreements, statements,
etc., shall be in form and content acceptable to Bank in its sole discretion.
9. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors do hereby:
--------------------------------------
(a) ratify, confirm and acknowledge that the Loan Agreement, as
amended, and the other Loan Documents continue to be and are valid, binding and
in full force and effect;
(b) covenant and agree to perform all obligations of Obligors
contained herein and under the Loan Agreement, as amended, and the other Loan
Documents;
(c) acknowledge and agree that Obligors have no defense, set-off,
counterclaim or challenge against the payment of any sums owing under Loan
Documents, the enforcement of any of the terms of the Loan Agreement, as
amended, or the other Loan Documents;
(d) acknowledge and agree that all representations and warranties of
Obligors contained in the Loan Agreement and/or the other Loan Documents, as
amended, are true, accurate and correct on and as of the date hereof as if made
on and as of the date hereof;
(e) represent and warrant that no Event of Default (as defined in the
Loan Agreement or any of the other Loan Documents) or event which with the
giving of notice or passage of time or both would constitute such an Event of
Default exists and all information described in the foregoing Background is
true, accurate and complete;
(f) acknowledge and agree that nothing contained herein and no actions
taken pursuant to the terms hereof is intended to constitute a novation of the
Loan Agreement or any of the other Loan Documents, and does not constitute a
release, termination or waiver of any of the rights or remedies granted to the
Bank therein, which rights and remedies are hereby ratified, confirmed, extended
and continued as security for the obligations of Obligors to Bank under the Loan
Agreement and the other Loan Documents, including, without limitation, this
Amendment; and
(g) acknowledge and agree that any Obligor's failure to comply with or
perform any of its covenants, agreements or obligations contained in this
Amendment shall constitute an Event of Default under the Loan Agreement and each
of the Loan Documents.
10. COSTS AND EXPENSES. Upon execution of this Amendment, Obligors shall
------------------
pay to Bank, all costs and expenses incurred by Bank in connection with the
review, preparation and
5
<PAGE>
negotiation of this Amendment and all documents in connection therewith,
including, without limitation, all of Bank's attorneys' fees and costs.
11. INCONSISTENCIES. To the extent of any inconsistency between the
---------------
terms, conditions and provisions of this Amendment and the terms, conditions and
provisions of the Loan Agreement or the other Loan Documents, the terms,
conditions and provisions of this Amendment shall prevail. All terms,
conditions and provisions of the Loan Agreement and the other Loan Documents not
inconsistent herewith shall remain in full force and effect and are hereby
ratified and confirmed by Obligors.
12. CONSTRUCTION. All references to the Loan Agreement therein or in
------------
any other Loan Documents shall be deemed to be a reference to the Loan Agreement
as amended hereby.
13. NO WAIVER. Nothing contained herein and no actions taken pursuant to
---------
the terms hereof are intended to nor shall they constitute a waiver by the Bank
of any rights or remedies available to Bank at law or in equity or as provided
in the Loan Agreement or the other Loan Documents.
14. BINDING EFFECT. This Amendment shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and assigns.
15. GOVERNING LAW. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
16. HEADINGS. The headings of the sections of this Amendment are inserted
--------
for convenience only and shall not be deemed to constitute a part of this
Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date first above written.
NOBEL EDUCATION DYNAMICS, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
BLUEGRASS REAL ESTATE
COMPANY, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
[SIGNATURES CONTINUED NEXT PAGE]
6
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
IMAGINE EDUCATIONAL PRODUCTS,
INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
MERRYHILL SCHOOLS, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
EDUCO, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
NEDI, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
MONTESSORI HOUSE, INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
[SIGNATURES CONTINUED NEXT PAGE]
7
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
ANOTHER GENERATION ENTERPRISES,
INC.
By:_____________________________________
Name/Title:_____________________________
Attest:_________________________________
Name/Title:_____________________________
SUMMIT BANK, formerly known as
First Valley Bank
By:_____________________________________
Donald H. McCarty
Regional Vice President
8
<PAGE>
SEVENTH AMENDMENT AND MODIFICATION
TO LOAN AND SECURITY AGREEMENT
------------------------------
THIS SEVENTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the
"AMENDMENT") is made effective as of the 22nd day of December, 1997, by and
among NOBEL EDUCATION DYNAMICS, INC. ("NOBEL"), IMAGINE EDUCATIONAL PRODUCTS,
INC. ("IMAGINE"), MERRYHILL SCHOOLS, INC. ("MERRYHILL"), EDUCO, INC. ("EDUCO"),
NEDI, INC. ("NEDI"), MONTESSORI HOUSE, INC. ("MONTESSORI"), ANOTHER GENERATION
ENTERPRISES, INC. ("ANOTHER GENERATION") (collectively, the "OBLIGORS") and
SUMMIT BANK, formerly known as First Valley Bank ("BANK").
BACKGROUND
----------
A. By a Loan and Security Agreement among Obligors, Children's Park,
Incorporated, Rocking Horse Management Corporation, Bluegrass Real Estate
Company, Inc. and Bank dated August 30, 1995 (as amended by those certain
amendments dated September 1, 1995, April 4, 1996, July 23, 1996, November 1,
1996, March 20, 1997 and May 5, 1997, the "LOAN AGREEMENT"), Bank agreed, inter
alia, to extend to Obligors a (i) revolving line of credit in the original
principal amount of up to Thirteen Million Eight Hundred Thousand Dollars
($13,800,000.00) (the "LINE"), (ii) term loan in the original principal amount
of Seven Million Five Hundred Thousand Dollars ($7,500,000.00) (the "TERM
LOAN"), and (iii) term loan in the original principal amount of Six Million
Dollars ($6,000,000.00) (the "NEW TERM LOAN") (hereafter, the Term Loan and the
New Term Loan may be referred to collectively as the "TERM LOANS"). Subsequent
to the execution of the Loan Agreement, Children's Park, Incorporated, Rocking
Horse Management Corporation and Bluegrass Real Estate Company, Inc. merged into
Nobel with Nobel being the surviving entity.
B. Obligors' obligation to repay the sums advanced under the (i) Line is
evidenced by that certain Line Note from Obligors to Bank dated May 5, 1997 in
the face amount of Thirteen Million Eight Hundred Thousand Dollars
($13,800,000.00) (the "LINE NOTE"), (ii) Term Loan is evidenced by that certain
Term Note from Obligors to Bank dated August 30, 1995 in the original principal
amount of Seven Million Five Hundred Thousand Dollars ( $7,500,000.00) (as
amended, the "TERM NOTE"), and (iii) New Term Loan is evidenced by that certain
New Term Note from Obligors to Bank dated April 4, 1996 in the original
principal amount of Six Million Dollars ($6,000,000.00) (as amended, the "NEW
TERM NOTE") (hereafter, the Term Note and the New Term Note may be referred to
collectively as the "TERM NOTES").
C. Nobel is further indebted to Bank (the "NOBEL LOAN") as evidenced by a
certain promissory note dated January 31, 1994 in the original principal amount
of Four Hundred Ninety-One Thousand Three Hundred Thirteen and 69/100 Dollars
($491,313.69) from Nobel to Mount Holly State Bank (the "NOBEL NOTE"). Through
a series of transactions, Bank is the successor by merger to Mount Holly State
Bank and Bank is the holder of the Nobel Note.
D. Obligors and Bank desire to further amend the Loan Agreement to
restructure the Line, the Term Loans and the Nobel Loan in accordance with the
terms and conditions hereof.
E. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in the Loan Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
<PAGE>
1. RESTRUCTURE OF THE LINE, THE TERM LOANS AND THE NOBEL LOAN.
----------------------------------------------------------
a. The current outstanding balances under the Line (including,
without limitation, the face amount of all issued and outstanding letters
of credit thereunder), the Term Loans and the Nobel Loan are as follows:
i. Line - $7,820,000 (incl. $300,000 letters of credit)
ii. Term Loan - $ 5,450,000
iii New Term Loan - $ 4,200,000
iv. Nobel Loan - $406,450.67
b. Effective as of the date hereof, the Line, the Term Loans and the
Nobel Loan shall be restructured as Revolving and Term Facility A and
Revolving and Term Facility B, as more fully described in SECTION 2 below.
---------
c. The initial principal balances outstanding under Revolving and
Term Facility A and Revolving and Term Facility B shall be as follows:
i. Revolving and Term Facility A - $0
ii. Revolving and Term Facility B - $17,876,450.67
(incl. $300,000 letters of credit)
Effective as of the date hereof, such sums shall accrue interest and
be repaid in accordance with the terms and conditions set forth in this
Amendment.
d. The Line, the Term Loan, the New Term Loan and the Nobel Loan are
being replaced with Revolving and Term Facility A and Revolving and Term
Facility B and to the extent the context so requires, all references in the
Loan Agreement, each of the other Loan Documents, the Nobel Note and any
documents in connection therewith to the Line, the Term Loan, the New Term
Loan, the Nobel Loan, the Line Note, the Term Note, the New Term Note and
the Nobel Note shall be deemed references to Revolving and Term Facility A,
Revolving and Term Facility B, Revolving and Term Facility Note A and
Revolving and Term Facility Note B, mutatis mutandis. The term "BANK
INDEBTEDNESS" under the Loan Agreement and any other term under any Loan
Document or any documents in connection with the Nobel Loan which describes
the indebtedness or other obligations of Obligors to Bank shall be deemed
to include, without limitation, all obligations of Obligors to Bank under
Revolving and Term Facility A and Revolving and Term Facility B. The term
"COLLATERAL" under the Loan Agreement shall be deemed to include, without
limitation, all security for the Nobel Loan. All obligations of Obligors
to Bank under the Revolving and Term Credit Facilities shall be secured by
all of the Collateral.
2. CREDIT FACILITIES. SECTION 1.1 of the Loan Agreement is amended to
----------------- -----------
read, in its entirety, as follows:
"1.1 CREDIT FACILITIES. Bank will establish for Obligors for and
-----------------
during the period from the date hereof and until December 1, 2005 (the
"CONTRACT PERIOD"), subject to the terms and conditions hereof:
(a) A revolving and term facility pursuant to which Bank will
from time to time during the period from December 22, 1997 through and
including December
2
<PAGE>
22, 2000 (the "REVOLVING PERIOD"), make loans to Obligors in an
aggregate amount not exceeding at any time Three Million Dollars
($3,000,000.00) ("REVOLVING AND TERM FACILITY A"); and
(b) A revolving and term facility pursuant to which Bank will
from time to time during the Revolving Period, make loans or other
extensions of credit to Obligors in an aggregate amount not exceeding
at any time Twenty-Two Million Dollars ($22,000,000.00) ("REVOLVING
AND TERM FACILITY B"). Hereafter, Revolving and Term Facility A and
Revolving and Term Facility B may be referred to collectively as the
"REVOLVING AND TERM FACILITIES. "
During the Revolving Period, Obligors may borrow, repay and reborrow
under the Revolving and Term Facilities; provided, however, with respect to
-------- -------
Revolving and Term Facility B, such borrowings and repayments during the
Revolving Period shall be in minimum amounts of Two Hundred Thousand
Dollars ($200,000.00) each. After the Revolving Period, no further
advances will be made under the Revolving and Term Facilities and all sums
outstanding thereunder shall be repaid as provided for in this Agreement.
The Revolving and Term Facilities shall be subject to all terms and
conditions set forth in all of the Loan Documents (as hereafter defined),
which terms and conditions are incorporated herein. Obligors' obligations
to repay the loans and other extensions of credit under the Revolving and
Term Facilities shall be evidenced by Obligors' amended and restated
promissory notes (collectively, the "NOTES") in the face amounts of Three
Million Dollars ($3,000,000.00) ("REVOLVING AND TERM FACILITY NOTE A") and
Twenty-Two Million Dollars ($22,000,000.00) ("REVOLVING AND TERM FACILITY
NOTE B"), respectively, both of which shall be in the forms attached hereto
as EXHIBIT "A". The Revolving and Term Facilities shall be subject to
-----------
review and renewal after expiration of the Contract Period, at the sole
direction of Bank."
3. USE OF PROCEEDS. SECTION 1.3(a) of the Loan Agreement is amended to
--------------- --------------
read, in its entirety, as follows:
"(a) USE OF PROCEEDS UNDER THE REVOLVING AND TERM FACILITIES. The
-------------------------------------------------------
proceeds advanced under the Revolving and Term Facilities shall be used for
proper working capital purposes, to fund future acquisitions of educational
facilities or companies and construction of educational facilities by
Obligors and for the issuance of standby letters of credit under Revolving
and Term Facility B only; provided, however, the face amount under
-----------------
outstanding letters of credit issued under Revolving and Term Facility B
shall not at any time exceed Two Million Dollars ($2,000,000.00) in the
aggregate."
4. INTEREST RATES. SECTION 2 of the Loan Agreement is amended to read,
-------------- ---------
in its entirety, as follows:
"2. INTEREST RATES.
--------------
2.1 INTEREST RATES ON REVOLVING AND TERM FACILITY A. Interest
-----------------------------------------------
on the unpaid principal balance of Revolving and Term Facility A will
accrue at a definite and certain but variable per annum rate equal to
the Floating Rate.
3
<PAGE>
2.2 INTEREST RATES ON REVOLVING AND TERM FACILITY B. Interest
-----------------------------------------------
on the unpaid principal balance of Revolving and Term Facility B will
accrue at one of the two (2) interest rate options set forth below,
subject to the restrictions and in accordance with the procedures set
forth in this Agreement:
(i) Line LIBOR Rate; or
(ii) Floating Rate.
2.3 TERM-OUT PORTION. Interest on the unpaid principal balance
----------------
of any Term-Out Portion will accrue from the Effective Date until
final payment thereof at the Term-Out Rate.
2.4 REQUEST FOR FLOATING RATE ON THE REVOLVING AND TERM FACILITY
------------------------------------------------------------
B. All advances under Revolving and Term Facility B shall accrue
-
interest at the Floating Rate, unless Obligors have requested the Line
LIBOR Rate. The Obligors shall be deemed to have requested the
Floating Rate unless the Line LIBOR Rate has been requested in
accordance with the terms of this Agreement.
If the Obligors desire to convert the interest rate applicable to
all or any part of the principal balance of Revolving and Term
Facility B from the Line LIBOR Rate to the Floating Rate, upon
delivery by Obligors to Bank of a Floating Rate Notification, that
portion of the principal balance outstanding under Revolving and Term
Facility B identified in such Floating Rate Notification shall accrue
interest at the Floating Rate from the expiration of the then current
Rate Period related to such principal amount until the effective date
of another interest rate option chosen for such amount in accordance
with the terms of this Agreement.
2.5 REQUEST FOR LINE LIBOR RATE. If the Obligors desire that
---------------------------
all or part of the outstanding principal balance under Revolving and
Term Facility B accrue interest at the Line LIBOR Rate, Obligors shall
give Bank a LIBOR Rate Notification. Upon delivery by Obligors to
Bank of a LIBOR Rate Notification, that portion of the principal
balance outstanding under Revolving and Term Facility B identified in
such LIBOR Rate Notification shall accrue interest at the LIBOR Rate
as follows: (a) with respect to the principal amount of any new
advance under Revolving and Term Facility B, from the date of such
advance until the end of the Rate Period specified in such LIBOR Rate
Notification; and/or (b) with respect to all or any portion of the
principal amount of Revolving and Term Facility B outstanding and
accruing interest at another Line LIBOR Rate at the time of the LIBOR
Rate Notification related to such principal amount, from the
expiration of the then current Rate Period related to such principal
amount until the end of the Rate Period specified in such LIBOR Rate
Notification; and/or (c) with respect to all or any portion of the
principal amount of Revolving and Term Facility B outstanding and
accruing interest at the Floating Rate at the time of the LIBOR Rate
Notification related to such principal amount, from the date set forth
in such LIBOR Rate Notification until the end of the Rate Period
specified in such LIBOR Rate Notification.
4
<PAGE>
2.6 CERTAIN PROVISIONS REGARDING REVOLVING AND TERM FACILITY B
----------------------------------------------------------
INTEREST RATES. Obligors understand and agree that: (a) subject to
--------------
the provisions of this Agreement, the interest rates set forth in
SECTION 2.2 above may apply simultaneously to different portions of
-----------
the outstanding principal of Revolving and Term Facility B, (b) the
Line LIBOR Rate may apply simultaneously to various portions of the
outstanding principal of Revolving and Term Facility B for various
Rate Periods, (c) the Rate Periods for the Line LIBOR Rate shall be
either one (1), two (2) or three (3) months, (d) the Line LIBOR Rate
applicable to any portion of the outstanding principal of Revolving
and Term Facility B may be different from the Line LIBOR Rate
applicable to any other portion of the outstanding principal of
Revolving and Term Facility B, (e) individual portions of Revolving
and Term Facility B accruing interest at a Line LIBOR Rate must be in
amounts of at least Two Hundred Fifty Thousand Dollars ($250,000.00)
each, and (f) Bank shall have the right to terminate any Rate Period
and the interest applicable thereto, prior to the maturity of such
Rate Period, if Bank determines in good faith (which determination
shall be conclusive) that continuance of such interest rate has been
made unlawful by any law, statute, rule or regulation to which Bank
may be subject, in which event the principal amount to which such
terminated Rate Period relates shall thereafter earn interest at the
Floating Rate.
2.7 FLOATING RATE FALL BACK FOR REVOLVING AND TERM FACILITY B.
---------------------------------------------------------
After expiration of any Rate Period, any principal portion of
Revolving and Term Facility B corresponding to such Rate Period which
has not been converted or renewed in accordance with the terms of this
Agreement shall accrue interest automatically at the Floating Rate
from the date of expiration of such Rate Period until paid in full,
unless and until Obligors request another interest rate in accordance
with the terms of this Agreement.
2.8 LIBOR RATE BORROWINGS. No more than three (3) separate
---------------------
borrowings in the aggregate accruing interest at the Line LIBOR Rate
may be outstanding at any one time.
2.9 DEFAULT RATE. Upon the occurrence and during the
------------
continuance of an Event of Default, at the option of Bank after ten
(10) days notice to Obligors, interest will accrue on the outstanding
principal balance of the Revolving and Term Facilities at a per annum
rate which is three percent (3%) in excess of the highest rate in
effect for Revolving and Term Facility A and Revolving and Term
Facility B, respectively, at the time the Event of Default occurs.
During the continuance of any Event of Default, Obligors shall no
longer have the ability to elect interest rate options.
2.10 POST JUDGMENT INTEREST. Any judgment obtained for sums due
----------------------
hereunder or under the Loan Documents will accrue interest at the
applicable default rate set forth above until paid.
2.11 CALCULATION. Interest will be computed on the basis of a
-----------
year of 360 days and paid for the actual number of days elapsed.
5
<PAGE>
2.12 LIMITATION OF INTEREST TO MAXIMUM LAWFUL RATE. In no event
---------------------------------------------
will the rate of interest payable hereunder exceed the maximum rate of
interest permitted to be charged by applicable law (including the
choice of law rules) and any interest paid in excess of the permitted
rate will be refunded to Obligors. Such refund will be made by
application of the excessive amount of interest paid against any sums
outstanding hereunder and will be applied in such order as Bank may
determine. If the excessive amount of interest paid exceeds the sums
outstanding, the portion exceeding the sums outstanding will be
refunded in cash by Bank. Any such crediting or refunding will not
cure or waive any default by Obligors. Obligors agree, however, that
in determining whether or not any interest payable hereunder exceeds
the highest rate permitted by law, any non-principal payment,
including without limitation prepayment fees and late charges, will be
deemed to the extent permitted by law to be an expense, fee, premium
or penalty rather than interest.
2.13 REQUEST BY ONE OBLIGOR. Any requests to be made by
----------------------
Obligors under this SECTION 2 and any documents to be executed in
---------
connection therewith may be made or executed by any Obligor
individually and any such request and documents delivered by any such
Obligor shall be binding upon all Obligors."
5. PAYMENTS AND FEES. SECTION 3 of the Loan Agreement is amended to
----------------- ---------
read, in its entirety, as follows:
"3. PAYMENTS AND FEES.
-----------------
3.1 PRINCIPAL AND INTEREST. Principal and interest on the
----------------------
Revolving and Term Facilities shall be paid as follows:
(a) Obligors will pay interest monthly at the applicable
rate set forth in SECTIONS 2.1 AND 2.2 above on the first day of
--------------------
each calendar month commencing on January 1, 1998.
(b) Obligors shall repay the outstanding principal balance
of the Revolving and Term Facilities in (i) fifty-nine (59) equal
and consecutive monthly installments on the first day of each
month commencing on January 1, 2001, each in an amount equal to
the quotient obtained by dividing the aggregate outstanding
principal balance of the Revolving and Term Facilities as of the
last day of the Revolving Period by sixty (60), and (ii) one
final payment of the remaining principal balance thereof, all
accrued and unpaid interest thereon and all other sums due in
connection therewith on December 1, 2005.
3.2 TERM-OUT PORTION. Obligors may, at their option during the
----------------
Revolving Period, by delivering to Bank a Term-Out Notice, elect to
term out a portion or portions of the outstanding principal balance
under the Revolving and Term Facility B in minimum increments of at
least Two Million Five Hundred Thousand Dollars ($2,500,000.00) each
(each, a "TERM-OUT PORTION" and collectively, the "TERM-OUT
PORTIONS"). Each Term-Out Portion shall be repaid in (a) fifty-nine
(59) equal and consecutive monthly payments of principal each in an
amount equal to the quotient obtained by dividing the original
principal amount of
6
<PAGE>
such Term-Out Portion by sixty (60), together with interest thereon at
the Term-Out Rate, commencing on the first (1st) day of the first
(1st) month after the Effective Date, and (b) one (1) final payment of
the remaining balance thereof and all accrued and unpaid interest
thereon, on the first day of the sixtieth (60th) month after the
Effective Date.
Obligors shall deliver to Bank not less than fifteen (15) days
prior written notice of Obligors' desire to elect a Term-Out Portion
(each, a "TERM-OUT NOTICE"), which Term-Out Notice shall indicate the
amount of such Term-Out Portion and the date on which Obligors desire
such Term-Out Portion to become effective (the "EFFECTIVE DATE").
Once a Term-Out Notice is delivered by Obligors, such Term-Out Notice
shall be irrevocable and, on the Effective Date, the maximum amount
available under Revolving and Term Facility B shall be permanently
reduced by the full amount of the Term-Out Portion identified in such
Term-Out Notice.
3.3 PREPAYMENT OR TERMINATION OF THE REVOLVING AND TERM
---------------------------------------------------
FACILITIES.
----------
(a) Obligors may prepay all or any portion of the Revolving
and Term Facilities or terminate the Revolving and Term
Facilities (such termination or prepayment being referred to
herein as a "PREPAYMENT EVENT") upon thirty (30) days prior
written notice to Bank (a "PREPAYMENT EVENT NOTICE") specifying
the amount of the Revolving and Term Facilities Obligors desire
to prepay or that Obligors desire to terminate the Revolving and
Term Facilities. Once delivered, the Prepayment Event Notice
shall be irrevocable.
(b) In the event that (i) a Prepayment Event occurs, or (ii)
an Event of Default occurs as a result of Obligors' failure to
pay any sums when due under this Agreement (whether upon
maturity, acceleration or otherwise) and the Revolving and Term
Facilities are terminated, Obligors shall pay to Bank, in
addition to all other sums due hereunder, a fee (the "PREPAYMENT
FEE") with respect to each Term-Out Portion in an amount equal to
the product obtained by multiplying the applicable percentage set
forth below times the outstanding principal amount of each Term-
Out Portion prepaid or terminated:
DATE OF PREPAYMENT EVENT PERCENTAGE
------------------------ ----------
Prior to the first anniversary of the date of the
Term-Out Notice delivered in respect of such
Term-Out Portion 5%
On or after the first anniversary of the date of the
Term-Out Notice delivered in respect of such
Term-Out Portion but prior to the second
anniversary of such date 4%
7
<PAGE>
On or after the second anniversary of the date of the
Term-Out Notice delivered in respect of such
Term-Out Portion but prior to the third
anniversary of such date 3%
On or after the third anniversary of the date of the
Term-Out Notice delivered in respect of such
Term-Out Portion but prior to the fourth
anniversary of such date 2%
On or after the fourth anniversary of the date of the
Term-Out Notice delivered in respect of such
Term-Out Portion 1%
Notwithstanding anything in this SECTION 3.3 to the contrary,
-----------
provided that no Event of Default shall have occurred and be
continuing, Obligors may, without paying the Prepayment Fee, prepay
during any fiscal year of Obligors, from internally generated funds
only, an amount not to exceed twenty percent (20%) of the balance of
each Term-Out Portion outstanding at the beginning of such fiscal
year.
In addition to the foregoing fees, if any portion of Revolving
and Term Facility B is accruing interest at the Line LIBOR Rate at the
time of a Prepayment Event, or if for any other reason Obligors pay
all or any portion of such principal balance prior to the end of the
applicable Rate Period, Obligors shall pay to Bank an additional fee
on such portion equal to the economic loss, if any, suffered by Bank
as determined by Bank in accordance with its customary practices,
which determination shall be conclusive.
3.4 TERM-OUT PORTION FEE. Obligors shall pay to Bank a fee in
--------------------
connection with each Term-Out Portion in an amount equal to one-
quarter of one percent (1/4%) of each such Term-Out Portion (the
"TERM-OUT PORTION FEE"). Each Term-Out Portion Fee shall be payable
upon delivery of the respective Term-Out Notice.
3.5 LETTER OF CREDIT FEES. For each issuance or renewal of a
---------------------
standby letter of credit hereunder, Obligors will pay to Bank an
issuance or renewal fee in an amount equal to one percent (1%) per
annum of the face amount of such standby letter of credit, payable
coincident with and as a condition of the issuance or renewal of such
standby letter of credit. In addition, Obligors shall pay such other
fees and charges in connection with the negotiation or cancellation of
each standby letter of credit as may be customarily charged by Bank.
Such fees shall be computed on the basis of a year of 360 days.
3.6 USAGE FEE. During the Revolving Period, Obligors shall
---------
unconditionally pay to Bank a fee equal to one fifth of one percent
(1/5%) per annum of the average daily unused portion of the Revolving
and Term Facilities (which shall be Twenty-Five Million Dollars
($25,000,000.00) (or such greater amount if the maximum committed
amount for the Revolving and Term Facilities is ever increased),
8
<PAGE>
minus the average daily outstanding principal balance of cash advances
under the Revolving and Term Facilities for such period, minus the
average outstanding undrawn face amount of all standby letters of
credit issued and outstanding under the Line during such period),
which fee shall be computed on a quarterly basis in arrears and shall
be due and payable on the first day of each calendar quarter
commencing on January 1, 1998.
3.7 LATE CHARGE. In the event that Obligors fail to pay any
-----------
principal, interest or other fees or expenses payable hereunder for a
period of at least fifteen (15) days past the applicable due date, in
addition to paying such sums, Obligors shall pay a late charge equal
to the lesser of: (a) five percent (5%) of such past due payment, or
(b) Two Thousand Five Hundred Dollars ($2,500.00), as compensation for
the expenses incident to such past due payment.
3.8 PAYMENT METHOD. Obligors irrevocably authorize Bank to
--------------
debit all payments required to be made by Obligors hereunder, under
the Revolving and Term Facilities, on the date due, from any deposit
account maintained by Obligors or any of them, with Bank; provided,
--------
however, prior to the occurrence of an Event of Default, Obligors may
-------
designate which accounts maintained with Bank shall be so debited.
Otherwise, Obligors will be obligated to make such payments directly
to Bank. All payments are to be made in immediately available funds.
If Bank accepts payment in any other form, such payment shall not be
deemed to have been made until the funds comprising such payment have
actually been received by or made available to Bank.
3.9 APPLICATION OF PAYMENTS. Any and all payments on account of
-----------------------
the Bank Indebtedness will be applied to accrued and unpaid interest,
outstanding principal and other sums due hereunder or under the Loan
Documents, in such order as Bank, in its discretion, elects. If
Obligors make a payment or payments and such payment or payments, or
any part thereof, are subsequently invalidated, declared to be
fraudulent or preferential, set aside or are required to be repaid to
a trustee, receiver, or any other person under any bankruptcy act,
state or federal law, common law or equitable cause, then to the
extent of such payment or payments, the obligations or part thereof
hereunder intended to be satisfied shall be revived and continued in
full force and effect as if said payment or payments had not been
made.
3.10 LOAN ACCOUNT. Bank will open and maintain on its books a
------------
loan account (the "LOAN ACCOUNT") with respect to advances made,
repayments, prepayments, the computation and payment of interest and
fees and the computation and final payment of all other amounts due
and sums paid to Bank under this Agreement. Except in the case of
manifest error in computation, the Loan Account will be conclusive and
binding on the Obligors as to the amount at any time due to Bank from
Obligors under this Agreement or the Notes.
3.11 INDEMNITY; LOSS OF MARGIN. Obligors will indemnify Bank
-------------------------
against any direct loss or expense which Bank sustains or incurs as a
consequence of an Event of Default, including, without limitation, any
failure of Obligors to pay when due (at maturity, by acceleration or
otherwise) any principal, interest, fee or any other
9
<PAGE>
amount due under this Agreement or the other Loan Documents. If Bank
sustains or incurs any such loss or expense it will from time to time
notify Obligors in writing of the amount determined in good faith by
the Bank to be necessary to indemnify Bank for the loss or expense.
Such amount will be due and payable by Obligors to Bank within ten
(10) days after presentation by Bank of a statement setting forth a
brief explanation of and Bank's calculation of such amount, which
statement shall be conclusively deemed correct absent manifest error.
Any amount payable to the Bank under this Section will bear interest
at the highest default rate payable under the Revolving and Term
Credit Facilities from the due date until paid, both before and after
judgment.
In the event that any present or future law, rule, regulation,
treaty or official directive or the interpretation or application
thereof by any central bank, monetary authority or governmental
authority, or the compliance with any guideline or request of any
central bank, monetary authority or governmental authority (whether or
not having the force of law):
(a) subjects Bank to any tax with respect to any amounts
payable under this Agreement or the other Loan Documents by
Obligors or otherwise with respect to the transactions
contemplated under this Agreement or the other Loan Documents
(except for taxes on the overall net income of Bank imposed by
the United States of America or any political subdivision
thereof); or
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit, capital maintenance, capital
adequacy, or similar requirement against assets held by, or
deposits in or for the account of, or loans or advances or
commitment to make loans or advances by, or letters of credit
issued or commitment to issue letters of credit by, the Bank; or
(c) imposes upon Bank any other condition with respect to
advances or extensions of credit or the commitment to make
advances or extensions of credit under this Agreement,
and the result of any of the foregoing is to increase the costs
of Bank, reduce the income receivable by or return on equity of Bank
or impose any expense upon Bank with respect to any advances or
extensions of credit or commitments to make advances or extensions of
credit under this Agreement, Bank shall so notify Obligors in writing.
Obligors agree to pay Bank the amount of such increase in cost,
reduction in income, reduced return on equity or capital, or
additional expense (such amount being the "REIMBURSEMENT AMOUNT")
suffered or incurred by Bank within thirty (30) days after
presentation by Bank of a statement concerning such increase in cost,
reduction in income, reduced return on equity or capital, or
additional expense. Such statement shall set forth a brief
explanation of the Reimbursement Amount and Bank's calculation of the
Reimbursement Amount (in determining such Reimbursement Amount the
Bank may use any reasonable averaging and attribution methods), which
statement shall be conclusively deemed correct absent manifest error.
Notwithstanding the foregoing, if an event of the nature described in
10
<PAGE>
SECTION 3.11(a), (b) OR (c) above occurs, Obligors shall have the
---------------------------
right to repay in full all Bank Indebtedness without any prepayment
premium (other than the Prepayment Fee and an amount equal to the
economic loss suffered by Bank with respect to that portion of the
Bank Indebtedness accruing interest at the Line LIBOR Rate at the time
of such prepayment), provided that, (i) within thirty (30) days of the
presentation of such statement to Obligors, Obligors pay to Bank the
Reimbursement Amount then due Bank through such date, (ii) such
repayment to Bank is made on or before the one hundred twentieth
(120th) day following the presentation of such statement to Obligors,
and (iii) at the time of such repayment, Obligors shall also pay to
Bank the Reimbursement Amount then due Bank through the date of such
repayment.
If the amount set forth in such statement is not paid in full as
set forth above within thirty (30) days after such presentation of
such statement, or the amount due in connection with a repayment of
the Bank Indebtedness as described above is not paid in full within
one hundred twenty (120) days after such presentation of such
statement, interest will be payable on the unpaid amount at the
highest default rate payable hereunder until paid, both before and
after judgment."
6. NEW FACILITIES. SECTION 6.27 of the Loan Agreement is amended to
-------------- ------------
read, in its entirety, as follows:
"6.27 NEW FACILITIES. During any fiscal year, Obligors shall not
--------------
establish more than five (5) newly constructed educational facilities that
Obligors will own or which otherwise appear as an asset on any Obligor's
balance sheet. During any fiscal year, Obligors will not acquire more than
five (5) parcels of land for the construction of facilities nor expend in
excess of Two Million Five Hundred Thousand Dollars ($2,500,000.00) in the
aggregate for such land acquisition."
7. FINANCIAL REPORTING. SECTION 8 of the Loan Agreement is amended as
------------------- ---------
follows:
a. By amending SECTION 8.2 to read, in its entirety, as follows:
-----------
"8.2 PROJECTIONS AND CASH FLOW. As soon as available and in any
-------------------------
event prior to (a) December 31 of each fiscal year of Obligors,
projections and cash flows on a month-by-month basis for the next
succeeding twelve (12) months, and (b) August 15 of each fiscal year
of Obligors, a restatement of the most recently delivered projections
showing Obligors' actual operating results through the first two (2)
quarters of such year and, to the extent necessary, revised
projections for the last two (2) quarters of such year, prepared by
the controller or chief financial officer of Obligors in form and
content satisfactory to Bank and in such detail so that, among other
things, core, new and acquired school performance are distinguished
from one another. Obligors have furnished to Bank initial projections
dated as of the date hereof and attached hereto as SCHEDULE 8.2
------------
containing the information required by this SECTION 8.2. Obligors
-----------
represent and covenant that (a) the initial projections attached
hereto have been and all projections required by this SECTION 8.2
-----------
shall be prepared by the controller or chief financial officer of
Obligors and represent, and in the future shall represent, the best
available good faith estimate of Obligors regarding the course of
Obligors' business for the periods covered thereby; (b) the
assumptions set forth in the initial projections are and the
assumptions set forth in the future
11
<PAGE>
projections delivered hereafter shall be reasonable and realistic
based on then current economic conditions; (c) Obligors know of no
reason why Obligors should not be able to achieve the performance
levels set forth in the initial projections and Obligors shall have no
knowledge at the time of delivery of future projections of any reason
why Obligors shall not be able to meet the performance levels set
forth in said projections; and (d) Obligors have sufficient capital as
may be required for their ongoing businesses and to pay their existing
and anticipated debts as they mature."
b. By amending SECTION 8.11 to read, in its entirety, as follows:
------------
"8.11 PROFIT AND LOSS PER FACILITY. As soon as available and in
----------------------------
any event within (a) forty-five (45) days after the end of each of the
first three (3) fiscal quarters of Obligors during each year and (b)
ninety (90) days after the end of the fourth fiscal quarter of
Obligors during each year, quarterly profit and loss statements for
each district (or region, if there is no district) operated by
Obligors, in form and content satisfactory to Bank."
8. DEFINITIONS. SECTION 14 of the Loan Agreement is amended as follows:
----------- ----------
a. By amending SECTION 14.23 to read, in its entirety, as follows:
-------------
"14.23 FLOATING RATE MARGIN shall mean (a) during the period
--------------------
from December 22, 1997 through and including March 31, 1998 (the
"INITIAL PERIOD"), twenty-five (25) basis points, and (b) during the
period commencing April 1, 1998 and thereafter (the "SUBSEQUENT
PERIOD"), one of the following margins determined based on the ratio
of Obligors' Total Funded Indebtedness to EBITDA from time to time:
RATIO OF TOTAL FUNDED INDEBTEDNESS FLOATING RATE
TO EBITDA MARGIN
---------------------------------- -------------
3.5 to 1.0, but 4.0 to 1.0 25 basis points
2.5 to 1.0, but less than 3.5 to 1.0 0 basis points
1.5 to 1.0, but less than 2.5 to 1.0 -25 basis points
less than 1.5 to 1.0 -50 basis points
The Floating Rate Margin during the Subsequent Period shall be
determined on a quarterly basis effective upon the receipt, review and
approval by Bank of Obligors' financial statements for such quarter,
which financial statements shall include, inter alia, a calculation of
Obligors' Total Funded Indebtedness to EBITDA as of the end of such
quarter. If Obligors fail to deliver to Bank the foregoing financial
statements, the Floating Rate Margin shall be highest margin set forth
above."
b. By amending SECTION 14.30 to read, in its entirety, as follows:
-------------
12
<PAGE>
"14.30 "LIBOR RATE MARGIN" shall mean (a) during the Initial
-------------------
Period, two hundred twenty-five (225) basis points, and (b) during the
Subsequent Period, one of the following margins determined based on
the ratio of Obligors' Total Funded Indebtedness to EBITDA from time
to time:
RATIO OF TOTAL FUNDED INDEBTEDNESS FLOATING RATE
TO EBITDA MARGIN
---------------------------------- -------------
3.5 to 1.0, but 4.0 to 1.0 225 basis points
2.5 to 1.0, but less than 3.5 to 1.0 175 basis points
1.5 to 1.0, but less than 2.5 to 1.0 150 basis points
less than 1.5 to 1.0 125 basis points
The LIBOR Rate Margin during the Subsequent Period shall be
determined on a quarterly basis effective upon the receipt, review and
approval by Bank of Obligors' financial statements for such quarter,
which financial statements shall include, inter alia, a calculation of
Obligors' Total Funded Indebtedness to EBITDA as of the end of such
quarter. If Obligors fail to deliver to Bank the foregoing financial
statements, the LIBOR Rate Margin shall be highest margin set forth
above."
c. By amending SECTION 14.36 to read, in its entirety, as follows:
-------------
"14.36 "PERMITTED ACQUISITIONS" shall mean an acquisition by any
------------------------
Obligor in which the purchase price for the entity or assets being
acquired is less than Two Million Five Hundred Thousand Dollars
($2,500,000.00)."
9. RESTRUCTURE CHARGE. During Obligors' fiscal year ending December 31,
------------------
1997, a non-recurring restructure charge in a maximum amount of Three Million
Eight Hundred Ninety-Four Thousand Dollars ($3,894,000.00) (including gross
extraordinary expenses) will be expensed by Obligors. For the purposes of
determining Obligors' compliance with the financial covenants in SECTION 7 of
---------
the Loan Agreement for the twelve (12) month period ending December 31, 1997
(and any portion thereof included in any rolling four (4) quarter calculations
for any subsequent periods) only, the foregoing restructure charge shall be
omitted. The components of the foregoing restructure charge are subject to the
approval of Bank.
10. ACQUISITIONS.
------------
a. Obligors shall not make any acquisitions of the ownership interest
or assets of another Person (including, without limitation, any Permitted
Acquisition) unless and until the properties owned by Nobel located in
Sterling, Virginia and Sacramento, California have been sold and all
proceeds of such sales, net only of sums approved by Bank, have been paid
to Bank to reduce the Bank Indebtedness. Obligors represent to Bank that
the aggregate gross proceeds from the sales of such properties shall be
approximately Six Million Dollars ($6,000,000.00), but in no event less
than Five Million Five Hundred Thousand Dollars ($5,500,000.00).
13
<PAGE>
b. Prior to making any Permitted Acquisition and in addition to all
other requirements set forth in the Loan Agreement with respect thereto,
Obligors shall deliver to Bank a certificate in form and content
satisfactory to Bank stating that the acquisition is a Permitted
Acquisition.
11. ASSET MANAGEMENT ACCOUNT. Contemporaneously with the execution of
------------------------
this Amendment, Bank and Obligors will execute that certain Summit Asset
Management Account Supplemental Agreement for Line of Credit (the "SUPPLEMENTAL
AGREEMENT") in connection with Revolving and Term Facility A. The terms and
conditions of the Supplemental Agreement are incorporated in the Loan Agreement
by this reference thereto and the term "LOAN DOCUMENTS" shall hereafter be
deemed to include, without limitation, the Supplemental Agreement In the event
of any inconsistencies between the terms and conditions of the Loan Agreement
and the Supplemental Agreement, the terms and conditions of the Loan Agreement
shall control (except for any inconsistencies with respect to SECTION 2.3 of the
-----------
Supplemental Agreement, which shall be controlled by the Supplemental
Agreement). All other terms and conditions of the Supplemental Agreement are in
full force and effect and are hereby ratified and confirmed by Bank and
Obligors.
12. FEE. Contemporaneously with the execution of this Amendment, Obligors
---
shall pay to Bank a fee in an amount equal to Thirty Thousand Dollars
($30,000.00). Bank is hereby authorized to deduct such fee from any deposit
account of any Obligor maintained with Bank; provided, however, to the extent of
availability therein, Bank shall deduct such fee first from Nobel's account with
Bank.
13. NEW NOTES. Contemporaneously with the execution of this Amendment,
---------
Obligors shall execute and deliver to Bank Revolving and Term Facility Note A
and Revolving and Term Facility Note B, which notes shall re-evidence the
existing indebtedness of Obligors to Bank as restructured under the Revolving
and Term Facilities. Revolving and Term Facility Note A and Revolving and Term
Facility Note B merely re-evidence the indebtedness previously evidenced by the
Line Note, the Term Notes and the Nobel Note, and are given in substitution of,
and not as payment for or as a novation of the Line Note, the Term Notes or the
Nobel Notes. Bank will stamp the Line Note, the Term Notes and the Nobel Note
to show that they have has been re-evidenced and succeeded.
14. FURTHER ASSURANCES. Obligors covenant and agree to execute and
------------------
deliver to Bank or to cause to be executed and delivered at the sole cost and
expense of Obligors, from time to time, any and all other documents, agreements,
statements, certificates and information as Bank shall reasonably request to
evidence or effect the terms hereof, the Loan Agreement, as amended, or any of
the other Loan Documents, or to enforce or to protect Bank's interest in the
Collateral. All such documents, agreements, statements, etc., shall be in form
and content acceptable to Bank in its sole discretion.
15. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors do hereby:
--------------------------------------
a. ratify, confirm and acknowledge that the Loan Agreement, as
amended, and the other Loan Documents continue to be and are valid, binding
and in full force and effect;
b. covenant and agree to perform all obligations of Obligors
contained herein and under the Loan Agreement, as amended, and the other
Loan Documents;
c. acknowledge and agree that Obligors have no defense, set-off,
counterclaim or challenge against the payment of any sums owing under Loan
Documents, the enforcement of any of the terms of the Loan Agreement, as
amended, or the other Loan Documents;
14
<PAGE>
d. acknowledge and agree that all representations and warranties of
Obligors contained in the Loan Agreement and/or the other Loan Documents,
as amended, are true, accurate and correct on and as of the date hereof as
if made on and as of the date hereof, provided that the Schedules to
Article 5 of the Loan Agreement shall be as attached hereto;
e. represent and warrant that no Event of Default (as defined in the
Loan Agreement or any of the other Loan Documents) or event which with the
giving of notice or passage of time or both would constitute such an Event
of Default exists and all information described in the foregoing Background
is true, accurate and complete;
f. acknowledge and agree that nothing contained herein and no actions
taken pursuant to the terms hereof is intended to constitute a novation of
the Loan Agreement or any of the other Loan Documents, and does not
constitute a release, termination or waiver of any of the rights or
remedies granted to the Bank therein, which rights and remedies are hereby
ratified, confirmed, extended and continued as security for the obligations
of Obligors to Bank under the Loan Agreement and the other Loan Documents,
including, without limitation, this Amendment; and
g. acknowledge and agree that any Obligor's failure to comply with or
perform any of its covenants, agreements or obligations contained in this
Amendment shall constitute an Event of Default under the Loan Agreement and
each of the Loan Documents.
16. COSTS AND EXPENSES. Upon execution of this Amendment, Obligors shall
------------------
pay to Bank, all costs and expenses incurred by Bank in connection with the
review, preparation and negotiation of this Amendment and all documents in
connection therewith, including, without limitation, all of Bank's attorneys'
fees and out-of-pocket expenses.
17. INCONSISTENCIES. To the extent of any inconsistency between the
---------------
terms, conditions and provisions of this Amendment and the terms, conditions and
provisions of the Loan Agreement or the other Loan Documents, the terms,
conditions and provisions of this Amendment shall prevail. All terms,
conditions and provisions of the Loan Agreement and the other Loan Documents not
inconsistent herewith shall remain in full force and effect and are hereby
ratified and confirmed by Obligors.
18. CONSTRUCTION. All references to the Loan Agreement therein or in
------------
any other Loan Documents shall be deemed to be a reference to the Loan Agreement
as amended hereby.
19. NO WAIVER. Nothing contained herein and no actions taken pursuant to
---------
the terms hereof are intended to nor shall they constitute a waiver by the Bank
of any rights or remedies available to Bank at law or in equity or as provided
in the Loan Agreement or the other Loan Documents.
20. BINDING EFFECT. This Amendment shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and assigns.
21. GOVERNING LAW. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
22. HEADINGS. The headings of the sections of this Amendment are inserted
--------
for convenience only and shall not be deemed to constitute a part of this
Amendment.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date first above written.
NOBEL EDUCATION DYNAMICS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
IMAGINE EDUCATIONAL PRODUCTS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
MERRYHILL SCHOOLS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
[SIGNATURES CONTINUED ON NEXT PAGE]
16
<PAGE>
EDUCO, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
NEDI, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
MONTESSORI HOUSE, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
ANOTHER GENERATION ENTERPRISES, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ______________________________
Name/Title: ____________________________
SUMMIT BANK
By: ___________________________________
Janet L. Helms, Vice-President
17
<PAGE>
REVOLVING AND TERM FACILITY NOTE A
----------------------------------
$3,000,000.00 Media, Pennsylvania
Dated: December 22, 1997
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned
("BORROWER"), hereby promises to pay to the order of SUMMIT BANK ("BANK") the
principal sum of Three Million Dollars ($3,000,000.00), or such greater or
lesser principal amount as may be outstanding from time to time under Revolving
and Term Facility A established by Bank for the benefit of Borrower pursuant to
the terms of that certain Loan and Security Agreement dated August 30, 1995
between Borrower and Bank (such Loan and Security Agreement, as the same may
have been and may hereafter be amended, supplemented or restated from time to
time, being the "LOAN AGREEMENT"), together with interest thereon, upon the
following terms:
1. REVOLVING AND TERM FACILITY NOTE A. This Note is the "REVOLVING AND
----------------------------------
TERM FACILITY NOTE A" as defined in the Loan Agreement and, as such, shall be
construed in accordance with all terms and conditions thereof. Capitalized
terms not defined herein shall have such meaning as provided in the Loan
Agreement. This Note is entitled to all the rights and remedies provided in the
Loan Agreement and the Loan Documents and is secured by all collateral as
described therein.
2. INTEREST RATE. Interest on the unpaid principal balance hereof will
-------------
accrue from the date of advance until final payment thereof at the applicable
rates per annum described in SECTION 2.1 of the Loan Agreement.
-----------
3. DEFAULT INTEREST. Interest will accrue on the outstanding principal
----------------
amount hereof, following the occurrence of an Event of Default, until paid at
the applicable rate per annum described in SECTION 2.9 of the Loan Agreement
-----------
(the "DEFAULT RATE").
4. POST JUDGMENT INTEREST. Any judgment obtained for sums due hereunder
----------------------
or under the Loan Documents will accrue interest at the Default Rate until paid.
5. COMPUTATION. Interest will be computed on the basis of a year of
-----------
three hundred sixty (360) days and paid for the actual number of days elapsed.
6. PAYMENTS. Principal and interest hereunder shall be paid in the
--------
manner provided for in SECTION 3 of the Loan Agreement.
---------
7. PLACE OF PAYMENT. Principal and interest hereunder shall be payable
----------------
as provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
8. DEFAULT; REMEDIES. Upon the occurrence of an Event of Default or
-----------------
expiration of the Contract Period, Bank, at its option and without notice to
Borrower, may declare immediately due and payable the entire unpaid balance of
principal and all other sums due by Borrower hereunder or under the Loan
Documents, together with interest accrued thereon at the applicable rate
specified above. Payment thereof may be enforced and recovered in whole or in
part at any time and from time to time by one or more of the remedies provided
to Bank in this Note or in the Loan Documents or as otherwise provided at law or
in equity, all of which remedies are cumulative and concurrent.
<PAGE>
9. WAIVERS. BORROWER AND ALL ENDORSERS, JOINTLY AND SEVERALLY, WAIVE
-------
PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DEMAND, NOTICE OF NONPAYMENT OR
DISHONOR, PROTEST AND NOTICE OF PROTEST OF THIS NOTE, AND ALL OTHER NOTICES IN
CONNECTION WITH THE DELIVERY, ACCEPTANCE, PERFORMANCE, DEFAULT OR ENFORCEMENT OF
THE PAYMENT OF THIS NOTE, EXCEPT FOR SUCH NOTICES, IF ANY, AS ARE EXPRESSLY
REQUIRED TO BE DELIVERED BY BANK TO BORROWER UNDER THE LOAN AGREEMENT.
10. MISCELLANEOUS. If any provisions of this Note shall be held invalid
-------------
or unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon
Borrower and upon Borrower's successors and assigns and shall benefit Bank and
its successors and assigns. The prompt and faithful performance of all of
Borrower's obligations hereunder, including without limitation, time of payment,
is of the essence of this Note.
11. JOINT AND SEVERAL LIABILITY. All agreements, conditions, covenants
---------------------------
and provisions of this Note shall be the joint and several obligation of each
Borrower.
12. CONFESSION OF JUDGMENT. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
----------------------
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER THE OCCURRENCE OF AN
EVENT OF DEFAULT UNDER THE LOAN AGREEMENT OR EXPIRATION OF THE CONTRACT PERIOD
IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE OR THE LOAN DOCUMENTS AT THE
SUIT OF BANK, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED, WITHOUT STAY OF
EXECUTION, AS OF ANY TERM OR TIME, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST BORROWER FOR THE ENTIRE UNPAID OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE
AND ALL OTHER SUMS TO BE PAID BY BORROWER TO OR ON BEHALF OF BANK PURSUANT TO
THE TERMS HEREOF OR OF THE LOAN DOCUMENTS AND ALL ARREARAGES OF INTEREST
THEREON, TOGETHER WITH ALL COSTS AND OTHER EXPENSES AND AN ATTORNEY'S COLLECTION
COMMISSION OF FIFTEEN PERCENT (15%) OF THE AGGREGATE AMOUNT OF THE FOREGOING
SUMS, BUT IN NO EVENT LESS THAN $5,000.00; AND FOR SO DOING THIS NOTE OR A COPY
HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY
ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL
PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER. BORROWER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE EXECUTION AND DELIVERY OF
THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE ENTRY
OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL
BECOME A LIEN ON ALL REAL PROPERTY OF BORROWER IN THE COUNTY WHERE SUCH JUDGMENT
IS ENTERED.
13. PRIOR NOTES. Borrower acknowledges and agrees that this Note,
-----------
together with Revolving and Term Facility Note B, re-evidences the indebtedness
previously evidenced by the Line Note, the Term
<PAGE>
Note, the New Term Note and the Nobel Note and is given in substitution of, and
not as payment for, the Line Note, the Term Note and the New Term Note and shall
not be deemed a novation thereof.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
NOBEL EDUCATION DYNAMICS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
IMAGINE EDUCATIONAL PRODUCTS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
MERRYHILL SCHOOLS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
EDUCO, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
NEDI, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
MONTESSORI HOUSE, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
ANOTHER GENERATION ENTERPRISES, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
<PAGE>
REVOLVING AND TERM FACILITY NOTE B
----------------------------------
$22,000,000.00 Media, Pennsylvania
Dated: December 22, 1997
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned
("BORROWER"), hereby promises to pay to the order of SUMMIT BANK ("BANK") the
principal sum of Twenty-Two Million Dollars ($22,000,000.00), or such greater or
lesser principal amount as may be outstanding from time to time under Revolving
and Term Facility B established by Bank for the benefit of Borrower pursuant to
the terms of that certain Loan and Security Agreement dated August 30, 1995
between Borrower and Bank (such Loan and Security Agreement, as the same may
have been and may hereafter be amended, supplemented or restated from time to
time, being the "LOAN AGREEMENT"), together with interest thereon, upon the
following terms:
1. REVOLVING AND TERM FACILITY NOTE B. This Note is the "REVOLVING AND
----------------------------------
TERM FACILITY NOTE B" as defined in the Loan Agreement and, as such, shall be
construed in accordance with all terms and conditions thereof. Capitalized
terms not defined herein shall have such meaning as provided in the Loan
Agreement. This Note is entitled to all the rights and remedies provided in the
Loan Agreement and the Loan Documents and is secured by all collateral as
described therein.
2. INTEREST RATE. Interest on the unpaid principal balance hereof will
-------------
accrue from the date of advance until final payment thereof at the applicable
rates per annum described in SECTION 2.2 of the Loan Agreement.
-----------
3. DEFAULT INTEREST. Interest will accrue on the outstanding principal
----------------
amount hereof, following the occurrence of an Event of Default, until paid at
the applicable rate per annum described in SECTION 2.9 of the Loan Agreement
-----------
(the "DEFAULT RATE").
4. POST JUDGMENT INTEREST. Any judgment obtained for sums due hereunder
----------------------
or under the Loan Documents will accrue interest at the Default Rate until paid.
5. COMPUTATION. Interest will be computed on the basis of a year of
-----------
three hundred sixty (360) days and paid for the actual number of days elapsed.
6. PAYMENTS. Principal and interest hereunder shall be paid in the
--------
manner provided for in SECTION 3 of the Loan Agreement.
---------
7. PLACE OF PAYMENT. Principal and interest hereunder shall be payable
----------------
as provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
8. DEFAULT; REMEDIES. Upon the occurrence of an Event of Default or
-----------------
expiration of the Contract Period, Bank, at its option and without notice to
Borrower, may declare immediately due and payable the entire unpaid balance of
principal and all other sums due by Borrower hereunder or under the Loan
Documents, together with interest accrued thereon at the applicable rate
specified above. Payment thereof may be enforced and recovered in whole or in
part at any time and from time to time by one or more of the remedies provided
to Bank in this Note or in the Loan Documents or as otherwise provided at law or
in equity, all of which remedies are cumulative and concurrent.
<PAGE>
9. WAIVERS. Borrower and all endorsers, jointly and severally, waive
-------
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note, except for such notices, if any, as are expressly
required to be delivered by Bank to Borrower under the Loan Agreement.
10. MISCELLANEOUS. If any provisions of this Note shall be held invalid
-------------
or unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon
Borrower and upon Borrower's successors and assigns and shall benefit Bank and
its successors and assigns. The prompt and faithful performance of all of
Borrower's obligations hereunder, including without limitation, time of payment,
is of the essence of this Note.
11. JOINT AND SEVERAL LIABILITY. All agreements, conditions, covenants
---------------------------
and provisions of this Note shall be the joint and several obligation of each
Borrower.
12. CONFESSION OF JUDGMENT. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
----------------------
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER THE OCCURRENCE OF AN
EVENT OF DEFAULT UNDER THE LOAN AGREEMENT OR EXPIRATION OF THE CONTRACT PERIOD
IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE OR THE LOAN DOCUMENTS AT THE
SUIT OF BANK, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED, WITHOUT STAY OF
EXECUTION, AS OF ANY TERM OR TIME, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST BORROWER FOR THE ENTIRE UNPAID OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE
AND ALL OTHER SUMS TO BE PAID BY BORROWER TO OR ON BEHALF OF BANK PURSUANT TO
THE TERMS HEREOF OR OF THE LOAN DOCUMENTS AND ALL ARREARAGES OF INTEREST
THEREON, TOGETHER WITH ALL COSTS AND OTHER EXPENSES AND AN ATTORNEY'S COLLECTION
COMMISSION OF FIFTEEN PERCENT (15%) OF THE AGGREGATE AMOUNT OF THE FOREGOING
SUMS, BUT IN NO EVENT LESS THAN $5,000.00; AND FOR SO DOING THIS NOTE OR A COPY
HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY
ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL
PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER. BORROWER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE EXECUTION AND DELIVERY OF
THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE ENTRY
OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL
BECOME A LIEN ON ALL REAL PROPERTY OF BORROWER IN THE COUNTY WHERE SUCH JUDGMENT
IS ENTERED.
13. PRIOR NOTES. Borrower acknowledges and agrees that this Note,
-----------
together with Revolving and Term Facility Note A, re-evidences the indebtedness
previously evidenced by the Line Note, the Term
<PAGE>
Note, the New Term Note and the Nobel Note and is given in substitution of, and
not as payment for, the Line Note, the Term Note and the New Term Note and shall
not be deemed a novation thereof.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
NOBEL EDUCATION DYNAMICS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
IMAGINE EDUCATIONAL PRODUCTS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
MERRYHILL SCHOOLS, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
EDUCO, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
NEDI, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
MONTESSORI HOUSE, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
ANOTHER GENERATION ENTERPRISES, INC.
By: ___________________________________
Name/Title: ____________________________
[CORPORATE SEAL]
Attest: ___________________________
Name/Title: ____________________________
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
1995 STOCK INCENTIVE PLAN
EFFECTIVE DATE: JUNE 21, 1995
AS AMENDED: JUNE 12, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1 Purpose ....................................................... 1
SECTION 2 Administration................................................. 1
SECTION 3 Eligibility.................................................... 2
SECTION 4 Stock.......................................................... 3
SECTION 5 Granting of Options to Key Employees........................... 3
SECTION 6 Granting of NQSOs to Outside Directors......................... 4
SECTION 7 Annual Limit for ISOs.......................................... 4
SECTION 8 Options and SARs............................................... 5
SECTION 9 Restricted Stock Awards........................................ 10
SECTION 10 Unrestricted Stock Awards...................................... 12
SECTION 11 Capital Adjustments............................................ 12
SECTION 12 Change in Control.............................................. 13
SECTION 13 Amendment or Discontinuance of the Plan........................ 14
SECTION 14 Termination of Plan............................................ 15
SECTION 15 Shareholder Approval........................................... 15
SECTION 16 Miscellaneous.................................................. 15
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
1995 STOCK INCENTIVE PLAN
-------------------------
SECTION 1
PURPOSE
-------
This NOBEL EDUCATION DYNAMICS, INC. 1995 STOCK INCENTIVE PLAN ("Plan") is
intended to provide a means whereby NOBEL EDUCATION DYNAMICS, INC. ("Company")
and any Subsidiary of the Company (as hereinafter defined) may, through the
grant of incentive stock options and non-qualified stock options (collectively
"Options"), stock appreciation rights ("SARs"), stock subject to restrictions
("Restricted Stock") and stock not subject to restrictions ("Unrestricted
Stock") to Key Employees and Outside Directors (both as defined in Section 3),
attract and retain such Key Employees and Outside Directors and motivate such
individuals to exercise their best efforts on behalf of the Company and of any
Subsidiary.
As used in the Plan, the term "incentive stock option" ("ISO") means an
Option which qualifies as an incentive stock option within the meaning of
section 422 of the Internal Revenue Code of 1986, as amended from time to time
(the "Code"), at the time it is granted and which is either designated as an ISO
in the Option Agreement (as hereinafter defined) covering such Option or which
is designated as an ISO by the Committee (as defined in Section 2 hereof) at the
time of grant. The term "non-qualified stock option" ("NQSO") means any other
Option granted under the Plan. The term "Subsidiary" means any corporation
(whether or not in existence at the time the Plan is adopted) which, at the time
an Award is granted, is a subsidiary of the Company under the definition of
"subsidiary corporation" contained in section 424(f) of the Code, or any
successor thereto.
SECTION 2
ADMINISTRATION
--------------
The Plan shall be administered by the Company's Compensation Committee (the
"Committee"), which shall consist of two or more Outside Directors who shall be
appointed by, and shall serve at the pleasure of, the Company's Board of
Directors (the "Board"). Each member of the Committee, while serving as such,
shall be deemed to be acting in his capacity as a director of the Company.
Except as otherwise permitted under Section 6 and under section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), and paragraph (c)(2)(i) of
Rule 16b-3 thereunder, no member of the Committee shall be granted, nor shall
have been granted, Awards (as defined below) pursuant to the Plan or equity
securities (within the meaning of 17 C.F.R. (S)240.16a-1(d)) pursuant to any
other plan of the Company or of any of its affiliates, as defined in or under
the Exchange Act, at any time during the period commencing with the date which
is one year prior to the date his service on the Committee began and ending on
the date which is one day after the date on which his service on the Committee
ceased. Each member of the Committee shall also be an "outside director" within
the meaning of Prop. Treas. Reg. (S) 1.162-27(e)(3), or any successor thereto.
<PAGE>
The Committee shall have full and final authority in its absolute
discretion, subject to the terms of the Plan, to select the Key Employees to be
granted ISOs, NQSOs, SARs, Restricted Stock and Unrestricted Stock (collectively
"Awards") under the Plan, to grant Awards on behalf of the Company, and to set
the date of grant and the other terms of such Awards. With respect to the
eligibility of Outside Directors, the Plan is intended to comply with Rule 16b-3
and its successors promulgated under the Exchange Act as a "formula award" plan
described in Rule 16b-3(c)(2)(ii), and any provision of this Plan applicable to
Outside Directors that is to the contrary shall be deemed null and void.
Consequently, the award of Options to Outside Directors shall be as set forth in
Section 6, and the Committee shall not have any discretionary authority with
respect thereto.
The Committee may correct any defect, supply any omission and reconcile any
inconsistency in the Plan and in any Award granted hereunder in the manner and
to the extent it shall deem desirable. The Committee also shall have the
authority to establish such rules and regulations, not inconsistent with the
provisions of the Plan, for the proper administration of the Plan, and to amend,
modify or rescind any such rules and regulations, and to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations, determinations and
interpretations shall be binding and conclusive upon the Company, its
shareholders and all officers and employees and former officers and employees,
and upon their respective legal representatives, beneficiaries, successors and
assigns and upon all other persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Award granted
hereunder.
SECTION 3
ELIGIBILITY
-----------
(a) IN GENERAL. Key Employees and Outside Directors shall be eligible to
----------
receive Awards under the Plan. Key Employees and Outside Directors who have
been granted an Award under the Plan shall be referred to as "Grantees." More
than one Award may be made to a Grantee under the Plan.
(b) KEY EMPLOYEES. Key Employees are (1) officers of the Company or a
-------------
Subsidiary, (2) school principals, center directors, and regional managers of
the Company or a Subsidiary, and (3) any other employees of the Company or a
Subsidiary so designated by the Committee. Key Employees shall be eligible to
receive any type of Award available under the Plan.
(c) OUTSIDE DIRECTORS. Outside Directors are directors of the Company who
-----------------
are not officers or employees thereof. Outside Directors shall only be eligible
to receive NQSOs pursuant to Section 6.
2
<PAGE>
SECTION 4
STOCK
-----
The number of common shares of the Company, par value $.001 per share
("Common Shares"), that may be subject to Awards under the Plan shall be 750,000
shares (such number of shares reflecting adjustment for effectiveness of the
Company's Plan of Recapitalization effected on September 28, 1995), subject to
adjustment as hereinafter provided; provided that no Key Employee shall receive
Options for more than 40,000 Common Shares (such number of shares also
reflecting adjustment for effectiveness of the Company's Plan of
Recapitalization) during any calendar year (i.e., any period from January 1
through December 31 of the same year). Common Shares issuable under the Plan
may be authorized but unissued shares or reacquired shares, as the Company may
determine from time to time.
Any Common Shares subject to an Option which expires or otherwise
terminates for any reason whatever (including, without limitation, the Key
Employee's surrender thereof) without having been exercised, and any shares of
Restricted Stock which are forfeited, shall continue to be available for the
granting of Awards under the Plan; provided, however, that (a) if an Option is
cancelled, the Common Shares covered by the cancelled Option shall be counted
against the maximum number of shares specified in this Section 4 for which
Options may be granted to a single Key Employee, and (b) if the exercise price
of an Option is reduced after the date of grant, the transaction shall be
treated as a cancellation of the original Option and the grant of a new Option
for purposes of counting the maximum number of shares for which Options may be
granted to a Key Employee. Common Shares subject to an Option cancelled upon
the exercise of a SAR shall not again be available for Awards under the Plan.
SECTION 5
GRANTING OF OPTIONS TO KEY EMPLOYEES
------------------------------------
From time to time until the expiration or earlier suspension or
discontinuance of the Plan, the Committee may, on behalf of the Company, grant
to Key Employees under the Plan such Options as it determines are warranted,
subject to the limitations of the Plan; provided, however, that grants of ISOs
and NQSOs shall be separate and not in tandem. The granting of an Option under
the Plan shall not be deemed either to entitle the Key Employee to, or to
disqualify the Key Employee from, any other Awards under the Plan. In making
any determination as to whether a Key Employee shall be granted an Option, the
type of Option to be granted, and the number of Common Shares to be covered by
the Option, the Committee shall take into account the duties of the Key
Employee, his present and potential contributions to the success of the Company
or a Subsidiary, the tax implications to the Company and the Key Employee of any
Options granted, and such other factors as the Committee shall deem relevant in
accomplishing the purposes of the Plan. Moreover, the Committee may provide in
the Option Agreement that the Option may be exercised only if certain
conditions, as determined by the Committee, are fulfilled.
3
<PAGE>
SECTION 6
GRANTING OF NQSOS TO OUTSIDE DIRECTORS
--------------------------------------
As of March 31, 1998 and each March 31 thereafter until the expiration or
earlier suspension or discontinuance of the Plan, each individual serving as an
Outside Director on such date shall be granted a NQSO to purchase 2,000 Common
Shares (such number of shares reflecting adjustment for effectiveness of the
Company's Plan of Recapitalization) (as adjusted pursuant to section 11, if
necessary), provided that (a) the individual served as a director for the entire
fiscal year immediately preceding such March 31, and (b) the Company's pre-tax
income for such fiscal year exceeds by at least 20% the Company's pre-tax income
for the previous fiscal year, as calculated in accordance with generally
accepted accounting principles ("GAAP"). Outside Directors shall also retain
NQSOs which have been granted to them under the Plan in 1996 and 1997.
SECTION 7
ANNUAL LIMIT FOR ISOS
---------------------
(a) ANNUAL LIMIT. The aggregate Fair Market Value (determined as of the
------------
date the ISO is granted) of the Common Shares with respect to which ISOs become
exercisable for the first time by a Key Employee during any calendar year (under
this Plan and any other ISO plan of the Company or any parent corporation
(within the meaning of section 424(e) of the Code ("Parent")) or Subsidiary)
shall not exceed $100,000. The term "Fair Market Value" shall mean the value of
the Common Shares arrived at by a good faith determination of the Committee and
shall be:
(1) The mean between the highest and lowest quoted selling price, if
there is a market for the Common Shares on a registered securities exchange
or in an over the counter market, on the date specified;
(2) The weighted average of the means between the highest and lowest
sales on the nearest date before and the nearest date after the specified
date, if there are no such sales on the specified date but there are such
sales on dates within a reasonable period both before and after the
specified date;
(3) The mean between the bid and asked prices, as reported by the
National Quotation Bureau on the specified date, if actual sales are not
available during a reasonable period beginning before and ending after the
specified date; or
(4) Such other method of determining Fair Market Value as shall be
authorized by the Code, or the rules or regulations thereunder, and adopted
by the Committee.
Where the Fair Market Value of Common Shares is determined under (2)
above, the average of the means between the highest and lowest sales on the
nearest date before and the nearest date after the specified date shall be
weighted inversely by the respective numbers of trading days between the
dates of reported sales and the specified date (i.e.,
----
4
<PAGE>
the valuation date), in accordance with Treas. Reg. (S) 20.2031-2(b)(1), or
any successor thereto.
(b) OPTIONS OVER ANNUAL LIMIT. If an Option intended as an ISO is granted
-------------------------
to a Key Employee and such Option may not be treated in whole or in part as an
ISO pursuant to the limitation in (a) above, such Option shall be treated as an
ISO to the extent it may be so treated under such limitation and as a NQSO as to
the remainder. For purposes of determining whether an ISO would cause such
limitation to be exceeded, ISOs shall be taken into account in the order
granted.
(c) NQSOS, SARS, RESTRICTED STOCK AND UNRESTRICTED STOCK. The annual limit
----------------------------------------------------
set forth above for ISOs shall not apply to NQSOs, SARs, Restricted Stock and
Unrestricted Stock.
SECTION 8
OPTIONS AND SARS
----------------
(a) TERMS AND CONDITIONS OF OPTIONS. The Options granted pursuant to the
-------------------------------
Plan shall include expressly or by reference the following terms and conditions,
as well as such other provisions not inconsistent with the provisions of this
Plan as the Committee shall deem desirable, and for ISOs granted under this
Plan, the provisions of section 422(b) of the Code:
(1) NUMBER OF COMMON SHARES. The Option Agreement shall state the
-----------------------
number of Common Shares to which the Option pertains.
(2) PRICE.
-----
(A) KEY EMPLOYEES. With respect to Options granted to Key
-------------
Employees, the Option exercise price shall be determined and fixed by the
Committee in its discretion at the time of grant, but shall not be less
100% (110% in the case of an ISO granted to a more than 10% shareholder as
provided in Subsection (10) below) of the Fair Market Value of the optioned
Common Shares on the date the Option is granted.
(B) OUTSIDE DIRECTORS. With respect to Options granted to
-----------------
Outside Directors, the Option exercise price shall be the Fair Market Value
of the optioned Common Shares on the date the Option is granted.
(3) TERM.
----
(A) ISOS. Subject to earlier termination as provided in
----
Subsections (5), (6) and (7) below, the term of each ISO shall be not
more than 10 years (5 years
5
<PAGE>
in the case of a more than 10% shareholder as provided in Subsection
(10) below) from the date of grant.
(B) NQSOS GRANTED TO KEY EMPLOYEES. Subject to earlier
------------------------------
termination as provided in Subsections (5), (6) and (7) below, the
term of each NQSO granted to a Key Employee shall be not more than 10
years from the date of grant.
(C) NQSOS GRANTED TO OUTSIDE DIRECTORS. Subject to earlier
----------------------------------
termination as provided in Subsection (8) below, the term of each NQSO
granted to an Outside Director shall be 10 years from the date of grant.
(4) EXERCISE.
--------
(A) OPTIONS GRANTED TO KEY EMPLOYEES. Options granted to Key
--------------------------------
Employees shall be exercisable in such installments and on such dates,
commencing not earlier than 6 months from the later of the date of
grant or the date the Plan is approved by the Company's shareholders,
as the Committee may specify, provided that:
(i) In the case of new Options granted to a Key Employee
in replacement for options (whether granted under the Plan or
otherwise) held by the Key Employee, the new Options may be made
exercisable, if so determined by the Committee, in its
discretion, at the earliest date the replaced options were
exercisable; and
(ii) The Committee may accelerate the exercise date of any
outstanding Options granted to Key Employees in its discretion,
if it deems such acceleration to be desirable.
(B) OPTIONS GRANTED TO OUTSIDE DIRECTORS. Options granted to
------------------------------------
Outside Directors shall be exercisable commencing six months after the
later of the date of grant or the date the Plan is approved by the
Company's shareholders.
(C) GENERAL. Any Common Shares, the right to the purchase of
-------
which has accrued, under an Option may be purchased at any time up to
the expiration or termination of the Option. Exercisable Options may
be exercised, in whole or in part, from time to time by giving written
notice of exercise to the Company at its principal office, specifying
the number of Common Shares to be purchased and accompanied by payment
in full of the aggregate Option exercise price for such shares. Only
full shares shall be issued under the Plan, and any fractional share
which might otherwise be issuable upon the exercise of an Option
granted hereunder shall be forfeited.
6
<PAGE>
(D) MANNER OF PAYMENT. The Option price of an Option granted to
-----------------
an Outside Director shall be payable in cash or its equivalent.
The Option price of an Option granted to a Key Employee shall be
payable:
(i) In cash or its equivalent;
(ii) In the case of an ISO, if the Committee, in its
discretion, causes the Option Agreement so to provide, and in the
case of a NQSO if the Committee, in its discretion, so determines
at or prior to the time of exercise, in Common Shares previously
acquired by the Grantee, provided that (1) if such shares were
acquired through the exercise of an ISO and are used to pay the
Option exercise price of an ISO, such shares have been held by
the Key Employee for a period of not less than the holding period
described in section 422(a)(1) of the Code on the date of
exercise, or (2) if such shares were acquired through the
exercise of a NQSO and are used to pay the Option exercise price
of an ISO, or if such shares were acquired through exercise of a
NQSO or of an option under a similar plan or through exercise of
an ISO and are used to pay the Option exercise price of a NQSO,
or if such shares were acquired under a SAR, or through the grant
of Restricted or Unrestricted Stock, such shares have been held
by the Key Employee for a period of more than 12 months on the
date of exercise; or
(iii) In the discretion of the Committee, in any combination
of (i) and (ii) above.
In the event such Option exercise price is paid, in whole or in
part, with Common Shares, the portion of the Option exercise price so
paid shall equal the Fair Market Value on the date of exercise of the
Common Shares surrendered in payment of such Option exercise price.
(5) EXERCISE UPON TERMINATION OF KEY EMPLOYEE. If a Key Employee's
-----------------------------------------
employment by the Company (and Subsidiaries) is terminated by either party
prior to the expiration date fixed for his or her Option for any reason
other than death or disability, such Option may be exercised, to the extent
of the number of Common Shares with respect to which the Key Employee could
have exercised it on the date of such termination, or to any greater extent
permitted by the Committee, by the Key Employee at any time prior to the
earlier of:
(A) The expiration date specified in such Option; or
(B) Three months after the date of such termination of
employment.
7
<PAGE>
(6) EXERCISE UPON DISABILITY OF KEY EMPLOYEE. If a Key Employee shall
----------------------------------------
become disabled (within the meaning of section 22(e)(3) of the Code) during
his or her employment and, prior to the expiration date fixed for his or
her Option, his or her employment is terminated as a consequence of such
disability, such Option may be exercised, to the extent of the number of
Common Shares with respect to which the Key Employee could have exercised
it on the date of such termination, or to any greater extent permitted by
the Committee, by the Key Employee at any time prior to the earlier of:
(A) The expiration date specified in such Option; or
(B) One year after the date of such termination of employment.
In the event of the Key Employee's legal disability, such Option may
be so exercised by the Key Employee's legal representative.
(7) EXERCISE UPON DEATH OF KEY EMPLOYEE. If a Key Employee shall die
-----------------------------------
during his or her employment and prior to the expiration date fixed for his
or her Option, or if a Key Employee whose employment is terminated for any
reason shall die following his or her termination of employment but prior
to the earliest of:
(A) The expiration date fixed for his or her Option;
(B) The expiration of the period determined under Subsections (5)
and (6) above; or
(C) In the case of an ISO, three months following termination of
employment,
such Option may be exercised, to the extent of the number of Common Shares
with respect to which the Key Employee could have exercised it on the date
of his or her death, or to any greater extent permitted by the Committee,
by the Key Employee's estate, personal representative or beneficiary who
acquired the right to exercise such Option by bequest or inheritance or by
reason of the death of the Key Employee, at any time prior to the earlier
of:
(i) The expiration date specified in such Option; or
(ii One year after the date of death.
(8) EXERCISE UPON TERMINATION OF OUTSIDE DIRECTOR'S SERVICE. If an
-------------------------------------------------------
Outside Director's service on the Board is terminated prior to the
expiration date fixed for his or her Option, such Option may be exercised
by the Outside Director at any time prior to the earlier of:
8
<PAGE>
(A) The expiration date specified in such Option; or
(B) One year after such termination of service.
Notwithstanding the above, if an Outside Director dies during
this period, such Option may be exercised, to the extent of the number
of Common Shares with respect to which the Outside Director could have
exercised it on the date of his or her death, by the Outside
Director's estate, personal representative or beneficiary who acquired
the right to exercise such Option by bequest or inheritance or by
reason of the death of the Outside Director, at any time prior to the
earlier of:
(i) The expiration date specified in such Option; or
(ii) One year after the date of the Outside Director's
death.
(9) RIGHTS AS A SHAREHOLDER. A Grantee shall have no rights as a
-----------------------
shareholder with respect to any Common Shares covered by his or her Option
until the issuance of a stock certificate to him or her for such shares.
(10) TEN PERCENT SHAREHOLDER. If a Key Employee owns more than 10% of
-----------------------
the total combined voting power of all shares of stock of the Company or of
a Subsidiary or Parent at the time an ISO is granted to such Key Employee,
the Option exercise price for the ISO shall be not less than 110% of the
Fair Market Value of the optioned Common Shares on the date the ISO is
granted, and such ISO, by its terms, shall not be exercisable after the
expiration of five years from the date the ISO is granted. The conditions
set forth in this Subsection (10) shall not apply to NQSOs.
(11) OPTION AGREEMENTS. Options granted under the Plan shall be
-----------------
evidenced by written documents ("Option Agreements") in such form as the
Committee shall, from time to time, approve. Option Agreements shall
contain such provisions, not inconsistent with the provisions of the Plan
for NQSOs granted pursuant to the Plan, and such conditions, not
inconsistent with section 422(b) of the Code or the provisions of the Plan,
for ISOs granted pursuant to the Plan, as the Committee shall deem
advisable. An Option Agreement shall specify whether the Option is an ISO
or NQSO; provided, however, if the Option is not designated in the Option
Agreement as an ISO or NQSO, the Option shall constitute an ISO if it
complies with the terms of section 422 of the Code, and otherwise, it shall
constitute a NQSO. Each Grantee who receives an Option shall enter into,
and be bound by, the terms of an Option Agreement.
(b) SARS. An Option Agreement may, in the discretion of the Committee,
----
include a provision under which a Key Employee shall have the right, in lieu of
exercising all or a portion of the Key Employee's Option, to elect instead to
receive an amount equal to the difference between the Fair Market Value of all,
or a specified number, of the Common Shares subject to
9
<PAGE>
such Option on the date such right is exercised and the exercise price under
such Option, such amount to be paid in cash or in Common Shares (based on their
Fair Market Value on the date such right is exercised), or in a combination of
cash and Common Shares, as the Committee shall determine. Such right is referred
to in this Plan as a stock appreciation right ("SAR"). Any SAR shall be
exercisable only at a time when the Option to which it is related is
exercisable; provided, however, that if the Key Employee is a director or
officer of the Company within the meaning of Section 16 of the Exchange Act,
cash may be paid to the Key Employee upon the exercise of a SAR only if the Key
Employee exercises the SAR (by giving the notice described in Section 8(a)(4)(C)
hereof) during the period beginning on the third business day following the
release for publication of the Company's quarterly and annual summary statements
of sales and earnings, and ending on the twelfth business day following such
date.
A SAR shall be granted in tandem with the related Option, and the Option-
SAR shall be considered exercised when, and to the extent that, either the
underlying Option or the SAR is exercised. Any SAR shall be subject to the
following additional conditions:
(1) The SAR will expire no later than the termination of the Option to
which it relates;
(2) The SAR will be transferable only if and when the underlying
Option is transferable, and under the same conditions; and
(3) The SAR may be exercised only when there is a positive spread,
i.e., when the Fair Market Value of the Common Shares subject to the Option
----
exceeds the exercise price of such Option.
SECTION 9
RESTRICTED STOCK AWARDS
-----------------------
From time to time until the expiration or earlier termination of the Plan,
the Committee may, on behalf of the Company, make such Restricted Stock Awards
under the Plan to Key Employees as it determines are warranted. Restricted
Stock Awards shall be subject to the following terms and conditions, as well as
such other terms and conditions as the Committee may prescribe:
(a) VESTING PERIOD; CONDITIONS. At the time of granting a Restricted Stock
--------------------------
Award, the Committee may establish one or more vesting periods ("Vesting
Periods") with respect to the Common Shares covered by the Award. The length of
any such Vesting Period(s) applicable to a Restricted Stock Award shall be
within the discretion of the Committee. At the time of grant, the Committee may
also establish such additional conditions to the payment of a Restricted Stock
Award ("Conditions") as it may deem advisable in its sole discretion, such as
the achievement of corporate or individual goals. Subject to the provisions of
this Section 9 and any other Conditions
10
<PAGE>
prescribed by the Committee, Common Shares subject to a Restricted Stock Award
shall vest in the Key Employee upon the expiration of the Vesting Period with
respect to such Common Shares. The Committee may accelerate the vesting date of
any unvested Common Shares subject to a Restricted Stock Award in its
discretion, if it deems such acceleration to be desirable.
(b) ISSUANCE AND DELIVERY OF CERTIFICATES. Upon the granting of a
-------------------------------------
Restricted Stock Award, the Company may, if so determined by the Committee at
the time of the grant, issue certificates representing the Common Shares subject
to the Restricted Stock Award in the name of the Key Employee. Any such Common
Shares shall bear a legend indicating that they are subject to the terms of the
Plan and the Restricted Stock Award Agreement (as hereinafter defined) and that
they may not be sold, exchanged, transferred, pledged, hypothecated or otherwise
disposed of except in accordance with the terms of the Plan and the Restricted
Stock Award Agreement. Upon issuance of such certificates, the Key Employee
shall immediately execute a stock power or other instrument of transfer,
appropriately endorsed in blank, to be held with the certificates by the Company
pursuant to the terms of the Plan and the Restricted Stock Award Agreement.
Only full shares shall be issued, and any fractional shares which might
otherwise be issuable pursuant to a Restricted Stock Award shall be forfeited.
After the Key Employee becomes vested in Common Shares subject to the Restricted
Stock Award, the Company shall deliver the vested Common Shares to the Key
Employee or his or her beneficiary or estate, as applicable.
(c) RIGHTS AS A SHAREHOLDER. If the Company issues certificates
-----------------------
representing the Common Shares subject to a Restricted Stock Award prior to the
expiration of the Vesting Period for the Common Shares subject to such Award or
prior to the satisfaction of the Conditions, if any, pertaining to such Award,
the Key Employee shall be entitled to receive dividends paid on such Common
Shares, shall have the right to vote such Common Shares, and shall have all
other shareholder's rights with respect to such Common Shares, except that (1)
the Key Employee will not be entitled to delivery of the stock certificate, (2)
the Company will retain custody of the Common Shares, and (3) the Common Shares
subject to the Restricted Stock Award will revert to the Company to the extent
all Vesting Periods and Conditions applicable to such Award are not satisfied.
(d) TERMINATION OF EMPLOYMENT. At the time of granting a Restricted Stock
-------------------------
Award, the Committee shall specify in the Restricted Stock Award Agreement, the
manner of determining the number, if any, of the unvested Common Shares subject
to the Award which shall become vested in the Key Employee, or in his or her
beneficiary or estate, if the Key Employee's employment by the Company (and
Subsidiaries) is terminated prior to the later of the expiration of the Vesting
Period or the satisfaction of all of the Conditions with respect to such Common
Shares. Any Restricted Stock Award Agreement may provide different vesting
provisions upon a Key Employee's termination due to death or disability. Any
remaining unvested Common Shares covered by the Key Employee's Restricted Stock
Award shall immediately be forfeited upon termination of employment, except that
the Committee, if it determines that the circumstances warrant, may direct that
all or a portion of such remaining unvested Common
11
<PAGE>
Shares also be vested in the Key Employee, or in his or her beneficiary or
estate, subject to such further terms and conditions, if any, as the Committee
may determine.
(e) PAYMENT FOR RESTRICTED STOCK. The Committee may, on behalf of the
----------------------------
Company, grant Restricted Stock Awards under which the Key Employee shall not be
required to make any payment for the Restricted Stock or, in the alternative,
under which the Key Employee, as a condition to the Restricted Stock Award,
shall pay all (or any lesser amount than all) of the Fair Market Value of the
Common Stock, determined as of the date the Restricted Stock Award is granted.
If the latter, such purchase price shall be paid as provided in the Restricted
Stock Award Agreement.
(f) RESTRICTED STOCK AWARD AGREEMENT. Restricted Stock Awards under the
--------------------------------
Plan shall be evidenced by written documents ("Restricted Stock Award
Agreements") in such form as the Committee shall, from time to time, approve.
Restricted Stock Award Agreements shall contain such provisions, not
inconsistent with the provisions of the Plan, as the Committee shall deem
advisable. Each Key Employee granted a Restricted Stock Award shall enter into,
and be bound by the terms of, a Restricted Stock Award Agreement.
SECTION 10
UNRESTRICTED STOCK AWARDS
-------------------------
(a) AWARDS OF UNRESTRICTED STOCK. From time to time until the expiration
----------------------------
or earlier termination of the Plan, the Committee may, on behalf of the Company,
make such Unrestricted Stock Awards under the Plan to Key Employees as it
determines are warranted.
(b) REGISTRATION. Each certificate for unrestricted Common Shares shall be
------------
registered in the name of the Key Employee and immediately be delivered to him
or her.
SECTION 11
CAPITAL ADJUSTMENTS
-------------------
The number of Common Shares which may be issued under the Plan, the maximum
number of Common Shares with respect to which Options may be granted to any Key
Employee under the Plan, both as stated in Section 4 hereof, the number of
Common Shares per NQSO granted to an Outside Director as stated in Section 6,
the number of Common Shares issuable upon the exercise of outstanding Options
under the Plan (as well as the Option exercise price per share under such
outstanding Options), and the number of Common Shares to be delivered upon the
vesting of outstanding Restricted Stock Awards (as well as the purchase price,
if any, for such Common Shares) shall, subject to the provisions of section
424(a) of the Code, be adjusted to reflect any stock dividend, stock split,
share combination, or similar change in the capitalization of the Company.
12
<PAGE>
In the event of a corporate transaction (as that term is described in
section 424(a) of the Code and the Treasury Regulations issued thereunder as,
for example, a merger, consolidation, acquisition of property or stock,
separation, reorganization, or liquidation), each outstanding Award shall be
assumed by the surviving or successor corporation; provided, however, that, in
the event of a proposed corporate transaction, the Committee may terminate all
or a portion of the outstanding Options granted to Key Employees effective upon
closing of such corporate transaction if it determines that such termination is
in the best interests of the Company. If the Committee decides so to terminate
outstanding Options, the Committee shall give each Key Employee holding an
Option to be terminated not less than seven days' notice prior to any such
termination by reason of such a corporate transaction, and, at the closing of
such corporate transaction, such Options shall be terminated (unless previously
exercised) and the Company shall pay to each Key Employee who holds an Option so
terminated (except for any Option which terminated prior to the date of such
closing otherwise than by reason of such Committee action) an amount equal to
the consideration paid, or to be paid, per share of Common Stock to holders of
Common Stock in connection with such corporate transaction (as determined in
good faith by the Committee) less the applicable exercise price of the Option.
Further, as provided in Section 8(a)(4)(A)(ii) hereof, the Committee, in its
discretion, may accelerate, in whole or in part, the date on which any or all
Options granted to Key Employees become exercisable.
The Committee also may, in its discretion, change the terms of any
outstanding Awards granted to Key Employees to reflect any such corporate
transaction, provided that, in the case of ISOs, such change is excluded from
the definition of a "modification" under section 424(h) of the Code.
SECTION 12
CHANGE IN CONTROL
-----------------
Upon a Change in Control, the Committee (as it is constituted on the day
preceding the date of the Change in Control) may, in its discretion, accelerate
the vesting and exercisability of outstanding Options and SARs granted to Key
Employees and accelerate the vesting of Restricted Stock Awards granted to Key
Employees. "Change in Control" shall mean the point in time when any person (as
such term is used in Section 13 of the Exchange Act and the rules and
regulations thereunder and including any Affiliate or Associate of such person,
as defined in Rule 12b-2 under the Exchange Act, and any person acting in
concert with such person) directly or indirectly acquires or otherwise becomes
entitled to vote more than 50 percent of the voting power entitled to be cast at
elections for directors of the Company. At the discretion of the Committee, an
Option Agreement may include a provision that an Option will vest and become
exercisable upon a Change of Control and a Restricted Stock Award Agreement may
include a provision that the Restricted Stock Award will vest upon a Change of
Control.
13
<PAGE>
SECTION 13
AMENDMENT OR DISCONTINUANCE OF THE PLAN
---------------------------------------
(a) IN GENERAL. The Board from time to time may suspend or discontinue the
----------
Plan or amend it in any respect whatsoever, except that, without the approval of
the shareholders (given in the manner set forth in Subsection (b) below): (1)
the class of persons eligible to receive Awards shall not be changed nor shall
any other requirement as to eligibility for participation in the Plan be
materially modified; (2) the maximum number of Common Shares with respect to
which Awards may be granted under the Plan shall not be increased except as
permitted under Section 11; (3) the benefits accruing to individuals
participating in the Plan shall not be materially increased; (4) the duration of
the Plan under Section 14 shall not be extended; and (5) no amendment which
would require shareholder approval pursuant to Prop. Treas. Reg. (S) 1.162-
27(e)(4)(vi), or any successor thereto, may be made.
(b) MANNER OF SHAREHOLDER APPROVAL.
------------------------------
(1) The approval of shareholders must be by a majority of the
outstanding Common Shares present, or represented, and entitled to vote at
a meeting duly held in accordance with the applicable laws of the state of
Delaware; and
(2) The approval of shareholders must occur --
(i) By a method and in a degree that would be treated as adequate
under applicable state law in the case of an action requiring
shareholder approval (i.e., an action on which shareholders would be
entitled to vote if the action were taken at a duly held shareholders'
meeting); or
(ii) By a majority of the votes cast at a duly held shareholders'
meeting at which a quorum representing a majority of all outstanding
voting stock is, either in person or by proxy, present and voting on
the Plan.
(c) AMENDMENTS AFFECTING OUTSIDE DIRECTORS. Notwithstanding the foregoing,
--------------------------------------
no amendment to any provision of the Plan that would affect (1) the amount and
price of Common Shares subject to NQSOs to be awarded to Outside Directors, (2)
the timing of such grants to Outside Directors, or (3) the formula, if any, that
determines the amount, price, and timing of NQSO grants to Outside Directors,
shall be made more than once every six months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act, or the rules
promulgated thereunder.
Notwithstanding the foregoing, no such suspension, discontinuance or
amendment shall terminate or affect the continued existence of rights created
under Awards issued and outstanding or materially impair the rights of any
holder of an outstanding Award without the consent of such holder.
14
<PAGE>
SECTION 14
TERMINATION OF PLAN
-------------------
Unless earlier terminated as provided in the Plan, the Plan and all
authority granted hereunder shall terminate absolutely at 12:00 midnight on May
31, 2005, which date is within 10 years after the date the Plan was adopted by
the Board, and no Awards hereunder shall be granted thereafter. Nothing
contained in this Section 14, however, shall terminate or affect the continued
existence of rights created under Awards issued hereunder and outstanding on May
31, 2005 which by their terms extend beyond such date.
SECTION 15
SHAREHOLDER APPROVAL
--------------------
This Plan shall become effective on June 21, 1995 (the date the Plan was
adopted by the Board); provided, however, that if the Plan is not approved by
the shareholders, in the manner described in Section 13(b), within 12 months
after said date, the Plan and all Awards granted hereunder shall be null and
void and no additional Awards shall be granted hereunder.
SECTION 16
MISCELLANEOUS
-------------
(a) GOVERNING LAW. The Plan, and the Option Agreements and Restricted
-------------
Stock Award Agreements (collectively the "Award Agreements") entered into, and
the Awards granted thereunder, shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the operation of, and the
rights of Grantees under, the Plan, the Award Agreements, and the Awards shall
be governed by applicable federal law and otherwise by the laws of the state of
Delaware.
(b) RIGHTS. Neither the adoption of the Plan nor any action of the Board
------
or the Committee shall be deemed to give any individual any right to be granted
an Award, or any other right hereunder, unless and until the Committee shall
have granted such individual an Award, and then his or her rights shall be only
such as are provided by the Plan and the Award Agreement.
Any Option under the Plan shall not entitle the holder thereof to any
rights as a shareholder of the Company prior to the exercise of such Option and
the issuance of the Common Shares pursuant thereto. Further, notwithstanding
any provisions of the Plan or any Award Agreement with a Key Employee, the
Company shall have the right, in its discretion, to retire a Key Employee at any
time pursuant to its retirement rules or otherwise to terminate his or her
employment at any time for any reason whatsoever.
15
<PAGE>
(c) NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall
--------------------------------
impose no obligation upon a Grantee to exercise such Option.
(d) NON-TRANSFERABILITY. Other than Unrestricted Stock Awards, no Award
-------------------
shall be assignable or transferable by a Grantee otherwise than by will or by
the laws of descent and distribution, and during the lifetime of the Grantee,
any Options or related SARs shall be exercisable only by the Grantee or by his
or her guardian or legal representative. If a Grantee is married at the time of
exercise of an Option and if the Grantee so requests at the time of exercise,
the certificate or certificates issued shall be registered in the name of the
Grantee and the Grantee's spouse, jointly, with right of survivorship.
(e) WITHHOLDING AND USE OF COMMON SHARES TO SATISFY TAX OBLIGATIONS. The
---------------------------------------------------------------
obligation of the Company to deliver Common Shares or pay cash to a Key Employee
pursuant to any Award under the Plan shall be subject to applicable federal,
state and local tax withholding requirements.
In connection with an Award in the form of Common Shares, subject to the
withholding requirements of applicable federal tax laws, the Committee, in its
discretion (and subject to such withholding rules ("Withholding Rules") as shall
be adopted by the Committee), may permit the Key Employee to satisfy the minimum
required federal withholding tax, in whole or in part, by electing to have the
Company withhold (or by returning to the Company) Common Shares, which shares
shall be valued, for this purpose, at their Fair Market Value on the date of
exercise of the Option or the date of vesting in the case of Restricted Stock
(or if later, the date on which the Key Employee recognizes ordinary income with
respect to such Option or Restricted Stock) (the "Determination Date");
provided, however, that with respect to Key Employees who are subject to section
16 of the Exchange Act, any such amount of minimum federal taxes required to be
withheld shall be satisfied by withholding Common Shares. An election to use
Common Shares to satisfy federal tax withholding requirements must be made in
compliance with and subject to the Withholding Rules. The Company may not
withhold Common Shares in excess of the number necessary to satisfy the minimum
federal income tax withholding requirements. In the event Common Shares
acquired under the exercise of an ISO are used to satisfy such withholding
requirement, such Common Shares must have been held by the Key Employee for a
period of not less than the holding period described in section 422(a)(1) of the
Code on the Determination Date, or if such Common Shares were acquired through
the exercise of a NQSO or of an option under a similar plan, such option must
have been granted to the Key Employee at least six months prior to the
Determination Date.
(f) LISTING AND REGISTRATION OF COMMON SHARES. Each Award shall be subject
-----------------------------------------
to the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the Common Shares
covered thereby upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of such Award
or the purchase or vesting of Common Shares thereunder, or that action by the
Company or by the
16
<PAGE>
Grantee should be taken in order to obtain an exemption from any such
requirement, no such Option may be exercised, in whole or in part, and no Common
Shares shall be delivered pursuant to a Restricted or Unrestricted Stock Award,
unless and until such listing, registration, qualification, consent, approval,
or action shall have been effected, obtained, or taken under conditions
acceptable to the Committee. Without limiting the generality of the foregoing,
each Grantee or his or her legal representative or beneficiary may also be
required to give satisfactory assurance that Common Shares purchased upon
exercise of an Option or received pursuant to a Restricted or Unrestricted Stock
Award are being purchased for investment and not with a view to distribution,
and certificates representing such Common Shares may be legended accordingly.
17
<PAGE>
NOBEL EDUCATION DYNAMICS, INC.
Non-qualified Stock Option Agreement
------------------------------------
Non-qualified Stock Option Agreement dated as of ________, 199__
("Agreement") between Nobel Education Dynamics, Inc., a Delaware corporation
(the "Company"), and __________ ("Employee").
1. Definitions
-----------
1.1 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
1.2 "Committee" means the Compensation Committee appointed by the Board of
Directors of the Company to administer the Plan.
1.3 "Common Stock" means the Company's Common Stock, par value $0.001 per
share.
1.4 "Date of Exercise" means the date on which the notice required by
Section 4.1 hereof is received by the Company.
1.5 "Date of Grant" means ____________, 199_.
1.6 "Fair Market Value" shall mean the value of the Common Stock arrived
at by a good faith determination of the Committee and shall be:
(a) The mean between the highest and lowest quoted selling price, if
there is a market for the Common Stock on a registered securities exchange
or in an over the counter market, on the date specified;
(b) The weighted average of the means between the highest and lowest
sales on the nearest date before and the nearest date after the specified
date, if there are no such sales on the specified date but there are such
sales on dates within a reasonable period both before and after the
specified date (determined as set forth in Section 7(a) of the Plan);
(c) The mean between the bid and asked prices, as reported by the
National Quotation Bureau on the specified date, if actual sales are not
available during a reasonable period beginning before and ending after the
specified date; or
(d) Such other method of determining Fair Market Value as shall be
authorized by the Code, or the rules or regulations thereunder, and adopted
by the Committee.
<PAGE>
1.7 "Option" means the option granted hereunder. The Option hereby
granted is a non-qualified stock option (i.e., not an "incentive stock option"
within the meaning of section 422 of the Code).
1.8 "Optioned Stock" means the shares of Common Stock that are subject to
the Option.
1.9 "Plan" means the Nobel Education Dynamics, Inc. 1995 Stock Incentive
Plan attached as Exhibit A and incorporated herein by reference.
1.10 "Subsidiary" means any corporation (whether or not in existence at the
time the Plan is adopted) which, at the time an Award is granted, is a
subsidiary of the Company under the definition of "subsidiary corporation"
contained in section 424(f) of the Code, or any successor.
1.11 "Termination Date" means the earliest to occur of the following:
(a) the tenth (10th) anniversary of the Date of Grant;
(b) If Employee's employment by the Company (and Subsidiaries) is
terminated by either party for any reason other than death or disability, the
date three months after the date of such termination of employment;
(c) If Employee shall become disabled (within the meaning of section
22(e)(3) of the Code) during Employee's employment and Employee's employment is
terminated as a consequence of such disability, the date one year after the date
of such termination of employment; or
(d) If Employee shall die during Employee's employment, the date one
year after the date of death;
provided that if Employee's employment is terminated for any reason other than
death and Employee shall die following such termination of employment but prior
to the expiration of the period determined under clause (b) or (c) above
(whichever is applicable), then the Termination Date shall mean the earlier of
(i) the tenth (10th) anniversary of the Date of Grant and (ii) the date one year
after the date of death;
provided, further, that, in any event, the Committee shall have the authority
to extend further the Termination Date if permitted to do so by the Plan.
2. Grant of Option.
---------------
Subject to the terms and conditions of this Agreement, the Company hereby
grants to Employee the option to purchase the number of shares of Common Stock
listed on the signature page hereof. The exercise price of the Option in
respect of each share of Optioned Stock shall be
2
<PAGE>
$______, subject to adjustment pursuant Section 9 hereof and the Plan.
Notwithstanding the foregoing, only full shares shall be issued hereunder, and
any fractional share which might otherwise be issuable upon the exercise of the
Option shall be forfeited.
3. Time of Exercise.
----------------
The Option shall be exercisable from time to time following the Date of
Grant through the Termination Date with respect to all or any portion of the
Option which shall have been vested as of the Date of Exercise. The Option
shall vest with respect to one-third of the shares of Optioned Stock subject
thereto as of the Date of Grant on each of the first, second and third
anniversary dates of the Date of Grant. The Option shall terminate absolutely
at 5:00 p.m. New York Time on the Termination Date.
4. Manner of Exercise; Payment.
---------------------------
4.1 Exercise of the Option shall be effected by giving written notice of
exercise to the Company, in care of the Secretary of the Company. Any such
notice shall state the number of shares of Optioned Stock for which the Option
is being exercised and shall be accompanied by payment in full of the exercise
price for such shares of Optioned Stock. Such notice shall be irrevocable once
given.
4.2 Employee shall have the right to exercise the Option with respect to
all or part of the Optioned Stock. Exercise of the Option with respect to part
of the Optioned Stock does not waive or limit Employee's rights with respect to
the balance of the Optioned Stock.
4.3 The exercise price for the Optioned Stock upon exercise shall be
payable in cash or its equivalent; provided, however, that if the Committee, in
its discretion, so determines at or prior to the time of exercise, Employee may
pay all or a portion of the exercise price in shares of Common Stock previously
acquired by Employee; provided further that if such shares were acquired through
exercise of an option or under a stock appreciation right or through the grant
by the Company of restricted stock or unrestricted stock, Employee shall have
held such shares for a period of more than 12 months on the Date of Exercise;
provided further that any right to pay the exercise price by delivery of shares
shall be subject to applicable laws. In the event all or a portion of the
aggregate exercise price is paid with shares of Common Stock, the shares of
Common Stock surrendered in payment of such Option shall be valued at the Fair
Market Value of such shares on the Date of Exercise.
5. Nontransferability.
------------------
The Option shall not be assignable or transferable by Employee, otherwise
than by will or by the laws of descent and distribution, and the Option shall be
exercisable only by the Grantee; provided that in the event of Employee's legal
disability, the Option may be so exercised by Employee's guardian or legal
representative and in the event of Employee's death, the Option may
3
<PAGE>
be so exercised by Employee's estate, personal representative or beneficiary who
acquired the right to exercise such Option by bequest or inheritance or by
reason of the death of Employee. If Employee is married at the time of exercise
of the Option and if Employee so requests at the time of exercise, the
certificate or certificates issued shall be registered in the name of Employee
and Employee's spouse, jointly, with right of survivorship.
6. Securities Laws
---------------
The Company may from time to time impose any conditions on the exercise of
the Option as it deems necessary or advisable to ensure that the Option granted
hereunder, and the exercise thereof, satisfy the applicable requirements of
federal and state securities laws. Such conditions to satisfy applicable
federal and state securities laws may include, without limitation, the partial
or complete suspension of the right to exercise the Option, the printing of
legends on certificates issued pursuant to Section 7 and requiring Employee to
deliver to the Company a representation letter as to Employee's investment
intent.
7. Issuance of Certificates for Shares
-----------------------------------
Subject to the provisions of this Agreement, the certificates for the
shares of Common Stock issuable upon exercise of the Option shall be delivered
to Employee (or to such person entitled thereto in accordance with Section 5) as
promptly after the Date of Exercise as is feasible, provided that the exercise
shall not be complete, and the Company shall not be obligated to make such
deliveries, until (a) Employee has made payment in full for such shares of
Optioned Stock pursuant to Section 4 and (b) Employee and the Company (or such
Subsidiary as is the employer of Employee) have arranged for the payment by
Employee to the Company (or such Subsidiary), or the withholding from Employee's
other compensation, of an amount in cash equal to the amount of any tax required
to be withheld by the Company (or such Subsidiary) by any applicable federal or
state laws or regulations on account of such exercise. The Company may also
condition delivery of shares of Common Stock upon the prior receipt from
Employee of any undertakings or representations that it may determine are
required to ensure that the certificates are being issued in compliance with
federal and state securities laws.
8. Rights Prior to Issuance of Certificates
----------------------------------------
Neither Employee nor the person to whom the rights of Employee shall have
passed by will or the laws of descent and distribution shall have any of the
rights of a stockholder with respect to any shares of Optioned Stock until the
date of the issuance to such person of certificates for such shares of Optioned
Stock pursuant thereto.
9. Stock Dividends; Subdivision or Combination of Shares
-----------------------------------------------------
The number of shares of Common Stock subject to the Option (as well as the
Option exercise price per share), shall, subject to the provisions of section
424(a) of the Code, (a) be
4
<PAGE>
adjusted to reflect any stock dividend, stock split, share combination, or
similar change in the capitalization of the Company and (b) be adjusted as
provided in Section 11 of the Plan upon certain other events.
10. Option Not to Affect Employment
-------------------------------
The Option granted hereunder shall not confer upon Employee any right to
continue in the employment of the Company or any Subsidiary of the Company.
11. Withholding.
-----------
Each Employee authorizes the Company to make any required withholding from
such Employee's compensation for the payment of any and all income taxes and
other sums that may be due any governmental authority (other than taxes imposed
directly upon the Company) as a result of the receipt by Employee of
compensation income pursuant to the foregoing payments, and agrees, if requested
by the Company and if the Company has complied with its obligations hereunder,
and in lieu of all or a portion of such withholding, to pay the Company in a
lump sum such amounts as the Company may be required to remit to any
governmental authority on behalf of Employee in respect of any such taxes and
other sums. Subject to applicable law, and to the extent permitted by the
Committee in accordance with the Plan, Employee may satisfy the minimum required
federal withholding tax, in whole or in part, by electing to have the Company
withhold (or by returning to the Company) shares of Common Stock.
12. Status of Option; Interpretation.
--------------------------------
The Committee shall have sole power to resolve any dispute or disagreement
arising out of this Agreement. The Option is subject to the terms and
conditions of the Plan as now in effect and as may be amended, from time to
time, in accordance with the Plan (which terms and conditions are and
automatically shall be incorporated herein by reference and made a part hereof
and shall control in the event of any conflict with any of the terms of this
Agreement).
13. Miscellaneous
-------------
13. All notices and other communications hereunder shall be in writing and
shall be transmitted by messenger, courier service or certified first-class mail
(in each case postage or cost of delivery prepaid) and shall be effective when
delivered. The address for notices and other communications of (i) the Company
is Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media,
PA 19063, Attn: Corporate Secretary, and (ii) Employee is the address set forth
below under Employee's signature. Either party may change its address for
notice given notice to the other pursuant to this Section 13.1.
13. This Agreement may be executed in two or more counterparts all of
which taken together will constitute one and the same instrument.
5
<PAGE>
13. This Agreement shall be governed by the applicable Code provisions to
the maximum extent possible; otherwise, the operation of, and the rights of
Employee under this Agreement shall be governed by applicable federal law and
otherwise by the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
Nobel Education Dynamics, Inc.
By:
-------------------------------------
EMPLOYEE:
----------------------------------------
Employee's Address:
Number of Shares
of Optioned Stock: ___________________
6
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Merryhill Schools, Inc.
Merryhill Schools Nevada, Inc.
Nedi, Inc.
The foregoing list omits certain subsidiaries of the Registrants which,
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as of December 31, 1997.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Nobel Education Dynamics, Inc. (Formerly the Rocking Horse Child Care Centers of
America, Inc.) and subsidiaries on Form S-3 (File Nos. 333-3793, 333-3797, and
33-73496) and Forms S-8 (File Nos. 33-21859, 33-44888 and 33-64701) of our
report dated February 13, 1998, except for Note 16, as to which the date is
March 26, 1998, on our audits of the consolidated financial statements of Nobel
Education Dynamics, Inc. and subsidiaries as of December 31, 1997 and 1996 and
for the years ended December 31, 1997, 1996 and 1995 which report is included in
this Annual Report on Form 10-K.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 27, 1998
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<PAGE>
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