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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 June 30, 1999
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 LEARNING COMMUNITIES, 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_____
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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 September 17, 1999, 5,921,365 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 September 17, 1999 was approximately $20,900,000 (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
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 18, 1999 (the "Proxy Statement") and to be
filed within 120 days after the registrant's fiscal year ended June 30, 1999 are
incorporated by reference in Part III.
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TABLE OF CONTENTS
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Item
No. Page
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PART I
1. Business............................................................ 1
Executive Officers of the Company................................... 11
2. Properties.......................................................... 14
3. Legal Proceedings................................................... 14
4. Submission of Matters to a Vote of Security Holders................. 14
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters..................................... 15
6. Selected Financial Data............................................. 17
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................... 18
8. Financial Statements and Supplementary Data......................... 24
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................. 24
PART III
10. Directors and Executive Officers of the Registrant.................. 25
11. Executive Compensation.............................................. 25
12. Security Ownership of Certain Owners and Management................. 25
13. Certain Relationships and Related Transactions...................... 25
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 26
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PART I
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
Our Fiscal 1999 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. We derive our forward-
looking statements from our operating budgets and forecasts, which are based
upon detailed assumptions about many important factors such as market demand,
market conditions and competitive activities. While we believe that our
assumptions are reasonable, we caution that there are inherent difficulties in
predicting the impact of certain factors, especially those affecting the
acceptance of our newly developed schools and businesses and performance of
recently acquired businesses, which could cause actual results to differ
materially from predicted results.
Item 1. Business.
General
We are a leader in providing affordable private education from preschool
through eighth grade. Our core business consists of the operation of
preschools, elementary schools and middle schools. These schools typically
provide summer camps and before-and-after school programs. Recently, we have
entered certain related businesses in private education, including schools for
learning challenged children, charter schools, specialty high schools and
tutorial programs. As of September 15, 1999, we had 138 schools in 13 states,
with an aggregate capacity of approximately 21,000 children. Our schools
operate under the global brand name "Nobel Learning Communities"; our credo is
"Quality Education Maximizing a Child's Life Opportunities."
Our schools are located in California, Pennsylvania, New Jersey, Virginia,
Florida, Maryland, North Carolina, South Carolina, Illinois, Nevada, Texas,
Oregon and Washington. The schools operate under various names, including
Chesterbrook Academy, Merryhill School, Evergreen Academy and Another Generation
Preschool. Our largest operation is our Merryhill School system in California,
comprised of 30 preschools, elementary schools and middle schools.
We are pursuing a four-pronged strategy to take advantage of the
significant growth opportunities in the private education market:
. internal organic growth at existing schools, including expansions
of campus facilities
. new school development in both existing and new markets
. strategic acquisitions
. development of new businesses, including schools for learning
challenged children, charter schools, tutorial programs and
corporate sponsored schools.
Our strategy is based on meeting the needs of an educational continuum,
from infancy to eighth grade. We encourage our children to stay with Nobel
schools as they grow, within our geographic clusters called "Nobel Learning
Communities." Our clusters increase market awareness; achieve operating
efficiencies; and provide cross-marketing opportunities, particularly by
providing feeder populations from preschool to elementary school, and elementary
school to middle school.
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We seek to distinguish Nobel Learning Communities from our competition with
the qualitative and quantitative program outcomes. At each level, we support a
child's development with age appropriate curriculum-based programs. We foster
learning through small classes, technology use and early introduction of a
foreign language. Further, through our new initiatives in tutoring and schools
for learning challenged, Nobel Learning Communities will serve those with
special needs.
Many of our schools operate from 6:30 a.m. to 6:00 p.m., allowing early
drop-off and late pick-up by working parents. In most locations, programs are
available for children starting at six weeks of age. For a competitive price,
parents can feel comfortable leaving their children at a Nobel school knowing
they will receive both a quality education and engage in well-supervised
activities.
Most of our schools complement their programs with before and after school
programs and summer camps (both sports and educational). Many of our schools
have swimming pools. Our schools also seek to improve margins by providing
ancillary services and products, such as book sales, uniform sales and portrait
services.
Our corporate office is located at Rose Tree Corporate Center II, 1400
North Providence Road, Suite 3055, Media, PA 19063. Our telephone number is
(610) 891-8200. We have two Internet sites. The address for our customer site is
www.nobellearning.com. The address for our investor site is
www.nobeleducation.com.
Educational Philosophy and Implementation
Our educational philosophy is based on a sound research foundation,
innovative instructional techniques and quality practice and proprietary
curricula developed by experienced educators. Our programs stress the
development of the whole child and are based on concepts of integrated and age-
appropriate learning. Our 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 individual educational needs and skills are considered upon
entrance into a Nobel school. Progress is regularly monitored in terms of both
the curriculum's objectives and the child's cognitive, social, emotional and
physical skill development. The result is the opportunity for each of our
students to develop a strong foundation in academic learning, positive self-
esteem, and emotional and physical well-being, based on a personalized approach.
Under the direction of our Vice President - Education, we circulate regular
"curriculum updates," a communication to assist staff in planning their daily
and weekly programs with current and effective instructional practices and
materials. We have also established multi-media products for a "Learning
Lending Library" collection. The library, which is managed out of our corporate
office, is available to all Nobel schools for student and teacher development
and parent interest. Many of these resources support our curriculum and our
frameworks (standards and benchmarks). We provide an Education Guide which
summarizes our philosophy of education and reviews various "tools" available to
principals and teachers.
In 1996, we launched our National Education Advisory Board. Under the
direction of our Vice President - Education, the Board includes six nationally-
known educators each of whom advises Nobel on his or her particular area of
expertise:
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. Dr. Barbara Presseisen, our retired Vice President of Education
(Cognitive Development)
. 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) (Professor Emeritus)
. Dr. Drew H. Gitomer of Educational Testing Service (Testing and
Evaluation).
The Advisory Board helps oversee curriculum development in our schools, advises
on the most effective teaching methods, and assists in finding the best
instructional materials and practices to help our students learn effectively and
efficiently. Advisory Board members are also available to work on special
projects and services that enhance our school programs.
We maintain that small class sizes and qualified teachers are basic
ingredients of quality education. Our philosophy is based on personalized
instruction that leads to a student's active involvement in learning and
understanding. The program for our schools is a skills-based and developmentally
appropriate comprehensive curriculum. We implement the curriculum in ways that
stimulate 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 integrated into the program, as appropriate, in all content areas. Our
schools employ state-of-the-art equipment, with interactive software. Most
schools in the Nobel Learning Communities introduce a second language between
the ages of two and three and continue that instruction into the pre-K,
kindergarten and school age programs.
We offer 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, community leaders 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 instrumental music lessons.
Experienced principals and directors and their faculties implement our
programs. Our staff members foster open communication, teamwork and the
attention to detail required to provide superior programs. School principals
and directors work closely with regional and corporate management, particularly
in the regular assessment of program quality. We seek to assure that our
schools meet or exceed the standards of appropriate accrediting agencies through
an internal quality assurance program. Many Nobel schools are accredited, or
are currently seeking accreditation, by the National Association for the
Education of Young Children (NAEYC), the National Independent
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Private Schools Association (NIPSA), or the Commission on International and
Trans-Regional Accreditation (CITA). We have programs to recognize and reward
our educators for their outstanding performance and achievement. Similarly, we
furnish guidance for the continued training and staff development of teaching
personnel, using both internal trainers and external consultants. Staff members
are recognized for the completion of continuing education experiences and
encouraged to pursue formal, advanced learning.
Operations / School Systems
In order to maintain uniform standards, our schools share consistent
educational goals and operating procedures. To respond to local demands,
principals are encouraged to tailor curriculums, within Nobel's standards, to
meet local needs. Our 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 three Vice Presidents of Operations. The principal or
director is critical to the success of the school and is provided with ongoing
training. Principals and directors are responsible to maintain the quality of
educational services delivered at their schools; to recommend pricing strategy
based upon school location and local area demographics; to manage their
personnel; to develop sales and marketing strategies; and to assure fiscal
management.
Principals and directors are also responsible to raise additional revenues
through ancillary programs, such as sales of school uniforms, candy, children's
portraits and school stores. In Fiscal 1998, our corporate office began central
management of the most significant ancillary programs. This central management
has enabled us to obtain more favorable terms from vendors and to encourage more
active participation from schools.
Principals and directors submit financial reports to our corporate office
and to appropriate district and division 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 Nobel in total. Weekly or monthly tuition rates and
utilization rates are continually monitored. Each school and center is measured
on a monthly basis versus its individual business plan. We are currently
implementing new software which will assist us to operate our schools more
effectively and efficiently and will provide management with enhanced and timely
operational information.
We hire qualified individuals and prefer to promote from within. Employment
applicants are reviewed with background checks made to verify accurate
employment history and establish background, reputation and character. After
hiring, our faculty is reviewed and evaluated annually through formal
evaluation. All of our principals and directors are eligible for incentive
compensation based on the profitability of their schools.
Marketing and Customers
We generate the majority of new enrollments from our reputation in the
community and word-of-mouth recommendations of parents. Further, we group our
preschools geographically to
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increase local market awareness and to supply a student population for our
elementary and middle schools. Our educational continuum from preschool through
elementary and middle school also helps demonstrate to parents our educational
focus. We market our services through yellow page advertising, print ads in
local publications, radio, and through distribution of promotional materials in
residential areas. Marketing campaigns are conducted throughout the year,
primarily at the local level by our school directors and principals. In
addition, the various regional offices conduct targeted marketing programs, such
as mass mailings and media advertising.
In our marketing, we strive to differentiate ourselves from our competition
through the quality of our programs. We emphasize the features and benefits of
our schools, including advanced learning, comprehensive curricula, small class
sizes, national accreditation, credentialed teachers, before and after school
programs and summer camps. We promote our introduction at an early age of
foreign language and technology use, and the results of standardized tests,
which show that our school age children perform one and one-half to three grade
levels above national norms.
Corporate Development
A significant portion of our growth has been through the opening of new
schools and preschools and making strategic acquisitions of existing schools and
preschools. We expect this strategy to continue into the immediate future.
New School Development
New school development offers an attractive growth opportunity for us to
expand into both new and existing markets. Proposed development sites are
presented to us through a network of developers and land realtors across the
United States. After site selection, we engage a developer or contractor to
build a facility to our specifications. We currently work with several
developers who purchase the land, build the facility and lease the premises to
us under a long-term lease. Alternatively, we purchase land, construct the
building with our own or borrowed funds and then seek to enter into a sale and
lease back transaction with an investor.
In fiscal 1999, we opened three elementary schools and two preschools; in
fiscal 2000 through September 15,2000, we opened two elementary schools
(including a charter school) and two preschools, and expanded two of our
campuses. We plan to open approximately four new schools (including a
replacement school) in the remainder of fiscal 2000 and approximately eight new
schools in fiscal 2001. Our development plans are dependent on the continued
availability of developer and financing arrangements.
Typically, new schools are single-story stand alone structures located near
residential neighborhoods on acreage appropriate to the nature of the school. We
carefully evaluate all proposed development sites and make 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 educational data; local licensing
requirements; and real estate costs.
"Nobel On-The-Job"
We plan to augment our development efforts through pursuit of corporate
sponsored programs and schools, marketed under the name "Nobel On-The-Job." We
believe that the curriculum based nature of our programs and the education focus
of our company can make us attractive to many
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corporations that seek to offer their employees high quality preschool programs.
Also, some companies are considering providing elementary grade schools for
their employees. Currently, many of our preschools are located in corporate
parks, or otherwise accessible to corporate locations. To enhance our
relationship with the corporate community, we have negotiated corporate discount
programs at some of our facilities. Participants include Marriot Corporation,
Circuit City, American Express and Motorola. In 1999, we competed successfully
against two market leaders in corporate- affiliated preschools and were awarded
a fifteen year contract to operate a preschool in Herndon, Virginia for the
Northwest Federal Credit Union.
Acquisitions
Since 1994, Nobel has acquired 68 schools: 46 preschools, 17 elementary
schools and five high schools. We strive to make only acquisitions which are
strategic in nature: to enhance our presence within an existing cluster; to
establish a base in a new geographic area with growth potential; or to provide
an entry into a new business (e.g., learning challenged students). In Fiscal
1999, we acquired, through an 80% joint venture, three schools located in
southern Florida which educate children with learning disabilities and a
preschool located in Leesburg, Virginia. In September 1999, we acquired all the
capital stock of Houston Learning Academy, an operator of five specialty high
schools in the Houston, Texas market.
Nobel Learning Solutions
In Fiscal 1999, Nobel launched several new businesses through its new
division, Nobel Learning Solutions.
Paladin Academy(Tm)
Our Paladin Academy schools serve the needs of learning-challenged and
developmentally delayed students. Through these schools, our mission is to
improve the learning process and achievement levels of children and adults
having dyslexia, attention deficit disorder and other learning difficulties. We
offer clinical day schools, tutoring clinics and summer programs, as well as
psycho-educational and developmental testing and community outreach programs.
Paladin Academy day schools offer full day programs serving the special
needs of students from kindergarten throughout high school. The goal of Paladin
Academy is to enable students to reenter mainstream school programs within two
to three years. We offer one-on-one tutorial clinics to our day school students,
as supplemental instruction, and to other children, college students and adults
who require an educational therapy program.
As of September 15, 1999, we operated six Paladin Academy schools. These
include three "stand-alone" private schools in South Florida, acquired in our
August 1998 purchase of the assets of Development Resource Centers. Our Paladin
Academy schools also include three schools that commenced operations calendar
year 1999, conducted in classrooms of other Nobel Learning Communities schools
(including two in South Florida and one in Chantilly, Virginia). We plan to
undertake a further roll-out of Paladin Academy schools within the Nobel school
clusters across the United States, based on the performance of these new
schools.
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We believe that Nobel school clusters will foster the development of the
Paladin Academy schools. Existing schools in a Nobel cluster can refer students
requiring special help to Paladin Academy; our marketing efforts can foster name
recognition of all services available within the Nobel Learning Community.
Also, we can reduce start-up costs for new Paladin Academy schools by utilizing
excess capacity at existing Nobel Learning Community schools. Paladin Academy
schools can also share soccer fields, basketball courts and gymnasiums of
schools at which they are located, or nearby.
All Paladin Academy schools are operated through a an 80%-owned joint
venture with an entity owned by the seller of Development Resource Centers.
Nobel Learning Advantage
In late calendar year 1999, we will begin to offer comprehensive tutorial
and diagnostic programs under the name Nobel Learning Advantage. These programs
will include adaptive (remedial), transitional (enrichment) and gifted
components within two major content areas: reading, writing and mathematics.
Each program will have a diagnostic and an instructional component that can be
delivered in three grade ranges (K - 2, 3 - 5, and 6 - 8). In Fall 1999, we will
commence piloting our reading programs at two of our schools; in January 2000,
we expect to commence a roll-out of this program. By Spring 2000, we will begin
to commence piloting our mathematic tutorial programs; commercial application of
these programs is planned to commence in the 2000/2001 school year. We plan to
market our tutoring services both to our current students and to students
outside the Nobel Learning Community. Initially, we expect to train our
elementary and middle school staff to conduct tutoring services. We believe that
this approach will be attractive to our teachers, affording them the opportunity
to earn income to supplement their salaries.
Charter Schools
In 1999, Nobel entered the charter school market, by assisting a non-profit
entity to apply for a charter from the School District of Philadelphia. The
School District of Philadelphia awarded the non-profit entity a charter for 624
children; well in excess of that number of children applied for enrollment.
Nobel will provide administrative and construction management services to the
charter school pursuant to a five-year management contract. The non-profit
entity will fund its own operations, through payments from the School District
of Philadelphia. As part of the arrangements with the charter school, Nobel
leases the charter school premises from a third party, and subleases the
premises to the non-profit entity.
We believe that our experience in developing and operating schools was an
important factor in the decision of the non-profit entity to seek our management
services and of the School District of Philadelphia to approve the charter. We
are actively pursuing other charter school opportunities in states which have
the student fees and management flexibilities to make the charter school
management arrangements economically viable.
Houston Learning Academy
In September 1999, we acquired all the capital stock of Houston Learning
Academy, an operator of five specialty high schools in the Houston, Texas
market. The Houston Learning
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Academy schools offer a half day fully accredited high school program, as well
as tutorial and summer school programs. These schools' programs feature very
small class sizes and individualized attention. Many students who attend Houston
Learning Academy desire to engage in other activities in the afternoons or are
attracted to the flexibility of the schools' curriculum.
Industry and Competition
Annual spending in education and training is estimated to exceed $740
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 $34 billion while estimates of spending for kindergarten
through twelfth grade ("K -12") are $358 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 over 100,000 schools in the $34 billion
preschool/child care segment, of which $11.5 billion is spent in the for-profit
segment. Likewise, it is estimated there are 85,000 schools in the $358 billion
K - 12 segment, of which $18.5 billion 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 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.
The market for learning challenged schools (part of the over-all K-12
market) is very fragmented and is estimated to be $9.6 billion and servicing
approximately 8 million children. The market for tutorial and diagnostic
services is estimated to be $12 to $18 billion, with Sylvan Learning Centers and
Huntington Learning Centers being the principal competitors. Corporate sponsored
schools, which are currently almost entirely preschools, with 8,300 workplace
childcare centers, is estimated to be a $2 billion market, and has grown at 20%
to 25% per year since 1992. The largest competitor is Bright Horizons, with
annual revenue of approximately $250 million. We believe that these markets have
significant potential, and we intend to pursue actively growth in these markets.
But, our efforts may not be successful.
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 our expansion plans.
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During the 1996 presidential 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. Our 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, we compete with other for-profit private schools,
with non-profit schools and, in a sense, with public school systems. We
anticipate that, given the perceived potential of the education market, well-
financed competition may emerge, including possible competition from the large
for-profit child care companies. The only for-profit competitor of which Nobel
is aware which currently competes beyond a regional level is Children's World, a
subsidiary of Aramark Corporation. We believe 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 $34 billion highly fragmented
industry, with diverse competition from both public and private sectors.
Approximately eight million children are enrolled in 90,000 centers/schools, of
which less than nine percent are managed by for-profit chains. Revenues of the
45 largest child care/preschool providers represent approximately 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. We believe 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. We believe 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. We offer a national
curriculum based program with excellent standards.
The demand for quality preschools is increasing. More than 60% of married
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%.
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From 1970 to 1997, the percentage of women who worked full time increased 39% to
57%. 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, we believe 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 many of our competitors.
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 our personnel.
Insurance
We currently maintain 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. We believe we have adequate insurance
coverage at this time. There can be no assurance that in future years we will
not again become subject to lower limits.
Service Marks
We have 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. We believe that
certain of our service marks have substantial value in our marketing in the
respective areas in which our schools operate.
Seasonality
Our 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. We continue
to seek to improve summer results through camps and other programs.
Employees
On September 15, 1999, we employed approximately 3,800 persons,
approximately 1,000 of whom were employed on a part-time basis. We believe that
our relationship with our employees is satisfactory.
10
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -----------------------------------------------------------------------------------------------
<S> <C>
A. J. Clegg 60 Chairman of the Board of Directors and
Chief Executive Officer; Director
Daryl A. Dixon 39 President and Chief Operating Officer
John R. Frock 56 Executive Vice President -- Corporate
Development; Assistant Secretary; Director
William E. Bailey 40 Vice President and Chief Financial Officer
B. Robin Eglin 43 Executive Vice President -- Nobel Learning
Solutions
Yvonne DeAngelo 41 Vice President -- Administration and Finance;
Secretary
Lynn A. Fontana 52 Vice President -- Education
Emily Louviere 55 Vice President -- Western Operations
Joy McAndrew 39 Vice President -- Marketing
Denise Price 45 Vice President -- Southern Operations
Barry S. Swirsky 43 General Counsel
Daniel Wallace 46 Vice President -- Real Estate Development
Debora A. Wood 37 Vice President -- Northern Operations
</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 Nobel 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 provided investment
management and consulting services to businesses, including Nobel. In 1979, he
formed Empery Corporation, an operator of businesses in the cable television and
printing industries, and held the offices of Chairman, President and CEO during
his tenure (1979-1993). In addition, Mr. Clegg served as Chairman and CEO of
TVC, Inc. (1983-1993), a distributor of cable 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,
11
<PAGE>
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.
Daryl A. Dixon. Mr. Dixon joined Nobel as President and Chief Operating Officer
in February 1999. Mr. Dixon was formerly an executive with NovaCare, Inc., where
he served as President and General Manager of NovaCare, Inc.'s Long-term Care
Services (formerly, the Contract Rehabilitation Division) from January 1994 to
January 1999 and Vice President, Operations of the Contract Rehabilitation
Division from November 1992 until January 1994. Mr. Dixon spent ten years in
various management positions with Manor Health Care, including three years of
Vice President - Operations.
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 Nobel 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, including 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 Nobel as Vice President and Chief
Financial Officer in January 1998. Prior to joining Nobel, 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.
B. Robin Eglin. Mr. Eglin joined Nobel in April 1995, and currently serves as
Executive Vice President of Nobel Learning Solutions. Previously, he served as
Nobel's Vice President - Real Estate Development and Executive Vice President -
Real Estate Development. 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.
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,
she served as Senior Auditor for Coopers and Lybrand from 1986 to 1989.
Dr. Lynn A. Fontana. Dr. Fontana joined Nobel as Vice President - Education in
August 1999. Dr. Fontana has been actively involved in education and training
for more than twenty years. As President of Fountain Communications Inc. (1990-
1998), and Thoughtful Technologies, LLC (1998-1999), Dr. Fontana provided
consulting and production services for educational organizations, publishers,
and government agencies. As a research associate professor at George Mason
University (GMU) from 1990-1997, she directed externally funded educational
research and development projects. She also served as an advisor to the
University's Provost on distance education and chaired the university-wide
distance education task force. Prior to joining the research faculty at GMU,
12
<PAGE>
Dr. Fontana was the Chief Education Officer for WETA, the public television
station for Washington, D.C. From 1983 to 1984, she directed the Global
Understanding project at National Public Radio and from 1980 to 1983 was
director of research and development for the CloseUp/ C-Span project in
Washington, D.C., which provided public affairs programming to schools
nationwide. From 1994 through 1997, Dr. Fontana was Vice President of the
National History Day Board of Trustees on which she has served since 1990. She
currently chairs the nominating committee of the National History Day Board.
Dr. Fontana has a BA in history and political science from Juniata College and a
Ph.D. in education from Indiana University.
Joy McAndrew. Ms. Andrew joined Nobel as Vice President - Marketing in May
1997. Prior to joining Nobel, Ms. Andrew held several executive positions with
Nutri/System, Inc., a national weight loss company, from 1987 to 1993 and 1994
to 1997. During the interim 1993 to 1994 period, Ms. McAndrew was Account
Director at Thomas J. Paul, Inc., a national advertising/marking/ public
relations agency, where she assumed sole responsibility for the account of
Johnson and Johnson's Personal Products Division.
Emily Louviere. Ms. Louviere joined Nobel as Vice President - West 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.
Denise Price. Ms. Price joined Nobel as National Director of Training in July
1997 and was named Vice President - Southern Operations in November 1998. Prior
to joining Nobel, from June 1983 to June 1997, Ms. Price held various position
at KinderCare KinderCare Learning Centers, Inc., including Regional Operations
Manager managing multi-site educational operations, National Director of
Accreditation supervising the accreditation process for over 1,200 preschools,
and Business Development Manager developing on-site schools for corporate
clients. In addition, Ms. Price's professional experience includes being a
certified validator for the National Association for the Education of Young
Children (NAEYC) and a current board member on the NAEYC National Advisory
Board, NAEYC Commission Decision Board and the National Child Care Association
(NCCA) Commission Decision Board.
Barry S. Swirsky. Mr. Swirsky been the General Counsel of Nobel 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, transactional and securities matters. Mr.
Swirsky commenced his legal career as an associate with Reavis & McGrath in New
13
<PAGE>
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.
Daniel J. Wallace. Mr. Wallace joined Nobel as Vice President - Real Estate
Development in June 1999. Prior to joining Nobel, from August 1997 to March
1999, Mr. Wallace was Director of Development for Balanced Care Corporation, an
east coast operator of assisted living and seniors housing facilities. In his
two years with Balanced Care, Mr. Wallace developed 24 projects in six states.
Mr. Wallace also has over 16 years of retail development experience, serving as
Director of Real Estate for Uni-Marts, Inc., a regional operator of convenience
stores and fast food restaurants. At Uni-Marts, Mr. Wallace was responsible for
the development of over 400 sites in six Mid-Atlantic states. Mr. Wallace is a
graduate of Penn State University.
Debora A. Wood. Ms. Wood joined Nobel as Vice President - North Operations in
August 1999. Before joining Nobel, from 1984 to 1999, Ms. Wood was employed by
NovaCare, Inc., where she held several operations positions of progressive
responsibility, including District Manger, Area Manager and Regional Vice
President in the Contract Rehabilitation Division, as well as Vice President of
Occupational Health Services.
Item 2. Properties.
At September 15, 1999, we operated 138 schools on ten owned and 118 leased
properties in 13 states. Our schools are geographically distributed as follows:
30 in California, 19 in North Carolina, 19 in Pennsylvania, 17 in Virginia, 11
in New Jersey, 15 in Florida, seven in Illinois, six in Nevada, five in Texas,
four in Washington, two each in South Carolina and Oregon and one in Maryland.
Our schools generally are located in suburban settings.
The land and buildings which we own are subject to mortgages on the
real property. Our leased properties are leased under long-term leases which are
typically triple-net leases requiring us to pay all applicable real estate
taxes, utility expenses and insurance costs. These leases usually contain
inflation related rent escalators.
From time to time, we purchase undeveloped land for future development. At
June 30, 1999, we owned one such property in North Carolina. We also own the
land and building of three properties in Florida and Maine at which we formerly
operated day care centers; two of these properties are leased to third parties.
We lease 13,837 square feet of space for our corporate offices in Media,
Pennsylvania.
Item 3. Legal Proceedings.
We are engaged in legal actions arising in the ordinary course of its
business. We believe that the ultimate outcome of all such matters will not have
a material adverse effect on our consolidated financial position or results of
operations. The significance of these matters on our 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.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
Our common stock trades on The Nasdaq Stock Market under the symbol NCLI.
"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 our 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 our
common stock as reported by Nasdaq for each quarter during the period from
January 1, 1997 through June 30, 1999 and for the first quarter to date in
Fiscal 2000.
High Low
Fiscal 1997 (January 1, 1997 to December 31, 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
Fiscal 1998 (January 1, 1998 to June 30, 1998)
First Quarter...................................... 9 3/8 4 7/8
Second Quarter..................................... 9 1/8 7 7/8
Fiscal 1999 (July 1, 1998 to June 30, 1999)
First Quarter...................................... 9 3/4 5 7/8
Second Quarter..................................... 7 7/8 5 1/32
Third Quarter...................................... 6 1/4 4 1/4
Fourth Quarter..................................... 6 1/16 4 1/2
Fiscal 2000
First Quarter (as of September 11, 1999)........... 6 1/8 4 1/4
Holders
At September 10, 1999, there were approximately 400 holders of record of
shares of common stock.
15
<PAGE>
Dividend Policy
We have never paid a dividend on our common stock and do not expect to do
so in the foreseeable future. Although the payment of dividends is at the
discretion of the Board of Directors, we intend to retain our earnings in order
to finance our ongoing operations and to develop and expand our business. Our
credit facility with our lenders prohibits us from paying dividends on our
common stock or making other cash distributions without the lenders' consent.
Further, our financing documents relating to our private placement of our
$10,000,000 Subordinated Note with Allied Capital Corporation prohibit us from
paying cash dividends on our common stock without Allied's approval, and our
financing documents relating to our private placement of the Series C
Convertible Preferred Stock to Edison Venture Fund II, L.P. prohibit us from
paying cash dividends on our common stock, unless the dividend is permitted
under our bank agreement and the amount of the dividend is less than or equal to
50% of our operating income less income tax.
16
<PAGE>
Item 6.
Selected Financial Data
(In thousands except per share 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 Six Months Ended For the Year Ended December 31,
OPERATING DATA June 30, 1999 June 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 109,762 $ 48,995 $ 80,980 $ 58,909 $ 44,154 $ 34,372
School operating expenses 95,957 42,142 69,858 48,871 35,762 28,032
- --------------------------------------------------------------------------------------------------------------------------------
School operating profit 13,805 6,853 11,122 10,038 8,392 6,340
New school development 518 501 400 207 146 129
General and administrative expenses 7,717 3,391 5,973 4,190 3,396 2,696
Restructuring expense - - 2,960 - - -
Litigation expense - - - - 500 200
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 5,570 2,961 1,789 5,641 4,350 3,315
Interest expense 2,998 1,044 2,047 2,004 1,840 1,223
Other (income) expense (248) (102) (158) (482) (126) 107
Minority interest 74 35 86 94 86 83
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,746 1,984 (186) 4,025 2,550 1,902
Income tax (benefit) expense 1,153 833 250 1,562 (1,356) (438)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item 1,593 1,151 (436) 2,463 3,906 2,340
Extraordinary item - - 449 - 62 -
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,593 1,151 (885) 2,463 3,844 2,340
Preferred dividends 83 51 102 109 184 199
- --------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 1,510 $ 1,100 $ (987) $ 2,354 $ 3,660 $ 2,141
================================================================================================================================
EBITDA/(1)/
(earnings before interest, taxes,
depreciation and amortization expense) $ 11,123 $ 5,243 $ 4,803 $ 8,313 $ 6,020 $ 4,426
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (post split):
Net income (loss) before extraordinary item $ 0.25 $ 0.18 $ (0.09) $ 0.42 $ 0.79 $ 0.57
Extraordinary item - - (0.07) - (0.01) -
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.25 $ 0.18 $ (0.16) $ 0.42 $ 0.78 $ 0.57
================================================================================================================================
Dilutive earnings per share (post split)
Net income (loss) before extraordinary item $ 0.22 $ 0.15 $ (0.09) $ 0.34 $ 0.64 $ 0.46
Extraordinary item - (0.07) - (0.01) -
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.22 $ 0.15 $ (0.16) $ 0.34 $ 0.63 $ 0.46
================================================================================================================================
BALANCE SHEET DATA:
Working capital deficit $ (12,087) $ (10,221) $ (7,946) $ (1,351) $ (831) $ (4,197)
Cost in excess of net assets acquired 45,725 41,753 37,439 25,601 17,274 8,888
Total assets 81,025 75,020 74,398 56,833 44,937 23,234
Short-term debt and
Current portion of long-term debt 2,209 2,031 2,793 3,448 1,371 1,768
Long-term debt and obligations 29,147 26,477 28,470 14,226 20,272 7,846
Stockholders' equity 34,145 32,736 31,636 32,323 16,121 8,298
</TABLE>
(1) EBITDA includes depreciation expense included in general and administrative
expenses of $370,000 for the year ended June 30, 1999, $125,000 for the six
months ended June 30, 1998 and $153,000, $73,000, $181,000, $238,000, for
the years ended December 31, 1997, 1996, 1995 and 1994, respectively.
<PAGE>
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
Fiscal Year ended June 30, 1999 ("1999") compared to the twelve months ended
June 30, 1998 ("1998 period")
On December 19, 1997, the Company changed its fiscal year end to the last Friday
in June closest to June 30. To facilitate a discussion of the Company's
operating performance for 1999, the corresponding period for the twelve months
ended June 30, 1998 is presented.
During 1999, the Company acquired the assets or stock of companies owning four
schools. These acquisitions include: three schools for the learning challenged
in Dade County, Florida and one preschool in Leesburg, Virginia. In addition,
the Company opened six new schools, of which three were preschools and three
were elementary schools. The Company also closed seven schools.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for 1999 and the 1998 period into three
categories: Baseline Schools, Schools Acquired Within the Year and New School
Development (dollars in thousands).
<TABLE>
<CAPTION>
Twelve months % of Twelve months % of 1999-1998
June 30, 1999 revenue June 30, 1998 revenue Variance ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASELINE SCHOOLS (1)
Revenues $ 92,967 100.0 $ 75,895 100.0 $ 17,072
Operating profit $ 15,467 16.6 $ 12,739 16.8 $ 2,728
- --------------------------------------------------------------------------------------------
SCHOOLS ACQUIRED
WITHIN THE YEAR (2)
Revenue 1,743 100.0% 4,127 100.0 (2,384)
Operating profit 650 37.3% 565 13.7 84
- --------------------------------------------------------------------------------------------
NEW SCHOOL
DEVELOPMENT (3)
Revenues 15,052 100.0 10,288 100.0 4,764
Operating profit (Loss) (478) (3.2) (744) (7.2) 267
- --------------------------------------------------------------------------------------------
Total Revenues $ 109,762 100.0 $ 90,310 100.0% $ 19,452
============================================================================================
School operating profit
before amortization
of goodwill 15,639 14.2 12,560 13.9 3,079
Less amortization
of goodwill 1,834 1.7 1,370 1.5 464
- --------------------------------------------------------------------------------------------
School operating profit $ 13,805 12.6 $ 11,190 12.4 $ 2,615
============================================================================================
</TABLE>
(1) Baseline Schools is defined as all schools, except schools included in
Schools Acquired Within the Year or New School Development (see footnotes
(2) and (3)).(Schools which were acquired in the 1998 period are included
in "Baseline Schools" for 1999 results and "Schools Acquired Within the
Year" for 1998 results. Schools which opened during the twelve months ended
June 30, 1996 are included in "Baseline Schools" for 1999 results and "New
Development" for 1998 period results.)
(2) Schools Acquired Within the Year is defined as (i) schools acquired during
the 12 months ended June 30, 1998 for the 1998 period results and (ii)
schools acquired during the 12 months ended June 30, 1999 for 1999 results.
(3) New School Development is defined as schools which have not been opened for
two full fiscal years (i.e. schools opened between June 30, 1996 to June
30, 1998 for 1998 period results and (ii) schools opened between June 30,
1997 to June 30, 1999 for 1999 period results).
Revenues in the Baseline Schools increased $17,072,000 or 22.5% from the 1998
period to 1999. The increase is a result of the combination of several factors:
(1) An increase in revenues of $10,030,000 related to acquisitions completed in
the 1998 period. (2) a $5,085,000 increase related to new schools opened during
the twelve months ended June 1996, and (3) an increase of revenues of $1,957,000
in all other schools due to increased tuitions and enrollments. Operating profit
of the Baseline Schools increased $2,728,000 as a result of (1) a $492,000
increase in operating profit related to the schools acquired in the 1998
period, (2) a $486,000 increase related to new schools opened during the twelve
months ended June 1996, and (3) a $1,750,000 increase related to all other
schools.
The Company acquired four schools during 1999 which contributed total revenues
of $1,743,000 and school operating profits of $650,000. The Company acquired
eight schools during the 1998 period which in such period contributed revenues
of $4,127,000 and operating profit of $565,000. Operating profit margin before
goodwill of the schools acquired in 1999 was 37.3% or 23.6% above the schools
included in the 1998 period. Three of the four schools acquired in 1999 were a
part of the acquisition of an 80% interest in schools for the learning
challenged. Operating margins in these schools are higher as a result of the
higher tuition the Company can charge for this specialized service.
In 1999, revenues related to new schools opened during the period between July
1, 1997 to June 30, 1999 totaled $15,052,000 or an increase of $4,764,000 or
46.3% compared to the schools opened during the period between July 1, 1996 to
June 30, 1998. During 1999, the Company opened six schools, three of which were
elementary schools and during the 12 months ended June 30, 1998, the Company
opened twelve schools, five of which were elementary schools. Operating loss
totaled $478,000 in 1999 compared to operating losses of $744,000 in 1998
period. The decrease in the loss is a result of the mix in the type of schools
opened and the timing and number of school openings. Elementary and middle
schools take longer to become profitable compared to preschools. Elementary
schools typically take 24 to 36 months to become profitable compared to 18 to 24
months in a preschool.
Overall, in 1999 the Company's total revenues increased $19,452,000 or 21.5% and
school operating profits (after goodwill) increased $2,615,000 as compared to
1998 period. School operating profit margins increased from 12.4% in the 1998
period to 12.6% in 1999, as explained above.
New school development costs decreased $286,000 in 1999 primarily because of the
decrease in the number of schools opened. During 1999, the Company opened three
elementary and three preschools as compared to five elementary schools and seven
preschools in the 1998 period. Elementary schools typically have higher start up
costs than preschools. 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 $1,170,000 or 17.9% to $7,717,000
in the 1999. The increase is attributable to the increase in the Company's
infrastructure to support its revenue growth. In February 1999, the Company
added a President/Chief Operating Officer. As a percentage of revenue, general
and administrative expenses decreased from 7.2% of revenues in 1998 period to
7.0% of revenues in 1999. Management is continuing to build
<PAGE>
the infrastructure needed for growth of the Company and anticipates maintaining
the current level of such general and administrative expenses as a percentage of
revenues.
During the 1998 period, the Company recorded a restructuring charge totaling
$2,960,000 attributable to a combination of factors. Of the $2,960,000,
$2,000,000 was related to the write-off of goodwill recorded in connection with
the acquisition of nine schools located in Indianapolis, $789,000 was related to
the write down of the book value of tangible assets 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 $171,000 was related to the
restructuring of management that took place in 1997 and early 1998.
As a result of the factors mentioned above, operating income increased
$4,691,000 to $5,570,000 for 1999 as compared to the 1998 period. Excluding the
restructuring charge incurred in the 1998 period, operating income in 1999
increased $1,731,000 or 45.1%.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization), totaled $11,123,000 for 1999 which was $6,910,000 above the 1998
period. EBITDA for the 1998 period, adjusted to exclude restructuring expense
and extraordinary loss was $7,625,000. EBITDA for 1999 was $3,501,000 above the
adjusted EBITDA for the 1998 period. As a percentage of revenue, EBITDA for 1999
equaled 10.1% versus 8.4% for the adjusted EBITDA in the 1998 period. 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 by $867,000 or 40.7% for 1999 as compared to the 1998
period. The increase in interest expense is a result of increased borrowings
under the Company's senior debt facility and subordinated debt issued in
connection with Company's acquisitions. In addition, interest expense increased
due to the issuance by the Company in July 1998 of a $10,000,000 senior
subordinated note. The net proceeds were used to reduce the borrowings under the
Company's senior debt facility. The senior subordinated note bears interest at
10% and is approximately 200 basis points higher than the floating rate debt on
the Company's senior debt facility. In connection with this transaction, the
Company also issued warrants to acquire shares of the Company's common stock.
The Company recorded a debt discount and allocated $900,000 of the proceeds of
the transaction to the value of the warrants. This debt discount is being
amortized to interest expense over the term of the senior subordinated note.
The provision for income taxes of $1,153,000 for 1999 was in excess of amounts
computed by applying statutory federal income tax rates to income before income
taxes due primarily to non-deductible goodwill incurred with acquisitions for
stock and state income taxes. For acquisitions of stock of a company, purchase
accounting applies for accounting purposes; but, for tax purposes, the Company
inherits the historic basis of the purchased company in its assets, without any
goodwill.
SIX MONTHS ENDED JUNE 30, 1998 ("1998 PERIOD") COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1997 ("1997 PERIOD")
The Company's transition period, which ended June 30, 1998, includes the six
months from January 1 to June 30, 1998. To facilitate a discussion of the
Company's operating performance for the 1998 period, the corresponding period in
1997 is presented.
During the twelve months subsequent to June 30, 1997, the Company acquired the
assets or stock of companies owning eight schools. These acquisitions included:
two preschools and one elementary school in Las Vegas, Nevada; two elementary
and one preschool located in Seattle, Washington; one elementary school in
Portland, Oregon and one elementary school in North Lauderdale, Florida. In
addition, the Company opened 12 new schools, of which six were preschools and
six were elementary schools. The Company also closed nine schools whose
leases expired.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the 1998 and 1997 periods into three
categories: Baseline Schools, Schools Acquired Within the Year and New School
Development (dollars in thousands)
<TABLE>
<CAPTION>
Six months % of Six months % of 1999-1998
June 30, 1998 revenue June 30, 1997 revenue Variance ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASELINE SCHOOLS (1)
Revenues $ 41,113 100.0% $ 28,517 100.0% $ 12,596
Operating Profit $ 7,534 18.3% $ 5,491 19.3% 2,043
- --------------------------------------------------------------------------------------------
SCHOOLS ACQUIRED
WITHIN THE YEAR (2)
Revenues 3,263 100.0% 7,491 100.0% (4,228)
Operating Profit 460 14.1% 1,551 20.7% (1,091)
- --------------------------------------------------------------------------------------------
NEW SCHOOL
DEVELOPMENT (3)
Revenues 4,619 100.0% 3,656 100.0% 963
Operating Profit (Loss) (396) (8.6)% 261 7.1% (657)
- --------------------------------------------------------------------------------------------
Total Revenues $ 48,995 100.0% $ 39,664 100.0% 9,331
============================================================================================
School Operating Profit
Before Amortization
of Goodwill 7,598 15.5% 7,303 18.4% 295
Less Amortization
of Goodwill 745 1.5% 517 1.3% 228
- --------------------------------------------------------------------------------------------
School Operating Profit $ 6,853 14.0% $ 6,786 17.1% $ 67
============================================================================================
</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 1997 are included in
"Baseline Schools" for 1998 period results and "Schools Acquired Within the
Year" for 1997 period results. Schools which were first opened in 1996 are
included in "Baseline Schools" for 1998 period results and "New
Development" for 1997 period results).
(2) Schools Acquired Within the Year is defined as (i) schools acquired during
the 12 months ended June 30, 1997 for 1997 period results and (ii) schools
acquired during the 12 months ended June 30, 1998 for 1998 period results.
(3) New School Development is defined as schools which have not been opened for
two full fiscal years (i.e. schools opened between July 1, 1995 and June
30, 1997 for 1997 period results and schools opened between July 1, 1996
and June 30, 1998 for 1998 period results).
Revenues in the Baseline Schools increased $12,596,000 or 44.2% from the 1997 to
the 1998 period. The increase is a result of the combination of several factors,
including (1) an increase in revenues of $9,440,000 related to acquisitions
completed in fiscal 1997, (2) a $2,803,000 increase related to New Schools
opened in fiscal 1996, and (3) an increase of revenues of $353,000 in all other
schools. Operating profit of the Baseline Schools increased $2,043,000 as a
result of (1) a $1,994,000 increase in operating profit related to the schools
acquired in fiscal 1997, (2) a $213,000 increase related to the operating
profit of the fiscal 1996 New Schools offset by (3) a $164,000 decrease related
to the decrease in all other schools.
The Company acquired eight schools during the 12 months ended June 30, 1998
which contributed total revenues of $3,263,000 and school operating profits of
$460,000. The Company acquired thirteen schools during the 12 months ended June
30, 1997 which contributed revenues of $7,491,000 and operating profit of
$1,551,000. The operating profit margins of schools included in the 1998 period
was 14.1% or 6.6% below the schools included in the 1997 period. One of the
eight schools included in the 1998 period was a new
<PAGE>
school that opened subsequent to the acquisition. The start-up losses associated
with opening new schools contributed to this decline in operating margin.
Revenues related to the New Schools opened during the period between July 1,
1996 and June 30, 1998 totaled $4,619,000 in the 1998 period or an increase of
$963,000 or 26.3% compared to the schools opened during the period between July
1, 1995 and June 30, 1997 in the 1997 period. During the 12 months ended June
30, 1998, the Company opened 12 schools, five of which were elementary schools,
and during the 12 months ended June 30, 1997, the Company opened eight schools,
three of which were elementary schools. Operating losses totaled $396,000 in the
1998 period compared to operating income of $261,000 in the 1997 period. The
increase in the losses is a result of the mix in the type of schools opened and
the timing and number of the openings. Elementary and middle schools take longer
to become profitable compared to preschools. Elementary schools typically take
24 to 36 months to become profitable compared to 18 to 24 months in a preschool.
Overall, in the 1998 period, the Company's total revenues increased $9,331,000
or 23.5% and school operating profits increased $67,000, compared to the 1997
period. Meanwhile, school profit margins (after goodwill) decreased from 17.1%
in 1996 to 14.0% in the 1997 period as explained above.
New school development costs increased $403,000 in the 1998 period primarily
because of the increase in the number of schools opened. During the 1998 period,
the Company opened four elementary and one preschool as compared to two
preschools in the 1997 period. Elementary schools typically have higher start-up
costs than preschools. 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 $574,000 or 20.4% to $3,391,000 in
the 1998 period. The increase is attributable to the increase in the Company's
infrastructure to support its revenue growth. During 1997 and 1998, the Company
added 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. As a percentage of revenue, general and administrative expenses decreased
from 7.1% of revenues in the 1997 period to 6.9% of revenues in the 1998 period.
As a result of the factors mentioned above, operating income decreased $910,000
or 23.5% to $2,961,000 for the 1998 period as compared to the 1997 period.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization), totaled $5,243,000 for the 1998 period which was $309,000 or 5.6%
below the 1997 period. As a percentage of revenue, EBITDA for the 1998 period
equaled 10.7% versus 13.3% for the 1997 period. EBITDA is not a measure of
performance under generally accepted accounting principals, however the Company
and the investment community consider it an important indicator.
Interest expense increased by $200,000 or 23.4% for the 1998 period compared to
the 1997 period. The increase in interest expense is a result of increased
borrowings under the Company's senior debt facility and subordinated debt issued
in connection with the Company's acquisitions.
The provision for income taxes of $833,000 for the 1998 period was in excess of
amounts computed by applying statutory federal income tax rates to income before
income taxes due primarily to non-deductible goodwill incurred with acquisitions
for stock and state income taxes. For acquisitions of stock of a company,
purchase accounting applies for accounting purposes; but, for tax purposes, the
Company inherits the historic basis of the purchased company in its assets,
without any goodwill.
The fiscal year ended December 31, 1997 ("1997") compared to the fiscal year
ended December 31, 1996 ("1996")
During 1997, the Company acquired the assets or stock of companies owning 17
schools. These acquisitions include: six preschools in Florida and a 20%
interest in an elementary school; two preschools and one elementary school in
Las Vegas, Nevada and two elementary and three preschools located in San Jose,
California. Also considered for the purposes hereof as being acquired in 1997
are one elementary school in Southern California and a preschool and elementary
school in Seattle, Washington acquired at the end of December 1996. In addition,
the Company opened 12 new schools in 1997 of which eight were preschools and
four were elementary schools (two of which were replacement schools). During
1997, the Company closed seven schools whose leases expired.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the years ended 1997 and 1996 into three
categories: Baseline Schools, Schools Acquired Within the Year and New School
Development (dollars in thousands).
<TABLE>
<CAPTION>
Six months % of Six months % of 1999-1998
June 30, 1998 revenue June 30, 1997 revenue Variance($)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASELINE SCHOOLS(1)
Revenues $59,567 100.0 % $49,977 100.0% $ 9,590
Operating Profit $10,176 17.1 % $ 9,312 18.6% $ 864
- --------------------------------------------------------------------------------------------
SCHOOLS ACQUIRED
WITHIN THE YEAR(2)
Revenue 14,232 100.0 % 3,437 100.0% 10,795
Operating Profit 2,345 16.5 % 775 22.6% 1,570
- --------------------------------------------------------------------------------------------
NEW SCHOOL
DEVELOPMENT(3)
Revenues 7,181 100.0 % 5,495 100.0% 1,686
Operating Profit (Loss) (410) (5.7)% 586 10.7% (996)
- ---------------------------------------------------------------------------------------------
Total Revenues $80,980 100.0 % $58,909 100.0% $22,071
=============================================================================================
School Operating Profit
Before Amortization
of Goodwill 12,111 15.0 % 10,673 18.1% 1,438
Less Amortization
of Goodwill (989) 1.2 % (635) 1.1% (354)
- ---------------------------------------------------------------------------------------------
School Operating Profit $11,122 13.7 % $10,038 17.0% $ 1,084
=============================================================================================
</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 schools opened in 1996 or 1997 for 1997 results).
Revenues in the Baseline Schools increased $9,590,000 or 19.2% from 1996 to
1997. The increase is a result of the combination of several factors, including
(1) an increase in revenues of $6,173,000 increase related to acquisitions
completed in 1996, (2) a $4,636,000 increase related to New Schools opened in
1995, (3) an increase of revenues of $643,000 in schools other than Merryhill
and South Carolina, offset by (4) a decrease in Merryhill enrollment resulting
in a $1,003,000 decrease in revenues and (5) a decrease of $859,000 related to
the revenues of six schools closed in South Carolina in 1996. Operating profit
of
<PAGE>
the Baseline Schools increased $864,000 or 9.3% as a result of (1) a $1,383,000
increase in operating profit related to the schools acquired in 1996, (2) a
$850,000 increase related to the operating profit of the 1995 New Schools offset
by (3) a $949,000 decrease related to the decrease in the Merryhill schools and
by (4) a $420,000 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
was 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 increased
because of recently built replacement schools, which expanded capacity. The
Company took 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 $14,232,000 and $2,345,000, respectively. This is an
increase in acquisition activity totaling $10,795,000 in revenues and $1,570,000
in operating profit compared to schools acquired in 1999. In 1996, the Company
acquired seven schools with revenue of $3,437,000 and operating profit of
$775,000. The operating profit margins of schools acquired decreased 6.1% from
22.6% in 1996 to 16.5% 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 $7,181,000 in
1997 or an increase of $1,686,000 or 30.7% compared to 1995 and 1996. In 1997,
the Company built 12 schools and in 1996 the Company built seven schools.
Operating loss totaled $410,000 in 1997 compared to operating income of $586,000
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 $22,071,000 or 37.5% and
school operating profits increased $1,084,000 compared to 1996. Meanwhile,
school operating profit margins (after goodwill) decreased from 17.0% in 1996 to
13.7% in 1997 as explained above.
New School development costs nearly doubled, increasing $193,000 or 93% to
$401,000 in 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.
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 $1,783,000 or 42.6% to $5,973,000
in 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
7.1% of revenues in 1996 to 7.4% of revenues in 1997.
In 1997, the Company recorded a restructuring charge totaling $2,960,000 related
to a combination of factors. Of the $2,960,000, $2,000,000 was 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 were scheduled to close when their leases expired,
and $171,000 is related to the restructuring of management that took place in
1997 and early 1998.
As a result of the factors mentioned above, operating income decreased
$3,852,000 or 68% to $1,789,000 in 1997 compared to the same period in 1996.
Adjusted operating income, defined as operating income before the restructuring
charge, totaled $4,749,000 in 1997, which represents a decrease of $892,000 or
15.8% compared to the prior year.
In 1997 EBITDA (defined as earnings before interest, income taxes, depreciation
and amortization) totaled $4,803,000 which was $3,510,000 or 42.2% below the
prior year. As a percentage of revenue, EBITDA for 1997 equaled 5.9% versus
14.1% for 1996. Adjusted EBITDA (defined as EBITDA before the restructuring
charge) equaled $8,212,000 which was $101,000 or 1% below $8,313,000 for 1996.
As a percentage of revenues, adjusted EBITDA equaled 10.1% for 1997 as compared
to 14.1% 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 $42,000 or 2.1% for 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 stock was used in the first half of 1997 to complete the
acquisitions of Another Generation and Rainbow Bridge schools.
Other income decreased $324,000 and 67% for 1997 totaling $158,000 compared to
1996 of $483,000. 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.
<PAGE>
The provision for income taxes totaled $250,000 for 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 $1,165,000 which represents a 42% tax rate. This represented a decrease
of $397,000 or 25% compared to $1,562,000 for 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.
LIQUIDITY AND CAPITAL RESOURCES
Management is pursuing a four-pronged growth strategy for 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,
(3) strategic acquisitions, and (4) development of new education businesses. The
Company's principal sources of liquidity are (1) cash flow generated from
operations, (2) future borrowings under the Company's $35.0 million Amended and
Restated Loan and Security Agreement, (3) the use of site developers to build
schools and lease them to the Company, and (4) issuance of subordinated
indebtedness or shares of common stock to sellers in acquisition transactions.
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 working capital needs,
capital expenditures, and renovations and the building of new schools in the
near term future.
The Company continues 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 continue to seek additional funds through debt or
equity financing.
In March 1999, the Company entered into an Amended and Restated Loan and
Security Agreement which increased the Company's borrowing capacity to
$35,000,000. Four separate facilities were established under the Amended and
Restated Loan and Security Agreement: (1)$7,000,000 Working Capital Credit
Facility A, (2) $3,000,000 Working Capital Credit Facility B, (3)$15,000,000
Acquisition Credit Facility and (4) $10,000,000 Term Loan.
Working Capital Credit Facility A and B funds are available until March 2002.
Under the Acquisition Credit Facility, no principal payments are required until
March 2001. At that time the outstanding principal under the Acquisition Credit
Facility will be converted into a term loan which will require principal
payments in 16 quarterly installments.
Under the Term Loan Facility, no principal payments are required until April
2000. Quarterly installments of $250,000 are required the first four
quarters (through January 2001); thereafter quarterly installments of $562,500
are required until January 2005.
At June 30, 1999, $2,072,000 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $2,695,000 was outstanding
under the Acquisition Credit Facility and $10,000,000 was outstanding under the
Term Loan.
In July 1998, the Company issued a $10.0 million senior subordinated note to
Allied Capital Corporation ("Note"). The net proceeds were used to reduce the
Company's outstanding balance of the Company's senior bank debt. The Note bears
interest at 10% and matures in two installments of principal, $5.0 million in
2004 and $5.0 million in 2005. Payments on the note are subordinated to the
Company's senior bank debt. In connection with the financing transaction, the
Company also issued to Allied Capital Corporation warrants to acquire 531,255
shares of the Company's common stock at $8.5625 per share. The Company recorded
a debt discount and allocated $900,000 of the proceeds of the transaction to the
value of the warrants. This debt discount is being amortized to interest expense
over the term of the Note.
In December 1998, the Board of Directors authorized the repurchase of $1,000,000
of the Company's common stock. During 1999, 193,700 shares were repurchased for
$1,000,000.
Total cash and cash equivalents decreased $165,000 from $1,805,000 at June 30,
1998 to $1,640,000 at June 30, 1999. The net decrease was due primarily to (1)
cash used for acquisitions totaling approximately $3,743,000, (2) approximately
$7,330,000 used for the building of New Schools and acquisition of land parcels
and (3) net repayment of long term debt and subordinated debt of $7,360,000.
These decreases were offset by (1) cash flow from operations of $7,034,000, (2)
proceeds from the sale of property totaling $4,133,000, and the proceeds from
the issuance of a subordinated note of $10,000,000.
The working capital deficit increased $1,866,000 from $10,221,000 at June 30,
1998 to $12,087,000 at June 30, 1999. The increase is primarily the result of
the decrease in prepaid rent and insurance and an increase in unearned income.
CAPITAL EXPENDITURES
The Company is continuously maintaining and upgrading the property and equipment
of each school. During 1999, the Company spent approximately $9,669,000 on
capital expenditures, which included $7,330,000 for new school development and
$2,339,000 on upgrading existing facilities. During the six months ended June
30, 1998, the Company spent $4,952,000 on capital expenditures, which included
$3,498,000 for new school development and $1,454,000 on upgrading existing
facilities. During 1997, the Company spent approximately $15,221,000 on capital
expenditures, which included $11,137,000 on new school development and
$4,184,000 on upgrading existing facilities.
During 1999, the Company received $3,485,000 from sale and leaseback
transactions of new schools and $648,000 from the sale of closed schools. In
addition, the Company expects to receive an additional $2,600,000 in fiscal year
2000 from sale and leaseback transactions. During the six months ended June 30,
1998 and the twelve months ended December 31, 1997, the Company
<PAGE>
received $6,948,000 and $7,451,000, respectively, from the sale and leaseback
transactions of new schools.
The Company's Amended and Restated Security Agreement for Fiscal 2000 limits the
Company's spending for capital expenditure to $8.0 million.
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. 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.
YEAR 2000 COMPLIANCE
Management has implemented measures to ensure that the Company's information
systems and applications will recognize and process information pertaining to
the Year 2000. The measures being conducted utilize both internal and external
resources and are directed at risk assessments, remediation, acquisition of new
systems and applications, and testing of the systems and applications for Year
2000 compliance.
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. The Company has completed an inventory of all hardware, primarily
personal computers and corporate network equipment. All non-compliant hardware
has been replaced.
Concurrent with the Company's year 2000 compliance efforts, the Company is
upgrading its management information system to link the schools to the corporate
office as well as to other schools. This process includes purchasing new and
replacing old equipment and software to improve management efficiencies as well
as assure Year 2000 compliance. Management anticipates that the process will be
complete by December 1999 and projects spending between $ 500,000 and $1,000,000
on this project.
Although the Company could be affected by the systems of other companies with
which it does business, management does not believe that the Company's business
will be materially adversely affected by the failure of third parties to be Year
2000 compliant. Because of the geographical distribution of the Company's
schools, the Company is not dependent on any one or a small group of vendors for
goods and services and the needs of our customers for our services should not be
adversely affected by Year 2000 issues.
Management expects that the Company will be Year 2000 compliant by the end of
1999. A failure to meet this deadline should not disrupt the Company's delivery
of its services to customers. However, a failure of the Company's system could
indirectly significantly impact operations, as for example, by an inability to
pay employees and vendors in a timely manner.
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
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company manages its business based on geographical regions within the United
States. The Company has aggregated these regions based on management's belief
that these regions have met the aggregation criteria set forth in the standard.
<PAGE>
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-
14 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
24
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item with respect to the directors of the
Company is incorporated herein by reference to the information set forth in the
Proxy Statement. The information required by this Item with respect to
executive officers of the Company is furnished in a separate item captioned
"Executive Officers of the Company" and included in Part I of this Annual Report
on Form 10-K.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the information set forth in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference
to the information set forth in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference
to the information set forth in the Proxy Statement.
25
<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
Supplemental Schedules for Consolidated Statements of Cash
Flow........................................................ F-6
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 December 31, 1998, 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.)
26
<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 Amended and Restated Loan and Security Agreement dated March 9, 1999
between the Registrant and its subsidiaries, as borrowers, and Summit
Bank, in its capacity as Agent and the financial institutions listed
on Schedule A attached thereto (as such schedule may be amended,
modified or replaced from time to time), in their capacity as Lenders.
(Certain schedules (and similar attachments) to Exhibits 4.1 have not
been filed. The Registrant will furnish supplementally a copy of any
omitted schedules or attachments to the Commission upon request.)
(Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.2 Working Capital Facility Note A dated as of March 9, 1999 in the
principal sum of $7,000,000 payable to the order of Summit Bank.
(Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.3 Working Capital Facility Note B dated as of March 9, 1999 in the
principal sum of $3,000,000 payable to the order of Summit Bank.
(Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.4 Acquisition Credit Facility Note dated as of March 9, 1999 in the
principal sum of $15,000,000 payable to the order of Summit Bank.
(Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.5 Term Note A dated as of March 9, 1999 in the principal sum of
$10,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein by reference.)
4.6 Investment Agreement dated as of June 30, 1998 between Registrant and
its subsidiaries and Allied Capital Corporation 4.11. (Filed as
Exhibit 4.11 to the Registrant's Annual Report on Form 10-K for the
transitional fiscal year ended June 30, 1998 and incorporated herein
by reference.)
4.7 Senior Subordinated Note dated as of June 30, 1998 in the principal
amount of $10,000,000 payable to the order of Allied Capital
Corporation 4.12. (Filed as Exhibit 4.12 to the Registrant's Annual
Report on Form 10-K for the transitional fiscal year ended June 30,
1998 and incorporated herein by reference.)
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. (Filed as
Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the
transitional fiscal year ended June 30, 1998 and incorporated herein
by reference.)
27
<PAGE>
10.4 Form of Stock Option Agreement, for stock option grants under 1995
Stock Incentive Plan. (Filed as Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the transitional fiscal year ended June
30, 1998 and incorporated herein by reference.)
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 92,172.25 shares (subject to
adjustment) of the Common Stock of the Registrant. (Filed as Exhibit
4C to the Registrant's Current Report on Form 8-K dated September 11,
1995, date of earliest event reported August 25, 1995, and
incorporated herein by reference.)
Exhibit 10.12 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:
28
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Warrant No. Holder (subject to adjustment)
----------- ------ -----------------------
<S> <C> <C>
2 Allied Capital Corporation II 142,932.25
3 Allied Investment Corporation 92,713
4 Allied Investment Corporation II 50,219.5
</TABLE>
10.13 Common Stock Purchase Warrant dated as of June 30, 1998 entitling
Allied Capital Corporation to purchase up to 531,255 shares (subject
to adjustment) of the Common Stock of the Registrant. (Filed as
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the
transitional fiscal year ended June 30, 1998 and incorporated herein
by reference.)
10.14 First Amended and Restated Registration Rights Agreement dated as of
June 30, 1998 by and between the Registrant and Allied Capital
Corporation. (Filed as Exhibit 10.14 to the Registrant's Annual Report
on Form 10-K for the transitional fiscal year ended June 30, 1998 and
incorporated herein by reference.)
10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement
and Summary Plan Description, Issued February, 1997, as amended on
June 11, 1998. (Filed as Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for the transitional fiscal year ended June 30,
1998 and incorporated herein by reference.)
10.16 Employment Agreement dated January 25, 1999 between the Registrant and
Daryl Dixon. (Filed as Exhibit 10 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999 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.)
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers & 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.
(d) Financial Statement Schedules.
None.
29
<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.
30
<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: September 27, 1999 NOBEL LEARNING COMMUNITIES, 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, September 27, 1999
- ----------------------
A. J. Clegg President and Chief
Executive Officer and Director
/s/ William Bailey Vice President, September 27, 1999
- ----------------------
William Bailey Chief Financial Officer
(Principal Financial Officer)
/s/ Yvonne DeAngelo Vice President - Finance September 27, 1999
- ----------------------
Yvonne DeAngelo and Administration
(Principal Accounting Officer)
/s/ Edward Chambers Director September 27, 1999
- ----------------------
Edward H. Chambers
/s/ John R. Frock Executive Vice President September 27, 1999
- ----------------------
John R. Frock and Director
31
<PAGE>
/s/ Peter H. Havens
- ---------------------- Director September 27, 1999
Peter H. Havens
______________________ Director September 27, 1999
Pamela S. Lewis
______________________ Director September 27, 1999
Eugene G. Monaco
______________________ Director September 27, 1999
William L. Walton
/s/ Robert Zobel Director September 27, 1999
- ----------------------
Robert Zobel
32
<PAGE>
-------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
-------------------------------------------------
Report of Independent Accountants
To the Stockholders
and the Board of Directors
of Nobel Learning Communities, Inc.:
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) present fairly, in all material respects, the financial position
of Nobel Learning Communities, Inc. and its subsidiaries at June 30, 1999 and
1998, and the results of their operations and their cash flows for the year
ended June 30, 1999 and for the six months ended June 30, 1998 and each of the
two years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 2, 1999
F-1
<PAGE>
-------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
-------------------------------------------------
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- ------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,640 $ 1,805
Accounts receivable, less allowance for doubtful
accounts of $177 in 1999 and $133 in 1998 1,689 1,130
Prepaid rent 859 1,276
Prepaid insurance and other 844 738
- ------------------------------------------------------------------------------------
Total Current Assets 5,032 4,949
- ------------------------------------------------------------------------------------
Property and equipment, at cost 37,024 31,601
Accumulated depreciation (12,324) (9,226)
- ------------------------------------------------------------------------------------
24,700 22,375
Property and equipment held for sale 1,202 1,371
Cost in excess of net assets acquired 45,725 41,753
Deposits and other assets 3,347 3,541
Deferred taxes 1,019 1,031
- ------------------------------------------------------------------------------------
Total Assets $ 81,025 $ 75,020
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
Current portion of long-term obligations $ 2,209 $ 2,031
Cash overdraft liability 1,792 1,397
Accounts payable and other current liabilities 8,236 8,147
Unearned income 4,882 3,595
- ------------------------------------------------------------------------------------
Total Current Liabilities 17,119 15,170
- ------------------------------------------------------------------------------------
Long-term obligations 15,316 20,311
Long-term subordinated debt 13,831 6,166
Capital lease obligations 73 162
Deferred gain on sale/leaseback 27 35
Minority interest in consolidated subsidiary 514 440
- ------------------------------------------------------------------------------------
Total Liabilities $ 46,880 $ 42,284
- ------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 9 and 15)
Stockholders' Equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; issued and outstanding 4,593,542 in
1999 and 1998. $5,530 aggregate liquidation
preference at June 30, 1999 and at June 30, 1998 5 5
Common stock, $0.01 par value; 20,000,000 shares
authorized; issued and outstanding 6,121,365
in 1999 and 1998 6 6
Treasury stock, cost; 236,810 shares in 1999 and
36,810 in 1998 (1,375) (375)
Additional paid-in capital 39,239 38,340
Accumulated deficit (3,730) (5,240)
- ------------------------------------------------------------------------------------
Total Stockholders' Equity 34,145 32,736
- ------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 81,025 $ 75,020
====================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
-------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
-------------------------------------------------
Consolidated Statements of Income
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the year For the six months For the year ended For the year ended
ended June 30, 1999 ended June 30, 1998 December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 109,762 $ 48,995 $ 80,980 $ 58,909
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Personnel costs 53,203 23,368 38,557 26,777
School operating costs 16,266 7,023 11,932 8,755
Insurance, taxes, rent and other 21,479 9,661 16,131 11,128
Depreciation and amortization 5,009 2,090 3,238 2,211
- ------------------------------------------------------------------------------------------------------------------------------------
95,957 42,142 69,858 48,871
- ------------------------------------------------------------------------------------------------------------------------------------
School operating profit 13,805 6,853 11,122 10,038
- ------------------------------------------------------------------------------------------------------------------------------------
New school development 518 501 400 207
General and administrative expenses 7,717 3,391 5,973 4,190
Restructuring expense - - 2,960 -
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 5,570 2,961 1,789 5,641
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 2,998 1,044 2,047 2,004
Other (income) expense (248) (102) (158) (482)
Minority interest in income of
consolidated subsidiary 74 35 86 94
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,746 1,984 (186) 4,025
Income tax expense 1,153 833 250 1,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item $ 1,593 $ 1,151 $ (436) $ 2,463
- ------------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss on early extinguishment
of debt, (net of income tax benefit of $330) - - 449 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,593 1,151 (885) 2,463
Preferred stock dividends 83 51 102 109
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common
stockholders $ 1,510 $ 1,100 $ (987) $ 2,354
====================================================================================================================================
Basic earnings (loss) per share:
Net income (loss) before extraordinary item $ 0.25 $ 0.18 $ (0.09) $ 0.42
Extraordinary item - - (0.07) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.25 $ 0.18 $ (0.16) $ 0.42
====================================================================================================================================
Dilutive earnings (loss) per share:
Net income (loss) before extraordinary item $ 0.22 $ 0.15 $ (0.09) $ 0.34
Extraordinary item - - (0.07) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.22 $ 0.15 $ (0.16) $ 0.34
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
---------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
---------------------------------------------------
Consolidated Statements of Stockholders' Equity
For the Year Ended June 30, 1999, the Six Months Ended June 30, 1998, and for
the Years Ended December 31, 1997 and 1996
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Treasury and
Additional Common
Preferred Stock Common Stock Paid-In Stock Accumulated
Shares Amount Shares Amount Capital Issuable Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
Balances as of January 1, 1996 5,505,150 $ 6 4,095,094 $ 4 $ 21,818 $ 2,000 $ (7,707) $ 16,121
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options and warrants
exercised and related tax benefit - - 63,750 - 500 - - $ 500
Common shares issuable - - 312,500 1 1,999 (2,000) - -
Common shares issued - - 122,270 - 1,740 - - 1,740
Private placement of common stock,
net of transaction costs - - 1,000,000 1 11,607 - - 11,608
Conversion of preferred stock (807,608) (1) 237,441 - 1 - - -
Preferred dividends - - - - - - (109) (109)
Net income - - - - - - 2,463 2,463
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1996 4,697,542 $ 5 5,831,055 $ 6 $ 37,665 $ - $ (5,353) $ 32,323
============================================================================================================================
Stock options and warrants
exercised and related
tax benefit - - 256,750 - 682 - - 682
Conversion of preferred stock (104,000) - 33,560 - - - - -
Other - - - - (7) - - (7)
Treasury stock - - - - - (375) - (375)
Preferred dividends - - - - - - (102) (102)
Net loss - - - - - - (885) (885)
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1997 4,593,542 $ 5 6,121,365 $ 6 $ 38,340 $ (375) $ (6,340) 31,636
============================================================================================================================
Preferred dividends - - - - - - (51) (51)
Net Income - - - - - - 1,151 1,151
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 1998 4,593,542 $ 5 6,121,365 $ 6 $ 38,340 $ (375) $ (5,240) $ 32,736
============================================================================================================================
Treasury stock - - - - - (1,000) - (1,000)
Issuance of warrants
for common stock - - - - 899 - - 899
Preferred dividends - - - - - - (83) (83)
- ----------------------------------------------------------------------------------------------------------------------------
Net income - - - - - - 1,593 1,593
June 30, 1999 4,593,542 $ 5 6,121,365 $ 6 $ 39,239 $(1,375) $ (3,730) $ 34,145
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
--------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
--------------------------------------------------
Consolidated Statements of Cash Flow
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year For the six months For the year ended For the year ended
ended June 30, 1999 ended June 30, 1998 December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 1,593 $ 1,151 $ (885) $ 2,463
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 5,409 1,964 3,230 2,202
Provision for losses on accounts receivable 190 96 345 87
Provision for restructuring - - 2,960 -
Provision for deferred taxes 571 277 (300) 1,207
Minority interest in income 74 35 86 94
Early extinguishment of debt - - 779 -
Changes in Assets and Liabilities
Net of Acquisitions:
Accounts receivable (749) (134) (612) (139)
Prepaid assets 323 (17) (641) (74)
Other assets and liabilities (723) 1,088 (228) (243)
Unearned income 913 (562) 213 (133)
Accounts payable and accrued expenses (352) (599) 2,400 (689)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Adjustments 5,656 2,148 8,232 2,312
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 7,249 3,299 7,347 4,775
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (9,669) (4,952) (15,221) (12,776)
Proceeds from sale of property
and equipment 4,133 6,948 7,451 8,636
Payment for acquisitions net
of cash acquired (3,743) (3,457) (10,145) (4,968)
Payment of earn out related to acquisition - (1,500) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (9,279) (2,961) (17,915) (9,108)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from term loan and
Revolving line of credit 15,510 12,526 18,641 6,000
Proceeds from other debt 10,000 - - 1,500
Proceeds from issuance of common stock - - - 11,608
Cash Overdraft 395 1,397 - -
Repayment of long term debt (20,581) (14,474) (9,682) (7,023)
Repayment of subordinated debt (2,289) (497) (1,164) (6,334)
Repayment of capital lease obligation (87) (39) (71) (50)
Dividends paid to preferred stockholders (83) (51) (102) (108)
Proceeds from exercise of stock options - - 299 277
Purchase of Treasury Stock (1,000) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,865 (1,138) 7,921 5,870
Net increase (decrease) in cash and
cash equivalents (165) (800) (2,647) 1,537
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,805 2,605 5,252 3,715
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,640 $ 1,805 $ 2,605 $ 5,252
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
-------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
-------------------------------------------------
Supplemental Schedules
for Consolidated Statements of Cash Flow
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year For the six months For the year ended For the year ended
ended June 30, 1999 ended June 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supplemental Disclosures of
Cash Flow Information
Cash paid during year for:
Interest $ 2,890 $ 992 $ 2,005 $ 1,973
Income taxes 1,629 157 728 434
Noncash financing and
investing activities
Tax benefit related to exercise of
stock options and warrants - - - 224
Acquisitions
Fair value of tangible
assets acquired 63 1,432 2,404 841
Cost in excess of net
assets acquired 5,225 4,876 14,844 8,979
Cash acquired - - - (573)
Liabilities assumed (437) (1,291) (1,352) (685)
Notes issued (1,108) (1,560) (5,751) (1,854)
Common shares issued - - - (1,740)
- ----------------------------------------------------------------------------------------------------------------------------------
Total cash paid for acquisitions $ 3,743 $ 3,457 $ 10,145 $ 4,968
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
-------------------------------------------------
Nobel Learning Communities, Inc. and Subsidiaries
-------------------------------------------------
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies and Company Background:
Nobel Learning Communities, Inc. (the "Company"), formerly Nobel Education
Dynamics, Inc., was founded in 1982 and commenced operations in 1984. The
Company operates private pre-schools, elementary schools and middle schools
located in California, the Mid-Atlantic states, North Carolina, South 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.
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.
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. 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 $1,385,000, $591,000, $1,005,000, and $651,000
for the year ended June 30, 1999, the six months ended June 30, 1998, and the
years ended December 31, 1997 and 1996, respectively. Accumulated amortization
at June 30, 1999 and 1998, was $5,130,274 and $3,745,691, 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
FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". 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.
Income Taxes:
The Company accounts for income taxes using the asset and liability method, in
accordance with FAS 109, "Accounting for Income Taxes". 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.
Segment Information
The Company manages its business based on geographical regions within the United
States. Under SFAS 131, "Segment Reporting", the Company has aggregated these
regions based on management's belief that these regions have met the aggregation
criteria set forth in the standard.
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 years calculation accordingly. The restatement did
not result in a material change from amounts previously reported.
F-7
<PAGE>
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-dividend 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. For the year
ended December 31, 1997, 1,356,108 common stock equivalents were excluded from
the computation of dilutive earnings per share as the effect would have been
antidilutive.
Earnings per share are computed as follows (dollars in thousands except per
share data):
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30 June 30 December 31 December 31
1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic (loss) earnings per share:
Net (loss) income $ 1,593 $ 1,151 $ (885) $ 2,463
Less preferred stock dividends 83 51 102 109
- -------------------------------------------------------------------------------------------------
Net income available for
common stock 1,510 1,100 (987) 2,354
Average common stock
outstanding 6,038,136 6,121,365 6,052,625 5,545,605
- -------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.25 $ 0.18 $ (0.16) $ 0.42
Diluted earnings (loss) per share:
Net (loss) income available for
common stock and
dilutive securities $ 1,593 $ 1,151 $ (987) $ 2,463
Average common stock outstanding 6,038,136 6,121,365 6,052,625 5,545,605
Additional common shares resulting
from dilutive securities:
Options, warrants and convertible
preferred stock 1,316,200 1,395,686 N/A 1,717,178
- ------------------------------------------------------------------------------------------------
Average common stock and
dilutive securities outstanding 7,354,336 7,517,051 6,052,625 7,262,783
Diluted earnings (loss) per share $ 0.22 $ 0.15 $ (0.16) $ 0.34
</TABLE>
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 CHANGE IN FISCAL YEAR
In the last quarter of 1997, the Company changed its fiscal year end to the end
of June. Accordingly, the Company's transition period, which ended June 30, 1998
includes the six months from January 1 to June 30, 1998. There were 52 weeks in
each of fiscal 1999, 1997, and fiscal 1996 and 26 weeks in fiscal 1998.
The following unaudited results of operations for the six months ending June 30,
1997 and the twelve months ended June 30, 1998 are presented for comparative
purposes and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for that period (dollars in
thousands, except per share data).
<TABLE>
<CAPTION>
Twelve months Six months
ended ended
June 30, 1998 June 30, 1997
(unaudited) (unaudited)
- ------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 90,310 $ 39,664
Operating expenses 79,120 32,879
- ------------------------------------------------------------------------
School operating profit 11,190 6,785
New school development 804 98
General and administrative expenses 6,547 2,816
Restructuring expense 2,960 -
- ------------------------------------------------------------------------
Operating income 879 3,871
Interest expense 2,131 854
Other income (150) (5)
Minority interest in earnings
of consolidated subsidiary 72 49
- ------------------------------------------------------------------------
Income before income taxes (1,174) 2,973
Income tax expense (benefit) (165) 1,249
- ------------------------------------------------------------------------
Net income (loss) before extraordinary
item (1,009) 1,724
Extraordinary loss 449 -
- ------------------------------------------------------------------------
Net income (loss) (1,458) 1,724
Preferred stock dividends 102 51
- ------------------------------------------------------------------------
Net income available to
common stockholders $ (1,560) $ 1,673
- ------------------------------------------------------------------------
Basic earnings per share $ (0.25) $ 0.28
Dilutive earnings per share $ (0.25) $ 0.23
</TABLE>
3 ACQUISITIONS:
During the year ended June 30, 1999, the six months ended June 30, 1998 and the
years 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 from the date of acquisition.
1999 ACQUISITIONS
In June 1999, the Company acquired the assets of Flint Ridge Preschool in
Leesburg, Virginia, which has a capacity of 190 students. The purchase price
equaled $478,355 in cash and $207,543 in a subordinated note payable over five
years.
In August 1998, the Company entered into a transaction with Developmental
Resource Center, Inc. (DRC) to form Paladin Academy, LLC, which is owned 80% by
the Company and 20% by DRC. DRC is owned by Dr. Deborah Levy, a recognized
leader in the field of special education programs. The three schools formerly
owned by DRC, located in Florida, specialize in full day programs, summer camps,
testing services and clinics for K-12th grade students who have learning
challenges such as dyslexia, attention deficit disorder (ADD and ADHD) and other
learning disabilities.
1998 ACQUISITIONS
In March and May 1998, the Company completed the acquisition of four elementary
schools and one preschool. The Company acquired the assets of Touchstone
Elementary School in Lake Oswego, Oregon, which has a capacity for 150 students.
The Company acquired the stock of Lake Forest Park
F-8
<PAGE>
Montessori School, Inc., owner of Lake Forest Park Montessori School, in
Seattle, Washington, which has a capacity of 250 students. The Company acquired
the assets of the Western School, located in North Lauderdale, Florida, which
has a capacity for 350 children. Lastly, the Company acquired the Brighton
Schools in Seattle, Washington. The Brighton Schools consist of an elementary
school and a preschool with a combined capacity of 319 students. The aggregate
purchase price for the four acquisitions equaled $3,457,000 in cash, $1,560,000
in subordinated notes payable over five years and approximately $1,291,000 in
assumed liabilities.
1997 ACQUISITIONS
Acquisition of Another Generation Enterprises Inc.
In January 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. The
aggregate purchase price for the stock totaled $4,543,000, with $3,643,000 in
cash, $750,000 in notes and approximately $150,000 in assumed liabilities.
Also in January 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 students 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
In April 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 licensed capacity of 950. The
purchase price of the acquisitions totaled $7,508,000, $5,140,000 paid in cash
and $2,368,000 paid in notes, (including amount paid on an "earn out" based on
achievement of certain earnings targets).
Acquisition of Las Vegas Schools
In September 1997, the Company purchased three schools located in Las Vegas,
Nevada, formerly operating as Hillpointe Elementary School and Warren Walker
Preschools, with current combined licensed capacity of 670. The Hillpointe
Elementary School is a new school which opened in September 1997. 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.
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
1999, 1998, and 1997 all occurred at the beginning of 1997. 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
1997, 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
(dollars in thousands).
<TABLE>
<CAPTION>
Year ended Six months ended Year ended
June 30, 1999 June 30, 1998 December 31, 1997
(unaudited) (unaudited) (unaudited)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 110,484 $ 51,981 $ 92,781
Net income before
extraordinary item $ 1,629 $ 1,337 $ 470
Earnings per share
Basic $ 0.26 $ 0.21 $ 0.06
Diluted $ 0.22 $ 0.18 $ 0.06
</TABLE>
4 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
$859,347 and $2,364,000 at June 30, 1999 and 1998, respectively. 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.
5 PROPERTY AND EQUIPMENT:
The balances of major property and equipment classes, excluding property and
equipment held for sale, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Land $ 3,352 $ 3,147
Buildings 6,027 6,154
Assets under capital lease obligations 913 913
Leasehold improvements 7,536 5,947
Furniture and equipment 15,460 12,573
Construction in progress 3,736 2,867
- ----------------------------------------------------------------------
$ 37,024 $ 31,601
Accumulated depreciation (12,324) (9,226)
- ----------------------------------------------------------------------
$ 24,700 $ 22,375
- ----------------------------------------------------------------------
</TABLE>
Depreciation expense was $3,175,000, $1,325,00, $2,096,000, and $1,560,000 for
the year ended June 30, 1999, the six months ended June 30, 1998 and for the
years ended December 31, 1997 and 1996, respectively. Amortization of capital
leases included in depreciation expense amounted to $14,640 for the year ended
June 30, 1999, $7,320 in the six months ended June 30, 1998, and $14,640 in each
of the years 1997, and 1996. Accumulated amortization of capital leases amounted
to $483,000, and $468,000 at June 30, 1999 and June 30, 1998, respectively.
F-9
<PAGE>
6 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 $2,960,000 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 schools located in
Indianapolis, (2) $789,000 related to the closing of non-performing schools, and
(3) $171,000 related to the costs associated with the restructuring of the
management team.
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.
Non-cash charges included in the $2,960,000 charge were $2,269,019. During the
twelve months ended June 30, 1999, cash payments related to the closing of non-
performing schools were $165,636. During the six months ended June 30, 1998 and
1997, cash payments related to the closing of non-performing schools and cost
associated with the restructuring of the management team were $144,897 and
$129,837, respectively.
The amounts reflected in the table below include certain properties located in
the Southeast related to a prior restructuring.
The balances of major property and equipment held for sale were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 219 $ 219
Buildings 745 741
Leasehold improvements 653 936
Furniture and equipment 939 629
Accumulated depreciation (1,354) (1,154)
- ------------------------------------------------------------------------------
$ 1,202 $ 1,371
==============================================================================
</TABLE>
7 DEBT:
Debt consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM OBLIGATIONS:
Revolving and term credit facility $ 14,767 $ 19,427
First mortgages, due in varying installation
over three to 20 years with fixed interest rates
ranging from 11% or 12% 239 281
Notes payable to sellers from various acquisitions,
due in varying installments over three to
15 years with fixed interest rates varying
from 8% to 12% 191 257
Other 454 758
- -----------------------------------------------------------------------------------------
Total long term obligations $ 15,651 $ 20,723
Less current portion (335) (412)
- -----------------------------------------------------------------------------------------
$ 15,316 $ 20,311
=========================================================================================
LONG TERM OBLIGATIONS:
Senior subordinated note due 2005 interest at
10%, payable quarterly. Net of original issue
discount of $771 at June 30, 1999 $ 9,229 $ -
Subordinated debt agreements, due in varying
installments over five to 10 years with
fixed interest rates varying from 7% to 8% $ 6,388 $ 7,697
- -----------------------------------------------------------------------------------------
Total subordinated debt 15,617 7,697
Less current portion (1,786) (1,531)
- -----------------------------------------------------------------------------------------
$ 13,831 $ 6,166
=========================================================================================
</TABLE>
In March 1999, the Company entered into an Amended and Restated Loan and
Security Agreement which increased the Company's borrowing capacity to
$35,000,000. Four separate facilities were established under the Amended and
Restated Loan and Security Agreement: (1) $7,000,000 Working Capital Credit
Facility A, (2) $3,000,000 Working Capital Credit Facility B, (3) $15,000,000
Acquisition Credit Facility and (4) $10,000,000 Term Loan.
Interest on the unpaid principal balance of the Working Capital Facility A and
the Acquisition Credit Facility accrues at a variable interest rate ("Floating
Rate") equal to the base rate of Summit Bank plus 25 basis points (subject to
increase or decrease based on performance) or a LIBOR-based rate (at the
Company's option, chosen at the beginning of any interest period). Interest on
the unpaid principal balance of Working Capital Credit Facility B accrues at the
Floating Rate. Interest on the unpaid principal balance of the Term Loan accrues
at 7.5%.
Working Capital Credit Facility A and B funds are available until March 2002 at
which time, it may be extended, refinanced or repaid. Under the Acquisition
Credit Facility, no principal payments are required until March 2001. At that
time, the outstanding principal under the Acquisition Credit Facility will be
converted into a term loan which will require principal payments in 16 quarterly
installments.
Under the Term Loan Facility, no principal payments are required until April
2000. Quarterly installments of $250,000 are required each of the first four
quarters (through January 2001); thereafter quarterly installments of $562,500
are required until January 2005.
F-10
<PAGE>
At June 30, 1999, $2,072,138 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $2,694,855 was outstanding
under the Acquisition Credit Facility and $10,000,000 was outstanding under the
Term Loan.
In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation. The senior subordinated note bears interest at 10.0%
and matures in two installments of principal, $5,000,000 in 2004 and $5,000,000
in 2005. Payments on the note are subordinate to the Company's senior bank debt.
In connection with the financing transaction, the Company also issued to Allied
Capital Corporation warrants to acquire 531,255 shares of the Company's common
stock at $8.5625 per share. The exercise price of $8.5625 may be reduced, if at
May 31, 2000 the trailing 30 day average high and low stock price is lower than
$8.5625. The Company recorded a debt discount and allocated $899,000 of the
proceeds of the transaction to the value of the warrants. This debt discounting
is being amortized to interest expense over the term of the note.
In 1997, the Company amended its credit agreement three times, the most
significant of which occurred in December with the execution of the Seventh
Amendment and Modification to the Credit Agreement. These amendments: (1)
increased the Company's borrowing capacity to $25,000,000, (2) changed the prior
fixed interest rates (applicable to term loans) to variable rates and (3)
increased the number of permitted new school construction projects.
Because of the significant change in the repayment terms of the senior loan in
1997, 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 1995 financing totaling $779,000 on a pretax
basis. The charge was recorded as an extraordinary item and accordingly shown
tax effected.
At June 30, 1998, the principal amounts outstanding under the senior loan were
$19,427,000 all of which was under a revolving credit facility.
Maturities of long-term obligations are as follows: $2,245,000 in 2000,
$3,451,000 in 2001, $6,768,000 in 2002, $3,782,000 in 2003, and $15,024,000 in
2004 and thereafter.
8 ACCOUNTS PAYABLE
AND OTHER CURRENT LIABILITIES:
Accounts payable and other current liabilities were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Accounts payable $ 2,163 $ 1,029
Reserve for closed centers 414 644
Accrued payroll and related items 2,232 1,791
Accrued rent 614 600
Accrued property taxes 1,126 1,514
Other accrued expense 1,687 2,569
- ---------------------------------------------------------------------------
$ 8,236 $ 8,147
===========================================================================
</TABLE>
9 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 June 30, 1999 (dollars in thousands):
Operating Leases
<TABLE>
<CAPTION>
Closed Schools to Continuing
Schools be Divested Schools Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 $ 294 $ 49 $ 16,619 $ 16,962
2001 241 - 16,032 16,273
2002 234 - 15,188 15,422
2003 193 - 14,219 14,412
2004 173 - 13,590 13,763
2005 and thereafter 409 - 89,790 90,199
-----------------------------------------------------------------------------------
Total minimum lease
obligations $1,544 $ 49 $ 165,438 $167,031
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Capital Leases
- ----------------------------------------------------------
<S> <C>
2000 $ 56
2001 102
2002 26
-------------------------------------------------------
Total minimum lease obligations $ 184
-------------------------------------------------------
Less amount representing interest 22
-------------------------------------------------------
Present value of capital lease obligations 162
-------------------------------------------------------
Less current portion 89
-------------------------------------------------------
$ 73
=======================================================
</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 $16,595,000, $7,103,000, $11,157,000, and
$8,113,000, for the year ended June 30, 1999, for the six months ended June 30,
1998 and the years ended December 31, 1997 and 1996, 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's tenancy under 15 leases have been assigned or sublet to third
parties. If such parties default, the Company is contingently liable. Contingent
future rental payments under the assigned leases are as follows (dollars in
thousands):
2000 $ 1,247
2001 $ 1,168
2002 $ 1,075
2003 $ 1,084
2004 and thereafter $ 4,427
10 STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In connection with a debt refinancing, 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
F-11
<PAGE>
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. At June 30, 1999 and 1998, 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 a 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 C 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. At June 30, 1999 and
1998, 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. At both June 30, 1999 and June
30, 1998, 1,029,712 shares were outstanding. 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.
COMMON STOCK WARRANTS:
In connection with a $10,000,000 senior subordinated note issued to Allied
Capital Corporation in July 1998, the Company issued warrants to acquire an
aggregate of 531,255 shares of the Company's common stock at $8.5625 per share.
The exercise price of $8.5625 may be reduced, if at May 31, 2000, the trailing
30 day average high and low stock price is lower than $8.5625.
In connection with a debt refinancing in August, 1995, the Company issued to
Allied Capital Corporation warrants to acquire an aggregate of 309,042 shares of
the Company's Common Stock.
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 amendments 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
the Compensation Committee at the date of grant.
Options are exercisable for up to ten years from date of grant. Option activity
with respect to the Company's stock incentive plans and other employee options
was as follows:
OUTSTANDING OPTIONS
<TABLE>
<CAPTION>
Weighted
average
exercise
Number Range price
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 145,225 $ 3.00 to $ 13.00 $ 9.78
- -------------------------------------------------------------------------------
Granted 60,500 $ 10.50 to $ 15.81 $ 11.52
Canceled (28,175) 11.625 11.62
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
- -------------------------------------------------------------------------------
Granted 156,507 $ 5.06 to $ 9.25 $ 5.90
Canceled (13,250) 7.87 to 11.62 10.02
- -------------------------------------------------------------------------------
Balance, June 30, 1998 414,432 $ 3.00 to $ 16.50 $ 8.15
- -------------------------------------------------------------------------------
Granted 523,725 $ 4.50 to $ 9.25 $ 4.82
Canceled (4,825) 7.87 to 11.62 7.52
- -------------------------------------------------------------------------------
Balance, June 30, 1999 933,332 $ 3.00 to $ 16.50 $ 6.39
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Of the 523,725 options granted during the year ended June 30, 1999. 110,000
options were granted outside of the Company's stock incentive plans. At June
30, 1999 and June 30, 1998, 12,343 and 417,943 shares, respectively, remained
available for options of 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 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 (dollars in thousands except per share data):
<TABLE>
<CAPTION>
Year ended Six months Year ended Year ended
June 30, ended June 30, December 31, December 31,
1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income
- as reported $ 1,593 $ 1,151 $ (885) $ 2,463
Net (loss) income
- pro forma $ 1,037 $ 863 $ (1,222) $ 2,365
Net (loss) income
per share
- as reported $ 0.25 $ 0.18 $ (0.16) $ 0.42
Net (loss) income
per share
- pro forma $ 0.19 $ 0.14 $ (0.20) $ 0.41
</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:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 44.145 39.23%
Risk-free interest rate 5.03% 6.0%
Expected life of options 3 years 3 years
</TABLE>
Activity with respect to warrants outstanding at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Number Range
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------
Granted -
Canceled -
Exercised -
- ---------------------------------------------------------------------------------------------
Balance, June 30, 1998 434,042 $ 4.00 to $ 7.52
- ---------------------------------------------------------------------------------------------
Granted 531,225 $ 8.58
Canceled - - -
Exercised - $ - $ -
- ---------------------------------------------------------------------------------------------
Balance, June 30, 1999 965,267 $ 4.00 to $ 8.58
- ---------------------------------------------------------------------------------------------
</TABLE>
11. OTHER (INCOME) EXPENSES:
Other (income) expense consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
Year ended Six months Year ended Year ended
June 30, ended June 30, December 31, December 31,
1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ (188) $ (95) $ (179) $ (470)
Rental income (49) (17) (77) (143)
Depreciation related to
rental properties 18 9 33 73
Other projects (31) - (2) -
Costs related to centers
held for sale 2 1 67 58
- -----------------------------------------------------------------------------------------------
$ (248) $ (102) $ (158) $ (482)
- -----------------------------------------------------------------------------------------------
</TABLE>
12 INCOME TAXES:
Current tax provision (dollars in thousands):
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal $ 587 $ 467 $ 26 $ 62
State (5) 89 194 293
- -------------------------------------------------------------------------------------------------
$ 582 $ 556 $ 220 $ 355
Deferred tax provision 571 277 30 1,207
- -------------------------------------------------------------------------------------------------
$ 1,153 $ 833 $ 250 $ 1,562
=================================================================================================
</TABLE>
The difference between the actual income tax rate and the statutory U.S. federal
income tax rate is attributable to the following (dollars in thousands):
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate $ 934 $ 674 $ (63) $ 1,364
State taxes, net of federal
tax benefit 82 54 137 119
Goodwill and other 137 105 176 79
- -------------------------------------------------------------------------------------------------
$ 1,153 $ 833 $ 250 $ 1,562
=================================================================================================
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
June 30 June 30 December 31 December 31
1999 1998 1997 1996
tax assets tax assets tax assets tax assets
(liabilities) (liabilities) (liabilities) (liabilities)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depreciation $ (681) $ (725) $ (576) $ (383)
Provision for center closings
and other restructuring 906 1,534 1,635 379
Net operating losses - - - 801
AMT credit carryforward 591 95 94 90
Other 203 127 155 121
- ------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,019 $ 1,031 $ 1,308 $ 1,008
============================================================================================================
</TABLE>
<PAGE>
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 were $161,000, $60,000, $90,000, and $74,000 for
the year ended June 30, 1999, the six months ended June 30, 1998 and the years
ended December 31, 1997 and 1996, respectively.
14 FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments approximates carrying value. The
following methods and assumptions were considered by the Company in determining
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates fair value.
Debt: The estimated fair value of the Company's debt as a whole was based on the
discounted cash flows of all debt instruments.
15 COMMITMENTS AND CONTINGENCIES:
The Company is 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
On July 30, 1999, the Company sold the business operations of the nine schools
located in the vicinity of Indianapolis, Indiana to Children's Discovery Centers
of America, Inc., which is controlled by Knowledge Universe, for a total of
$550,000 in cash. Knowledge Universe, through KU Learning, LLC controls a
significant percentage of the Company's stock. No gain or loss was recorded for
the sale of the operations as the Company had written down the carrying value of
the business at December 31, 1997
17 QUARTERLY RESULTS OF OPERATIONS UNAUDITED
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Net Operating Net Earnings per common share Sales Price
Revenues Income Income Basic Dilutive High Low
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Quarter Ended September 30, 1998 $23,911 $ 339 $ (186) $(0.03) $(0.03) 9 3/4 5 7/8
Quarter Ended December 30, 1998 27,742 1,383 384 $ 0.06 $ 0.05 7 7/8 5 1/32
Quarter ended March 31, 1999 28,975 2,021 740 $ 0.12 $ 0.10 6 1/4 4 1/4
Quarter ended June 30, 1999 29,134 1,827 655 $ 0.11 $ 0.09 6 1/16 4 1/2
1998
Quarter ended September 30, 1997 18,926 (8) (285) $(0.05) $(0.05) 9 3/4 8 1/4
Quarter ended December 30, 1997/(1)/ 22,389 (2,073) (2,323) $(0.39) $(0.39) 9 7/16 4 1/2
Quarter ended March 31, 1998 23,706 1,510 618 $ 0.10 $ 0.08 9 3/8 4 7/8
Quarter ended June 30, 1998 25,289 1,450 532 $ 0.09 $ 0.07 9 3/8 7 7/8
</TABLE>
1. In the quarter ended December 31, 1997, the Company recorded a
restructuring charge of $2.9 million and an extraordinary item of $449,000.
2. The Company paid no dividends on the common stock in the time period from
July 1, 1997 through June 30, 1999. Dividends are paid only on the
preferred stock.
<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 December 31, 1998, 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 Amended and Restated Loan and Security Agreement dated March 9, 1999
between the Registrant and its subsidiaries, as borrowers, and Summit
Bank, in its capacity as Agent and the financial institutions listed on
Schedule A attached thereto (as such schedule may be amended, modified or
replaced from time to time), in their capacity as Lenders. (Certain
schedules (and similar attachments) to Exhibits 4.1 have not been filed.
The Registrant will furnish supplementally a copy of any omitted
schedules or attachments to the Commission upon request.) (Filed as
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference.)
4.2 Working Capital Facility Note A dated as of March 9, 1999 in the
principal sum of $7,000,000 payable to the order of Summit Bank. (Filed
as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference.)
4.3 Working Capital Facility Note B dated as of March 9, 1999 in the
principal sum of $3,000,000 payable to the order of Summit Bank. (Filed
as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference.)
4.4 Acquisition Credit Facility Note dated as of March 9, 1999 in the
principal sum of $15,000,000 payable to the order of Summit Bank. (Filed
as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference.)
4.5 Term Note A dated as of March 9, 1999 in the principal sum of $10,000,000
payable to the order of Summit Bank. (Filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 and incorporated herein by reference.)
<PAGE>
4.6 Investment Agreement dated as of June 30, 1998 between Registrant and its
subsidiaries and Allied Capital Corporation. (Filed as Exhibit 4.11 to
the Registrant's Annual Report on Form 10-K for the transitional fiscal
year ended June 30, 1998 and incorporated herein by reference.)
4.7 Senior Subordinated Note dated as of June 30, 1998 in the principal
amount of $10,000,000 payable to the order of Allied Capital Corporation.
(Filed as Exhibit 4.12 to the Registrant's Annual Report on Form 10-K for
the transitional fiscal year ended June 30, 1998 and incorporated herein
by reference.)
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. (Filed as
Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the
transitional fiscal year ended June 30, 1998 and incorporated herein by
reference.)
10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock
Incentive Plan. (Filed as Exhibit 10.4 to the Registrant's Annual Report
on Form 10-K for the transitional fiscal year ended June 30, 1998 and
incorporated herein by reference.)
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.)
<PAGE>
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 92,172.25 shares (subject to
adjustment) of the Common Stock of the Registrant. (Filed as Exhibit 4C
to the Registrant's Current Report on Form 8-K dated September 11, 1995,
date of earliest event reported August 25, 1995, and incorporated herein
by reference.)
Exhibit 10.12 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:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Warrant No. Holder (subject to adjustment)
----------- ------ -----------------------
<S> <C> <C>
2 Allied Capital Corporation II 142,932.25
3 Allied Investment Corporation 92,713
4 Allied Investment Corporation II 50,219.5
</TABLE>
10.13 Common Stock Purchase Warrant dated as of June 30, 1998 entitling Allied
Capital Corporation to purchase up to 531,255 shares (subject to
adjustment) of the Common Stock of the Registrant. (Filed as Exhibit
10.13 to the Registrant's Annual Report on Form 10-K for the transitional
fiscal year ended June 30, 1998 and incorporated herein by reference.)
10.14 First Amended and Restated Registration Rights Agreement dated as of June
30, 1998 by and between the Registrant and Allied Capital Corporation.
(Filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K
for the transitional fiscal year ended June 30, 1998 and incorporated
herein by reference.)
10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and
Summary Plan Description, Issued February, 1997, as amended on June 11,
1998. (Filed as Exhibit 10.15 to the Registrant's Annual Report on Form
10-K for the transitional fiscal year ended June 30, 1998 and
incorporated herein by reference.)
10.16 Employment Agreement dated January 25, 1999 between the Registrant and
Daryl Dixon. (Filed as Exhibit 10 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 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.)
<PAGE>
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.)
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule
<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 June 30, 1998.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Nobel Learning Communities, Inc. (formerly Nobel Education Dynamics, 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 August 2,
1999, on our audits of the consolidated financial statements of Nobel
Learning Communities, Inc. and subsidiaries as of June 30, 1999 and 1998 and for
the year ended June 30, 1999, the six months ended June 30, 1998 and each of the
two years in the period ended December 31, 1997 which report is included in this
Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
September 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 1,640 1,805
<SECURITIES> 0 0
<RECEIVABLES> 1,689 1,130
<ALLOWANCES> 177 133
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,032 4,949
<PP&E> 37,024 31,601
<DEPRECIATION> (12,324) (9,226)
<TOTAL-ASSETS> 81,025 75,020
<CURRENT-LIABILITIES> 17,119 15,170
<BONDS> 0 0
0 0
5 5
<COMMON> 6 6
<OTHER-SE> 34,134 32,725
<TOTAL-LIABILITY-AND-EQUITY> 81,025 75,020
<SALES> 109,762 48,995
<TOTAL-REVENUES> 109,762 48,995
<CGS> 0 0
<TOTAL-COSTS> 104,192 46,016
<OTHER-EXPENSES> (248) (102)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,998 1,044
<INCOME-PRETAX> 2,746 1,984
<INCOME-TAX> 1,153 833
<INCOME-CONTINUING> 1,593 1,151
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,593 1,593
<EPS-BASIC> 0.25 0.18
<EPS-DILUTED> 0.22 0.15
</TABLE>
