<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: September 30, 2000
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.)
1400 N. Providence Road, Suite 3055, Media, PA 19063
(Address of principal executive offices) (Zip Code)
(610) 891-8200
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all report(s) 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,976,599 shares of Common
Stock outstanding at November 13, 2000.
<PAGE>
INDEX TO FORM 10-Q
Nobel Learning Communities, Inc.
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets,
September 30, 2000 (unaudited) and June 30, 2000 2
Consolidated Statements of Income for the
three months ended September 30, 2000 (unaudited)
and 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the
three months ended September 30, 2000 (unaudited)
and 1999 (unaudited) 4
Notes to Consolidated Interim Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
PART I
Financial Information
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
The Company's fiscal 2001 outlook and all other statements in this report other
than historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company believes
that its assumptions are reasonable, it cautions that there are inherent
difficulties in predicting the impact of certain factors, especially those
affecting the acceptance of the Company's newly developed and converted schools
and performance of recently acquired businesses, which could cause actual
results to differ materially from predicted results.
1
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Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Current Assets September 30, 2000 June 30, 2000
--------------------------------------- --------------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 4,551 $3,798
Accounts receivable, less allowance for doubtful
accounts of $333 in September and $288 in June 2000 1,567 1,619
Prepaid rents 2,084 1,591
Other prepaid expenses 745 772
--------------------- ------------
Total Current Assets 8,947 7,780
--------------------- ------------
Property & equipment at cost 60,135 52,780
Accumulated depreciation (17,392) (16,304)
--------------------- ------------
Total Property & Equipment 42,743 36,476
Property and equipment held for sale 687 690
Cost in excess of net assets acquired 50,553 49,794
Deposits and other assets 3,479 2,742
Deferred taxes 9 9
--------------------- -----------
Total Assets $106,418 $97,491
===================== ===========
Liabilities and Stockholders' Equity
---------------------------------------
Current portion of long-term obligations $ 7,608 $ 6,230
Accounts payable and other current liabilities 9,913 8,994
Cash Overdraft Liability 3,217 3,768
Unearned income 9,400 5,168
--------------------- -----------
Total Current Liabilities 30,138 24,160
--------------------- -----------
Long-term obligations 26,102 23,260
Long-term subordinated debt 12,835 12,892
Capital lease obligations 0 0
Deferrred gain on sale/leaseback 19 20
Minority interest in consolidated subsidiary 603 601
--------------------- -----------
Total Liabilities 69,697 60,933
Stockholders' Equity:
Preferred Stock, $0.001 par value; 10,000,000 shares authorized, 4,587,524
issued and outstanding at September 30, 2000, and June 30, 2000; $5,524
aggregate liquidation preference at September 30, 2000 and June 30, 2000 5 5
Common Stock, $0.001 par value, 20,000,000 shares authorized, 6,126,168
issued at September 30, 2000 and at June 30, 2000 6 6
Treasury Stock, cost; 230,510 shares (1,375) (1,375)
Additional paid in capital 39,662 39,256
Accumulated deficit (1,577) (1,334)
--------------------- -----------
Total Stockholders' Equity 36,721 36,558
--------------------- -----------
Total Liabilities & Stockholders' Equity $106,418 $97,491
===================== ===========
</TABLE>
<PAGE>
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the three months ended September 30, 2000 and 1999
------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Revenues $32,689 $27,345
Operating expenses 29,308 24,424
---------- ----------
School operating profit 3,381 2,921
General and admistrative expenses 2,509 2,121
New school development costs 208 194
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Operating income 664 606
Interest expense 1,050 804
Other income (expense) 3 (20)
Minority interest in earnings of consolidated subsidiary (7) 21
---------- ----------
Loss before income taxes (382) (199)
Income tax (benefit) (160) (84)
---------- ----------
Net loss ($222) ($115)
========== ==========
Preferred stock dividends $21 $21
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Net loss available to common stockholders ($243) ($136)
========== ==========
Basic loss per share ($0.04) ($0.02)
========== ==========
Dilutive loss per share ($0.04) ($0.02)
========== ==========
</TABLE>
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part
of these financial statements.
<PAGE>
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the three months ended September 30, 2000 and 1999
---------------------------------------------
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net Cash Provided By Operating Activities $5,318 $5,037
Cash Flows From Investing Activities:
Proceeds from sale of real estate 325 915
Capital expenditures (7,520) (4,006)
Payment for acquisitions (510) (1,410)
--------- ---------
Net Cash (Used In) Investing Activities: (7,705) (4,501)
--------- ---------
Cash Flows From Financing Activities:
Repayment of capital lease obligation (15) (23)
Payments of dividends on preferred stock (21) (21)
Proceeds from long term debt 6,169 7,900
Repayment of long term debt (2,507) (5,546)
Repayment of subordinated debt (486) (388)
--------- ---------
Net Cash Provided by Financing Activities: 3,140 1,922
--------- ---------
Net increase in cash and cash equivalents 753 2,458
Cash and cash equivalents at the beginning of the period 3,798 1,640
--------- ---------
Cash and cash equivalents at the end of the period $4,551 $4,098
========= =========
</TABLE>
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part
of these financial statements.
<PAGE>
NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
for the three months ended September 30, 2000 and 1999
(unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements have been prepared by the Registrant
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the financial
position and results of operations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with the
generally accepted accounting principals have been condensed or omitted pursuant
to such SEC rules and regulations. It is suggested that these financial
statements are read in conjunction with the consolidated financial statements
and notes thereto included in the Registrant's Annual Report on Form 10-K for
the year ended June 30, 2000.
Due to the inherent seasonal nature of the education and child care businesses,
annualization of amounts in these interim financial statements may not be
indicative of the actual operating results for the full year.
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.
Note 2 - Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. In the calculation
of dilutive earnings per share, shares outstanding are adjusted to assume
conversion of the Company's non-interest bearing convertible preferred stock if
they are dilutive. In the calculation of basic earnings per share, weighted
average number of shares outstanding are used as the denominator. The Company
was in a loss position for the three months ended September 30, 2000 and 1999,
resulting in the calculation of dilutive earnings per share being antidilutive.
Earnings per share are computed as follows.
For the Three Months September 30,
----------------------------------
2000 1999
----------------------------------
Basic (loss ) earnings per share
--------------------------------
Net income (loss) $ (222) $ (115)
Less preferred dividends $ 21 $ 21
----------------------------------
Net income (loss) available for
common stock $ (243) $ (136)
==================================
Average common stock 5,931 5,925
outstanding
Basic earnings (loss) per share $ (0.04) $ (0.02)
----------------------------------
5
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Note 3 - Acquisitions
In August 2000, the Company acquired the assets of Rainbow World Day Care School
in Chalfont, Pennsylvania, with a capacity of 180 students and estimated
revenues of $845,000. The purchase price consisted of $493,000 in cash and
44,131 shares of the Company's Common Stock (valued at $9.20 per share).
Note 4 - Commitments and Contingencies
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
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 schools and
liability insurance in amounts which management believes are 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.
6
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the First Quarter Ended September 30, 2000 vs the First Quarter ended
September 30, 1999
Revenues for the first quarter ended September 30, 2000 increased $5,344,000 or
19.5% to $32,689,000 from $27,345,000 for the first quarter ended September 30,
1999. The increase in revenues is primarily attributable to the increase in
enrollment, tuition increases and the increase in the number of schools.
At September 30, 2000, the Company operated 162 schools. Since September 30,
1999, the Company has opened or acquired 30 new schools: two elementary schools,
thirteen preschools, five schools for learning challenged (the Paladin Academy
schools), three charter schools and seven specialty high schools (Houston
Learning Academy). Of the 30 new schools, 11 were acquired. The Company has also
closed three underperforming schools and sold nine underperforming school (which
were the Indianapolis schools disposed of in July 2000). Since June 2000,
thirteen new schools were opened or acquired.
Same school revenue (schools that were opened in both periods) increased
$2,643,000 or 9.9% in the first quarter of 2000 compared to the prior year. This
increase is related to tuition and enrollment increases, which is partially due
to an improved summer program, and partially due to improved September
enrollments. The increase in revenues related to the 30 schools opened or
acquired totaled $1,810,000 for new schools and $1,524,000 for acquired schools.
These increases were offset by a decrease in revenues of $633,000 related to the
schools closings.
School operating profit for the first quarter ended September 30, 2000 increased
$460,000 or 15.7% to $3,381,000 from $2,921,000 for the first quarter ended
September of 1999. Total school operating profit margin decreased from 10.7% to
10.3%. The decrease in operating margin was due primarily to the operating
losses associated with its new schools.
Same school operating profit increased $795,000 or 26.6%. Same school operating
profit margin improved from 11.2% for the first quarter ended September 30, 1999
to 12.9% for the first quarter ended September 30, 2000. The increase in same
school operating profit is due to the revenue increase. For the first quarter
ended September 30, 2000 new schools incurred a loss of $573,000. Included in
these losses were $354,000 associated with the two Arizona based charter schools
acquired from TesseracT in May 2000. The losses associated with the Arizona
schools are attributable to lower than expected enrollment. Schools acquired in
the last twelve months contributed $219,000 in school operating income. School
closings positively affected the increase in school operating profit by $19,000.
General and administrative expenses increased $388,000 or 18.3% from $2,121,000
for the first quarter ended September 30, 1999 to $2,509,000 for the first
quarter ended September 30, 2000. As a percentage of revenue, general and
administrative expense decreased from 7.8% at September 30, 1999 to 7.7% at
September 30, 2000. This increase in general and administrative expenses was
primarily related to management additions necessary to support the growth in the
Company's specialty school and charter school strategies.
7
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New school development costs increased $14,000 or 7.2% from $194,000 for the
quarter ended September 30, 1999 to $208,000 for the quarter ended September 30,
2000. The increase is a result of timing and the number new school openings.
Operating income increased $58,000 or 9.6% from $606,000 for the quarter ended
September 30, 1999 to $664,000 for the quarter ended September 30, 2000.
Operating income from same schools (which include new school development cost
for four schools in the prior year) improved $989,000 or 35% over the same
quarter in the prior year. Schools acquired in the last 12 months improved
operating income by $219,000 and the effect of school closings improved
operating income by $19,000. These increases were offset by losses from new
schools incurred in the first quarter ended September 30, 2000, including new
school development cost, by $780,000 and the increase in general and
administrative expenses by $389,000.
For the first quarter of fiscal 2000, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $2,213,000. This
represents an increase of $266,000 over the comparable period. EBITDA is not a
measure of performance under generally accepted accounting principals, however
the Company and the investment community consider it an important calculation.
Interest expense increased $246,000 or 30.6% from $804,000 for the quarter ended
September 30, 1999 to $1,050,000 for the quarter ended September 30, 2000. The
increase is due to increased interest rates on the Company's credit facility and
increased borrowings for acquisitions, new school development and to fund the
development of its new charter schools. This increase was offset by a reduction
in interest expense on seller subordinated debt.
Income tax benefit totaled $160,000 for the quarter ended September 30, 2000
which reflects a 42% effective tax rate.
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) available 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.
In order for the Company to continue its acquisition strategy and development of
new education business, the Company will continue to seek additional funds
through debt and equity financing. Also, the Company and its senior lender are
currently negotiating to increase the Company's available borrowing by
$10,000,000. 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.
The Company anticipates that its existing principal credit facilities, cash
generated from operations and from anticipated proceeds of sale and leaseback
transactions relating to certain real properties, 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. If the Company is unsuccessful in consummating
the increase in available senior lender borrowings referenced above, such sale
and leaseback transactions, it may need to postpone certain capital
expenditures. Adverse consequences to the Company of any such postponement would
be related to the period of delay and the amount of the capital expenditures
postponed.
In March 1999 the Company entered into an Amended and Restated Loan and Security
Agreement which increased the Company's available borrowing 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 (which is tied to the
8
<PAGE>
Company's cash management arrangement), (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 September 30, 2000, $7,493,000 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $12,094,000 was outstanding
under the Acquisition Credit Facility and $9,500,000 was outstanding under the
Term Loan.
In October and November 2000, the Company received a total of $2,800,000 from
two transactions. The Company refinanced its leasehold improvements for one of
its charter schools and entered into a sale and leaseback transaction for one of
its private schools.
Total cash and cash equivalents increased $753,000 from $3,798,000 at June 30,
2000 to $4,551,000 at September 30, 2000. The net increase was related to cash
provided from operations totaling $5,318,000 and borrowings on the senior credit
facility of $3,662,000 offset by $7,705,000 in capital expenditures for new
school openings, charter schools and acquisitions.
The working capital deficit increased $4,814,000 from $16,380,000 at June 30,
2000 to $21,194,000 at September 30, 2000. The increase is primarily the result
of the increase in deferred revenue totaling $4,232,000 and an increase of
$1,378,000 in current maturities in long term debt. These increases were offset
by a decrease of $551,000 in cash overdraft liability and an increase of
$493,000 in prepaid rents. The increase in deferred revenues is related to the
prepayment of annual and semi-annual tuition by parents at the beginning of the
school year. The increase in current maturities of long term debt is due to
payments that will be required to be paid on the Company's senior credit
facility over the next twelve months.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. The new standard
becomes effective for the Company's fiscal year 2002. The Company does not
believe the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, which
provides guidance related to revenue recognition. SAB 101 allows companies to
report any changes in revenue recognition related to adopting its provisions as
an accounting change at the time of implementation in accordance with Accounting
Principles Board Opinion No. 20, Accounting Changes. SAB 101 becomes effective
for the fourth quarter of the Company's fiscal year 2001, however, early
implementation is acceptable. The Company does not believe the adoption of SAB
No. 101 will have a material impact on its financial position or results of
operations.
9
<PAGE>
Part II
Other Information
Item 1. Legal Proceedings.
On September 1, 2000, the Company took part in the filing of a lawsuit
entitled Nobel Learning Communities, Inc. and Paladin Academy, LLC v.
------------------------------------------------------------
Developmental Resource Center, Inc., Dr. Deborah Levy,. L.D. Learning.Com and
-----------------------------------------------------------------------------
Emily Levy, Case No. 00-3286 CIV-KING, filed in the federal district court for
----------
the Southern District of Florida. The eleven count complaint alleges that two
employees of Developmental Resource Center, Inc. ("DRC"), Dr. Deborah Levy ("Dr.
Levy") and Emily Levy ("Ms. Levy"), created eleven educational books (the
"Books"), within the course and scope of their employment for DRC. The
complaint also alleges that the copyrights to the Books were transferred by DRC
to Paladin Academy, LLC ("Paladin"), pursuant to an agreement and plan of
organization signed by the Company, DRC and Dr. Levy on June 19, 1998 (the
"Organization Agreement"). In exchange, the complaint alleges that DRC
received, among other things, a twenty percent limited liability interest in
Paladin (the "DRC Membership Interest"). The complaint therefore first asks the
court to enter a judgment declaring that Paladin is the owner of the copyrights
to the Books.
The complaint then asks the court to award damages to the Company as a
result of DRC's and Dr. Levy's alleged breach of certain representations and
warranties in the Organization Agreement. Next, the complaint asks the court to
award damages to the Company and to Paladin for alleged violations by DRC and
Dr. Levy of the State of Florida's Deceptive and Unfair Practices Act and
Florida's unfair competition laws. Two of the remaining counts in the
complaint deal with Dr. Levy's alleged breaches while an employee of Paladin.
One seeks damages in favor of Paladin because of Dr. Levy's alleged fraud in
causing Paladin to purchase the Books from an outside source, despite the fact
that Paladin is the owner of the copyrights to the Books. The other seeks
injunctive relief for breach of employment contract on the basis that Dr. Levy
was allegedly competing with Paladin and was diverting Paladin's business
opportunities for her own benefit. Another of the counts in the complaint is
for civil conspiracy against all of the defendants, including Ms. Levy and
LDLearning.Com ("LD Learning"), Ms. Levy's company, for allegedly conspiring to
register some of the copyrights to the Books in the name of LD Learning and for
selling and distributing the Books without Paladin's consent. The last count in
the complaint alleges that based on Dr. Levy's breaches of her employment
agreement with Paladin, Nobel is entitled to repurchase the DRC Membership
Interest in accordance with the formula set forth in the Agreement of Operation
of Nobel Learning Solutions, LLC, entered into between DRC and Nobel on August
14, 1998 (the "Operation Agreement").
On October 10, 2000, the defendants filed an answer and affirmative
defenses to the complaint. The defendants generally denied the allegations and
asserted thirteen affirmative defenses. On that same date, DRC, Dr. Levy and LD
Learning filed a twelve count counterclaim. The counterclaim alleges, among
other things, that Paladin's termination of Dr. Levy's employment was not "for
cause" and that, therefore, Nobel is not entitled to repurchase the DRC
Membership Interest and that its efforts to do so constitute conversion of the
DRC Membership Interest. In the Counterclaim, DRC and Dr. Levy also sue the
Company for breach of fiduciary duty, breach of the Operation Agreement and for
an accounting (for allegedly conspiring with Paladin to terminate Dr. Levy, for
violating the non-compete provision of the Operation Agreement and for failing
to provide financial information). Dr. Levy has sued Paladin for breach of the
employment agreement for allegedly terminating her without cause and for
requiring her to perform tasks outside the terms of the employment agreement.
The Counterclaim also alleges that Dr. Levy was terminated in violation of
Florida's Whistle Blower Law. Lastly, LD Learning has sued Paladin for
copyright infringement alleging that Paladin has used the Books without
permission.
The defendants' response to counterclaim and their motion to strike
affirmative defenses are both due on November 17, 2000. Discovery in this
lawsuit is in its very early stages. The Company has not yet had an opportunity
to fully assess the alleged merits of the counterclaim but believes them to be
without substantial support at this time. The Company is currently being
represented by the law firm of Duane, Morris & Heckscher, LLP. The Company
intends to vigorously pursue its claims set forth in the complaint and to
vigorously defend against the counterclaim.
Item 6. Exhibits and Reports on Form 8-K
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements 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.
NOBEL LEARNING COMMUNITIES, INC.
Dated: November 14, 2000 By: /s/ William E. Bailey
-----------------------------------
William E. Bailey
Vice President/Chief Financial Officer
(duly authorized officer and
principal financial officer)
10
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Exhibits
Exhibit
Number Description of Exhibits
27 Financial Data Schedule
11
