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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, 2000
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_____
-----
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 15, 2000, 5,976,599 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 15, 2000 was approximately $33,150,000 (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 16, 2000 (the "Proxy Statement") and to be
filed within 120 days after the registrant's fiscal year ended June 30, 2000 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...................................... 14
2. Properties............................................................. 15
3. Legal Proceedings...................................................... 15
4. Submission of Matters to a Vote of Security Holders.................... 16
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters........................................ 17
6. Selected Financial Data................................................ 19
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................... 20
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 2000 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 leading for-profit provider of education and school management
services for the pre-elementary through 12/th/ grade market. Our programs are
offered through a network of affordable private schools, charter schools,
schools for learning challenged students, and specialty high schools, under the
global brand name "Nobel Learning Communities". These schools typically provide
summer camps and before-and-after school programs. 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, Georgia, Illinois, Nevada,
Texas, Arizona, Oregon and Washington. The schools operate under various names,
including Chesterbrook Academy (East, South and Midwest), Merryhill School
(West), Evergreen Academy (Northwest), Paladin Academy (learning challenged) and
Houston Learning Academy (alternative high schools). As of September 15, 2000,
we had 162 schools in 15 states, with an aggregate capacity of approximately
27,000 children.
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.
Our strategy is based on meeting the educational needs of children,
beginning with infancy. We encourage our children to stay with Nobel schools as
they advance each school year, within our geographic clusters called "Nobel
Learning Communities." Through the use of strategically designed clusters, we
increase market awareness; achieve operating efficiencies; and provide cross-
marketing opportunities, particularly by providing feeder populations from pre-
elementary
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school to elementary school, and elementary school to middle school, and to and
from our other specialty programs. Centralized administration provides control
of program quality and development and significant operating efficiencies.
We seek to distinguish our schools from our competition with qualitative
and quantitative program outcomes. At each level, we support a child's
development with age appropriate curriculum-based programs. We foster learning
through accredited schools with small classes, supported by technology and early
introduction of a foreign language. Further, in certain locations, we serve
those with special needs through our schools for learning challenged and
alternative high schools. We believe that the empirical results support the
quality of our programs. Standardized test results have shown that our students
perform one and one-half to three grade levels above national norms in reading
and mathematics.
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). Some 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.
We were organized in 1984 as The Rocking Horse Childcare Centers of
America, Inc. In 1993, new management changed our strategic direction to expand
into private elementary education. This change in direction coincided with the
change of our name to Nobel Education Dynamics, Inc. In 1998, we changed our
name to Nobel Learning Communities, Inc. to reflect the organizational model
that we use today, which supports cross-marketing and operational synergies
within the "Nobel Learning Communities."
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 foundation of sound research,
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,
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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 Chief Education Officer, we have developed
curriculum guidelines for each grade level and content area to assist principals
and teachers plan their daily and weekly programs. At the educator's Web site
we have linked the curriculum guidelines to the products and services that are
most appropriate for addressing our guidelines. The Web site also provides our
educators with links to Nobel's frameworks and philosophy as well as other
resources that support our educational mission.
In 1996, we launched our National Education Advisory Board. Under the
direction of Lynn Fontana, our Vice President - Education, the Board includes
six nationally known educators each of whom advises Nobel on his or her
particular area of expertise:
. 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 the development of our curriculum guidelines,
advises on how best to integrate innovation into our schools and how best to
prepare our teachers to implement programs that address the curriculum
guidelines. Advisory Board members are also available to work on special
projects and services that enhance our school programs.
We maintain that small schools, small classes, qualified teachers, clearly
articulated curriculum guidelines and excellent educational materials 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 readiness and 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 three and four
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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.
We recognize that maintaining the quality of our teachers' capabilities and
professionalism is essential to sustaining our students' high level of academic
achievement and our profitability. We sponsor teacher development days covering
various aspects of teaching and education, using both internal trainers and
external consultants. Staff members are recognized for the completion of
continuing education experiences, encouraged to pursue formal advanced learning,
and rewarded for outstanding performance and achievement. Our educators serve
on task forces and committees who regularly review and revise guidelines,
programs, tools and current teaching methods.
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 Private Schools Association (NIPSA), or the Commission on
International and Trans-Regional Accreditation (CITA).
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.
Critical to our educational and financial success are our school
principals, who are responsible to manage school personnel and finances, to
ensure teacher adherence to our curriculum guidelines, and to implement local
sales and marketing strategies. We treat each school as a separate cost center,
holding each accountable for its own performance. Each school prepares an annual
budget and submits weekly financial data to the corporate office, and to
appropriate district and division managers. Tuition revenue, operating costs,
and utilization rates are continually monitored, with each school measured
weekly in relation to our business plan and prior year performance. Executive
Directors, another critical component to our success, oversee the principals in
their management responsibilities and they report to regional Vice Presidents of
Operations. School principals and directors work closely with regional and
corporate management, particularly in the regular assessment of program quality.
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. Our
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corporate office began central management of several significant ancillary
programs. This central management has enabled us to obtain more favorable terms
from vendors and to encourage more active participation from schools.
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 understanding of the candidate's background,
reputation and character. After hiring, our faculty is reviewed and evaluated
annually through a formal evaluation. process 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
pre-elementary schools geographically to increase local market awareness and to
supply a student population for our elementary and middle schools. Our
educational continuum from pre-elementary school 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 early age introduction of foreign
language and technology use, and evaluation progress, including 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 - Nobel Learning Communities (NLC) Strategy and
Implementation
Our growth has been primarily through the opening of new schools and making
strategic acquisitions of existing schools. We expect this strategy to continue
into the immediate future. Before we enter a new market, we devote significant
resources to evaluating that market's potential. Evaluation criteria include 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.
We consider not just the ability of a new market to sustain a single
school, but also our ability to support the successful development of a regional
cluster of our schools - a Nobel Learning Community ("NLC") - where pre-
elementary schools provide a pipeline of students to our elementary schools and
other programs. We believe that development of a NLC is key to our running
efficient, geographically concentrated operations. Our goal is for each Nobel
school
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within a NLC to function independently - and also benefit from cross-marketing,
cross-referral and brand awareness within the NLC. The combination school
structure also allows sharing of resources and costs. Examples include shared
athletic facilities, swimming pools, gymnasiums, transportation services, the
employment of regional maintenance employees, and the after-hours use of
classroom facilities.
New School Development
In fiscal 2000, we opened three elementary schools (including one charter
school) and five pre-elementary schools and five Paladin Academy schools (four
of which were in classrooms in our elementary schools). We also expanded one of
our campuses. In fiscal 2001 through September 15, 2001, we have opened four
elementary schools (including one charter school) and four pre-elementary
schools, and three Paladin Academy schools (two of which were in classrooms in
our elementary schools). In the remainder of fiscal 2001 and through the fall
of 2001, we plan to open approximately four elementary schools (not including
possible charter schools), 11 pre-elementary schools, 12 Paladin Academy schools
(six in classrooms in our elementary schools), and two Houston Learning Academy
schools).
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. Our development
plans are dependent on the continued availability of developer and financing
arrangements.
When we enter a new market, we typically first open pre-elementary schools
as a foundation for the NLC. Pre-elementary schools can build enrollments more
quickly than elementary school, since most communities do not provide free pre-
elementary school. As a NLC matures, our pre-elementary schools can supply a
student feeder population to Nobel elementary and middle schools and other
programs. Our current models for construction of new elementary school
facilities embody this mutual supportive concept. In addition to the elementary
grades, our new elementary schools typically include pre-elementary classes and,
possibly, Paladin Academy classes. As enrollment increases, pre-elementary and
Paladin Academy classes can expand to a new facility. In some cases, we plan at
the outset for construction of a second building on the same campus after such
growth has been attained. Typically, our new schools are single-story stand
alone structures located near residential neighborhoods on acreage appropriate
to the nature of the school.
Acquisitions
Since 1994, Nobel has acquired 78 schools: 51 pre-elementary schools, 22
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).
Key acquisition criteria are reputation, accretion to earnings, geographic
location in markets with excellent demographics and growth prospects, ability to
integrate into existing NLCs or become
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the foundation for new NLCs, and quality of personnel.
Recently, we have used strategic acquisitions to expand our market
offerings. These acquisitions not only allow us to enter markets we believe have
strong potential, but also present opportunities for profitable synergies with
our other educational offerings. In August 1998, we commenced our special
education offerings with the acquisition of the Developmental Resource Centers
in Southern Florida. With our September 1999 acquisition of the Houston Learning
Academy schools, we now offer alternative high schools for children who require
a more individualized learning environment. This acquisition also gives us
potential to expand into the summer school market. The acquisition of The
Activities Club facilitates our entry into the summer program and after school
program curriculum-based products for the public, charter, and private school
markets. Our equity interest in and strategic alliance with Total Education
Solutions expands our special education services to charter and public schools.
We expect acquisitions to continue to be a large part of our growth strategy.
"Nobel On-The-Job"
We plan to continue to augment our development efforts through the 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 corporations that
seek to offer their employees high quality pre-elementary school programs. Also,
some companies are considering providing elementary grade schools for their
employees. Currently, some of our pre-elementary schools 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, Weyerhauser, Lucent Technologies and Motorola.
In 1999, we competed successfully against two market leaders in corporate-
affiliated pre-elementary schools and were awarded a fifteen year contract to
operate a pre-elementary school in Herndon, Virginia for the Northwest Federal
Credit Union.
Nobel Learning Solutions
Since October 1999, many of our new business initiatives in educational
services have been managed through a separate division - Nobel Learning
Solutions. Nobel Learning Solutions currently manages our schools for learning
challenged students, alternative high schools, charter schools and tutoring
programs.
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 with
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
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reenter mainstream school programs after 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, 2000, we operated 12 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, one
additional school acquired in February 2000 also in South Florida, and eight
newly opened schools. As a part of our combination school strategy, most of our
new Paladin Academy schools are conducted in classrooms of Nobel Learning
Communities elementary schools. Paladin Academy schools are now located in
Florida, Virginia, North Carolina, Washington, California and Nevada, and a
Paladin Academy is scheduled to open in October 2000 in Arizona.
We believe that NCL clusters will foster the development of the Paladin
Academy schools. Existing Nobel schools 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 and absorbs overhead expense for new Paladin
Academy schools by utilizing excess capacity at existing and new elementary
schools. Paladin Academy schools can also share beneficial plant and equipment
resources, such as soccer fields, basketball courts and the gymnasiums of
schools at which they are located, or proximate.
We plan to expand Paladin Academy schools within Nobel school clusters
across the United States. Further, as Paladin Academy develops broader market
recognition independent of our private elementary schools, we plan to roll out
the program independently across the United States. Our ultimate goal is to
become the premier national operator of special education schools.
Expanding our initiatives in special education, in May 2000, we invested in
Total Education Solutions, which provides special education services to charter
schools and public schools who, because of lack of internal capabilities or
other reasons, wish to out-source their provision of special education programs
(which, under federal law, they are required to provide to select students).
Charter Schools
In July 1999, we began management of our first charter school, The
Philadelphia Academy Charter School in Philadelphia, PA, which serves 624
students in Kindergarten through eight grade. Our successful performance under
management of that contract resulted in the March 2000 award of two additional
contracts to manage new charter schools in Philadelphia (one opened in September
2000 and the other to open in September 2001). Under these management
agreements, we provide administrative and development/construction management
services to the charter schools pursuant to four or five-year terms, subject to
extension. The actual holders of the charters, non-profit entities managed by a
board of directors or trustees, fund their own operations, through payments from
the School District of Philadelphia. As part of the arrangements with the
charter schools, Nobel leases the charter school premises from a third party,
and subleases the premises to the non-profit entity.
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Further adding to our charter school operations, in May 2000, we acquired
two charter schools in Arizona: the Fletcher Heights Charter Elementary School
in Peoria, Arizona and the Desert Heights Elementary School, which opened in
Glendale, Arizona in August 2000. In contrast to our Philadelphia charter
schools and charters for which we are applying in other states, we hold the
charter and own and operate the Arizona charter schools independently, as
Arizona law permits the charter funds to be paid directly to a for-profit
corporation. Through our strategic alliance with Total Education Solutions, we
also provide special education services to 25 additional charter schools.
We intend to pursue additional charter school opportunities in states with
charter laws which allow charter school management arrangements to be
economically viable (e.g., attractive charter school reimbursement policies per
pupil and management flexibilities). We also consider geographic criteria. We
seek highly populated urban markets, particularly those with struggling public
schools, and proximity to existing NLC schools. While our private schools are
typically located in affluent suburban markets, charter schools can allow us to
offer our education programs to more urban locations. We are currently applying
to manage five additional charter schools in New York, Pennsylvania, and
Illinois.
We also plan to pursue growth in charter school management by competing for
contracts at existing charter schools. These include both charter management
contracts which are up for renewal and charters currently being managed by the
local not-for-profit administration. We will also consider selective
acquisitions of other companies in the charter school management business.
Since our charter schools operate under a charter granted by a state or
school board authority, we would lose the right to operate a school if the
charter authority were to revoke the charter. Typically, the charter holder is
community group which engages us to manage the school under a management
agreement; so the charter authority could base such revocation on actions of the
charter holder, which are outside of our control. Also, many state charter
school statutes require periodic reauthorization. If state charter school
legislation in such states were not reauthorized or were substantially altered,
our charter opportunities in the charter school market could be materially
adversely affected.
Houston Learning Academy
In September 1999, we acquired all the capital stock of Houston Learning
Academy (HLA), an operator of five alternative high schools in the Houston
metropolitan marketplace. HLA schools offer a half day fully accredited high
school program, as well as summer school (to approximately 2,000 students in
Summer 2000), tutorials and special education classes to residential hospitals.
HLA schools' programs feature very small class sizes and individualized
attention. Many students who attend HLA desire to engage in other activities in
the afternoons or are attracted to the flexibility of the schools' curriculum.
We plan to grow the HLA concept by leveraging our existing school model and
accreditation to other Texas metropolitan areas (Dallas, San Antonio), followed
by introduction into existing and future Nobel markets. We believe HLA and
Paladin Academy schools will have significant marketing and other synergies.
For example, since HLA programs run primarily in the morning, we can use the
same facilities
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to conduct Paladin Academy programs in the afternoons.
Nobel Education Solutions
We are building our Educational Services division, Nobel Education
Solutions, on the platform established by our December 1999 acquisition of The
Activities Club. The Activities Club provides before-and-after-school programs,
summer camps, and theme-based programs to public schools, private schools, and
corporations. We plan to introduce NES programs throughout our existing and
planned NLCs to further leverage our existing customer relationships, brand
equity and infrastructure. We also plan to market NES programs to public schools
and other alternative schools.
Industry and Competition
Annual spending for education and training is estimated to exceed $740
billion annually in the United States or approximately 10% of gross domestic
product. Estimates of spending on education for preprimary grades (pre-
elementary schools 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 pre-
elementary school/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 pre-elementary schools, 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 actively pursue
growth in these markets; although 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
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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
the growth. 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.
Education is a politically "hot issue," both nationally and locally. 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 prepared 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.
To attract 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 that integrates
elementary and pre-elementary schools 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 measured outcomes, accreditation, curriculum-intensive goals,
which would require significant cultural changes and capital investment.
The pre-elementary school/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/pre-elementary school providers
represent approximately five percent of total segment revenues. Also seeking
enrollments of pre-school age
11
<PAGE>
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 our target market - parents
seeking curriculum-based learning programs for their children - seek services
beyond those provided by child care providers without curriculum based learning.
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 pre-elementary schools is increasing. More than 60%
of married mothers with children under six years of spend their days in the
workplace. Both single parents and dual income families are on the rise. From
1980 to 1990, the percentage of dual income families rose from 50% to 60%. From
1970 to 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 pre-elementary school 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 pre-
elementary school market, many of these services are not offered by many of our
competitors.
Charter schools, voucher programs, and home schooling are growing rapidly
in the United States, largely in response to acknowledged shortcomings in the
traditional public school system. Charter schools are now legal in 37 states,
the District of Columbia, and Puerto Rico. Charter schools receive public funds
(to be used to fund all expenses, excluding the purchase of real estate) on a
per student basis. Charter schools, however, are not bound by most regulations
governing public schools. Initially viewed as an experiment when the first
charter school opened in 1992, 1,700 charter schools presently serve 350,000
students nationwide. Moreover, greater than two-thirds of these schools have
enrollment waiting lists. The United States will have 2,000 charter schools by
the end of 2000, a number that is expected to grow to 6,000 schools by 2010.
Currently, for-profit companies manage only about 10% of the charter schools in
the United States. This number is expected to triple over the next five years as
the benefits of professional management are validated and established charter
school management companies, such as us, enter the market. Major competitors in
charter school management include Edison Schools, Inc., Advantage Schools,
Beacon Education Management, Charter Schools USA, The Leona Group, National
Heritage Academy and SABIS Educational Systems. Other private school operators
and post-secondary education providers could possibly enter the charter school
market.
Regulation
Schools and pre-elementary schools 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
12
<PAGE>
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.
Our charter schools are subject to substantial additional federal and state
regulation since they are funded by public monies. Under our charter school
management agreements, the charter entity is ultimately responsible for
compliance with these regulations; we are responsible for such compliance in our
Arizona charter schools. Significant among federal laws is the Individuals with
Disabilities in Education Act. This act requires that students with qualified
disabilities receive an appropriate education through special education and
related services provided in a manner reasonably calculated to enable the child
to receive educational benefit in the least restrictive environment. The charter
school's obligation to provide these potentially extensive services, and the
attendant financial exposure, varies depending on state law. Other laws
applicable to our charter schools include the Family Educational Rights and
Privacy Act (which protects the privacy of a student's educational record), the
Gun-Free Schools Act (which requires us to effect certain policies, assurances
and reports at our charter schools regarding the discipline of students who
bring weapons to our schools) and various civil rights laws.
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)
and Merryhill Country School(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 pre-
elementary schools 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, 2000, we employed approximately 4,700 persons,
approximately 1,700 of whom were employed on a part-time or seasonal basis. We
believe that our relationship with our employees is satisfactory.
13
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
Name Age Position
------------------------------------------------------------------------
A. J. Clegg 61 Chairman of the Board of Directors and
Chief
Executive Officer; Director
Daryl A. Dixon 40 President and Chief Operating Officer
John R. Frock 57 Executive Vice President - Corporate
Development; Assistant Secretary; Director
William E. Bailey 41 Vice President and Chief Financial Officer
B. Robin Eglin 44 President - Nobel Learning Solutions
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 1996, Mr. Clegg has also served as a
member of the Board of Trustees of Drexel University. From June 1990 to
December 1997 (but involving immaterial amounts of time between 1994 and 1997),
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, 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. In August 2000, Mr. Clegg
was recognized as "Education Entrepreneur of the Year" by the Association of
Education Practitioners and Providers.
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
14
<PAGE>
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
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 an executive 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 operating activities. Mr. Eglin joined Carefree in 1989.
Prior to joining Blue Shield, Mr. Eglin held a management position with the
Company.
Item 2. Properties.
At September 15, 2000, we operated 162 schools on 11 owned and 133 leased
properties in 15 states. Our schools are geographically distributed as follows:
34 in California, 21 in North Carolina, 23 in Pennsylvania, 19 in Virginia, 12
in New Jersey, 17 in Florida, nine in Illinois, seven in Texas, six in Nevada,
six in Washington, two in South Carolina, two in Oregon, two in Arizona, one in
Georgia, 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;
however, at June 30, 2000, we did not hold any such properties. 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 14,022 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
15
<PAGE>
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.
16
<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 July
1, 1998 through June 30, 2000 and for the first quarter to date in Fiscal 2001.
High Low
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 (July 1, 1999 to June 30, 2000)
First Quarter................................ 6 1/8 4 1/4
Second Quarter............................... 9 5 1/8
Third Quarter................................ 9 5/16 6 1/2
Fourth Quarter............................... 8 3/16 5 15/16
Fiscal 2001
First Quarter (as of September 20, 2000)..... 10 7 3/4
Holders
At September 20, 2000, there were approximately 368 holders of record of
shares of common stock.
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
17
<PAGE>
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.
18
<PAGE>
Item 6. Selected Financial Data
Nobel Learning Communities, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the years ended June 30, Six months ended For the years ended December 31,
--------------------------- --------------------------------
Operating Data 2000 1999 June 30, 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $127,407 $ 109,762 $ 48,995 $80,980 $58,909 $44,154
School operating expenses 109,374 95,957 42,142 69,858 48,871 35,762
---------------------------------------------------------------------------------------------------------------------------------
School operating profit 18,033 13,805 6,853 11,122 10,038 8,392
-------------------------------------------------------------------------------------------------------------------------------
New school development 704 518 501 400 207 146
General and administrative expenses 9,742 7,717 3,391 5,973 4,190 3,396
Restructuring expense - - - 2,960 - -
Litigation expense - - - - - 500
-------------------------------------------------------------------------------------------------------------------------------
Operating income 7,587 5,570 2,961 1,789 5,641 4,350
Interest expense 3,373 2,998 1,044 2,047 2,004 1,840
Other (income) expense (145) (248) (102) (158) (482) (126)
Minority interest 88 74 35 86 94 86
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 4,271 2,746 1,984 (186) 4,025 2,550
Income tax (benefit) expense 1,793 1,153 833 250 1,562 (1,356)
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item 2,478 1,593 1,151 (436) 2,463 3,906
Extraordinary item - - - 449 - 62
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 2,478 1,593 1,151 (885) 2,463 3,844
Preferred dividends 82 83 51 102 109 184
-------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 2,396 $ 1,510 $ 1,100 $ (987) $ 2,354 $ 3,660
===============================================================================================================================
EBITDA
(earnings before interest, taxes,
depreciation and amortization expense) $ 13,943 $ 11,123 $ 5,243 $ 4,803 $ 8,313 $ 6,020
Basic earnings per share
Net income (loss) before extraordinary item $0.40 $ 0.25 $ 0.18 $ (0.09) $ 0.42 $ 0.79
Extraordinary item - - - (0.07) - (0.01)
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.40 $ 0.25 $ 0.18 $ (0.16) $ 0.42 $ 0.78
===============================================================================================================================
Dilutive earnings per share
Net income (loss) before extraordinary item $ 0.33 $ 0.22 $ 0.15 $ (0.09) $ 0.34 $ 0.64
Extraordinary item - - - (0.07) - (0.01)
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.33 $ 0.22 $ 0.15 $ (0.16) $ 0.34 $ 0.63
===============================================================================================================================
Balance Sheet Data:
Working capital deficit $(16,380) ($12,087) $(10,221) $(7,946) $(1,351) $ (831)
Cost in excess of net assets acquired 49,794 45,725 41,753 37,439 25,601 17,274
Total assets 97,491 81,025 75,020 74,398 56,833 44,937
Short-term debt and current portion
of long-term debt 6,230 2,209 2,031 2,793 3,448 1,371
Long-term debt 36,152 29,147 26,477 28,470 14,226 20,272
Stockholders' equity 36,558 34,145 32,736 31,636 32,323 16,121
</TABLE>
19
<PAGE>
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Fiscal Year ended June 30, 2000 ("2000") compared to the twelve months ended
June 30, 1999 ("1999").
The Company's fiscal year ends on June 30. The fiscal year ended June 30, 2000
was a 53 week year and the fiscal year ended June 30, 1999 was a 52 week year.
During 2000, the Company acquired the assets or stock of companies owning 14
schools. These acquisitions include: six specialty high schools in Houston,
Texas, four preschools in Illinois, New Jersey, Texas and Georgia, one
elementary school in New Jersey, two charter schools in Arizona and one special
education school in Florida. In addition, the Company opened eleven new
schools, of which five were preschools, two were elementary schools, three were
specialty schools, and one charter school. The Company also closed 12 schools,
nine of which related to the Indianapolis divestiture.
Following is a chart that breaks down revenues, school operating profit and
school operating profit margins for 2000 and 1999 into three categories:
<TABLE>
<CAPTION>
Twelve months % of Twelve months % of 2000-1999
June 30, 2000 revenue June 30, 1999 revenue Variance ($)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Baseline Schools (1)
Revenues $111,200 100.0 $ 92,967 100.0 $18,233
Operating profit $ 18,490 16.6 $ 15,467 16.6 $ 3,023
----------------------------------------------------------------------------------------
Schools Acquired
Within the Year (2)
Revenue 3,792 100.0 1,743 100.0 2,049
Operating profit 461 12.2 650 37.3 (189)
----------------------------------------------------------------------------------------
New School
Development (3)
Revenues 12,415 100.0 15,052 100.0 (2,637)
Operating profit (Loss) 1,026 8.3 (478) (3.2) 1,504
----------------------------------------------------------------------------------------
Total Revenues $127,407 100.0 $109,762 100.0 $17,645
========================================================================================
School operating profit
before amortization
of goodwill 19,977 15.7 15,639 14.2 4,338
Less amortization
of goodwill 1,944 1.5 1,834 1.7 110
----------------------------------------------------------------------------------------
School operating profit $ 18,033 14.2 $ 13,805 12.6 $ 4,228
========================================================================================
</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 that were acquired in 1999 are included
in "Baseline Schools" for 2000 results and "Schools Acquired Within the
Year" for 1999 results. Schools that were opened in the twelve months
ended June 30, 1998 are included in "Baseline Schools" for 2000 results and
"New Development" for 1999 results.)
(2) Schools Acquired Within the Year is defined as (i) schools acquired during
the 12 months ended June 30, 1999 for 1999 results and (ii) schools
acquired during the 12 months ended June 30, 2000 for 2000 results.
(3) New School Development is defined as schools that have not been opened for
two full fiscal years (i.e., schools opened between July 1, 1997 to June
30, 1999 for 1999 and (ii) schools opened between July 1, 1998 to June 30,
2000 for 2000 results).
In 2000, the Company's total revenues increased $17,645,000 or 16.1% as compared
to 1999. After adjusting 2000 to a comparable 52-week basis, revenues would have
increased approximately $15,845,000 or 14.2%. School operating profits (after
goodwill) increased $4,228,000 as compared to 1999. School operating profit
margins increased from 12.6% in 1999 to 14.2% in 2000.
Revenues in the Baseline Schools increased $18,233,000 or 19.6% from 1999 to
2000. The increase is a result of the combination of several factors: (1) an
increase in revenues of $2,423,000 related to acquisitions completed in the
1999, (2) a $12,615,000 increase related to new schools opened during the twelve
months ended June 1998, (3) an increase of revenues of $7,304,000 in all other
schools due to annual tuition increases and additional enrollments, and (4)
these increases were offset by a decrease of $4,109,000 related to closed or
sold schools. Operating profit of the Baseline Schools increased $3,023,000 as a
result of (1) a $401,000 increase in operating profit related to the schools
acquired in the 1999, (2) a $661,000 increase related to new schools opened
during the twelve months ended June 1998, (3) a $1,693,000 increase related to
all other schools due to control of personnel cost and additional enrollments,
and (4) a $268,000 increase as a result of the elimination of 12 closed or sold
schools.
The Company acquired 14 schools during 2000 which contributed total revenues of
$3,792,000 and school operating profits of $461,000. The Company acquired four
schools during 1999 which in such period contributed revenues of $1,743,000 and
operating profit of $650,000. Operating profit margin before goodwill of the
schools acquired in 2000 was 12.2% or 25.1% below the schools included in
1999. The decrease in the operating profit margin for the schools acquired in
2000 are due to the type and timing of the schools acquired. The schools
acquired in 2000 consist of various types of schools and were acquired
throughout the year as compared to the schools acquired in 1999 which consist of
an acquisition of three specialty learning schools in August 1998 which operates
with substantially higher margins and one preschool acquired in May 1999.
In 2000, revenues related to new schools opened during the period between July
1, 1998 to June 30, 2000 totaled $12,415,000 or a decrease of $2,637,000
compared to the schools opened during the period between July 1, 1997 to June
30, 1999. During 2000, the Company opened eleven schools, five preschools, two
elementary schools, three specialty schools, one charter school, and during the
12 months ended June 30, 1999, the Company opened six schools, three of which
were elementary schools. Operating income totaled $1,026,000 in 2000 compared to
operating losses of $478,000 in 1999. The $1,504,000 increase in operating
profit is a result of the mix in the type of schools opened and the timing and
number of school openings.
New school development costs increased $186,000 in 2000 primarily because of the
increase in the number of schools opened. During 2000, the Company opened eleven
schools as compared to six schools in 1999. New school development costs include
personnel, marketing and supplies.
General and administrative expenses increased $2,025,000 or 26.2% to $9,742,000
in 2000. As a percentage of revenue, general and administrative expenses
increased from 7.0% of revenues in 1999 to 7.6% of revenues in 2000. The
increase is attributable to the increase in the Company's infrastructure to
support its specialty school and charter school growth initiatives. During 2000,
the Company opened or acquired 10 specialty schools and 3 charter schools.
Management is continuing to build 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.
20
<PAGE>
As a result of the factors mentioned above, operating income increased
$2,017,000 to $7,587,000 for 2000 as compared to 1999. Operating income as a
percentage of revenue increased from 5.1% in 1999 to 5.9% in 2000.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization) totaled $13,943,000 for 2000 which was $2,820,000 above 1999. As a
percentage of revenue, EBITDA for 2000 equaled 10.9% versus 10.1% in 1999.
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 $375,000 or 12.5% for 2000 as compared to 1999.
The increase in interest expense is a result of increased borrowings under the
Company's senior debt facility in connection with Company's acquisitions and an
increase in interest rates on the Company's floating rate senior debt.
The provision for income taxes of $1,793,000 for 2000 was in excess of amounts
computed by applying statutory federal income tax rates to income before income
taxes due primarily to non-deductible goodwill incurred with acquisitions for
stock and state income taxes. For acquisitions of stock of a company, purchase
accounting applies for accounting purposes; but, for tax purposes, the Company
inherits the historic basis of the purchased company in its assets, without any
goodwill.
Fiscal Year ended June 30, 1999 ("1999") compared to the twelve months ended
June 30, 1998 ("1998 period")
On December 19, 1997, the Company changed its fiscal year end to the last Friday
in June closest to June 30. To facilitate a discussion of the Company's
operating performance for1999, the corresponding period for the twelve months
ended June 30,1998 is presented.
During 1999, the Company acquired the assets or stock of companies owning four
schools. These acquisitions include: three schools for the learning challenged
in Dade County, Florida and one preschool in Leesburg, Virginia. In addition,
the Company opened six new schools, of which three were preschools and three
were elementary schools. The Company also closed seven schools.
Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for 1999 and the 1998 period into three
categories: Baseline Schools, Schools Acquired Within the Year and New School
Development (dollars in thousands).
<TABLE>
<CAPTION>
Twelve months % of Twelve months % of 1999-1998
June 30, 1999 revenue June 30, 1998 revenue Variance ($)
---------------------------------------------------------------------------------------------
<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 July 1, 1996 to June
30, 1998 for 1998 period results and (ii) schools opened between July 1,
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 30, 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 30, 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.
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 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
21
<PAGE>
administrative expenses decreased from 7.2% of revenues in the 1998 period to
7.0% of revenues in 1999. Management is continuing to build 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.
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.
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 or equity financing. 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 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.
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, 2000, $7,840,000 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $7,174,000 was outstanding
under the Acquisition Credit Facility and $9,750,000 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, which warrants currently have an exercise
price of $7.00 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 increased $2,158,000 from $1,640,000 at June
30, 1999 to $3,798,000 at June 30, 2000. The net increase was due primarily to
(1) cash flow from operations of $10,170,000, (2) net borrowings of long term
debt and subordinated debt of $7,789,000 and (3) proceeds from the sale of
property totaling $2,449,000. These increases were offset by (1) cash used for
acquisitions totaling $6,669,000 and (2) capital expenditures totaling
$13,408,000.
The working capital deficit increased $4,293,000 from $12,087,000 at June 30,
1999 to $16,380,000 at June 30, 2000. The increase is primarily the result of
the increase in current portion of long term debt.
22
<PAGE>
Capital Expenditures
The Company is continuously maintaining and upgrading the property and equipment
of each school. During 2000, the Company spent approximately $13,408,000 on
capital expenditures, which included $8,947,000 for new school development and
$4,461,000 on upgrading existing facilities. 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 2000, the Company received $1,899,000 from sale and leaseback
transactions of new schools and $550,000 for the sale of under performing
schools. 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 $5,200,000 in fiscal year
2001 from sale and leaseback transactions.
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.
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 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.
23
<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-
15 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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
(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
</TABLE>
(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted as not applicable or
not required under the instructions contained in Regulation S-X or the
information is included elsewhere in the financial statements or notes
thereto.
(b) Reports on Form 8-K.
On May 30, 2000, the Company filed a Current Report on Form 8-K to report
the adoption on May 16, 2000 of a stockholders rights plan which contemplates
the issuance of preferred stock purchase rights to the Company's common
stockholders and preferred stockholders of record as of June 1, 2000, as set
forth in the Rights Agreement between the Company and Stocktrans, Inc., as
Rights Agent, filed as an exhibit to such filing.
(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.)
26
<PAGE>
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.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock. (Filed as Exhibit B to
Exhibit 1.1 to Registrant's Registration Statement on Form 8-A, dated
May 30, 2000 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 Exhibit 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 First Amendment, dated December 17, 1999, to Amended and Restated Loan
and Security Agreement by and among Registrant and its subsidiaries
and Summit Bank, as Agent and Lender (Filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 and incorporated herein by reference.)
4.3 Second Amendment, dated May 24, 2000, to Amended and Restated Loan and
Security Agreement by and among Registrant and its subsidiaries and
Summit Bank, as Agent and Lender.
4.4 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 4.2 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.5 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 4.3 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.6 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 4.4 to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1999 and incorporated herein by
reference.)
4.7 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 4.5
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein
27
<PAGE>
by reference.)
4.8 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.)
4.9 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 Rights Agreement, dated as of May 16, 2000, between Registrant and
Stocktrans, Inc., as Rights Agent, which includes, as Exhibit B,
thereto the Form of Rights Certificate. (Filed as Exhibit 1.1 to
Registrant's Registration Statement on Form 8-A, dated May 30, 2000
and incorporated herein by reference.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 Form of Non-Qualified 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.)
10.6 Form of Incentive Stock Option Agreement, for stock option grants
under 1995 Stock Incentive Plan.
10.7 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.)
10.8 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.)
28
<PAGE>
10.9 Stock Purchase Agreement dated May 28, 1992 between Registrant and a
limited number of accredited investors at $0.50 per share totaling
3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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. (Certain schedules (and similar
attachments) to Exhibit 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 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.)
10.14 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 10.14 is one in a series of four Common Stock Purchase Warrants issued
pursuant to the Investment Agreement dated as of August 30, 1995 that are
identical except for the Warrant No., the original holder thereof and the number
of shares of Common Stock of the Registrant for which the Warrant may be
exercised, which are as follows:
Number of Shares
of Common Stock
Warrant No. Holder (subject to adjustment)
----------- ------ -----------------------
2 Allied Capital Corporation II 142,932.25
3 Allied Investment Corporation 92,713
4 Allied Investment Corporation II 50,219.5
10.15 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
29
<PAGE>
Form 10-K for the transitional fiscal year ended June 30, 1998 and
incorporated herein by reference.)
10.16 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.)
10.17 Nobel Learning Communities, Inc. Senior Executive Severance Pay Plan
Statement and Summary Plan Description as modified February 3, 2000.
(Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 and incorporated herein
by reference.)
10.18 Nobel Learning Communities, Inc. Executive Severance Pay Plan
Statement and Summary Plan Description as modified February 3, 2000.
(Filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 and incorporated herein
by reference.)
10.19 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.)
10.20 Employment Agreement dated August 9, 1999 between the Registrant and
Lynn Fontana. (Filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999 and
incorporated herein by reference.)
10.21 First Amendment dated February 3, 2000 of Employment Agreement dated
as of August 9, 1999 between Registrant and Lynn Fontana. (Filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and incorporated herein by reference.)
10.22 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.)
10.23 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.)
10.24 Special Incentive Agreement dated as of November 20, 1999 between A.J.
Clegg and the Registrant.
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule
(d) Financial Statement Schedules.
None.
30
<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.
31
<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 28, 2000 NOBEL LEARNING COMMUNITIES, INC.
By: /s/ A. J. Clegg
----------------------------------
A. J. Clegg
Chairman of the Board
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 28, 2000
-------------------------
A. J. Clegg Chief Executive Officer and
Director
/s/ William Bailey Executive Vice President and September 28, 2000
-------------------------
William Bailey Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Edward H. Chambers Director September 28, 2000
-------------------------
Edward H. Chambers
/s/ John R. Frock Executive Vice President September 28, 2000
-------------------------
John R. Frock and Director
/s/ Peter H. Havens Director September 28, 2000
-------------------------
Peter H. Havens
32
<PAGE>
_________________________ Director September 28, 2000
Pamela S. Lewis
/s/ Eugene G. Monaco Director September 28, 2000
-------------------------
Eugene G. Monaco
/s/ William L. Walton Director September 28, 2000
-------------------------
William L. Walton
/s/ Robert Zobel Director September 28, 2000
-------------------------
Robert Zobel
33
<PAGE>
Report of Independent Accountants
To the Stockholders and
the Board of Directors of
Nobel Learning Communities, Inc.:
In our opinion, the consolidated 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, 2000 and 1999, and the results of their operations and their cash flows
for each of the two years in the period ended June 30, 2000 and 1999, the six
months ended June 30, 1998 and the year ended December 31, 1997 in conformity
with accounting principles generally accepted in the United States of America.
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
auditing standards generally accepted in the United States of America 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 15, 2000
F-1
<PAGE>
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 3,798 $ 1,640
Accounts receivable, less allowance for doubtful
accounts of $288 in 2000 and $177 in 1999 1,619 1,689
Prepaid rent 1,591 859
Prepaid insurance and other 772 844
-----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 7,780 5,032
-----------------------------------------------------------------------------------------------------------------------------
Property and equipment, at cost 52,780 37,024
Accumulated depreciation (16,304) (12,324)
-----------------------------------------------------------------------------------------------------------------------------
36,476 24,700
Property and equipment held for sale 690 1,202
Cost in excess of net assets acquired 49,794 45,725
Deposits and other assets 2,742 3,347
Deferred taxes 9 1,019
-----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 97,491 $ 81,025
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
Current portion of long-term obligations $ 6,230 $ 2,209
Cash overdraft liability 3,768 1,792
Accounts payable and other current liabilities 8,994 8,236
Unearned income 5,168 4,882
-----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 24,160 17,119
-----------------------------------------------------------------------------------------------------------------------------
Long-term obligations 23,260 15,316
Long-term subordinated debt 12,892 13,831
Capital lease obligations - 73
Deferred gain on sale/leaseback 20 27
Minority interest in consolidated subsidiary 601 514
-----------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 60,933 $ 46,880
-----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 9 and 15)
Stockholders' Equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, issued and outstanding 4,587,524 in
2000 and 4,593,542 in 1999. $5,524 aggregate liquidation
preference in 2000 and $5,530 in 1999 5 5
Common stock, $0.001 par value; 20,000,000 shares
authorized and issued 6,126,168 in 2000 and
6,121,365 in 1999. 6 6
Treasury stock, cost; 230,510 shares in 2000 and 1999 (1,375) (1,375)
Additional paid-in capital 39,256 39,239
Accumulated deficit (1,334) (3,730)
-----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 36,558 34,145
-----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 97,491 $ 81,025
=============================================================================================================================
</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 ended For the year ended For the six months For the year ended
June 30, 2000 June 30, 1999 ended June 30, 1998 December 31, 1997
<S> <C> <C> <C> <C>
Revenues $ 127,407 $ 109,762 $ 48,995 $ 80,980
-----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Personnel costs 60,541 53,203 23,368 38,557
School operating costs 19,514 16,266 7,023 11,932
Insurance, taxes, rent and other 23,493 21,479 9,661 16,131
Depreciation and amortization 5,826 5,009 2,090 3,238
-----------------------------------------------------------------------------------------------------------------------------------
109,374 95,957 42,142 69,858
-----------------------------------------------------------------------------------------------------------------------------------
School operating profit 18,033 13,805 6,853 11,122
-----------------------------------------------------------------------------------------------------------------------------------
New school development 704 518 501 400
General and administrative expenses 9,742 7,717 3,391 5,973
Restructuring expense - - - 2,960
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 7,587 5,570 2,961 1,789
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense 3,373 2,998 1,044 2,047
Other (income) expense (145) (248) (102) (158)
Minority interest in income of
consolidated subsidiary 88 74 35 86
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 4,271 2,746 1,984 (186)
Income tax expense 1,793 1,153 833 250
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item $ 2,478 $ 1,593 $ 1,151 $ (436)
-----------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss on early extinguishment
of debt, (net of income tax benefit of $330) - - - 449
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 2,478 1,593 1,151 (885)
Preferred stock dividends 82 83 51 102
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders $ 2,396 $ 1,510 $ 1,100 $ (987)
===================================================================================================================================
Basic earnings (loss) per share:
Net income (loss) before extraordinary item $ 0.40 $ 0.25 $ 0.18 $ (0.09)
Extraordinary item - - - (0.07)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.40 $ 0.25 $ 0.18 $ (0.16)
===================================================================================================================================
Dilutive earnings (loss) per share:
Net income (loss) before extraordinary item $ 0.33 $ 0.22 $ 0.15 $ (0.09)
Extraordinary item - - - (0.07)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.33 $ 0.22 $ 0.15 $ (0.16)
===================================================================================================================================
</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 Years Ended June 30, 2000 and 1999, the Six Months Ended June 30, 1998
and for the Year Ended December 31, 1997
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Treasury Accumulated
Shares Amount Shares Amount Capital Stock Deficit Total
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of January 1, 1997 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
--------------------------------------------------------------------------------------------------------------------------------
Stock options exercised and
related tax benefit - - 3,333 - 17 - - $ 17
Conversion of preferred stock (6,018) - 1,470 - - - - -
Preferred dividends - - - - - - (82) $ (82)
Net income - - - - - - 2,478 2,478
--------------------------------------------------------------------------------------------------------------------------------
June 30, 2000 4,587,524 $5 6,126,168 $6 $39,256 $(1,375) $(1,334) $36,558
--------------------------------------------------------------------------------------------------------------------------------
</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 Flows
(dollars in thousands)
<TABLE>
<CAPTION>
For the year ended For the year ended For the six months For the year ended
June 30, 2000 June 30, 1999 ended June 30, 1998 December 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 2,478 $ 1,593 $ 1,151 $ (885)
------------------------------------------------------------------------------------------------------------------------------------
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 6,299 5,409 1,964 3,230
Amortization of debt discount 128 128 - -
Provision for losses on accounts
receivable 372 190 96 345
Provision for restructuring - - - 2,960
Provision for deferred taxes 970 571 277 (300)
Minority interest in income 88 74 35 86
Early extinguishment of debt - - - 779
Changes in Assets and Liabilities
Net of Acquisitions:
Accounts receivable (8) (749) (134) (612)
Prepaid assets (384) 323 (17) (641)
Other assets and liabilities 185 (723) 1,088 (228)
Unearned income 124 913 (562) 213
Accounts payable and accrued expenses (82) (352) (599) 2,400
------------------------------------------------------------------------------------------------------------------------------------
Total Adjustments 7,692 5,784 2,148 8,232
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,170 7,377 3,299 7,347
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (13,408) (9,669) (4,952) (15,221)
Proceeds from sale of property and equipment 2,449 4,133 6,948 7,451
Payment for acquisitions net of cash acquired (6,669) (3,743) (3,457) (10,145)
Payment of earn out related to acquisition - - (1,500) -
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (17,628) (9,279) (2,961) (17,915)
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from term loan and revolving
line of credit 12,114 15,510 12,526 18,641
Proceeds from other debt - 10,000 - -
Cash overdraft 1,976 395 1,397 -
Repayment of long term debt (2,116) (20,581) (14,474) (9,682)
Repayment of subordinated debt (2,209) (2,417) (497) (1,164)
Repayment of capital lease obligation (84) (87) (39) (71)
Dividends paid to preferred stockholders (82) (83) (51) (102)
Proceeds from exercise of stock options 17 - - 299
Purchase of treasury stock - (1,000) - -
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 9,616 1,737 (1,138) 7,921
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 2,158 (165) (800) (2,647)
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,640 1,805 2,605 5,252
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,798 $ 1,640 $ 1,805 $ 2,605
====================================================================================================================================
</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 Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year For the year For the six months For the year ended
ended June 30, 2000 ended June 30, 1999 ended June 30, 1998 December 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash
Flow Information
Cash paid during year for:
Interest $ 3,206 $ 2,890 $ 992 $ 2,005
Income taxes 302 $ 1,629 $ 157 $ 728
Acquisitions
Fair value of tangible assets acquired 5,011 63 1,432 2,404
Cost in excess of net assets acquired 5,708 5,225 4,876 14,844
Liabilities assumed (931) (437) (1,291) (1,352)
Notes issued (3,119) (1,108) (1,560) (5,751)
------------------------------------------------------------------------------------------------------------------------------------
Total cash paid for acquisitions $ 6,669 $ 3,743 $ 3,457 $10,145
====================================================================================================================================
</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 incorporated in 1982 and commenced operations in 1984. The
Company operates private schools, schools for the learning challenged, specialty
high schools and charter schools located in California, the Mid-Atlantic states,
North Carolina, South Carolina, Virginia, Georgia, Texas, Arizona, 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 subsidiaries. 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:
The Company recognizes revenue for educational services as earned. Revenues
include tuition, fees and non-tuition revenue, reduced by discounts and
scholarships. The Company receives fees for registration, education and other
services.
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 $1,484,000, $1,385,000, $591,000, and
$1,005,000, for the years ended June 30, 2000 and 1999, the six months ended
June 30, 1998, and the year ended December 31, 1997, respectively. Accumulated
amortization at June 30, 2000 and 1999, was $6,614,000 and $5,130,000,
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:
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
F-7
<PAGE>
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 Year ended ended Year ended
June 30, 2000 June 30, 1999 June 30, 1998 December 31, 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) $ 2,478 $ 1,593 $ 1,151 $ (885)
Less preferred stock dividends 82 83 51 102
---------------------------------------------------------------------------------------------------------------------------
Net income available for
common stock 2,396 1,510 1,100 (987)
Average common
stock outstanding 5,929,811 6,038,136 6,121,365 6,052,625
---------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.40 $ 0.25 $ 0.18 $ (0.16)
Diluted earnings (loss) per share:
Net income (loss) available for
common stock and
dilutive securities $ 2,478 $ 1,593 $ 1,151 $ (987)
Average common
stock outstanding 5,929,811 6,038,136 6,121,365 6,052,625
Additional common shares
resulting from dilutive securities:
Options, warrants and convertible
preferred stock 1,543,123 1,316,200 1,395,686 N/A
---------------------------------------------------------------------------------------------------------------------------
Average common stock and
dilutive securities outstanding 7,472,934 7,354,336 7,517,051 6,052,625
Diluted earnings (loss) per share $ 0.33 $ 0.22 $ 0.15 $ (0.16)
</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.
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 53
weeks in fiscal 2000, 52 weeks in fiscal 1999 and 1997, 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 ended Six months 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 and Dispositions:
During the years ended June 30, 2000 and 1999, and the six months ended June 30,
1998, 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.
2000 Dispositions
On July 30, 1999, the Company sold the business operations of its 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 owns 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.
2000 Acquisitions
On September 9, 1999, the Company acquired the capital stock of Houston Learning
Academy, Inc., which operates schools in Houston, Texas for a purchase price of
$1,350,000 in cash and $615,000 in a subordinated note. Additionally, the
Company entered into a non-compete agreement with the former owner for a total
of $25,000. Houston Leaning Academy is an alternative high school program,
consisting of five schools and several hospital contracts. Revenues total
approximately $1,600,000, and capacity equals approximately 370 students for the
schools for the last fiscal year. In connection with the acquisition, the
Company also purchased for $25,000 an option to buy the management agreement for
a charter school operating in Houston, Texas.
On August 2, 1999, the Company acquired the land, building and assets of
Atlantic City Prep School located in Northfield, New Jersey for approximately
$757,000. The school has a capacity of 200 children and annual revenues of
approximately $400,000.
F-8
<PAGE>
On December 17, 1999, the Company entered into a transaction with Children's
Out-of-School Time, Inc. ("COST") to form The Activities Club, Inc. ("TAC"),
which is owned 80% by the Company and 20% by COST. In the transaction, Nobel
contributed $625,000 to the capital of TAC, and TAC distributed such cash to
COST. TAC also issued to COST a 7% subordinated promissory note in the amount of
$175,000. If a specified earnings threshold is met, Nobel will be required to
make an additional cash payment to TAC, which TAC would then distribute to COST.
Further, commencing in December 2002, COST has the right to require Nobel to
purchase its interest in TAC for the greater of $500,000 and a formula price
based on TAC's earnings before interest, taxes, depreciation and amortization.
On December 3, 1999, the Company acquired the assets of Play and Learn Child
Development Center in Illinois, with a capacity of 100 students and estimated
annual revenues of $600,000. On February 11, 2000, the Company acquired the
assets of High Road Academy in Boca Raton, Florida, with a capacity of 100
students and estimated annual revenues of $700,000. High Road Academy is a
specialty school for children with learning disabilities. On February 17, 2000,
the Company acquired the assets of David Sikes Child Care, Inc., in Norcross,
Georgia with the capacity of enrollment for 252 students and estimated annual
revenues of $822,000. In June 2000, the company acquired the assets of the Cross
Creek School in Plano, Texas with a capacity of 180 students and estimated
annual revenues of $1,000,000. The purchase price for these four schools
totaled $2,724,000 of which $2,342,000 was in cash, $702,000 was in subordinated
notes and $100,000 was in assumed liabilities.
On May 24, 2000, Nobel entered into a Credit Agreement with Total Education
Solutions, Inc. ("TES"), pursuant to which Nobel agreed to advance to TES, as
requested through May 24, 2001, the sum of $2,250,000. This loan is convertible
into TES common stock representing 30% of TES's outstanding common stock (as of
the date of closing), subject to adjustment in accordance with anti-dilution
provisions. If not earlier converted, the loan is due on May 24, 2005. In
connection with the loan transaction, Nobel also purchased a warrant to purchase
an additional 10% of TES common stock (subject to similar anti-dilution
provisions) at an exercise price of $100. In consideration of the issuance of
the warrant, Nobel paid to TES $250,000 and agreed to provide to TES certain
management services for a period of one year. The Warrant will not become
exercisable unless at least $3,500,000 of senior secured financing has been made
available to TES on competitive terms. (If Nobel fails to fund its $2,250,000
commitment, the Warrant will become unexerciseable and all funds loaned by Nobel
(including any loaned on any acquisition line) will convert to a subordinated
term note (with a seven year or a five year amortization of principal, depending
on the total loaned funds outstanding). At June 30, 2000, $250,000 was
outstanding under the Credit Agreement.
During April 2000, the Company received a statewide charter in the State of
Arizona to permit it to own and operate charter schools in that state. This
charter enabled the Company to acquire, in May 2000, the business assets and
real estate of two charter schools in the greater Phoenix, Arizona metropolitan
area with a capacity of 1,367 students. The Company agreed to pay the developer
and the operator of the schools (collectively, the "Sellers") an aggregate
purchase price of $9,838,000, subject to certain post-closing adjustments.
When the Company obtained fee title to the schools in May, the Company (i) paid
cash to the Sellers in the combined amount of $7,189,000 on account of the
$9,838,000 purchase price, (ii) held back $600,000 of the purchase price
pending delivery by one of the seller's certain furniture, fixtures and
equipment associated with the operation of the schools and (iii) issued
promissory notes to the Sellers (in the aggregate amount of $2,049,000) on
account of the purchase price. Simultaneously with the closing of this
transaction, the Company entered into a sale and leaseback transaction with a
third party developer for one of the two schools (located in the city of Peoria)
pursuant to which the Company received $6,200,000 in proceeds and entered into a
long-term operating lease. The Company has also directly funded the cost of
completing construction of the elementary school located in the City of Glendale
(the "Glendale School").
The promissory notes to the Seller's are due and payable by no later than
December 28, 2000. The amount of each of the promissory notes is subject to
adjustment, based upon, among other things, certain cost overruns experienced,
and/or savings realized, by the Company in connection with the completion of
construction of the Glendale School. Once the Glendale School is completed,
the Company plans to enter into a sale and leaseback transaction, the proceeds
of which will be used (i) to pay to the Sellers the amounts then due and payable
under the promissory note, and (ii) to recoup, in part, the funds expended by
the Company to complete the Glendale School.
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 $478,000 in cash and $208,000 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 a joint venture, Paladin Academy, LLC, owned
80% by the Company. 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 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.
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
2000 and 1999 all occurred at the beginning of 1999. 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
1999, or of the results which may occur in the future. Further, the information
gathered from
F-9
<PAGE>
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).
Year ended Year ended
June 30, 2000 June 30, 1999
(unaudited) (unaudited)
--------------------------------------------------
Revenues $133,662 $119,985
Net income before
extraordinary item $ 2,832 $ 2,107
Earnings per share
Basic $ 0.48 $ 0.34
Diluted $ 0.37 $ 0.29
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
$2,069,000 and $859,000 at June 30, 2000 and 1999, 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):
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------
Land $ 3,782 $ 3,352
Buildings 6,364 6,027
Assets under capital lease obligations 913 913
Leasehold improvements 10,855 7,536
Furniture and equipment 26,972 15,460
Construction in progress 3,894 3,736
-----------------------------------------------------------------------
$ 52,780 $ 37,024
Accumulated depreciation (16,304) (12,324)
-----------------------------------------------------------------------
$ 36,476 $ 24,700
=======================================================================
Depreciation expense was $4,354,000, $3,545,000, $1,470,000, and $2,096,000 for
the years ended June 30, 2000 and 1999, the six months ended June 30, 1998 and
for the year ended December 31, 1997, respectively. Amortization of capital
leases included in depreciation expense amounted to $14,640 for the year ended
June 30, 2000, $14,640 for the year ended June 30, 1999, $7,320 in the six
months ended June 30, 1998, and $14,640 for the year ended December 31, 1997.
Accumulated amortization of capital leases amounted to $498,000 and $483,000 at
June 30, 2000 and June 30, 1999, respectively.
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 closure of
several schools and the write down of the book value of the assets of certain
schools which were non-performing, (4) placing non-performing schools for sale
and (5) hiring of a Chief Operating Officer (President). The Company's
reorganization of the structure of its operations management entailed replacing
two levels of management with one (the new "executive director" position).
Executive directors manage fewer schools than had "district managers".
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 $2,355,000. During the
twelve months ended June 30, 2000 and 1999, cash payments related to the closing
of non-performing schools were $82,000 and $209,000, respectively. During the
six months ended June 30, 1998 and twelve months ended December 31, 1997, cash
payments related to the closing of non-performing schools and cost associated
with the restructuring of the management team were $145,000 and $130,000,
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):
June 30, 2000 June 30, 1999
---------------------------------------------------------
Land $ 219 $ 219
Buildings 745 745
Leasehold improvements 209 653
Furniture and equipment 402 939
Accumulated depreciation (885) (1,354)
---------------------------------------------------------
$ 690 $ 1,202
=========================================================
F-10
<PAGE>
7. Debt:
Debt consisted of the following (dollars in thousands):
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------
Long Term Obligations:
Revolving and term credit facility $24,764 $14,767
First mortgages, due in varying
installments over three to 20 years
with fixed interest rates ranging
from 11% or 12% 192 239
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% 147 191
Other 211 454
-----------------------------------------------------------------------
Total long term obligations $25,314 $15,651
Less current portion (2,054) (335)
-----------------------------------------------------------------------
$23,260 $15,316
=======================================================================
Long Term Subordinated Debt:
Senior subordinated note due 2005
interest at 10%, payable quarterly.
Net of original issue discount of
$643 at June 30, 2000 $ 9,357 $ 9,229
Subordinated debt agreements,
due in varying installments over
five to 10 years with fixed interest
rates varying from 7% to 8% 7,637 6,388
-----------------------------------------------------------------------
Total subordinated debt 16,994 15,617
Less current portion (4,102) (1,786)
-----------------------------------------------------------------------
$12,892 $13,831
=======================================================================
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.
At June 30, 2000, $7,840,000 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $7,174,000 was outstanding
under the Acquisition Credit Facility and $9,750,000 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 was reduced
to $7.00 per share on May 31, 2000 based on the terms of the warrant requiring
adjustment to the trailing 30 day average high and low stock price on that date.
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 December 1997, the Company amended its credit agreement to increase its
borrowing capacity to $25,000,000, and change the prior fixed interest rates
(applicable to term loans) to variable rates. Because of this significant
change in the repayment terms of the senior loan, in accordance with Emerging
Issue Task Force Issue 96-19 "Debtors Accounting for Modification of Debt
Instrument", in 1997, 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.
Maturities of long-term obligations are as follows: $6,230,000 in 2001,
$14,024,000 in 2002, $5,241,000 in 2003, $9,369,000 in 2004, and $8,159,000 in
2005 and thereafter.
8. Accounts Payable and Other Current Liabilities:
Accounts payable and other current liabilities were as follows
(dollars in thousands):
June 30, 2000 June 30, 1999
-------------------------------------------------------------------------------
Accounts payable $2,652 $2,163
Reserve for closed centers 236 414
Accrued payroll and related items 1,303 2,232
Accrued rent 394 614
Accrued taxes 1,093 1,126
Other accrued expense 3,316 1,687
-------------------------------------------------------------------------------
$8,994 $8,236
===============================================================================
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, 2000 (dollars in thousands):
Operating Leases
Closed Continuing
Schools Schools Total
-------------------------------------------------------------------
2001 $ 298 $ 19,480 $ 19,778
2002 237 18,518 18,755
2003 237 17,465 17,702
2004 177 16,656 16,833
2005 177 15,673 15,850
2006 and thereafter 377 100,565 100,942
-------------------------------------------------------------------
Total minimum lease obligations $1,503 $188,357 $189,860
===================================================================
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 $17,596,000, $16,595,000, $7,103,000, and
$11,157,000, for the years ended June 30, 2000 and 1999, for the six months
ended
F-11
<PAGE>
June 30, 1998 and the year ended December 31, 1997, 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 16 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):
2001 $ 1,168
2002 $ 1,075
2003 $ 1,084
2004 $ 1,094
2005 and thereafter $ 3,420
10. Stockholders' Equity:
Preferred Stock:
In 1995, the Company issued 1,063,830 shares of the Company's Series D
Convertible Preferred Stock for a purchase price of $2,000,000. The Series D
Preferred Stock is convertible to Common Stock at a conversion rate, subject to
adjustment, of 1/4 share of Common Stock for each share of Series D Convertible
Preferred Stock. Holders of Series D are not entitled to dividends, unless
dividends are declared on the Company's Common Stock. Upon liquidation, the
holders of shares of Series D Convertible Preferred Stock are entitled to
receive, before any distribution or payment is made upon any Common Stock, $1.88
per share plus any unpaid dividends. At June 30, 2000 and 1999, 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 (discussed below under "Common Stock Warrants") and the Series 2
Warrants (which terminated before becoming exercisable pursuant to their terms)
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,
2000 and 1999, 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. Shares outstanding at June 30,
2000 and June 30, 1999 were 1,023,694 and 1,029,712, respectively. Each share
of Series A Preferred Stock entitles the holder to an $.08 per share annual
dividend.
Each share of Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock entitles the holder to a number of votes equal to the number of
full shares of Common Stock into which such share is convertible. Except as
otherwise required by law, holders of Preferred Stock vote together with the
Common Stock, and not as a separate class, in the election of directors and on
each other matter submitted to a vote of the stockholders.
Stockholder Rights Plan:
In May 2000, the Board of Directors of the Company approved a Stockholder Rights
Plan. Under the Stockholder Rights Plan, preferred stock purchase rights were
distributed as a dividend at the rate of one Right for each share of Common
Stock outstanding as of the close of business on June 1, 2000. Each Right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock of the Company at an exercise
price of $18.00.
The Rights will not be exercisable unless a person or group acquires, or
announces the intent to acquire, beneficial ownership under certain
circumstances. The Rights are redeemable for $.001 per Right at the option of
the Board of Directors at any time prior to the close of business on the tenth
business day after the announcement of a stock acquisition event. If not
redeemed, the Rights will expire on May 31, 2010. Prior to the date upon which
the rights would become exercisable under the Plan, the Company's outstanding
stock certificates will represent both the shares of Common Stock and the
Rights, and the Rights will trade only with the shares of Common Stock.
The Rights are designed to provide the Board of Directors sufficient time to
evaluate proposed change-in-control transactions by encouraging potential
acquirers to negotiate with the Board of Directors before attempting a tender
offer for the Company. The Rights are not intended to prevent transactions on
terms that are fair to the Company's stockholders nor to deter any potential
acquirer who is willing to complete a transaction on such terms.
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 was reduced to $7.00 per share on May 31, 2000, based on the
terms of the warrant requiring adjustment to the trailing 30 day average high
and low stock price.
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.
On August 22, 1994, the Company issued Series 1 Warrants for the purchase of up
to 125,000 shares of the Company's common stock. The Series 1 Warrants are
exercisable at $4.00 per share (subject to adjustment) and expire on August 19,
2001.
2000 Stock Option Plan for Consultants:
In February 2000, the Company established the 2000 stock option plan for
consultants. This plan reserved up to an aggregate of 200,000 shares of common
stock of the Company for issuance in connection non-qualified stock options for
non-employee consultants. At June 30, 2000, 35,000 options have been granted
under this plan.
1995 Stock Incentive Plan:
On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan.
On November 18, 1999, 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 1,300,000. 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 or incentive
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.
F-12
<PAGE>
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
=============================================================================================
Balance, December 31, 1996 148,800 $ 3.00 to $ 16.44 $ 12.67
=============================================================================================
<S> <C> <C> <C> <C> <C>
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 $ 3.75 to $ 16.44 $ 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 $ 3.75 to $ 16.44 $ 8.15
=============================================================================================
Granted 423,725 $ 4.84 to $ 9.25 $ 4.82
Canceled (4,825) 7.87 to 11.62 7.52
---------------------------------------------------------------------------------------------
Balance, June 30, 1999 833,332 $ 3.75 to $ 16.44 $ 6.39
=============================================================================================
Granted 180,788 $ 5.87 to $ 8.13 $ 7.53
Canceled (33,467) 5.06 to 11.62 7.31
Exercised (3,333) 5.06 5.06
---------------------------------------------------------------------------------------------
Balance, June 30, 2000 977,320 $ 3.75 to $ 16.44 $ 6.88
=============================================================================================
</TABLE>
Of the 423,725 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,
2000 and June 30, 1999, 565,455 and 417,943 shares, respectively, remained
available for options or stock grants under the 1995 Stock Incentive Plan and
474,621 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 Year ended Six months Year ended
June 30 June 30, ended June 30, December 31,
2000 1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss):
- as reported $ 2,478 $ 1,593 $ 1,151 $ (885)
- pro forma $ 2,157 $ 1,379 $ 863 $ (1,222)
Basic earnings (loss) per share:
- as reported $ 0.40 $ 0.25 $ 0.18 $ (0.16)
- pro forma $ 0.35 $ 0.21 $ 0.14 $ (0.20)
Diluted earnings (loss) per share:
- as reported $ 0.33 $ 0.22 $ 0.15 $ (0.16)
- pro forma $ 0.29 $ 0.19 $ 0.12 $ (0.20)
</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:
2000 1999
----------------------------------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 47.67% 44.145%
Risk-free interest rate 5.27% 5.03%
Expected life of options 3 years 3 years
Activity with respect to warrants outstanding at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Number Range
=================================================================================
<S> <C> <C> <C> <C>
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
---------------------------------------------------------------------------------
Granted $
Canceled - - -
Exercised - $ - $ -
---------------------------------------------------------------------------------
Balance, June 30, 2000 965,267 $ 4.00 to $ 8.58
---------------------------------------------------------------------------------
</TABLE>
11. Other (Income) Expense:
Other (income) expense consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Six months Year ended
June 30, June 30 ended June 30, December 31,
2000 1999 1998 1997
===========================================================================================
<S> <C> <C> <C> <C>
Interest income $ (118) $ (188) $ (95) $ (179)
Rental income (46) (49) (17) (77)
Depreciation related to
rental properties 17 18 9 33
Other projects - (31) - (2)
Costs related to centers
held for sale 2 2 1 67
-------------------------------------------------------------------------------------------
$ (145) $ (248) $ (102) $ (158)
===========================================================================================
</TABLE>
12. Income Taxes:
Current tax provision (dollars in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Six months Year ended
June 30, June 30, ended June 30, December 31,
2000 1999 1998 1997
===========================================================================================
<S> <C> <C> <C> <C>
Federal $ 902 $ 587 $ 467 $ 26
State (79) (5) 89 194
-------------------------------------------------------------------------------------------
$ 823 $ 582 $ 556 $ 220
Deferred tax provision 970 571 277 30
-------------------------------------------------------------------------------------------
$ 1,793 $ 1,153 $ 833 $ 250
===========================================================================================
</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>
Year ended Year ended Six months Year ended
June 30, June 30, ended June 30, December 31,
2000 1999 1998 1997
==============================================================================================
<S> <C> <C> <C> <C>
U.S. federal statutory rate $ 1,495 $ 934 $ 674 $ (63)
State taxes, net of federal
tax benefit 128 82 54 137
Goodwill and other 170 137 105 176
----------------------------------------------------------------------------------------------
$ 1,793 $ 1,153 $ 833 $ 250
==============================================================================================
</TABLE>
F-13
<PAGE>
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>
Year ended Year ended Six months Year ended
June 30, June 30, ended June 30, December 31,
2000 1999 1998 1997
tax assets tax assets tax assets tax assets
(liabilities) (liabilities) (liabilities) (liabilities)
===============================================================================================
<S> <C> <C> <C> <C>
Depreciation $ (642) $ (681) $ (725) $ (576)
Provision for center closings
and other restructuring 60 906 1,534 1,635
AMT credit carryforward 591 591 95 94
Other - 203 127 155
-----------------------------------------------------------------------------------------------
Net deferred tax asset $ 9 $ 1,019 $ 1,031 $ 1,308
===============================================================================================
</TABLE>
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 $169,000, $161,000 $60,000, and $90,000 for the years ended
June 30, 2000 and 1999, the six months ended June 30, 1998 and the year ended
December 31, 1997, 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 schools 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:
In August 2000, the company acquired the assets of Rainbow World Day Care
School in Chalfont, Pennsylvania, with a capacity in excess of 250 students and
estimated revenues of $845,000. The purchase price consisted of $493,000 in cash
and an aggregate of 44,131 shares of the Company's Common Stock.
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>
2000
Quarter Ended September 30, 1999 $ 27,345 $ 606 $ (115) $ (0.02) $ (0.02) 6.125 4.25
Quarter Ended December 30, 1999 31,532 1,829 615 0.10 0.08 9.00 5.125
Quarter Ended March 31, 2000 33,127 2,510 971 0.16 0.13 9.313 6.50
Quarter Ended June 30, 2000 35,403 2,642 1,007 0.17 0.13 8.188 5.938
1999
Quarter Ended September 30, 1998 $ 23,911 $ 339 $ (186) (0.03) $ (0.03) 9.75 5.875
Quarter Ended December 30, 1998 27,742 1,383 384 0.06 0.05 7.875 5.031
Quarter Ended March 31, 1999 28,975 2,021 740 0.12 0.10 6.25 4.25
Quarter Ended June 30, 1999 29,134 1,827 655 0.11 0.09 6.063 4.50
</TABLE>
F-14
<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.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock. (Filed as Exhibit B to Exhibit 1.1
to Registrant's Registration Statement on Form 8-A, dated May 30, 2000 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 Exhibit 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 First Amendment, dated December 17, 1999, to Amended and Restated Loan and
Security Agreement by and among Registrant and its subsidiaries and Summit
Bank, as Agent and Lender (Filed as Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and
incorporated herein by reference.)
4.3 Second Amendment, dated May 24, 2000, to Amended and Restated Loan and
Security Agreement by and among Registrant and its subsidiaries and Summit
Bank, as Agent and Lender.
4.4 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
4.2 to the Registrant's
<PAGE>
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.)
4.5 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
4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein by reference.)
4.6 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 4.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference.)
4.7 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 4.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 and incorporated herein by reference.)
4.8 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.)
4.9 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 Rights Agreement, dated as of May 16, 2000, between Registrant and
Stocktrans, Inc., as Rights Agent, which includes, as Exhibit B, thereto
the Form of Rights Certificate. (Filed as Exhibit 1.1 to Registrant's
Registration Statement on Form 8-A, dated May 30, 2000 and incorporated
herein by reference.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 Form of Non-Qualified 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.)
<PAGE>
10.6 Form of Incentive Stock Option Agreement, for stock option grants under
1995 Stock Incentive Plan.
10.7 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.)
10.8 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.)
10.9 Stock Purchase Agreement dated May 28, 1992 between Registrant and a
limited number of accredited investors at $0.50 per share totaling
3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
Registrant's Current Report on Form 8-K dated June 11, 1992, date of
earliest event reported May 28, 1992, and incorporated herein by
reference.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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. (Certain schedules (and similar
attachments) to Exhibit 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 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.)
10.14 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 10.14 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:
<PAGE>
Number of Shares
of Common Stock
Warrant No. Holder (subject to adjustment)
----------- ------ -----------------------
2 Allied Capital Corporation II 142,932.25
3 Allied Investment Corporation 92,713
4 Allied Investment Corporation II 50,219.5
10.15 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.)
10.16 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.)
10.17 Nobel Learning Communities, Inc. Senior Executive Severance Pay Plan
Statement and Summary Plan Description as modified February 3, 2000.
(Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 and incorporated herein by
reference.)
10.18 Nobel Learning Communities, Inc. Executive Severance Pay Plan Statement
and Summary Plan Description as modified February 3, 2000. (Filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 and incorporated herein by reference.)
10.19 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.)
10.20 Employment Agreement dated August 9, 1999 between the Registrant and Lynn
Fontana. (Filed as Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 and incorporated
herein by reference.)
10.21 First Amendment dated February 3, 2000 of Employment Agreement dated as
of August 9, 1999 between Registrant and Lynn Fontana. (Filed as Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999 and incorporated herein by reference.)
10.22 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.)
10.23 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.)
10.24 Special Incentive Agreement dated as of November 20, 1999 between A.J.
Clegg and the Registrant
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
<PAGE>
27 Financial Data Schedule
