SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2001
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ______ to ______
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.)
1615 West Chester Pike, West Chester, PA 19382
(Address of principal executive offices) (Zip Code)
(484) 947-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all report(s)
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No____
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,443,286 shares of Common
Stock outstanding at February 4, 2002.
INDEX TO FORM 10-Q
Nobel Learning Communities, Inc.
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets,
December 31, 2001 (unaudited) and June 30, 2001......................... 2
Consolidated Statements of Income for the
six months ended December 31, 2001 (unaudited)
and 2000 (unaudited).................................................... 3
Consolidated Statements of Income for the
three months ended December 31, 2001 (unaudited)
and 2000 (unaudited).................................................... 4
Consolidated Statements of Cash Flows for the
six months ended December 31, 2001 (unaudited)
and 2000 (unaudited).................................................... 5
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Six Months Ended December
31, 2001 (unaudited)
Notes to Consolidated Interim Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 14
Item 4. Submission of Matters to Vote of Security Holders....................... 15
Item 6. Exhibits and Reports on Form 8-K........................................ 17
ii
PART I
Financial Information
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
The Company's fiscal 2002 outlook and all other statements in this report other
than historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company believes
that its assumptions are reasonable, it cautions that there are inherent
difficulties in predicting the impact of certain factors, especially those
affecting the acceptance of the Company's newly developed and converted schools
and performance of recently acquired businesses, which could cause actual
results to differ materially from predicted results.
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
Current Assets December 31, 2001 June 30, 2001
- --------------------------------------------------------- ----------------- -------------
Cash and cash equivalents $ 869 $ 1,321
Accounts receivable, less allowance for doubtful accounts
of $407 and $351 in December and June of 2001, respectively 3,131 2,858
Notes receivable 268 1,836
Prepaid rents 2,300 2,142
Other prepaid expenses 2,094 1,896
----------------- ------------
Total Current Assets 8,662 10,053
----------------- ------------
Property, & equipment at cost 57,306 52,018
Accumulated depreciation (23,464) (20,792)
----------------- ------------
Total property and equipment 33,842 31,226
Property and equipment held for sale 5,991 5,995
Goodwill and intangibles 49,959 50,232
Investment 2,428 2,225
Deposits and other assets 1,991 2,053
----------------- ------------
Total Assets $ 102,873 $ 101,784
================= ============
Liabilities and Stockholders' Equity
- ---------------------------------------------------------
Current portion of long-term obligations $ 5,348 $ 6,414
Current portion of swap contract 77 -
Cash overdraft liability 2,840 5,428
Accounts payable and other current liabilities 6,692 6,678
Unearned income 9,423 6,986
----------------- ------------
Total Current Liabilities 24,380 25,506
----------------- ------------
Long-term obligations 27,794 25,526
Long-term subordinated debt 10,525 11,415
Swap contract 423 -
Deferrred gain on sale/leaseback 41 15
Deferred taxes 256 460
Minority interest in consolidated subsidiary 215 261
----------------- ------------
Total Liabilities 63,634 63,183
Stockholders' Equity:
Preferred Stock, $.001 par value; 10,000,000 shares authorized, issued and
outstanding 4,587,464 at December 31, 2001, and June 30, 2001;
$5,524 aggregate liquidation preference at December 31, 2001
and June 30, 2001. 5 5
Common Stock, $.001 par value, 20,000,000 shares authorized, issued and
outstanding 6,393,286 at December 31, 2001 and 6,212,561 at June 30, 2001. 6 6
Treasury Stock, cost; 230,510 shares (1,375) (1,375)
Additional paid in capital 40,447 39,879
Retained earnings 451 86
Accumulated other comprehensive loss (295) -
----------------- ------------
Total Stockholders' Equity 39,239 38,601
----------------- ------------
Total Liabilities & Stockholders' Equity $ 102,873 $ 101,784
================= ============
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
2
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the six months ended December 31, 2001 and 2000
-------------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
2001 2000
--------------- --------------
Revenues $ 74,315 $ 69,203
Total operating expenses 65,937 62,631
--------------- --------------
School operating profit 8,378 6,572
General and administrative expenses 5,886 5,082
--------------- --------------
Operating income 2,492 1,490
Interest expense 1,872 2,186
Other income (84) (258)
Minority interest in earnings (loss) of consolidated subsidiary 17 (19)
--------------- --------------
Income before taxes and change in accounting principle 687 (419)
Income tax expense 281 (197)
--------------- --------------
Net income before change in accounting principle 406 (222)
Cummulative effect of change in accounting principle, net of tax
benefit of $242 - 295
--------------- --------------
Net income (loss) $ 406 $ (517)
=============== ==============
Preferred stock dividends 41 40
--------------- --------------
Net income (loss) available to common stockholders $ 365 $ (557)
=============== ==============
Basic income (loss) per share:
- ------------------------------
Net income (loss) per share before cummulative effect of accounting change $ 0.06 ($0.04)
Cummulative effect of accounting change - (0.05)
--------------- --------------
Net income (loss) per share $ 0.06 ($0.09)
=============== ==============
Dilutive income (loss) per share:
- ---------------------------------
Net income (loss) per share before cummulative effect of accounting change $ 0.05 ($0.04)
Cummulative effect of accounting change - ($0.05)
--------------- --------------
Net income (loss) per share $ 0.05 ($0.09)
=============== ==============
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
3
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the three months ended December 31, 2001 and 2000
-------------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
2001 2000
------------- --------------
Revenues $ 39,892 $ 37,673
Total operating expenses 34,247 33,115
------------- --------------
School operating profit 5,645 4,558
General and administrative expenses 3,115 2,573
------------- --------------
Operating income 2,530 1,985
Interest expense 922 1,134
Other income (2) (260)
Minority interest in earnings (loss) of consolidated subsidiary 7 (12)
------------- --------------
Income before taxes 1,603 1,123
Income tax expense 657 528
------------- --------------
Net income $ 946 $ 595
============= ==============
Preferred stock dividends 21 19
------------- --------------
Net income available to common stockholders $ 925 $ 576
============= ==============
Basic earnings per share $ 0.15 $ 0.10
============= ==============
Diluted earnings per share $ 0.13 $ 0.08
============= ==============
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
4
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the six months ended December 31, 2001 and 2000
------------------------------------------------------
(Dollars in thousands)
(unaudited)
2001 2000
------------- --------------
Net Cash Provided By Operating Activities $ 4,830 $ 1,558
Cash Flows From Investing Activities:
Proceeds from sale of real estate 532 3,672
Capital expenditures (5,127) (11,477)
Payment for acquisitions - (536)
Cash payments on note receivable 1,736 -
Advance on note receivable (314) -
------------- --------------
Net Cash Used In Investing Activities: (3,173) (8,341)
------------- --------------
Cash Flows From Financing Activities:
Proceeds from long term debt 3,454 9,171
Repayment of long term debt (1,288) (2,659)
Repayment of subordinated debt (2,151) (711)
Proceeds from exercise of options and warrants 568 -
Cash distribution of minority interest (63) -
Repayment of capital lease obligation - (48)
Payments of dividends on preferred stock (41) (40)
Cash overdraft (2,588) 447
------------- --------------
Net Cash (used in) Provided by Financing Activities: (2,109) 6,160
------------- --------------
Net decrease in cash and cash equivalents (452) (623)
Cash and cash equivalents at the beginning of the period 1,321 3,798
------------- --------------
Cash and cash equivalents at the end of the period 869 3,175
============= ==============
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report Form 10-K are an integral part of these consolidated
financial statements.
5
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
For the Year Ended June 30, 2001 and the Six Months Ended December 31, 2001
(Dollars in thousands except share data)
(Unaudited)
Treasury and Retained Accumulated
Additional Common Earnings/ Other
Preferred Stock Common Stock Paid-In Stock Accumulated Comprehensive
------------------ ----------------
Shares Amount Shares Amount Capital Issuable Deficit Loss Total
--------- -------- --------- -------- --------- ---------- ----------- ------------ --------
June 30, 2001 4,587,464 $ 5 6,212,561 $ 6 $ 39,879 $ (1,375) $ 86 $ - $38,601
Comprehensive loss:
Net income 406 $ 406
Swap contract (295) (295)
-------
Total comprehensive loss $ 111
Stock options and warrants
exercised and related tax benefit - - 180,725 - 568 - - $ 568
Preferred dividends - - - - - - (41) - (41)
--------- ------ --------- ------- --------- -------- --------- --------- -------
December 31, 2001 4,587,464 $ 5 6,393,286 $ 6 $ 40,447 $ (1,375) $ 451 $ (295) $39,239
========= ===== ========= ======= ========= ======== ========= ========= =======
The accompanying notes and the notes to the financial statements included in
the Registrant's Annual Report on Form 10-K are an
integral part of these financial statements
6
NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
for the six months ended December 31, 2001 and 2000
(unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The consolidated financial statements have been prepared by the Registrant
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the Company's
financial position and results of operations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Registrant's Annual Report on Form 10-K for the
year ended June 30, 2001.
Due to the inherent seasonal nature of the education and child care businesses,
annualization of amounts in these interim financial statements may not be
indicative of the actual operating results for the full year.
Future results of operations of the Company involve a number of risks and
uncertainties. Factors that could affect future operating results and cause
actual results to vary materially from historical results include, but are not
limited to, consumer acceptance of the Company's business strategy with respect
to expansion into new and existing markets, the Company's debt and related
financial covenants, difficulties in managing the Company's growth including
attracting and retaining qualified personnel, a large portion of the Company's
assets represent goodwill, increased competition, changes in government policy
and regulation, ability to obtain additional capital required to fully implement
(the Company's) business plan, and the Company's investment in Total Education
Solutions, Inc..
Note 2 - Earnings Per Share
- ---------------------------
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. In the calculation
of dilutive earnings per share, shares outstanding are adjusted to assume
conversion of the Company's non-interest bearing convertible preferred stock if
such conversion would be dilutive. In the calculation of basic earnings per
share, weighted average number of shares outstanding are used is the
denominator. The Company was in a loss position for the six months ended
December 31, 2000, resulting in the calculation of dilutive earnings per share
being antidilutive. Earnings per share are computed as follows.
7
For the Three Months December 31, For the Six Months December 31,
----------------------------------- ---------------------------------
2001 2000 2001 2000
----------------------------------- ---------------------------------
Basic earnings per share
- ------------------------------------
Net income (loss) $ 946 $ 595 $ 406 $ (222)
Less preferred dividends $ 21 $ 21 $ 41 $ 41
-------------- ------------- -------------- -------------
Net income available for
common stock $ 925 $ 574 $ 365 $ (263)
-------------- ------------- -------------- -------------
Average common stock
outstanding 6,172 5,975 6,082 5,967
Basic earnings per share $ 0.15 $ 0.10 $ 0.06 $ (0.04)
============== ============= ============== =============
Dilutive earnings per share
- ------------------------------------
Net income available for
common stock and dilutive securities $ 946 $ 595 $ 406 $ (222)
-------------- ------------- -------------- -------------
Average common stock
outstanding 6,172 5,975 6,082 5,967
Options,warrants and
and convertible securities 1,256 1,433 1,343 -
-------------- ------------- -------------- -------------
Average common stock and
dilutive securities outstanding 7,428 7,408 7,425 5,967
Dilutive earnings per share $ 0.13 $ 0.08 $ 0.05 $ (0.04)
============== ============= ============== =============
8
Note 3. Revenue Recognition.
- ---------------------------
The Company adopted Staff Accounting Bulletin ("SAB") 101 effective July 1,
2000. As a result of that adoption, the Company deferred $1,336,000 of
non-refundable registration and education fee revenues in the first quarter of
fiscal 2002. These non-refundable fees will be recognized as revenue throughout
the remainder of fiscal year 2002. In addition, fee revenues totaling $295,000,
net of income taxes of $242,000, were deferred from the fourth quarter of fiscal
2000. This one-time charge was recorded as a cumulative effect of a change in
accounting principle. All of the $537,000 of fee revenues deferred from the
previous fiscal year will subsequently be recognized during fiscal 2002. The
financial results for December 31, 2000 have been restated to reflect the
adoption of SAB 101. Registration fees deferred in the first quarter of fiscal
2001 were $1,159,000. The fee revenues deferred under SAB 101 will be amortized
over the typical school year of August to June. Summer camp registration fees
will be recognized during the months June, July and August. During the three
months ended December 31, 2001 and 2000, the Company recognized a portion of the
registration and education fees deferred in the first quarter of $491,000 and
$408,000, respectively.
Note 4. New Accounting Pronouncements
- -------------------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2001, which resulted in
an $838,000 reduction in goodwill amortization expense during the six months
ended December 31, 2001. Under SFAS No. 142, goodwill is no longer amortized but
reviewed for impairment annually, or more frequently if certain indicators
arise.
The net carrying value of goodwill is $49,530,000 million as of July 1, 2001
(the Company's adoption date of SFAS 142). The Company completed the "first
step" impairment test as required under SFAS 142 at December 31, 2001 and
determined that the recognition of an impairment loss was not necessary. The
fair value of the Company's ten reporting units was estimated using the expected
present value of future cash flows. For two of the reporting units fair value
approximated their carrying value while for the remaining eight reporting units
fair value exceeded carrying value. Goodwill will be assessed for impairment at
least annually or upon an adverse change in operations.
Goodwill amortization for the quarter ended December 31, 2000 amounted to
approximately $202,000 net of tax ($389,000 pretax), which would have impacted
the reported basic earnings per share by $0.03. Goodwill amortization for the
six months ended December 31, 2000 amounted to approximately $414,000 net of tax
($796,000 pretax), which would have impacted the reported basic earnings per
share by $0.07.
At December 31, 2001 the Company's intangibles assets were as follows:
As of December 31, 2001
-------------------------------------------
Gross Carrying Accumulated
($000s) Amount Amortization
------- ------------
Amortized intangible assets
Non-compete $ 2,493,000 $ (1,958,000)
Other 901,000 (73,000)
----------------- -----------------
Total $ 3,394,000 $ (2,031,000)
================= =================
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
addresses accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale and expands on the guidance provided by SFAS No. 121 with respect to cash
flow estimations. SFAS No. 144 becomes effective for the Company's fiscal year
2003. The Company is evaluating SFAS No. 144 and has not yet determined the
impact of adoption on its financial position.
9
Effective July 1, 2000, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value.
In connection with the May 2001 amendment to the Company's Amended and Restated
Loan and Security Agreement, the Company entered an interest rate swap agreement
on the $15,000,000 Term Loan Facility portion of its credit facility. The
Company uses this derivative financial instrument to manage its exposure to
fluctuations in interest rates. The instrument involves, to varying degrees,
market risk, as the instrument is subject to rate and price fluctuations, and
elements of credit risk in the event the counterparty should default. The
Company does not enter into derivative transactions for trading purposes. At
June 30, 2001 the Company's interest rate swap contract outstanding had a total
notional amount of $14,464,000 million and became effective August 1, 2001. The
notional amounts serves solely as a basis for the calculation of payments to be
exchanged and are not a measure of the exposure of the Company through the use
of derivatives. Under the interest rate swap contract, the Company agrees to pay
a fixed rate of 4.99% and the counterparty agrees to make payments based on 3-
month LIBOR. The market value of the interest rate swap agreement at December
31, 2001 was a liability of $500,000 and is included as a component of Other
Comprehensive Loss.
Note 5 - Investment in Total Education Solutions (TES)
- ------------------------------------------------------
The Company has a $2.5 million Note Receivable in the form of a Credit Agreement
with Total Education Solutions ("TES") due May 2005. TES, established in 1997
provides special education services to charter schools and public schools which,
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). Prior to the financing provided
from the Company in May 2000, TES was marginally profitable as it provided it
services to schools in a small regional area of Southern California. The
proceeds received by TES have been used for the expansion of its product
throughout California and plans to enter other states. TES revenues have grown
54% since the origination of the credit agreement. However, TES has also
incurred losses as a result of building the infrastructure to services other
regions. In addition, TES is currently exploring additional financing sources.
Management believes that valuations of such financing will approximate or exceed
the company's carrying value. Negative developments in these areas could have a
material effect on the collectability of the loan. The Company will continue to
monitor the financial condition and assess the carrying value of this
investment.
Note 6 - Segment Information
- ----------------------------
The Company manages its schools based on 4 geographical regions within the
United States. In FY 2000 the Company acquired Houston Learning Academy and The
Activities Club and began managing charter schools. These operations have
different characteristics and are managed separately from the school operations.
These operations do not currently meet the quantification criteria and therefore
are not deemed reportable under Statement of Financial Accounting Standards 131,
"Disclosures about Segments of an Enterprise and Related Information" and are
reflected in the "other" category.
10
The table below presents information about the reported operating income of the
company for the six months and the three months ended December 31, 2001 and
2000. (dollars in thousands):
Private
Six months ended December 31, Schools Other Total
--------------------------------- ------------- ----------- ------------
2001
----
Revenues $ 70,000 4,315 74,315
School operating profit $ 8,298 80 8,378
Depreciation and
amortization $ 2,421 381 2,802
2000
----
Revenues $ 65,418 3,785 69,203
School operating profit $ 6,781 (209) 6,572
Depreciation and
amortization $ 2,877 299 3,176
Three months ended December 31,
---------------------------------
2001
----
Revenues $ 37,499 2,393 39,892
School operating profit $ 5,598 47 5,645
Depreciation and
amortization $ 1,250 200 1,450
2000
----
Revenues $ 35,739 1,934 37,673
School operating profit $ 4,781 (223) 4,558
Depreciation and
amortization $ 1,462 164 1,626
Note 7 - Commitments and Contingencies
- --------------------------------------
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
will not have a material adverse effect on the Company's consolidated financial
position. The significance of these matters on the Company's future operating
results and cash flows depends on the level of future results of operations and
cash flows as well as on the timing and amounts, if any, of the ultimate
outcome.
The Company carries fire and other casualty insurance on its schools and
liability insurance in amounts which management believes are adequate for its
operations. As is the case with other entities in the education and preschool
industry, the Company cannot effectively insure itself against certain risks
inherent in its operations. Some forms of child abuse have sublimits per claim
in the general liability coverage.
11
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
For the Six Months Ended December 31, 2001 vs. the Six Months ended December 31,
2000
At December 31, 2001, the Company operated 174 schools. Since December 31, 2000,
the Company has opened 11 new schools: two elementary schools, five preschools,
three schools for learning challenged (the Paladin Academy schools), and one
charter school. The Company has also closed two schools. Since June 2001, five
new schools were opened.
Revenues for the six months ended December 31, 2001 increased $5,112,000 or 7.4%
to $74,315,000 from $69,203,000 for the six months ended December 31, 2000. The
increase in revenues is primarily attributable to tuition increases and the
increase in the number of schools.
The Company adopted SAB 101 effective July 1, 2000. As a result of that
adoption, the Company deferred $1,336,000 of non-refundable registration and
education fee revenues in the first quarter of fiscal 2002. The financial
results for December 31, 2000 have been restated to reflect the adoption of SAB
101. Registration fees deferred in the first quarter of 2001 were $1,159,000.
The registration fees deferred in the first quarter will be recognized as
revenue during the rest of the fiscal year. Registration fees deferred from the
first quarter and recognized in the second quarter was $419,000 and $408,000 for
the second quarter ended December 31, 2001 and 2000, respectively.
Same school revenue (schools that were opened in both periods) increased
$4,391,000 or 6.4% in the six months ended December 2001 compared to the same
period in the prior year. This increase is related to tuition and the maturing
of schools opened in 2000 offset by a decrease in enrollment in many of the
Company's preschools due primarily to the loss of employment by at least one
parent with a child in preschool. The increase in revenues related to the 11
schools opened totaled $947,000. Revenues related to The Activities Club
increased $140,000. These increases were offset by a decrease in revenues of
$366,000 related to the schools closings.
School operating profit for the six months ended December 31, 2001 increased
$1,806,000 or 27.5% to $8,378,000 from $6,572,000 for the six months ended
December of 2000. Total school operating profit margin increased from 9.5% for
the six months ended December of 2000 to 11.3% for the six months ended December
2001.
School operating profit was also affected by the adoption of SAB 101 as noted
above. In addition, The results for the quarter ended December 31, 2001, include
the effect of adopting SFAS No. 142, which resulted in a $838,000 reduction in
goodwill amortization expense. (See Note 4 to the financial statement's)
Same school operating profit increased $2,607,000 or 37.9%. Excluding the effect
of the adoption of SFAS 142, same school operating profit increased $1,769,000
or 25.7%. Same school operating profit margin improved from 10.0% for the six
months ended December 31, 2000 to 13.0% for the six months ended December 31,
2001. The increase in same school operating profit is due to the maturing of
schools opened in 2000 and lower school level expenses as a percentage of
revenue. For the six months ended December 31, 2001, new schools incurred a loss
of $982,000. The Activities Club reduced its operating loss during the six
months ended December 2001 by $198,000 as compared to the prior year. School
12
closings negatively affected the change in school operating profit by $17,000.
General and administrative expenses increased $804,000 or 15.8% from $5,082,000
for the six months ended December 31, 2000 to $5,886,000 for the six months
ended December 31, 2001. As a percentage of revenue, general and administrative
expense was 7.9% at December 31, 2001 and 7.3% at December 2000. This increase
in general and administrative expenses was primarily related to additional
corporate staffing and increased fees for professional and legal services.
As a result of the factors mentioned above, operating income increased
$1,002,000 from $1,490,000 for the six months ended December 31, 2000 to
$2,492,000 for the six months ended December 31, 2001.
For the six months of fiscal 2001, EBITDA (defined as earnings before interest,
income taxes, depreciation and amortization) totaled $5,573,000. This represents
an increase of $382,000 over the comparable period. EBITDA is not a measure of
performance under generally accepted accounting principles. However, the Company
and the investment community consider it an important calculation.
Interest expense decreased $314,000 or 14.4% from $2,186,000 for the six months
ended December 31, 2000 to $1,872,000 for the six months ended December 31,
2001. The decrease is due to decreased interest rates on the Company's credit
facility and decreased borrowings on the Company's credit facility.
Income tax expense totaled $281,000 for the six months ended December 31, 2001,
which reflects a 41% effective tax rate. The reduction in the tax rate from
fiscal 2001 is caused by the implementation of FAS 142, as the company is no
longer amortizing non-deductible goodwill.
For the Second Quarter Ended December 31, 2001 vs. the Second Quarter ended
December 31, 2000
Revenues for the second quarter ended December 31, 2001 increased $2,219,000 or
5.9% to $39,892,000 from $37,673,000 for the second quarter ended December 31,
2000. The increase in revenues is primarily attributable to tuition increases
and the increase in the number of schools.
The Company adopted SAB 101 effective July 1, 2000. As a result of that
adoption, the Company deferred $1,336,000 of non-refundable registration and
education fee revenues in the first quarter of fiscal 2002. The financial
results for December 31, 2000 have been restated to reflect the adoption of SAB
101. Registration fees deferred in the first quarter of 2001 were $1,159,000.
The registration fees deferred in the first quarter will be recognized as
revenue during the rest of the fiscal year. Registration fees deferred from the
first quarter and recognized in the second quarter was $419,000 and $408,000 for
the second quarter ended December 31, 2001 and 2000, respectively.
Same school revenue (schools that were opened in both periods) increased
$1,553,000 or 4.1% in the second quarter ended December 31, 2001 as compared to
the prior year. This increase is related to tuition and the maturing of schools
opened in 2000 offset by a decrease in enrollment in many of the Company's
preschools due primarily to the loss of employment by at least one parent with a
child in preschool. The increase in revenues related to the 11 schools opened
totaled $631,000. Revenues for The Activities Club increased $186,000. These
increases were offset by a decrease in revenues of $151,000 related to the
schools closings.
13
School operating profit for the second quarter ended December 31, 2001 increased
$1,087,000 or 23.8% to $5,645,000 from $4,558,000 for the second quarter ended
December of 2000. Total school operating profit margin increased from 12.1% for
the quarter ended December of 2000 to 14.2% for the quarter ended December 2001.
School operating profit was also affected by the adoption of SAB 101 as noted
above. In addition, The results for the quarter ended December 31, 2001, include
the effect of adopting SFAS No. 142, which resulted in a $419,000 reduction in
goodwill amortization expense. (See Note 4 to the financial statement's)
Same school operating profit increased $1,385,000 or 29.1%. Excluding the effect
of the adoption of SFAS 142, same school operating profit increased $966,000 or
20.3%. Same school operating profit margin improved from 12.7% for the second
quarter ended December 31, 2000 to 15.7% for the second quarter ended December
31, 2001. The increase in same school operating profit is due to the maturing of
schools opened in 2000 and lower school level expenses as a percentage of
revenue. For the second quarter ended December 31, 2001, new schools incurred a
loss of $479,000. The Activities Club reduced its operating loss in the quarter
ended December 2001 by $188,000 as compared to the same period in the prior
year. School closings negatively affected the change in school operating profit
by $7,000.
General and administrative expenses increased $542,000 or 21.1% from $2,573,000
for the second quarter ended December 31, 2000 to $3,115,000 for the second
quarter ended December 31, 2001. As a percentage of revenue, general and
administrative expense was 7.8% at December 31, 2001 and 6.8% at December 2000.
This increase in general and administrative expenses was primarily related to
additional corporate staffing and increased fees for professional and legal
services.
As a result of the factors mentioned above, operating income increased $545,000
from $1,985,000 for the quarter ended December 31, 2000 to $2,530,000 for the
quarter ended December 31, 2001.
For the second quarter of fiscal 2001, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $4,087,000. This
represents an increase of $81,000 over the comparable period. EBITDA is not a
measure of performance under generally accepted accounting principles. However,
the Company and the investment community consider it an important calculation.
Interest expense decreased $212,000 or 18.7% from $1,134,000 for the quarter
ended December 31, 2000 to $922,000 for the quarter ended December 31, 2001. The
decrease is due to decreased interest rates on the Company's credit facility and
decreased borrowings on the Company's credit facility.
Income tax expense totaled $657,000 for the quarter ended December 31, 2001,
which reflects a 41% effective tax rate. The reduction in the tax rate from
fiscal 2001 is caused by the implementation of FAS 142, as the company is no
longer amortizing non-deductible 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,
14
(2) future borrowings under the Company's $40.0 million Amended and Restated
Loan and Security Agreement, (3) the use of site developers to build schools and
lease them to the Company, and (4) issuance of subordinated indebtedness or
shares of common stock to sellers in acquisition transactions. The Company
identifies growth markets through both extensive demographic studies and an
analysis of the existing educational systems in the area. The Company seeks to
grow through a cluster approach whereby several preschools feed into an
elementary school. In order for the Company to continue its growth strategy, the
Company will continue to seek additional funds through debt and equity
financing.
Fiscal Year 2002 Cash Flows
Total cash and cash equivalents decreased $452,000 from $1,321,000 at June 31,
2001 to $869,000 at December 31, 2001. The net decrease was primarily related to
$5,359,000 in capital expenditures ($900,000 is related to new schools) and a
decrease in cash overdraft liability of $2,588,000. These uses of cash were
offset by cash provided from operations totaling $4,830,000, repayments on notes
receivable of $1,736,000 and proceeds from the exercise of warrants and options
of $568,000.
The working capital deficit increased $326,000 from $15,453,000 at June 31, 2001
to $15,779,000 at December 31, 2001. The increase is primarily the result of the
increase in deferred revenue totaling $2,437,000 and a decrease of $1,568,000 in
notes receivable. These increases were offset by a decrease of $2,588,000 in
cash overdraft liability and a decrease of $1,066,000 in current maturities of
long term debt. The increase in deferred revenues is related to the prepayment
of annual and semi-annual tuition by parents and by registration fees collected
at the beginning of the school year.
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 during
fiscal 2002. In addition, the company is actively marketing approx $6 million in
real estate for a potential sale lease-back transaction.
Long-Term Obligations and Commitments
In May 2001, the Company entered into its current Amended and Restated Loan and
Security Agreement which increased the Company's borrowing capacity to
$40,000,000. Three separate facilities were established under the Amended and
Restated Loan and Security Agreement: (1) $10,000,000 Working Capital Credit
Facility (2) $15,000,000 Acquisition Credit Facility and (3) $15,000,000 Term
Loan. The Term Loan Facility will mature on April 1, 2006 and provides for
$2,143,000 annual interim amortization with the balance paid at maturity. Under
the Acquisition Credit Facility, no principal payments are required until April
2003. 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. The Working Capital Credit Facility is
scheduled to terminate on April 1, 2003. In addition, the credit facilities
provide that Nobel must meet or exceed defined interest coverage ratios and must
not exceed leverage ratios. The Company is currently in compliance with such
covenants. If the Company were to experience a reduction of $1,000,000 in EBITDA
(a key measurement in the credit facilities for covenant compliance),
noncompliance with these covenants may result.
15
At December 31, 2001, a total of $29,635,000 was outstanding and $9,293,000 was
available under the Amended and Restated Loan Agreement. There was $3,490,000
outstanding under the Working Capital Credit Facility, $12,217,000 was
outstanding under the Acquisition Credit Facility and $13,928,000 was
outstanding under the Term Loan. In addition, the Company has $14,043,000
outstanding under subordinated debt agreement as well as significant commitments
under operating lease agreements. The following is a summary of these
obligations:
Contractual Obligations Less than 1-3 After 5
Total 1 year years years
Long-Term Obligations 43,667 5,348 15,303 23,016
Interest Rate Swap 500 77 404 19
Operating Leases * 231,735 23,670 66,402 141,663
* - Based on amounts presented in Footnote 12 of our June 30, 2001 financial
statements. These amounts have been updated for new leases entered into in
fiscal year 2002.
The Company also has significant commitments with certain of its executives that
would be triggered upon a change in control or certain termination events as
discussed in the Company's 2001 proxy statement.
16
Part II
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Other Information
Item 4. Submission of Matters to Vote of Security Holders
A. An annual meeting of the stockholders of the Company was held on November
15, 2001. The total shares eligible to vote on the record date included
6,345,561 shares of Common Stock, 1,023,694 shares of Series A Preferred
Stock, 2,500,000 shares of Series C Preferred Stock and 1,063,830 shares of
Series D Preferred Stock. Each share of Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock is convertible into 0.294,
0.25 and 0.25 shares of Common Stock, respectively. These shares represent
a total of 7,537,470 votes.
B. At the meeting:
1. Election of Director
--------------------
Two directors (Pamela S. Lewis and Daniel L. Russell) were elected to serve
until the 2004 Annual Meeting. The term of office of Edward Chambers, A.J. Clegg
and Peter Havens continues until the 2002 Annual Meeting. The term of office of
John R. Frock, Eugene G. Monaco and Robert E. Zobel continues until the 2003
Annual Meeting.
2. Ratification of Independent Auditors
------------------------------------
The selection of PricewaterhouseCoopers, LLP as the Company's independent
auditors for fiscal 2002 was approved by the requisite vote, the votes cast
being as follows:
Voted for 4,382,942
Voted against 3,225
Withheld 0
Abstentions 2,250
Broker Non-votes 0
---------
4,388,417
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOBEL LEARNING COMMUNITIES, INC.
Dated: February 14, 2002 By: /s/ William E. Bailey
--------------------------------------
William E. Bailey
Vice President/Chief Financial Officer
(duly authorized officer and
principal financial officer)
17
Exhibits
Exhibit
Number Description of Exhibit
3(ii) Nobel Learning Communities, Inc. Amended and Restated By-Laws
as modified November 15, 2001
10.1 Separation Agreement and Mutual Release dated as of November
30, 2001 between Registrant and Daryl A. Dixon
10.2 Nobel Learning Communities, Inc. Senior Executive Severance
Pay Plan Statement and Summary Plan Description and modified
December 21, 2001
10.3 Nobel Learning Communities, Inc. Executive Severance Pay Plan
Statement and Summary Plan Description as modified December
21, 2001
Item 6. Exhibits and Reports on Form 8-K
None
18