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
For the fiscal year ended June 30, 2001
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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 18, 2001, 6,337,561 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 18, 2001 was approximately $53,869,000 (based
upon the closing sale price of these shares on such date 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 15, 2001 (the "Proxy Statement") and to be
filed within 120 days after the registrant's fiscal year ended June 30, 2001 are
incorporated by reference in Part III.
TABLE OF CONTENTS
Item
No. Page
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................. 15
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters..................................... 16
6. Selected Financial Data............................................. 18
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................... 19
8. Financial Statements and Supplementary Data......................... 26
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................. 26
PART III
10. Directors and Executive Officers of the Registrant.................. 27
11. Executive Compensation.............................................. 27
12. Security Ownership of Certain Owners and Management................. 27
13. Certain Relationships and Related Transactions...................... 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 28
i
PART I
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
Our Fiscal 2001 outlook and all other statements in this report other than
historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. 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 private schools, charter schools, schools for
learning challenged students, and alternative 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 18, 2001,
we had 171 schools in 15 states, with an aggregate capacity of approximately
28,000 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 seek to
increase market awareness, achieve operating efficiencies, and provide cross-
marketing opportunities, particularly by providing feeder populations from pre-
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elementary 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.
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, emotional and
physical skill development. The result is the opportunity for each of our
students
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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 in planning their daily and weekly programs. At our 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 Executive 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).
. Dr. Janet Katz, Curriculum Coordinator, Upper Saddle River Schools
(Curriculum and Instruction).
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
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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 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 National Park, 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 professional 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.
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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 corporate office undertakes 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. 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 NLC is key to our
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running efficient, geographically concentrated operations. Our goal is for each
Nobel school within 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
Since June 2000 through June 2001 we opened five elementary schools (including
two charter schools), 11 pre-elementary schools, six Paladin Academy schools,
one Houston Learning Academy alternative high school and one charter high
school. From July 1, 2001 through September 18, 2001, we have opened one pre-
elementary school, one elementary and one Paladin Academy school. Throughout the
remainder of the twelve months ended June 30, 2002 ("fiscal 2002") we plan to
open approximately five elementary schools, five preschools, one Paladin Academy
school and one Houston Learning Academy alternative high school.
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 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: 50 pre-elementary schools, 22
elementary schools and six 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 the foundation for new NLCs, and quality
of personnel.
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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 offer alternative high schools for children who require a more
individualized learning environment. This acquisition also gave us potential to
expand into the summer school market. The acquisition of The Activities Club
facilitated 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
expanded our special education services to charter and public schools. We
expect acquisitions to continue to be a part of our growth strategy.
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 through high school. The goal of Paladin Academy
is to enable students to re-enter 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 18, 2001, we operated 18 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, one
additional stand alone school in Seattle, Washington and thirteen schools
located within Nobel elementary 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, Nevada and
New Jersey.
We believe that NLC 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 to which they are proximate.
We plan to expand Paladin Academy schools within Nobel school clusters across
the United
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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 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 opened 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.
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 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.
Since our charter schools operate under a charter granted by a state or school
board authority,
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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 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.
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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
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 in many local
areas. 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.
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Among others, 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 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
11
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 had approximately 2,000 charter schools at 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 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
12
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 18, 2001, we employed approximately 4,600 persons, approximately
1,400 of whom were employed on a part-time or seasonal basis. We believe that
our relationship with our employees is satisfactory.
13
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
Name Age Position
------------------------------------------------------------------------
A. J. Clegg 62 Chairman of the Board of Directors and Chief
Executive Officer; Director
Daryl A. Dixon 41 President and Chief Operating Officer
John R. Frock 58 Executive Vice President - Corporate Development;
Assistant Secretary; Director
William E. Bailey 42 Vice President and Chief Financial Officer
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 Banking, Ltd., which provided
investment management and consulting services to businesses, including Nobel.
14
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.
Item 2. Properties.
At September 18, 2001, we operated 171 schools on 10 owned and 161 leased
properties in 15 states. Our schools are geographically distributed as follows:
31 in California, 22 in North Carolina, 23 in Pennsylvania, 21 in Virginia,18 in
Florida, 14 in New Jersey, 10 in Illinois, eight in Texas, eight in Washington,
seven in Nevada, three in Oregon, two in South Carolina, 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, 2001, 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 our
business. We believe that the ultimate outcome of all such matters will not
have a material adverse effect on our consolidated financial position or results
of operations. The significance of these matters on our future operating
results and cash flows depends on the level of future results of operations and
cash flows as well as on the timing and amounts, if any, of the ultimate
outcome.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
Our common stock trades on The Nasdaq National Market under the symbol NLCI.
The table below sets forth the quarterly high and low bid prices for our
common stock as reported by Nasdaq for each quarter during the period from July
1, 1999 through June 30, 2001 and for the first quarter to date in Fiscal 2002.
High Low
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 (July 1, 2000 to June 30, 2001)
First Quarter.................................. 10 7 3/4
Second Quarter................................. 8 7/8 4 15/32
Third Quarter.................................. 10 1/4 5 33/64
Fourth Quarter................................. 10 7 35/64
Fiscal 2002
First Quarter (through of September 18, 2001).. 9 6 1/4
Holders
At September 18, 2001, there were approximately 500 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 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
16
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.
17
Item 6. Selected Financial Data.
Selected Financial Data
For the years ending June 30, Six Months Ended Year Ended Year Ended
Operating Data 2001 2000 1999 June 30, 1998 December 1997 December 1996
---- ---- ---- ------------- ------------- -------------
Revenue $ 147,952 $ 127,407 $ 109,762 $ 48,995 $ 80,980 $ 58,909
School operating expenses 129,786 110,078 96,475 42,643 70,258 49,078
--------- --------- --------- ------------- ------------- -------------
School operating profit 18,166 17,329 13,287 6,352 10,722 9,831
General and administrative expenses 11,004 9,742 7,717 3,391 5,973 4,190
Restructuring expense - - - - 2,960 -
--------- --------- --------- ------------- ------------- -------------
Operating income 7,162 7,587 5,570 2,961 1,789 5,641
Interest expense 4,171 3,373 2,998 1,044 2,047 2,004
Other income (424) (145) (248) (102) (158) (482)
Minority interest 23 88 74 35 86 94
--------- --------- --------- ------------- ------------- -------------
Income (loss) before income taxes 3,392 4,271 2,746 1,984 (186) 4,025
Income tax expense 1,596 1,793 1,153 833 250 1,562
--------- --------- --------- ------------- ------------- -------------
Net (loss) income before Cummulative effect
of change in accounting principle and
extraordinary item 1,796 2,478 1,593 1,151 (436) 2,463
Cummulative effect of accounting change 295
Extraordinary item - - - - 449 -
--------- --------- --------- ------------- ------------- -------------
Net income (loss) 1,501 2,478 1,593 1,151 (885) 2,463
Preferred dividends 81 82 83 51 102 109
--------- --------- --------- ------------- ------------- -------------
Net income available to common stockholders $ 1,420 $ 2,396 $ 1,510 $ 1,100 $ (987) $ 2,354
--------- --------- --------- ------------- ------------- -------------
EBITDA
(earnings before interest, taxes,
depreciation and amortization expense) $ 14,624 $ 13,943 $ 11,123 $ 5,243 $ 4,803 $ 8,313
--------- --------- --------- ------------- ------------- -------------
Basic earnings per share:
Net income (loss) before Cummulative effect
of change in accounting principle and
extraordinary item $ 0.29 $ 0.40 $ 0.25 $ 0.18 $ (0.09) $ 0.42
Cummulative effect of accounting change $ (0.05)
Extraordinary item - - - - (0.07) -
Net income (loss) $ 0.24 $ 0.40 $ 0.25 $ 0.18 $ (0.16) $ 0.42
--------- --------- --------- ------------- ------------- -------------
Dilutive earnings per share:
Net income (loss) before Cummulative effect
of change in accounting principle and
extraordinary item $ 0.24 $ 0.33 $ 0.22 $ 0.15 $ (0.09) $ 0.34
Cummulative effect of accounting change $ (0.04)
Extraordinary item - - - - (0.07) -
--------- --------- --------- ------------- ------------- -------------
Net income (loss) $ 0.20 $ 0.33 $ 0.22 $ 0.15 $ (0.16) $ 0.34
--------- --------- --------- ------------- ------------- -------------
Balance Sheet Data:
Working capital deficit $ (15,453) $ (16,946) $ (12,087) $ (10,221) $ (7,946) $ (1,351)
Goodwill and intangibles, net 50,232 51,447 47,319 43,754 37,923 25,683
Total assets 101,784 98,618 81,025 75,020 74,398 56,833
Short-term debt and
Current portion of long-term debt 6,414 6,293 2,209 2,031 2,793 3,448
Long-term debt 36,941 36,509 29,147 26,477 28,470 14,226
Stockholders' equity 38,601 36,558 34,145 32,736 31,636 32,323
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
---------------------
Fiscal Year ended June 30, 2001 ('2001") compared to the twelve months ended
June 30, 2000 ('2000")
The Company's Fiscal year ends on June 30. The fiscal year ended June 30, 2001
was a 52 week year and the fiscal year ended June 30, 2000 was a 53 week year.
Currently, the Company operates 171 schools. Since June 2000 through June 2001,
the Company has opened 24 schools and acquired two new schools: three elementary
schools, eleven preschools, six schools for learning challenged (the Paladin
Academy schools), one alternative high school (Houston Learning Academy) three
charter schools (includes two Arizona charter schools purchased in 2000). The
Company has also closed three underperforming schools.
Revenues in 2001 increased $20,545,000 or 16.1% to $147,952,000 in 2001 from
$127,407,000 for 2000. After adjusting 2000 to a comparable 52-week basis,
revenues would have increased approximately $22,345,000 or 17.9%. The increase
in revenues is primarily attributable to the increased enrollment, tuition
increases and the increase in the number of new and acquired schools.
Same school revenue (schools that were opened in both periods) increased
$7,974,000 from $124,926,000 in 2000 to $132,900,000 in 2001 or 6.4%. This
increase is related to tuition and enrollment increases and the maturing of
schools opened in 1999. The increase in revenues that related to the 24 new
schools totaled $12,503,000. Acquired schools contributed additional revenues of
$1,962,000. The revenues for The Activities Club ('TAC"), a business purchased
in December 1999, decreased $238,000 from $640,000 in 2000 to $402,000 in 2001.
These increases were offset by a decrease in revenues of $1,656,000 related to
closed schools.
School operating profit for 2001 increased $837,000 or 4.8% to $18,166,000 from
$17,329,000 in 2000. Total school operating profit as a percentage of revenue
decreased from 13.6% to 12.3%.
Same school operating profit increased $1,898,000 from $17,397,000 in 2000 to
$19,295,000 in 2001 or 10.9%. Same school operating profit margin improved from
13.9% in 2000 to 14.5% in 2001. The increase in same school operating profit is
due to the revenue increases and the maturing of the schools opened in 1999.
For 2001 new schools incurred losses of $711,000. Included in these losses were
19
$923,000 associated with the Company's two Arizona based charter schools. The
losses associated with the Arizona schools are attributable to lower than
expected enrollment. Acquired schools increased school operating income by
$253,000. In 2001, operating results from TAC were a loss of $474,000 or a
decrease of $550,000 as compared to 2000. If TAC is unsuccessful in receiving
additional orders or contracts to purchase its products, the future operations
of TAC could continue to be negatively affected. The net effect of school
closings decreased school operating profit by $53,000.
General and administrative expenses increased $1,262,000 or 13.0% to $11,004,000
in the 2001. As a percentage of revenue, general and administrative expenses
decreased from 7.6% of revenues in 2000 to 7.4% of revenues in 2001. 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. The increase in general and administrative
expense is primarily related to management additions necessary to support the
continued growth in the Company's private schools and specialty schools. Other
increases in general and administrative expenses include an increase in fees for
professional services and expenses related to new school locations that were
cancelled.
As a result of the factors mentioned above, operating income decreased $425,000
to $7,162,000 for 2001 as compared to the 2000. Operating income as a percentage
of revenue increased from 5.9% in 2000 to 4.8% in 2001.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization) before cumulative effect of change in accounting principle,
totaled $14,624,000 for 2001 which was $681,000 above 2000. As a percentage of
revenue, EBITDA for 2001 equaled 9.9% versus 10.9% in 2000. 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 $798,000 or 23.7% for 2001 as compared to 2000.
The increase in interest expense is a result of increased borrowings under the
Company's senior debt facility and an increase in interest rates on the
Company's floating rate senior debt.
The provision for income taxes of $1,596,000 for 2001 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.
Change in Accounting Principle
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 is effective for
the fourth quarter of Company's fiscal year 2001.
Previously, the majority of registration fees were deferred when received and
recorded in September to coincide with fall enrollment. Registration fees for
students enrolled during the school year were recorded when received. Under the
accounting method adopted retroactive to July 1, 2000, the Company now
recognizes school registration fees over the typical school year of August to
June. Summer camp registration fees are now recognized during months June, July
and August. The cumulative effect of the change on prior years resulted in a SAB
101 modifies the recognition of fee income but has no impact on cash flow or the
operations of the Company charge to income (net of taxes) of $295,000 which was
recognized during 2001.
20
Fiscal Year ended June 30, 2000 ("2000") compared to the twelve months ended
June 30, 1999 ("1999").
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 alternative high schools in Houston,
Texas and 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.
Revenues in 2000 increased $17,645,000 or 16.1% to $127,407,000 in 2000 from
$109,762,000 for 1999. After adjusting 2000 to a comparable 52-week basis,
revenues would have increased approximately $15,845,000 or 14.2%. The increase
in revenues is primarily attributable to the increased enrollment, tuition
increases and the increase in the number of new and acquired schools.
Same school revenue (schools that were opened in both periods) increased
$13,031,000 from $103,927,000 in 1999 to $116,958,000 in 2000 or 12.5%. This
increase is related to tuition and enrollment increases and the maturing of
schools opened in 1998. The increase in revenues that related to the eleven new
schools totaled $5,663,000. Acquired schools contributed additional revenues of
$3,124,000. The revenues for TAC, a business purchased in December 1999
contributed $640,000. These increases were offset by a decrease in revenues of
$4,813,000 related to the closed schools.
School operating profit for 2000 increased $4,042,000 or 30.4% to $17,329,000
from $13,287,000 in 1999. Total school operating profit as a percentage of
revenue increased from 12.1% to 13.6%.
Same school operating profit increased $3,050,000 from $13,718,000 in 1999 to
$16,768,000 in 2000 or 22.2%. Same school operating profit margin improved from
13.2% in 1999 to 14.3% in 2000. The increase in same school operating profit is
due to the revenue increases, lower operating expenses and the maturing of the
schools opened in 1998. For 2000, new schools contributed $333,000 in school
operating income. Acquired schools increased school operating income by
$273,000. Operating income from TAC was $75,000. The net effect of school
closings increased school operating profit by $309,000.
21
General and administrative expenses increased $2,025,000 or 26.2% to $9,742,000
in the 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.
As a result of the factors mentioned above, operating income increased
$2,017,000 to $7,587,000 for 2000 as compared to the 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% 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 the
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.
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 $40.0 million Amended and
Restated Loan and Security Agreement, (3) the use of site developers to build
schools and
22
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 acquisition strategy
and development of new education business, the Company will continue to seek
additional funds through debt and equity financing.
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.
Since 1995, the Company has amended its credit facility three times. Each
amendment increased borrowing capacity. In May 2001, the Company entered into
its most recent 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. Nobel's
obligations under the credit facilities are guaranteed by subsidiaries of Nobel
and collateralized by a pledge of stock of Nobel subsidiaries.
At June 30, 2001, a total of $27,398,000 was outstanding under the amended and
restated loan agreement; $1,053,000 was outstanding under Working Capital Credit
Facility, $11,345,000 was outstanding under the Acquisition Credit Facility and
$15,000,000 was outstanding under the Term Loan.
In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation. In May, 2001, the Company amended it $10,000,000
senior subordinated note. The amendment modified the principal repayments from
two installments of $5,000,000 in 2004 and 2005 to two installments of
$5,000,000 in 2006 and 2007. In addition, the interest rate on the note
increases from 10% at June 30, 2001 to 12% at October 1, 2001. 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
23
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.
Total cash and cash equivalents decreased $2,477,000 from $3,798,000 at June 30,
2000 to $1,321,000 at June 30, 2001. The net decrease was due primarily to (1)
capital expenditures of $15,224,000, (2) issuance of notes receivables of
$2,788,000 and (3) the repayment of long term debt of $13,864,000. This
decrease was offset by (1) cash flow from operations of $6,259,000, (2) proceeds
from term loan and revolving line of credit of $16,498,000 and (3) proceeds from
sale of property and equipment of $8,268,000. In August 2001, the Company
received repayment on one of its notes receivable of $1,664,000.
The working capital deficit decreased $1,493,000 from $16,946,000 at June 30,
2000 to $15,453,000 at June 30, 2001. The decrease is primarily the result of
the increase in current notes receivable and a decrease in accounts payable and
accrued liabilities. This decrease was offset by an increase in cash overdraft
liability and a decrease in cash and cash equivalents.
Capital Expenditures
The Company is continuously maintaining and upgrading the property and equipment
of each school. During 2001, the Company spent approximately $15,224,000 on
capital expenditures, which included $9,587,000 for new school development and
$5,637,000 on upgrading existing facilities. . During 2000, the Company spent
approximately $13,056,000 on capital expenditures, which included $8,947,000 for
new school development and $4,109,000 on upgrading existing facilities
During 2001, the Company received $8,268,000 from sale and leaseback
transactions of new schools and reimbursements of cost incurred by the Company
from owner- developers of new sites. During 2000, the Company received
$1,699,000 from sale and leaseback transactions of new schools and $550,000 for
the sale of under performing schools.
Inflation
The Company has not been significantly affected by inflation.
24
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
In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and
No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective
July 1, 2001 and January 1, 2002, respectively, for the Corporation. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 142, amortization of
goodwill, including goodwill recorded in past business combinations will
discontinue upon adoption of this standard. In addition, goodwill recorded as a
result of business combinations completed during the six-month period ending
December 31, 2001 will not be amortized. All goodwill and intangible assets will
be tested for impairment in accordance with the provisions of the Statement. The
Corporation is currently reviewing the provisions of SFAS 141 and SFAS 142 and
assessing the impact of adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and interest
rate swaps agreements.
Interest Rates
The Company's exposure to market risk for changes in interest rates relate
primarily to debt obligations. The Company has no cash flow exposure due to rate
changes on its 10%, $10,000,000 senior subordinated debt at June 30, 2001 and
June 30, 2000. The Company also has no cash flow exposure on certain mortgages,
notes payable and subordinate debt agreements aggregating $6,471,000 and
$8,681,000 million at June 30, 2001 and June 30, 2000, respectively. However,
the Company does have cash flow exposure on two of its credit facilities under
the Amended and Restated Loan and Security Agreement. The Working Capital and
the Acquisition Credit Facility are subject to variable LIBOR or prime base rate
pricing. Accordingly, a 1% change in the LIBOR rate and the prime rate would
have resulted in interest expense changing by approximately $205,000 and $84,000
million in fiscal 2001 and 2000, respectively.
Interest Rate Swap Agreement
In connection with the May 2001 amendment to the Company's Amended and Restated
Loan and Security Agreement, it entered an interest rate swap agreement on the
$15,000,000 Term Loan 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
becomes 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.
25
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.
26
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.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Report:
Page
----
(1) Financial Statements.
Report of Independent Accountants............................ F-1
Consolidated Balance Sheets.................................. F-2
Consolidated Statements of Income............................ F-3
Consolidated Statements of Stockholders' Equity.............. F-4
Consolidated Statements of Cash Flows........................ F-5
Supplemental Schedules for Consolidated Statements of
Cash Flow.................................................... F-6
Notes to Consolidated Financial Statements................... F-7
(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted as not applicable or
not required under the instructions contained in Regulation S-X or the
information is included elsewhere in the financial statements or notes
thereto.
(b) Reports on Form 8-K.
None
(c) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit
Number Description of Exhibit
3.1 Registrant's Certificate of Incorporation, as amended and restated.
(Filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998, and incorporated herein by
reference.)
3.2 Registrant's Certificate of Designation, Preferences and Rights of
Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
Registrant's Current Report on Form 8-K filed on June 14, 1993 and
incorporated herein by reference.)
3.3 Registrant's Certificate of Designation, Preferences and Rights of
Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
Registrant's Quarterly Report on Form 10-Q with respect to the quarter
ended June 30, 1994 and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of
Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the
Registrant's Current Report on Form 8-K filed on September 11, 1995,
date of earliest event reported August 25, 1995, and incorporated
herein by reference.)
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. (Filed as Exhibit 4.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2000 and incorporated herein by reference.)
4.4 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.)
4.5 Amended and Restated Senior Subordinated Note dated as of May 24, 2001
in the principal amount of $10,000,000 payable to the order of Allied
Capital Corporation.
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.
4.6 Third Amendment, dated as of May 24, 2001, to Amended and Restated
Loan and Security Agreement by and among Registrant and its
subsidiaries and Fleet National Bank, as successor by merger to Summit
Bank, as Agent and Lender.
4.7 Fourth Amendment, dated as of July 5, 2001, to Amended and Restated
Loan and Security Agreement by and among Registrant and its
subsidiaries and Fleet National Bank, as successor by merger to Summit
Bank, as Agent and Lender.
4.8 Amended and Restated Acquisition Credit Facility Note, dated as of May
24, 2001 in the principal amount of $11,250,000 payable to Fleet
National Bank, as successor by merger to Summit Bank.
4.9 Amended and Restated Term Note, dated as of May 24, 2001 in the
principal amount of $11,250,000 payable to Fleet National Bank, as
successor by merger to Summit Bank.
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. (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.)
10.7 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:
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. (Filed as Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for the year ended June 30,
2000 and incorporated herein by reference.)
10.25 Employment and Termination Agreement dated as of August 2001 between
A.J. Clegg and the Registrant.
10.26 Employment and Termination Agreement dated as of August 2001 between
John R. Frock and the Registrant.
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
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.
34
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, 2001 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, 2001
-----------------------
A. J. Clegg Chief Executive Officer and
Director (Principal Executive
Officer)
/s/ William Bailey Executive Vice President and September 28, 2001
-----------------------
William Bailey Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Edward H. Chambers Director September 28, 2001
-----------------------
Edward H. Chambers
/s/ John R. Frock Executive Vice President September 28, 2001
-----------------------
John R. Frock and Director
35
/s/ Peter H. Havens Director September 28, 2001
----------------------
Peter H. Havens
/s/ Pamela S. Lewis Director September 28, 2001
----------------------
Pamela S. Lewis
/s/ Eugene G. Monaco Director September 28, 2001
----------------------
Eugene G. Monaco
/s/ William L. Walton Director September 28, 2001
----------------------
William L. Walton
/s/ Robert Zobel Director September 28, 2001
----------------------
Robert Zobel
36
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, 2001 and 2000, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2001, 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 the opinion expressed above.
As discussed in Footnote 1 to the Company's Consolidated Financial Statements,
effective July 1, 2000, the Company changed its method of recognizing revenue.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 17, 2001
F-1
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
June 30, June 30,
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents $ 1,321 $ 3,798
Accounts receivable, less allowance for doubtful 2,858 2,060
accounts of $351 in 2001 and $288 in 2000
Notes receivable 1,836 126
Prepaid rent 2,142 1,591
Prepaid insurance and other 1,896 772
--------- ---------
Total Current Assets 10,053 8,347
--------- ---------
Property and equipment, at cost 52,018 45,392
Accumulated depreciation (20,792) (16,665)
--------- ---------
31,226 28,727
--------- ---------
Property and equipment held for sale 5,995 8,078
Goodwill and intangibles, net 50,232 51,447
Investment 2,225 500
Deposits and other assets 2,053 1,510
Deferred taxes -- 9
--------- ---------
Total Assets $ 101,784 $ 98,618
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations $ 6,414 $ 6,293
Cash overdraft liability 5,428 3,768
Accounts payable and other current liabilities 6,678 8,997
Unearned income 6,986 6,235
--------- ---------
Total Current Liabilities 25,506 25,293
--------- ---------
Long-term obligations 25,526 23,260
Long-term subordinated debt 11,415 13,249
Deferred gain on sale/leaseback 15 20
Deferred taxes 460 --
Minority interest in consolidated subsidiary 261 238
--------- ---------
Total Liabilities $ 63,183 $ 62,060
--------- ---------
Commitments and Contingencies (Notes 12 and 18)
Stockholders' Equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, issued and outstanding 4,587,464 in
both 2001 and 2000. $5,524 aggregate liquidation
preference at June 30, 2001 and 2000 5 5
Common stock, $0.001 par value; 20,000,000 shares
authorized, issued and outstanding 6,212,561 in 2001 and
6,126,168 in 2000 6 6
Treasury stock, cost; 230,510 shares in 2001 and 2000 (1,375) (1,375)
Additional paid-in capital 39,879 39,256
Retained earnings / accumulated deficit 86 (1,334)
--------- ---------
Total Stockholders' Equity 38,601 36,558
--------- ---------
Total Liabilities and Stockholders' Equity $ 101,784 $ 98,618
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share data)
For the year ended June 30,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues $ 147,952 $ 127,407 $ 109,762
--------- --------- ---------
Operating expenses:
Personnel costs 72,057 60,541 53,203
School operating costs 23,183 19,514 16,266
Insurance, taxes, rent and other 27,369 23,493 21,479
Depreciation and amortization 6,586 5,826 5,009
New school development 591 704 518
--------- --------- ---------
129,786 110,078 96,475
--------- --------- ---------
School operating profit 18,166 17,329 13,287
--------- --------- ---------
General and administrative expenses 11,004 9,742 7,717
--------- --------- ---------
Operating income 7,162 7,587 5,570
Interest expense 4,171 3,373 2,998
Other income (424) (145) (248)
Minority interest in income of
consolidated subsidiary 23 88 74
--------- --------- ---------
Income before income taxes and change in
accounting principle 3,392 4,271 2,746
Income tax expense 1,596 1,793 1,153
--------- --------- ---------
Net income before change in
accounting principle $ 1,796 $ 2,478 $ 1,593
--------- --------- ---------
Cumulative effect of change in accounting
principle, (net of income tax benefit of $242) 295 -- --
--------- --------- ---------
Net income 1,501 2,478 1,593
Preferred stock dividends 81 82 83
--------- --------- ---------
Net income available to common
stockholders $ 1,420 $ 2,396 $ 1,510
========= ========= =========
Basic earnings per share:
Net income before cumulative effect
of change in accounting principle $ 0.29 $ 0.40 $ 0.25
Cumulative effect of change in accounting principle (0.05) -- --
--------- --------- ---------
Net income $ 0.24 $ 0.40 $ 0.25
========= ========= =========
Dilutive earnings per share:
Net income before cumulative effect
of change in accounting principle $ 0.24 $ 0.33 $ 0.22
Cumulative effect of change in accounting principle (0.04) -- --
--------- --------- ---------
Net income $ 0.20 $ 0.33 $ 0.22
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Dollars in thousands)
For the year ended June 30,
--------------------------------------
2001 2000 1999
-------- -------- --------
Cash Flows from Operating Activities:
Net income $ 1,501 $ 2,478 $ 1,593
-------- -------- --------
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 7,061 6,299 5,409
Amortization of debt discount 128 128 128
Provision for losses on accounts receivable 900 372 190
Provision for deferred taxes 451 970 571
Minority interest in income 23 88 74
Other 273 -- --
Changes in Assets and Liabilities
Net of Acquisitions:
Accounts receivable (1,569) (8) (749)
Prepaid assets (1,669) (384) 323
Other assets and liabilities 204 185 (723)
Unearned income 725 124 913
Accounts payable and accrued expenses (1,769) (82) (352)
-------- -------- --------
Total Adjustments 4,758 7,692 5,784
-------- -------- --------
Net Cash Provided by Operating Activities 6,259 10,170 7,377
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (15,224) (13,408) (9,669)
Proceeds from sale of property and equipment 8,268 2,449 4,133
Payment for acquisitions net of cash acquired (539) (6,669) (3,743)
Issuance of notes receivable (2,788) -- --
-------- -------- --------
Net Cash Used in Investing Activities (10,283) (17,628) (9,279)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from term loan and revolving line of credit 16,498 12,114 15,510
Proceeds from other debt -- -- 10,000
Repayment of long term debt (13,864) (2,116) (20,581)
Repayment of subordinated debt (2,319) (2,209) (2,417)
Debt issuance cost (490) -- --
Repayment of capital lease obligation (74) (84) (87)
Dividends paid to preferred stockholders (81) (82) (83)
Cash overdraft 1,660 1,976 395
Proceeds from exercise of stock options 217 17 --
Purchase of Treasury Stock -- -- (1,000)
-------- -------- --------
Net Cash Provided by Financing Activities 1,547 9,616 1,737
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,477) 2,158 (165)
Cash and cash equivalents at beginning of year 3,798 1,640 1,805
-------- -------- --------
Cash and cash equivalents at end of year $ 1,321 $ 3,798 $ 1,640
======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2001, 2000 and 1999
(Dollars in thousands except share data)
Treasury and Retained
Additional Common Earnings/
Preferred Stock Common Stock Paid-In Stock Accumulated
Shares Amount Shares Amount Capital Issuable Deficit Total
------ ------ ------ ------ ------- -------- ------- -----
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 (6,078) -- 1,470 -- -- -- -- $ --
Preferred dividends -- -- -- -- -- -- (82) $ (82)
Net income -- -- -- -- -- -- 2,478 2,478
--------- ---------- --------- ---------- ---------- ---------- ---------- ----------
June 30, 2000 4,587,464 $ 5 6,126,168 $ 6 $ 39,256 $ (1,375) $ (1,334) $ 36,558
========= ========== ========= ========== ========== ========== ========== ==========
Stock options exercised
and related tax benefit -- -- 42,262 -- 217 -- -- $ 217
Common Stock issued related to
acquisitions -- -- 44,131 -- 406 -- -- $ 406
Preferred dividends -- -- -- -- -- -- (81) $ (81)
Net income -- -- -- -- -- -- 1,501 1,501
--------- ---------- --------- ---------- ---------- ---------- ---------- ----------
June 30, 2001 4,587,464 $ 5 6,212,561 $ 6 $ 39,879 $ (1,375) $ 86 $ 38,601
========= ========== ========= ========== ========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
Nobel Learning Communities, Inc. and Subsidiaries
Supplemental Schedules for Consolidated Statements of Cash Flow
(Dollars in thousands)
For the year ended June 30,
----------------------------------------
2001 2000 1999
------ ------ ------
Supplemental Disclosures of Cash
Flow Information
Cash paid during year for:
Interest $ 4,302 3,206 2,890
Income taxes $ 1,431 302 1,629
Acquisitions
Fair value of tangible assets acquired $ 173 5,011 63
Goodwill and intangibles $ 809 5,708 5,225
Liabilities assumed $ (38) (931) (437)
Notes issued $ -- (3,119) (1,108)
Common shares issued $ (405) -- --
------- ------- -------
Total cash paid for acquisitions $ 539 6,669 3,743
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
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, Pennsylvania, New
Jersey, Maryland, 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 subsidiary. All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principals
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Recognition of Revenues:
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.
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 is effective for
the fourth quarter of Company's fiscal year 2001.
Previously, the majority of registration fees were deferred when received and
recorded in September to coincide with fall enrollment. Registration fees for
students enrolled during the school year were recorded when received. Under the
accounting method adopted retroactive to July 1, 2000, the Company now
recognizes school registration fees over the typical school year of August to
June. Summer camp registration fees are now recognized during months June, July
and August. The cumulative effect of the change on prior years resulted in a
charge to income (net of taxes) of $295,000 which was recognized during fiscal
2001.
F-7
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.
Goodwill
The Company's policy is to amortize goodwill 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. Goodwill is amortized on a straight-line basis.
Amortization expense amounted to $1,660,000, $1,484,000, and $1,385,000, for the
years ended June 30, 2001, 2000 and 1999, respectively. Accumulated amortization
at June 30, 2001 and 2000, was $8,292,000 and $6,614,000, 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.
In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and
No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective
July 1, 2001 and January 1, 2002, respectively, for the Corporation. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after
F-8
June 30, 2001. Under SFAS 142, amortization of goodwill, including goodwill
recorded in past business combinations, will discontinue upon adoption of this
standard. In addition, goodwill recorded as a result of business combinations
completed during the six-month period ending December 31, 2001 will not be
amortized. All goodwill and intangible assets will be tested for impairment in
accordance with the provisions of the Statement. The Corporation is currently
reviewing the provisions of SFAS 141 and SFAS 142 and assessing the impact of
adoption.
Intangible Assets
Intangible assets include non-compete agreements, trademarks and other
identifiable intangibles acquired in acquisitions. Such intangibles are being
amortized over the life of the intangibles ranging from 3 - 20 years.
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.
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 convertible preferred stock if they are dilutive. In
the calculation of basic earnings per share, weighted average number of shares
outstanding are used as the denominator. Earnings per share are computed as
follows (dollars in thousands except per share data):
F-9
Year ending June 30,
------------------------------------
2001 2000 1999
Basic earnings per share:
-------------------------
Net income $1,501 $2,478 $1,593
Less preferred dividends 81 82 83
------------------------------------
Net income available for
common stock 1,420 2,396 1,510
------------------------------------
Average common stock outstanding 5,980,986 5,929,811 6,038,136
------------------------------------
Basic earnings per share $0.24 $0.40 $0.25
====================================
Diluted earnings per share:
---------------------------
Net income available for common stock
and dilutive securities $1,501 $2,478 $1,593
Average common stock outstanding 5,980,986 5,929,811 6,038,136
Additional common shares resulting
from dilutive securities:
Options; warrants and convertible
preferred stock 1,535,014 1,543,123 1,316,200
------------------------------------
Average common stock and dilutive
securities outstanding 7,516,000 7,472,934 7,354,336
------------------------------------
Dilutive earnings per share $0.20 $0.33 $0.22
====================================
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 has
investments in other entities. The collectability of such investments is
dependent upon the financial performance of these entities. The Company monitors
its exposure for credit losses and maintains allowances for anticipated losses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
F-10
Risk and Uncertainites
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
business plan, the Company's investment in Total Education Solutions, Inc.
("TES")(See footnote 8).
Negative developments in these areas could have a material effect on the
Company's business, financial condition and results of operations.
Adoption of New Accounting Pronouncement
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("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. The Company has one derivative that is not designed as a hedging
relationship and therefore the fair value amount, which is immaterial, is
reflected through current period earnings. The adoption SFAS 133 did not result
in any adjustment to income or to OCI. The Company uses derivative instruments
to manage exposure to interest rate risks. The Company's objectives for holding
derivatives are to minimize the risks using the most effective methods to
eliminate or reduce the impacts of interest rate exposures.
Reclassifications
Certain prior year amounts for the fiscal year ended June 30, 2000 and 1999 have
been reclassified to conform to the presentation adopted in fiscal 2001.
2. Acquisitions and Dispositions:
During the years ended June 30, 2001, 2000, and 1999, 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.
2001 Acquisition
In August 2000, the Company acquired the assets of Rainbow World Day Care School
in Chalfont, Pennsylvania, with a capacity of 180 students and estimated
revenues of $845,000. The purchase price consisted of $493,000 in cash and an
aggregate of 44,131 shares of the Company's Common Stock (valued at $9.20 per
share).
F-11
2000 Dispositions
On July 30, 1999, the Company sold the business operations of the nine schools
located in the vicinity of Indianapolis, Indiana to, Children's Discovery
Centers of America, Inc., which is controlled by Knowledge Universe, for a total
of $550,000 in cash. Knowledge Universe, through KU Learning, LLC 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. Houston Learning 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.
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.
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 children 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.
F-12
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) (the "Peoria School"),
pursuant to which the Company received $6,200,000 in sales proceeds and entered
into a long-term operating lease that gives the Company the right to occupy and
operate the Peoria School. The Company took over operations at the Peoria School
immediately upon the end of the 1999-2000 school year.
The second charter school was an elementary school located in the City of
Glendale (the "Glendale School"). Unlike the Peoria School, the Glendale School
was not open and operating at the time that the Company obtained fee title to
the school in May 2000. The Company completed construction of the Glendale
School and placed the facility in service during the 2000-2001 school year. The
Company directly funded the cost of completing construction , opening and
operating the Glendale School.
The promissory notes to the Seller's (in the aggregate face amount of
$2,049,000) (the "Arizona Promissory Notes") were due and payable by no later
than December 28, 2000 (the "Initial Maturity Date"). The Company's obligations
under the Arizona Promissory Notes, however, are subject to (i) certain rights
of set off under the transaction documents, and (ii) 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. Prior to the Initial Maturity Date, the Company exercised its right of
set-off under the transaction documents. Each of the Sellers has now instituted
litigation against the Company seeking collection of the Arizona Promissory
Notes, and disputing the Company's exercise of its right of set-off. Management
intends to defend vigorously its rights under the transaction documents;
however, as a practical matter, Management believes it highly likely that the
pending litigation will be settled. Now that the Glendale School has been
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 any amounts then due
and payable under the Arizona Promissory Notes (and/or in connection with any
settlement of the pending litigation) and (ii) to recoup, in part, the funds
expended by the Company to complete the Glendale School.
F-13
1999 Acquisitions
In June 1999, the Company acquired the assets of Flint Ridge Preschool in
Leesburg, Virginia, which has a capacity of 190 students. The purchase price
equaled $478,355 in cash and $207,543 in a subordinated note payable over five
years.
In August 1998, the Company entered into a transaction with Developmental
Resource Center, Inc. (DRC) to form Paladin Academy, LLC, which is owned 80% by
the Company and 20% by DRC. DRC is owned by Dr. Deborah Levy, a recognized
leader in the field of special education programs. The three schools formerly
owned by DRC, located in Florida, specialize in full day programs, summer camps,
testing services and clinics for K-12th grade students who have learning
challenges such as dyslexia, attention deficit disorder (ADD and ADHD) and other
learning disabilities. In connection with a settlement agreement dated April 30,
2001 with DRC, DRC transferred to the Company all its equity interest in Paladin
Academy, LLC which is now owned 100% by the Company.
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
2001 and 2000 all occurred at the beginning of 2000. The 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
2000, or of the results which may occur in the future. Further, the information
gathered from some acquired companies are estimates since some acquirees did not
maintain information on a period comparable with the Company's fiscal year-end
(dollars in thousands).
Year ended Year ended
June 30, 2001 June 30, 2000
(unaudited) (unaudited)
--------- ---------
Revenues $148,115 $134,486
Net income before change in
accounting principle $1,980 $2,860
Earnings per share
Basic $0.33 $0.48
Diluted $0.25 $0.37
3. Cash Equivalents:
The Company has an agreement with its primary bank that allows the bank to act
as the Company's principal in making daily investments with available funds in
excess of a selected minimum account balance. This investment amounted to
$537,000 and $2,069,000
F-14
at June 30, 2001 and 2000, 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.
4. Notes Receivable
A note receivable of $1,664,000 represents amounts due from People for People,
Inc. related to construction cost for a proposed charter school financed by the
Company. The principal amount of the note is due August 31, 2001, and interest
therein will be paid in installments thereafter. Interest on the note accrued at
2.5% over prime from July 11, 2000 to April 16, 2001 and at 14% through
maturity. People for People entered into a mortgage loan agreement on April 16,
2001 to fund the remaining construction cost and, upon the completion of
construction, to repay amounts due the Company. Accrued interest on the note at
June 30, 2001 was 109,000. On August 31, the $1,664,000 note was paid in full.
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, 2001 June 30, 2000
Land $ 2,832 $ 3,127
Buildings 5,741 6,321
Assets under capital lease obligations 913 913
Leasehold improvements 17,686 10,855
Furniture and equipment 24,827 23,384
Construction in progress 19 792
------------- -------------
$ 52,018 $ 45,392
Accumulated depreciation (20,792) (16,665)
------------- -------------
$ 31,226 $ 28,727
============= =============
Depreciation expense was $4,879,000, $4,354,000, and $3,545,000 for the years
ended June 30, 2001, 2000 and 1999, respectively. Amortization of capital leases
included in depreciation expense amounted to $15,000 for the years June 30, 2001
and 2000. Accumulated amortization of capital leases amounted to 512,000 and
$498,000 at June 30, 2001 and June 30, 2000, respectively.
6. Restructuring
In conjunction with a December 1997 restructuring plan, the Company recorded a
$2,960,000 charge. 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. At June 30, 2001, all charges related to this restructuring
plan have been incurred.
F-15
7. Property Held for Sale
The amounts reflected in the table below include certain properties for sale
pending sale and leaseback transactions. The balances of property held for sale
were as follows (dollars in thousands):
June 30, 2001 June 30, 2000
------------- --------------
Land $1,839 $2,519
Buildings 4,315 5,200
Leasehold improvements 110 842
Furniture and equipment 122 402
Accumulated depreciation (391) (885)
------------- -------------
$5,995 $8,078
============= =============
8. Investments:
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. At June 30, 2001 and 2000, $2,225,000 and
$250,000 was outstanding under the Credit Agreement, respectively.
9. Debt:
Debt consisted of the following (dollars in thousands):
June 30, 2001 June 30, 2000
-------------- --------------
Long Term Obligations:
Revolving and term credit facility $27,398 $ 24,764
First mortgages, due in varying installments
over three to 20 years with fixed interest rates
ranging from 11% or 12% 147 192
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% 118 147
Other 135 211
F-16
-------------- --------------
$27,798 $25,314
-------------- --------------
Less current portion (2,272) (2,054)
-------------- --------------
$25,526 $23,260
============== ==============
Long Term Subordinated Debt:
Senior subordinated note due 2005 interest at
10%, payable quarterly. Net of original issue
discount of $514,000 at June 30, 2001 $ 9,486 $ 9,357
Subordinated debt agreements, due in varying
installments over five to 10 years with fixed
interest rates varying from 7% to 8% 6,071 8,131
--------------- --------------
Total subordinated debt 15,557 17,488
Less current portion (4,142) (4,239)
--------------- --------------
$11,415 $13,249
=============== ==============
Credit Facility.
Since 1995, the Company has amended its credit facility three times. Each
amendment increased borrowing capacity. In May 2001, the Company entered into
its most recent 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. Nobel's
obligations under the credit facilities are guaranteed by subsidiaries of Nobel
and collateralized by a pledge of stock of Nobel subsidiaries.
The credit facilities bear interest, at Nobel's option, at either of the
following rates, which may be adjusted in quarterly increments based on the
achievement of performance goals: (1) an adjusted LIBOR rate plus a debt to
EBITDA-dependent rate ranging from 1.50% to 2.75%, or (2) a floating rate plus a
debt to EBITDA-dependent rate ranging from -0.25% to 100.00%.
EBITDA is defined by the credit facilities as net income before interest
expense, income taxes, depreciation and amortization.
At June 30, 2001, a total of $27,398,000 was outstanding under the amended and
restated loan agreement; $1,053,000 was outstanding under Working Capital Credit
Facility, $11,345,000 was outstanding under the Acquisition Credit Facility and
$15,000,000 was outstanding under the Term Loan.
F-17
The interest rate at June 30, 2001 for $24,000,000 outstanding was at 6.53%,
which was adjusted Libor plus 2.5%. The remaining $3,398,000 outstanding was at
7.5%. The interest rate at June 30, 2000 for $9,750,000 outstanding was 7.5% and
the remaining amount of $15,014,000 was 9.5%.
Nobel also pays a commitment fee on the Working Capital and Acquisition Facilty
calculated at a rate, which may be adjusted quarterly in increments based on a
debt to EBITDA -dependent ratio, ranging from 0.25% to 0.50% per year on the
undrawn portion of the commitments under the credit facilities. At June 1, 2001,
the commitment fee rate was 0.375%. This fee is payable quarterly in arrears.
In addition, Nobel pays a letter of credit fee based on the face amount of each
letter of credit calculated at the rate per year then applicable to loans under
the revolving credit facility bearing interest based on adjusted LIBOR rate plus
a debt to EBITDA-dependent rate ranging from 1.50% to 2.75%. At June 30, 2001,
the letter of credit fee rate was 2.50%, which included the fronting fee. These
fees are payable quarterly in arrears. In addition, Nobel will pay customary
transaction charges in connection with any letter of credit. At June 1, 2001,
Nobel had $ 337,000 committed under outstanding letters of credit.
The credit facilities contain customary covenants and provisions that restrict
Nobel's ability to change its business, declare dividends, grant liens, incur
additional indebtedness, make capital expenditures. In addition, the credit
facilities provide that Nobel must meet or exceed defined interest coverage
ratios and must not exceed leverage ratios.
In connection with the May amendment to the Company's Amended and Restated Loan
and Security Agreement, it entered an interest rate swap agreement on the
$15,000,000 Term Loan 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 becomes 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.
In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation. In May, 2001, the Company amended it $10,000,000
senior subordinated note. The amendment modified the principal repayments from
two installments of $5,000,000 in 2004 and 2005 to two installments of
$5,000,000 in 2006 and 2007. In addition, the interest rate on the note
increases from 10% at June 30, 2001 to 12% at October 1, 2001. 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
F-18
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.
Maturities of long-term obligations are as follows: $6,414,000 in 2002,
$3,487,000 in 2003, $5,559,000 in 2004, $6,257,000 in 2005, and $22,152,000 in
2006 and thereafter.
10. Accounts Payable and Other Current Liabilities:
Accounts payable and other current liabilities were as follows
(dollars in thousands):
June 30, 2001 June 30, 2000
--------------- --------------
Accounts payable $ 2,105 $ 2,652
Reserve for closed centers -- 236
Accrued payroll and related items 1,647 1,303
Accrued rent 345 394
Accrued taxes 186 1,271
Other accrued expense 2,395 3,141
--------------- --------------
$ 6,678 $ 8,997
=============== ==============
11. Cash Overdraft Liability:
Cash overdrafts represent unfunded checks drawn on zero balance accounts that
have not been presented for funding to the Company's banks. The overdrafts are
funded, without bank finance charges, as soon as they are presented.
12. 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, 2001 (dollars in thousands):
Operating Leases
2002 $ 22,796
2003 21,933
2004 21,413
2005 20,432
2006 18,915
2007 and thereafter 113,401
Total minimum lease obligations $218,890
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
F-19
leases was $21,469,000, $17,596,000, and $16,595,000, for the years ended June
30, 2001, 2000 and 1999, These leases are typically triple-net leases requiring
the Company to pay all applicable real estate taxes, utility expenses and
insurance costs.
At of June 30, 2001, the Company entered into a sale and leaseback transaction
with the Company's CEO. The total proceeds to the Company were $3,800,000 and
the related lease term is 20 years. Future obligations under the lease are
included in the table above.
The Company's tenancy under 17 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):
2002 $ 1,246
2003 $ 1,258
2004 $ 1,239
2005 $ 1,186
2006 and thereafter $ 3,156
13. 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, 2001 and 2000, 1,063,830 shares
were outstanding.
On August 22, 1994, the Company completed a private placement of an aggregate of
2,500,000 shares of Series C Convertible Preferred Stock and the Series 1
Warrants and Series 2 Warrants 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.
The Series 1 Warrants are exercisable at $4.00 per share, subject to adjustment,
and expire on August 19, 2001. The Series 2 Warrants have terminated pursuant to
their terms. At June 30, 2001 and 2000, 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
F-20
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, 2001 and 2000 were 1,023,694. 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
F-21
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.
At June 30, 2001, 2000 and 1999, 965,267 warrants were outstanding with an
exercise price of $4.00 to $7.52 per share.
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 with non-qualified stock options
for non-employee consultants. At June 30, 2001 and 2000, 35,000 options have
been granted under this plan. At June 30, 2001, $29,000 in compensation expense
has been recorded in accrued liabilities.
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.
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
F-22
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:
Weighted
Average
Number Range Price
---------------- ----------------------------- --------------
(in dollars)
Balance June 30, 1998 414,432 3.75 to 16.44 8.15
---------------- ------------ ------------ --------------
Granted 423,725 4.69 to 9.25 5.02
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
---------------- ------------ ------------ --------------
Granted 110,088 8.88 9.13 8.93
Exercised (42,262) 4.68 to 6.00 5.13
Canceled (87,968) 4.68 to 11.63 7.86
---------------- ------------ ------------ --------------
Balance June 30, 2001 957,178 3.75 to 16.44 7.16
---------------- ------------ ------------ --------------
Of the 110,088 options granted during 2001 and 423,725 options granted during
1999, 25,000 and 110,000 options, respectively, were granted outside of the
Company's stock incentive plans. At June 30, 2001 and June 30, 2000, 571,002 and
565,455 shares, respectively, remained available for options or stock grants
under the 1995 Stock Incentive Plan and 702,625 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):
F-23
For the Year ended June 30,
----------------------------------
2001 2000 1999
Net income:
- as reported $1,501 $2,478 $1,593
- pro forma $ 897 $2,157 $1,379
Basic earnings per share
- as reported $ 0.24 $ 0.40 $ 0.25
- pro forma $ 0.15 $ 0.35 $ 0.21
Diluted earnings per share
- as reported $ 0.20 $ 0.33 $ 0.22
- pro forma $ 0.12 $ 0.29 $ 0.19
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:
2001 2000
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 44.24% 47.67%
Risk-free interest rate 5.77% 5.27%
Expected life of options 3 years 3 years
14. Other (Income) Expense:
Other (income) expense consists of the following (dollars in thousands):
Year Ending June 30,
----------------------------------
2001 2000 1999
Interest income $ (426) (118) (188)
Rental income (39) (46) (49)
Depreciation related to rental properties 18 17 18
Other projects 22 - (31)
Cost related to schools held for sale 1 2 2
----- ------ ------
$ (424) (145) (248)
===== ====== ======
F-24
15. Income Taxes:
Current tax provision (dollars in thousands):
Year Ending June 30,
---------------------------
2001 2000 1999
---------------------------
Federal $ 788 $ 902 $ 587
State 115 (79) (5)
------ ------ ------
$ 903 $ 823 $ 582
Deferred tax provision 451 970 571
------ ------ ------
$1,354 $1,793 $1,153
====== ====== ======
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):
Year Ending June 30,
---------------------------
2001 2000 1999
---------------------------
U.S. federal statutory rate $ 984 $1,495 $ 934
State taxes, net of federal tax benefit 70 128 82
Goodwill and other 300 170 137
------ ------ ------
$1,354 $1,793 $1,153
====== ====== ======
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
F-25
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows (dollars in
thousands):
Year Ending June 30,
------------------------
2001 2000 1999
------------------------
tax assets (liabilities)
Goodwill amortization $(702) $(468) $ (374)
Depreciation (264) (174) (307)
Provision for school closings and
other restructuring - 60 906
AMT credit carryforward and state
net operating losses 647 732 591
Other - - 203
----- ----- ------
(319) 150 1,019
----- ----- ------
Valuation allowance (141) (141) -
----- ----- ------
Net deferred tax (liability) asset $(460) $ 9 $1,019
===== ===== ======
A valuation allowance was established against the Company's deferred tax asset
related to state tax net operating loss carryforwards due to the Company's lack
of earnings history of certain of the Company's subsidiaries in those states
and, accordingly, the uncertainty as to the realizability of the asset.
The Company has state net operating loss carryforwards aggregating to
approximately $7,000 as of June 30, 2001, which can be carried forward from
seven to twenty years depending on the state and will expire between 2005 and
2020, if not utilized.
16. 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 $238,000, $169,000, and $161,000 for the years ended June
30, 2001, 2000 and 1999, respectively.
F-26
17. Fair Value of Financial Instruments:
Fair value estimates, methods and assumptions are set forth below for Nobel's
financial instruments at June 30, 2001, and June 30, 2000.
Cash and cash equivalents, receivables, investments and current liabilities:
Fair value approximates the carrying value of cash and cash equivalents,
receivables and current liabilities as reflected in the consolidated balance
sheets at June 30, 2001 and 2000 because of the short-term maturity of these
instruments. The fair value of Nobel's investments is not readily determinable
as the related securities are not actively traded.
The Company believes the fair value of its $2,250,000. investment in TES
approximates its cost (see Note 8). This represents management's best estimate
using TES's latest available financial projections.
Long-term debt: Based on recent market activity, the carrying value of Nobel's
10% senior subordinated notes of $9,486,000 at June 30, 2001 and $9,357,000 at
June 30, 2000, approximated market value. The carrying values for Nobel's
remaining long-term debt of $33,869,000 and $33,371,000 at June 30, 2001 and
2000, respectively, approximated market value based on current rates that
management believes could be obtained for similar debt.
Interest rate instruments: The fair value of the interest rate swap is the
estimated amounts that the Company would pay or receive to terminate the
instrument at June 30, 2001, estimated by discounting expected cash flows using
quoted market interest rates. At June 30, 2001, the Company would have had to
pay $17,000 to terminate the interest rate swap.
18. 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.
F-27
19. Segment Information
The Company manages its schools based on 18 geographical regions within the
United States. In FY 2000 the company acquired Houston Learning Academy and TAC
(see Note 2) 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.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies."
The table below presents information about the reported operating income of the
company for the fiscal years ended June 30, 2001 and 2000, (dollars in
thousands):
Private
Schools Other Total
-------- -------- --------
June 30, 2001
-------------
Revenues $139,726 8,226 147,952
School operating profit $ 17,945 221 18,166
Depreciation and amortization $ 5,983 603 6,586
June 30, 2000
-------------
Revenues $125,176 2,231 127,407
School operating profit $ 16,910 419 17,329
Depreciation and amortization $ 5,739 87 5,826
June 30, 1999
-------------
Revenues $109,762 109,762
School operating profit $ 13,287 13,287
Depreciation and amortization $ 5,009 5,009
F-28
19. Subsequent events:
On August 19, 2001, 125,000 Series 1 Warrants issued in connection with the
Series C Convertible Preferred Stock were exercised at $4.00 per share.
20. Quarterly Results of Operations (unaudited):
(In thousands, except per share data and market price of stock)
The following table shows certain unaudited financial information for the
Company for the interim periods indicated. As discussed in Note 1, the Company
changed its method of revenue recognition related to registration fees effective
July 1, 2000. Accordingly, the following unaudited quarterly operating results
have been restated for the fiscal year ended June 30, 2001 to reflect the impact
of the change in accounting principle as if adopted on July 1, 2000.
Additionally, quarterly results may vary from year to year depending on the
timing and amount of revenues and costs associated with new center development
and acquisitions.
Fiscal 2001
-----------------------------------------------------------------------------------------------
Quarter ended Quarter ended Quarter ended Quarter ended
September 30, 2000 December 31, 2000 March 31, 2001 June 30, 2001
--------------------- -------------------- -------------------- ----------------------
As As As As
Previously As Previously As Previously As Previously As
Reported Adjusted Reported Adjusted Reported Adjusted Reported Adjusted
---------- -------- ---------- -------- ---------- -------- ---------- --------
Revenue $32,689 31,530 37,265 37,673 38,956 39,204 39,042 39,552
Operating profit $ 664 (495) 1,577 1,985 2,337 2,585 2,584 3,094
Cummulative effect of change in
accounting principle (net of tax) $ 295 - - - - - -
Net income (loss) $ (222) (1,111) 415 595 717 820 886 1,201
Earnings (loss) per share:
Basic $ (0.04) (0.19) 0.07 0.10 0.12 0.13 0.14 0.20
Diluted $ (0.04) (0.19) 0.06 0.08 0.10 0.11 0.12 0.16
Market price:
High $10.000 n/a 8.875 n/a 10.250 n/a 10.000 n/a
Low $ 7.750 n/a 4.688 n/a 5.516 n/a 7.550 n/a
Fiscal 2000
----------------------------------------------------------------------------------------------
Quarter ended Quarter ended Quarter ended Quarter ended
September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000
--------------------- -------------------- -------------------- ----------------------
Revenue $ 27,345 31,532 33,127 35,403
Operating profit $ 606 1,829 2,510 2,642
Net income (loss) $ (115) 615 971 1,007
Earnings (loss) per share:
Basic $ (0.02) 0.10 0.16 0.17
Diluted $ (0.02) 0.08 0.13 0.13
Market price:
High $ 6.125 9.000 9.313 8.188
Low $ 4.250 5.125 6.500 5.938
F-29