SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
-----
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________
Commission File Number 1-1003
NOBEL LEARNING COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2465204
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1615 West Chester Pike, West Chester, PA 19382
(Address of principal executive offices) (Zip Code)
(484) 947-2000
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all report(s) required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,544,953 shares of Common
Stock outstanding at May 9, 2002.
INDEX TO FORM 10-Q
Nobel Learning Communities, Inc.
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets,
March 31, 2002 (unaudited) and June 30, 2001 ...................... 2
Consolidated Statements of Income for the
nine months ended March 31, 2002 (unaudited)
and 2001 (unaudited) .............................................. 3
Consolidated Statements of Income for the
three months ended March 31, 2002 (unaudited)
and 2001 (unaudited) .............................................. 4
Consolidated Statements of Cash Flows for the
nine months ended March 31, 2002 (unaudited)
and 2001 (unaudited) .............................................. 5
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the nine months ended March 31, 2002
(unaudited)
Notes to Consolidated Interim Financial Statements ................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................. 21
ii
PART I
Financial Information
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
The Company's fiscal 2002 outlook and all other statements in this report other
than historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company believes
that its assumptions are reasonable, it cautions that there are inherent
difficulties in predicting the impact of certain factors, especially those
affecting the acceptance of the Company's newly developed and converted schools
and performance of recently acquired businesses, which could cause actual
results to differ materially from predicted results.
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
Current Assets March 31, 2002 June 30, 2001
- -------------------------------------------------------- ------------------ -------------------
Cash and cash equivalents $ 1,910 $ 1,321
Accounts receivable, less allowance for doubtful accounts
of $437 and $351 at March 2002 and June of 2001, respectively 2,890 2,858
Notes receivable 235 1,836
Prepaid rents 2,301 2,142
Other prepaid expenses 2,245 1,896
--------- ---------
Total Current Assets 9,581 10,053
--------- ---------
Property, & equipment at cost 59,103 52,018
Accumulated depreciation (24,887) (20,792)
--------- ---------
Total property and equipment 34,216 31,226
Property and equipment held for sale 5,597 5,995
Goodwill and intangibles 49,620 50,232
Investment 2,528 2,225
Deposits and other assets 1,627 2,053
--------- ---------
Total Assets $ 103,169 $ 101,784
========= =========
Liabilities and Stockholders' Equity
- --------------------------------------------------------
Current portion of long-term obligations $ 3,734 $ 6,414
Current portion of swap contract 46 -
Cash overdraft liability 2,678 5,428
Accounts payable and other current liabilities 8,185 6,678
Unearned income 9,856 6,986
--------- ---------
Total Current Liabilities 24,499 25,506
--------- ---------
Long-term obligations 26,181 25,526
Long-term subordinated debt 10,408 11,415
Swap contract 338 -
Deferrred gain on sale/leaseback 34 15
Deferred taxes 307 460
Minority interest in consolidated subsidiary 223 261
--------- ---------
Total Liabilities 61,990 63,183
Stockholders' Equity:
Preferred Stock, $.001 par value; 10,000,000 shares authorized, issued and
outstanding 4,587,464 at March 31, 2002, and June 30, 2001;
$5,524 aggregate liquidation preference at March 31, 2002 5 5
and June 30, 2001
Common Stock, $.001 par value, 20,000,000 shares authorized, issued and
outstanding 6,544,953 at March 31, 2002 and 6,212,561 at June 30, 2001 6 6
Treasury Stock, cost; 230,510 shares (1,375) (1,375)
Additional paid in capital 41,312 39,879
Retained earnings 1,462 86
Accumulated other comprehensive loss (231) -
--------- ---------
Total Stockholders' Equity 41,179 38,601
--------- ---------
Total Liabilities & Stockholders' Equity $ 103,169 $ 101,784
========= =========
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
2
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the nine months ended March 31, 2002 and 2001
(Dollars in thousands except per share amounts)
(unaudited)
2002 2001
--------- ---------
Revenues $ 115,052 $ 108,407
Total operating expenses 101,034 96,314
--------- ---------
School operating profit 14,018 12,093
General and administrative expenses 8,893 8,018
--------- ---------
Operating income 5,125 4,075
Interest expense 2,777 3,216
Other income (112) (305)
Minority interest in earnings of consolidated subsidiary 24 34
--------- ---------
Income before taxes and change in accounting principle 2,436 1,130
Income tax expense 998 531
--------- ---------
Net income before change in accounting principle 1,438 599
Cummulative effect of change in accounting principle, net of tax
benefit of $242 - 295
--------- ---------
Net income $ 1,438 $ 304
========= =========
Preferred stock dividends 62 61
--------- ---------
Net income available to common stockholders $ 1,376 $ 243
========= =========
Basic income per share:
- -----------------------
Net income per share before cummulative effect of accounting change $ 0.22 $ 0.09
Cummulative effect of accounting change - (0.05)
--------- ---------
Net income per share $ 0.22 $ 0.04
========= =========
Dilutive income per share:
- --------------------------
Net income per share before cummulative effect of accounting change $ 0.19 $ 0.08
Cummulative effect of accounting change - ($ 0.04)
--------- ---------
Net income per share $ 0.19 $ 0.04
--------- ---------
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
3
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the three months ended March 31, 2002 and 2001
(Dollars in thousands except per share amounts)
(unaudited)
2002 2001
-------- --------
Revenues $ 40,737 $ 39,204
Total operating expenses 35,097 33,683
-------- --------
School operating profit 5,640 5,521
General and administrative expenses 3,007 2,936
-------- --------
Operating income 2,633 2,585
Interest expense 905 1,030
Other income (28) (47)
Minority interest in earnings (loss) of consolidated subsidiary 8 53
-------- --------
Income before taxes 1,748 1,549
Income tax expense 716 729
-------- --------
Net income $ 1,032 $ 820
======== ========
Preferred stock dividends 21 21
-------- --------
Net income available to common stockholders $ 1,011 $ 799
======== ========
Basic earnings per share $ 0.16 $ 0.13
======== ========
Diluted earnings per share $ 0.14 $ 0.11
-------- --------
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
4
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the nine months ended March 31, 2002 and 2001
(Dollars in thousands)
(unaudited)
2002 2001
-------- --------
Net Cash Provided By Operating Activities $ 10,272 $ 4,216
Cash Flows From Investing Activities:
Proceeds from sale of real estate 636 4,535
Capital expenditures (7,468) (12,580)
Payment for acquisitions - (536)
Cash payments on note receivable 1,752 -
Advance on note receivable (414) (1,664)
-------- --------
Net Cash Used In Investing Activities: (5,494) (10,245)
-------- --------
Cash Flows From Financing Activities:
Proceeds from long term debt 2,299 10,358
Repayment of long term debt (1,607) (4,109)
Repayment of subordinated debt (3,635) (1,164)
Proceeds from capital lease 310
Repayment of capital lease obligation (114) (74)
Proceeds from exercise of stock options and warrants 1,433 159
Cash distribution of minority interest (63) -
Payments of dividends on preferred stock (62) (61)
Cash Overdraft (2,750) (1,092)
-------- --------
Net Cash (Used in) Provided by Financing Activities: (4,189) 4,017
-------- --------
Net increase (decrease) in cash and cash equivalents 589 (2,012)
Cash and cash equivalents at the beginning of the period 1,321 3,798
-------- --------
Cash and cash equivalents at the end of the period $ 1,910 $ 1,786
======== ========
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report Form 10-K are an integral part of these consolidated
financial statements.
5
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
For the Year Ended June 30, 2001 and the Nine Months Ended March 31, 2002
(Dollars in thousands except share data)
(Unaudited)
Treasury and Retained Accumulated
Additional Common Earnings/ Other
Preferred Stock Common Stock Paid-In Stock Accumulated Comprehensive
--------------- ------------
Shares Amount Shares Amount Capital Issuable Deficit Loss Total
----------- ------ ----------- ------- ---------- ------------ ----------- ------------- ---------
June 30, 2001 $ 4,587,464 $ 5 $ 6,212,561 $ 6 $ 39,879 $ (1,375) $ 86 $ - $ 38,601
Comprehensive income:
Net income 1,437 $ 1,437
Swap contract (231) (231)
--------
Total comprehensive income $ 1,206
Stock options and warrants
exercised and related tax
benefit - - 332,392 - 1,433 - - $ 1,433
Preferred dividends - - - - - - (61) - (61)
----------- ------ ----------- ------- ---------- ---------- --------- ------------- --------
March 31, 2002 $ 4,587,464 $ 5 $ 6,544,953 $ 6 $ 41,312 $ (1,375) $ 1,462 $ (231) $ 41,179
=========== ====== =========== ======= ========== ========== ========= ============= ========
The accompanying notes and the notes to the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements
6
NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
for the three months ended March 31, 2002 and 2002
(unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The consolidated financial statements have been prepared by the Registrant
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the Company's
financial position and results of operations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Registrant's Annual Report on Form 10-K for the
year ended June 30, 2001.
Due to the inherent seasonal nature of the education and child care businesses,
annualization of amounts in these interim financial statements may not be
indicative of the actual operating results for the full year.
Future results of operations of the Company involve a number of risks and
uncertainties. Factors that could affect future operating results and cause
actual results to vary materially from historical results include, but are not
limited to, consumer acceptance of the Company's business strategy with respect
to expansion into new and existing markets, the Company's debt and related
financial covenants, the Company's significant lease commitments, difficulties
in managing the Company's growth including attracting and retaining qualified
personnel, a large portion of the Company's assets represent goodwill, increased
competition, changes in government policy and regulation, ability to obtain
additional capital required to fully implement the Company's business plan, and
the Company's investment in Total Education Solutions, Inc..
Note 2 - Earnings Per Share
- ---------------------------
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. In the calculation
of dilutive earnings per share, shares outstanding are adjusted to assume
conversion of the Company's non-interest bearing convertible preferred stock if
such conversion would be dilutive. In the calculation of basic earnings per
share, weighted average number of shares outstanding is used as the denominator.
Earnings per share are computed as follows.
7
For the Three Months March 31, For the Nine Months December 31,
------------------------------ --------------------------------
2002 2001 2002 2001
------------------------------ --------------------------------
Basic earnings per share
- ------------------------
Net income $ 1,032 $ 820 $ 1,438 $ 304
Less preferred dividends $ 21 $ 21 $ 62 $ 61
--------- ---------- ---------- ---------
Net income available for
common stock $ 1,011 $ 799 $ 1,376 $ 243
--------- ---------- ---------- ---------
Average common stock
outstanding 6,223 5,992 6,167 5,975
Basic earnings per share $ 0.16 $ 0.13 $ 0.22 $ 0.04
========= ========== ========== =========
Dilutive earnings per share
- ---------------------------
Net income available for
common stock and dilutive securities $ 1,032 $ 820 $ 1,438 $ 304
--------- ---------- ---------- ---------
Average common stock
outstanding 6,223 5,992 6,167 5,975
Options, warrants and
and convertible securities 1,298 1,484 1,347 1,518
--------- ---------- ---------- ---------
Average common stock and
dilutive securities outstanding 7,521 7,476 7,514 7,493
Dilutive earnings per share $ 0.14 $ 0.11 $ 0.19 $ 0.04
========= ========== ========== =========
8
Note 3. Revenue Recognition.
- ---------------------------
The Company adopted Staff Accounting Bulletin ("SAB") 101 in fiscal 2001. As a
result of that adoption, the Company deferred $1,336,000 of non-refundable
registration and education fee revenues in the first quarter of fiscal 2002.
These non-refundable fees will be recognized as revenue throughout the remainder
of fiscal year 2002. The financial results for March 31, 2001 have been restated
to reflect the adoption of SAB 101. Registration fees deferred in the first
quarter of fiscal 2001 were $1,159,000. The fee revenues deferred under SAB 101
will be amortized over the typical school year of August to June. Summer camp
registration fees will be recognized during the months June, July and August.
Note 4. New Accounting Pronouncements
- -------------------------------------
On April 30, 2002 the Financial Accounting Standards Board (FASB) issued
Statement 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. FASB 145 rescinds Statement 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. Early application of the provisions of FASB 145 may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which FASB 145 is issued. The Company has elected to adopt FASB 145 as of the
beginning of the current fiscal year.
The Company had a promissory note obligation related to the purchase of a school
in Arizona of $1,408,000 issued in June 2000. The promissory note was paid in
full for $1,025,000 on February 14, 2002 resulting in a gain of $383,000. The
gain was the result of the settlement of claims related to the acquisition of
the school. As a result of the adoption of FASB 145, the Company recorded the
gain as other income during the quarter ended March 31, 2002 as it did not meet
the criteria for treatment as an extraordinary item as provided for in APB
opinion 30. The impact on diluted earnings per share for the quarter and year to
date March 31, 2002 was $0.03 per share.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2001, which resulted in
an $1,258,000 reduction in goodwill amortization expense during the nine months
ended March 31, 2002. Under SFAS No. 142, goodwill is no longer amortized but
reviewed for impairment annually, or more frequently if certain indicators
arise.
The net carrying value of goodwill is $49,530,000 million as of July 1, 2001
(the Company's adoption date of SFAS 142). The Company completed the "first
step" impairment test as required under SFAS 142 at December 31, 2001 and
determined that the recognition of an impairment loss was not necessary. The
fair value of the Company's ten reporting units was estimated using the expected
present value of future cash flows. For two of the reporting units fair value
approximated their carrying value while for the remaining eight reporting units
fair value exceeded carrying value. Goodwill will be assessed for impairment at
least annually or upon an adverse change in operations
9
Goodwill amortization for the quarter ended March 31, 2001 amounted to
approximately $244,000 net of tax ($413,000 pretax), which would have impacted
the reported basic earnings per share by $0.03. Goodwill amortization for the
nine months ended March 31, 2001 amounted to approximately $713,000 net of tax
($1,209,000 pretax), which would have impacted the reported basic earnings per
share by $0.16.
At March 31, 2002 the Company's intangibles assets were as follows:
As of March 31, 2002
---------------------------------------
Gross Carrying Accumulated
Amount Amortization
------ ------------
($000s)
Amortized intangible assets
Non-compete $ 2,493,000 $ (2,065,000)
Other 901,000 (85,000)
----------------- -----------------
Total $ 3,394,000 $ (2,150,000)
================= =================
Amortization of intangible assets are as follows $447,000 in 2002, $309,000 in
2003, $96,000 in 2004, $74,000 in 2005, and $666,000 in 2006 and thereafter.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
addresses accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale and expands on the guidance provided by SFAS No. 121 with respect to cash
flow estimations. SFAS No. 144 becomes effective for the Company's fiscal year
2003. The Company is evaluating SFAS No. 144 and has not yet determined the
impact of adoption on its financial position.
Effective July 1, 2000, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value.
In connection with the May 2001 amendment to the Company's Amended and Restated
Loan and Security Agreement, the Company entered an interest rate swap agreement
on the $15,000,000 Term Loan Facility portion of its credit facility. The
Company uses this derivative financial instrument to manage its exposure to
fluctuations in interest rates. The instrument involves, to varying degrees,
market risk, as the instrument is subject to rate and price fluctuations, and
elements of credit risk in the event the counterparty should default. The
Company does not enter into derivative transactions for trading purposes. At
June 30, 2001 the Company's interest rate swap contract outstanding had a total
notional amount of $14,464,000 million and became effective August 1, 2001. The
notional amounts serves solely as a basis for the calculation of payments to be
exchanged and are not a measure of the exposure of the Company through the use
of derivatives. Under the interest rate swap contract, the Company agrees to pay
a fixed rate of 4.99% and the counterparty agrees to make payments based on
3-month LIBOR. The market value of the interest rate swap agreement at March 31,
2002 was a liability of $384,000 and is included, net of tax, as a component of
Other Comprehensive Loss.
10
Note 5 - Investment in Total Education Solutions (TES)
- ------------------------------------------------------
The Company has a $2.5 million Note Receivable in the form of a Credit Agreement
with Total Education Solutions ("TES") due May 2005. TES, established in 1997
provides special education services to charter schools and public schools which,
because of lack of internal capabilities or other reasons, wish to out-source
their provision of special education programs (which, under federal law, they
are required to provide to select students). Prior to the financing provided
from the Company in May 2002, TES was marginally profitable as it provided its
services to schools in a small regional area of Southern California. The
proceeds received by TES have been used for the expansion of its product
throughout California and plans to enter other states. TES revenues have grown
54% since the origination of the credit agreement. However, TES has also
incurred losses as a result of building the infrastructure to services other
regions. In addition, TES is currently exploring additional financing sources.
Management believes that valuations of such financing will approximate or exceed
the company's carrying value. Negative developments in these areas could have a
material effect on the collectability of the loan. The Company will continue to
monitor the financial condition and assess the carrying value of this
investment.
Note 6 - Segment Information
- ----------------------------
The Company manages its schools based on 4 geographical regions within the
United States. In fiscal year 2000 the Company acquired Houston Learning Academy
and The Activities Club and began managing charter schools. These operations
have different characteristics and are managed separately from the school
operations. These operations do not currently meet the quantification criteria
and therefore are not deemed reportable under Statement of Financial Accounting
Standards 131, "Disclosures about Segments of an Enterprise and Related
Information" and are reflected in the "other" category.
The table below presents information about the reported operating income of the
company for the nine months and the three months ended March 31, 2002 and 2001.
(dollars in thousands):
11
Private
Nine months ended March 31, Schools Other Total
- --------------------------- --------- --------- ---------
2002
- ----
Revenues $108,415 6,637 115,052
School operating profit $ 13,956 62 14,018
Depreciation and
amortization $ 3,637 611 4,248
2001
- ----
Revenues $102,616 5,791 108,407
School operating profit $ 12,310 (217) 12,093
Depreciation and
amortization $ 4,337 453 4,790
Three months ended March 31,
- ----------------------------
2002
- ----
Revenues $ 38,415 2,322 40,737
School operating profit $ 5,658 (18) 5,640
Depreciation and
amortization $ 1,216 230 1,446
2001
- ----
Revenues $ 37,199 2,005 39,204
School operating profit $ 5,528 (7) 5,521
Depreciation and
amortization $ 1,460 155 1,615
Note 7 - Commitments and Contingencies
- --------------------------------------
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
will not have a material adverse effect on the Company's consolidated financial
position. The significance of these matters on the Company's future operating
results and cash flows depends on the level of future results of operations and
cash flows as well as on the timing and amounts, if any, of the ultimate
outcome.
The Company carries fire and other casualty insurance on its schools and
liability insurance in amounts which management believes are adequate for its
operations. As is the case with other entities in the education and preschool
industry, the Company cannot effectively insure itself against certain risks
inherent in its operations. Some forms of child abuse have sublimits per claim
in the general liability coverage.
12
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
For the Nine Months Ended March 31, 2002 vs. the Nine Months ended March 31,
2001
At March 31, 2002, the Company operated 174 schools. Since March 31, 2001, the
Company has opened 11 new schools: two elementary schools, five preschools,
three schools for learning challenged (the Paladin Academy schools), and one
charter school. The Company has also closed two schools.
Revenues for the nine months ended March 31, 2002 increased $6,645,000 or 6.1%
to $115,052,000 from $108,407,000 for the nine months ended March 31, 2001. The
increase in revenues is primarily attributable to tuition increases and the
increase in the number of schools.
The Company adopted SAB 101 effective July 1, 2000. As a result of that
adoption, the Company deferred $1,336,000 of non-refundable registration and
education fee revenues in the first quarter of fiscal 2002. The financial
results for March 31, 2001 have been restated to reflect the adoption of SAB
101. Registration fees deferred in the first quarter of 2001 were $1,159,000.
The registration fees deferred in the first quarter will be recognized as
revenue during the rest of the fiscal year. Registration fees deferred from the
first quarter and recognized for the nine months ended March 31, 2002 and 2001
was $1,035,000 and $656,000, respectively.
Same school revenue (schools that were opened in both periods) increased
$5,455,000 or 5.1% in the nine months ended March 2002 compared to the same
period in the prior year. This increase is related to tuition increases and the
maturing of schools opened in 2002 offset by a decrease in enrollment in many of
the Company's preschools due primarily to the slowing economy which often times
results in the loss of employment by at least one parent with a child in
preschool. The increase in revenues related to the 11 schools opened totaled
$1,518,000. Revenues related to The Activities Club increased $189,000. These
increases were offset by a decrease in revenues of $517,000 related to the two
school closings.
School operating profit for the nine months ended March 31, 2002 increased
$1,924,000 or 15.9% to $14,017,000 from $12,093,000 for the nine months ended
March of 2001. Total school operating profit margin increased from 11.2% for the
nine months ended March of 2001 to 12.2% for the nine months ended March 2002.
School operating profit was also affected by the adoption of SAB 101 as noted
above. In addition, the results for the quarter ended March 31, 2002, include
the effect of adopting SFAS No. 142, which resulted in a $1,209,000 reduction in
goodwill amortization expense. (See Note 4 to the financial statements).
Same school operating profit increased $2,835,000 or 22.6%. Excluding the effect
of the adoption of SFAS 142, same school operating profit increased $1,626,000
or 11.8%. Same school operating profit margin improved from 11.7% for the nine
months ended March 31, 2001 to 13.6% for the nine months ended March 31, 2002.
The increase in same school operating profit is due to the effect of the
adoption of SFAS 142, the maturing of schools opened in 2002 and lower school
level expenses as a percentage of revenue. For the nine months ended March 31,
2002, new schools incurred a loss of $1,144,000. The Activities Club reduced its
operating loss during the nine months ended March 2002 by $246,000 as compared
to the prior year. School closings negatively affected the change in school
operating profit by $12,000.
13
General and administrative expenses increased $875,000 or 10.9% from $8,018,000
for the nine months ended March 31, 2001 to $8,893,000 for the nine months ended
March 31, 2002. As a percentage of revenue, general and administrative expense
was 7.7% for the nine months ended March 31, 2002 and 7.4% for the nine months
ended March 31, 2001. This increase in general and administrative expenses was
primarily related to additional corporate staffing and increased fees for
professional and legal services.
As a result of the factors mentioned above, operating income increased
$1,049,000 from $4,075,000 for the nine months ended March 31, 2001 to
$5,124,000 for the nine months ended March 31, 2002.
Other income decreased $193,000 during the nine months ended March 31, 2002 as
compared to the comparable period in the prior year. This decrease was primarily
due to a decrease in interest income from investments. Other income for the nine
months ended March 31, 2002 includes the gain recognized on the settlement of a
promissory note of $383,588 (see note 4) and the write off of expenses related
to unsuccessful acquisitions of $344,908.
For the nine months of fiscal 2002, EBITDA (defined as earnings before interest,
income taxes, depreciation and amortization) totaled $9,779,000. This represents
an increase of $269,000 over the comparable period. EBITDA is not a measure of
performance under generally accepted accounting principles. However, the Company
and the investment community consider it an important calculation.
Interest expense decreased $439,000 or 13.7% from $3,216,000 for the nine months
ended March 31, 2001 to $2,777,000 for the nine months ended March 31, 2002. The
decrease is due to decreased interest rates on the Company's credit facility and
decreased borrowings on the Company's credit facility.
Income tax expense totaled $998,000 for the nine months ended March 31, 2002,
which reflects a 41% effective tax rate. The reduction in the tax rate from
fiscal 2002 is caused by the implementation of FAS 142, as the Company is no
longer amortizing non-deductible goodwill.
For the Third Quarter Ended March 31, 2002 vs. the Third Quarter ended March 31,
2001
Revenues for the third quarter ended March 31, 2002 increased $1,533,000 or 3.9%
to $40,737,000 from $39,204,000 for the third quarter ended March 31, 2001. The
increase in revenues is primarily attributable to tuition increases and the
increase in the number of schools.
The Company adopted SAB 101 effective July 1, 2000. As a result of that
adoption, the Company deferred $1,336,000 of non-refundable registration and
education fee revenues in the first quarter of fiscal 2002. The financial
results for March 31, 2001 have been restated to reflect the adoption of SAB
101. Registration fees deferred in the first quarter of 2001 were $1,159,000.
The registration fees deferred in the first quarter will be recognized as
revenue during the rest of the fiscal year. Registration fees deferred from the
first quarter and recognized for the third quarter ended March 31, 2002 and 2001
was $544,000 and $248,000, respectively.
Same school revenue (schools that were opened in both periods) increased
$864,000 or 2.2% in the third quarter ended March 31, 2002 as compared to the
prior year. This increase is related to tuition and the maturing of schools
opened in 2002 offset by a decrease in enrollment in many of the Company's
preschools due primarily to the loss of employment by at least one parent with a
child in preschool. The increase in revenues related to the 11 schools opened
totaled $772,000. Revenues for The Activities Club increased $48,000. These
increases were offset by a decrease in revenues of $151,000 related to
14
the two school closings.
School operating profit for the third quarter ended March 31, 2002 increased
$119,000 or 2.2% to $5,640,000 from $5,521,000 for the third quarter ended March
of 2001. Total school operating profit margin decreased from 14.1% for the
quarter ended March of 2001 to 13.8% for the quarter ended March 2002.
School operating profit was also affected by the adoption of SAB 101 as noted
above. In addition, the results for the quarter ended March 31, 2002, include
the effect of adopting SFAS No. 142, which resulted in a $412,000 reduction in
goodwill amortization expense. (See Note 4 to the financial statements).
Same school operating profit increased $361,000 or 6.4%. Excluding the effect of
the adoption of SFAS 142, same school operating profit decreased $51,000 or
1.0%. Same school operating profit margin improved from 14.5% for the third
quarter ended March 31, 2001 to 15.1% for the third quarter ended March 31,
2002. The increase in same school operating profit is due to the effect of SFAS
142, the maturing of schools opened in 2002. These increases were offset by a
decrease in enrollment in many of the Company's preschools due primarily to the
slowing economy which often times results in the loss of employment by at least
one parent with a child in preschool. For the third quarter ended March 31,
2002, new schools incurred a loss of $295,000. The Activities Club reduced its
operating loss in the quarter ended March 2002 by $48,000 as compared to the
same period in the prior year. School closings negatively affected the change in
school operating profit by $5,000.
General and administrative expenses increased $71,000 or 2.4% from $2,936,000
for the third quarter ended March 31, 2001 to $3,007,000 for the third quarter
ended March 31, 2002. As a percentage of revenue, general and administrative
expense was 7.4% for the quarter ended March 31, 2002 and 7.5% for the quarter
ended March 31, 2001. This increase in general and administrative expenses was
primarily related to additional corporate staffing which was offset by a
decreased in fees for professional and legal services.
As a result of the factors mentioned above, operating income increased $48,000
from $2,535,000 for the quarter ended March 31, 2001 to $2,633,000 for the
quarter ended March 31, 2002.
Other income decreased $19,000 during the quarter ended March 31, 2002 as
compared to the comparable period in the prior year. This decrease was primarily
due to a decrease in interest income from investments. Other income for the
third quarter ended March 31, 2002 includes the gain recognized on the
settlement of a promissory note of $383,588 (see note 4) and the write off of
expenses related to unsuccessful acquisitions of $344,908.
For the third quarter of fiscal 2002, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $4,205,000. This
represents a decrease of $114,000 over the comparable period. EBITDA is not a
measure of performance under generally accepted accounting principles. However,
the Company and the investment community consider it an important calculation.
Interest expense decreased $125,000 or 12.1% from $1,030,000 for the quarter
ended March 31, 2001 to $905,000 for the quarter ended March 31, 2002. The
decrease is due to decreased interest rates on the Company's credit facility and
decreased borrowings on the Company's credit facility.
Income tax expense totaled $716,000 for the quarter ended March 31, 2002, which
reflects a 41% effective tax rate. The reduction in the tax rate for fiscal 2002
is caused by the implementation of FAS 142, as the Company is no longer
amortizing non-deductible goodwill.
15
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 lease them to the Company, and (4) issuance of subordinated
indebtedness or shares of common stock to sellers in acquisition transactions.
The Company identifies growth markets through both extensive demographic studies
and an analysis of the existing educational systems in the area. The Company
seeks to grow through a cluster approach whereby several preschools feed into an
elementary school. In order for the Company to continue its growth strategy, the
Company will continue to seek additional funds through debt and equity
financing.
Fiscal Year 2002 Cash Flows
Total cash and cash equivalents increased $589,000 from $1,321,000 at June 30,
2001 to $1,910,000 at March 31, 2002. The net increase was primarily related to
cash provided from operations totaling $10,272,000, repayments on notes
receivable of $1,752,000 and proceeds from the exercise of stock options and
warrants of $1,433,000. These sources of cash were offset by $7,468,000 in
capital expenditures ($900,000 is related to new schools), a decrease in cash
overdraft liability of $2,750,000 and repayments of subordinated debt of
$3,635,000.
The working capital deficit decreased $535,000 from $15,453,000 at June 30, 2001
to $14,918,000 at March 31, 2002. The decrease is primarily the result of a
decrease of $2,750,000 in cash overdraft liability and a decrease of $2,680,000
in current maturities of long-term debt. This decrease was offset by an increase
in unearned income totaling $2,870,000 and a decrease of $1,601,000 in notes
receivable. The increase in unearned income is related to the prepayment of
annual and semi-annual tuition by parents and by registration fees collected at
the beginning of the school year.
The Company anticipates that its existing available principal credit facilities,
cash generated from operations, and continued support of site developers to
build and lease schools will be sufficient to satisfy working capital needs,
capital expenditures, and renovations and the building of new schools during
fiscal 2002. In addition, the Company is actively marketing approx $6 million in
real estate for a potential sale lease-back transaction.
Long-Term Obligations and Commitments
In May 2001, the Company entered into its current Amended and Restated Loan and
Security Agreement which increased the Company's borrowing capacity to
$40,000,000. Three separate facilities were established under the Amended and
Restated Loan and Security Agreement: (1) $10,000,000 Working Capital Credit
Facility (2) $15,000,000 Acquisition Credit Facility and (3) $15,000,000 Term
Loan. The Term Loan Facility will mature on April 1, 2006 and provides for
$2,143,000 annual interim amortization with the balance paid at maturity. Under
the Acquisition Credit Facility, no principal payments are required until April
2003. At that time, the outstanding principal under the Acquisition Credit
Facility will be converted into a term loan which will require principal
payments in 16 quarterly installments. The Working Capital Credit Facility is
scheduled to terminate on April 1, 2004. In addition, the credit facilities
provide that Nobel must meet or exceed defined interest coverage ratios and must
not exceed leverage ratios. The Company is currently in compliance with such
16
covenants. In the fourth quarter of fiscal 2002, three of the credit facilities
compliance ratio's become more restrictive. If the Company were to experience a
reduction of $300,000 in EBITDA (defined as earnings before interest, income
taxes, depreciation and amortization and a key measurement in the credit
facilities for covenant compliance), noncompliance with some of the covenants
may result.
At March 31, 2002, a total of $28,089,000 was outstanding and $10,304,000 was
available under the Amended and Restated Loan Agreement. There was $1,488,000
outstanding under the Working Capital Credit Facility, $13,208,000 was
outstanding under the Acquisition Credit Facility and $13,393,000 was
outstanding under the Term Loan. In addition, the Company has $12,234,000
outstanding under subordinated debt agreement as well as significant commitments
under operating lease agreements. The following is a summary of these
obligations:
Contractual Obligations Less than 1-3 After 5
Total 1 year years years
Long-Term Obligations 40,323 3,680 17,693 18,950
Interest Rate Swap 384 46 338
Operating Leases * 231,735 23,670 66,402 141,663
* - Based on amounts presented in Footnote 12 of our June 30, 2001 financial
statements. These amounts have been updated for new leases entered into in
fiscal year 2002.
The Company also has significant commitments with certain of its executives that
would be triggered upon a change in control or certain termination events as
discussed in the Company's 2002 proxy statement.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Predicting future events is inherently an imprecise activity and as such
requires the use of judgment. Actual results may vary from estimates in amounts
that may be material to the financial statements.
The Company's significant accounting policies are described in note 1 to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001. The following accounting
policies are considered critical to the preparation of the Company's financial
statements due to the estimation processes and business judgment involved in
their application.
Revenue recognition
- -------------------
Tuition revenues, net of discounts, and other revenues are recognized as
services are performed. Any tuition payments received in advance of the time
period for which service is to be performed is recorded as unearned revenue.
Charter school management fees are recognized based on a contractual
relationship with the charter school and do not include any tuition revenue
received by the charter school. Certain fees may be received in advance of
services being rendered, in which case the fee revenue is deferred and
recognized over the appropriate period of service. The Company's net revenues
meet the criteria of SAB No. 101, including the existence of an arrangement, the
rendering of services, a determinable fee and probable collection.
17
Accounts receivable
- -------------------
The Company's accounts receivable are comprised primarily of tuition due from
governmental agencies and parents. Accounts receivable are presented at
estimated net realizable value. The Company uses estimates in determining the
collectibility of its accounts receivable and must rely on its evaluation of
historical trends, governmental funding processes, specific customer issues and
current economic trends to arrive at appropriate reserves. Material differences
may result in the amount and timing of bad debt expense if actual experience
differs significantly from management estimates.
Long-lived and intangible assets
- --------------------------------
Under the requirements of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets, the Company assesses the potential impairment of property and
equipment, and identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An
asset's value is impaired if management's estimate of the aggregate future cash
flows, undiscounted and without interest charges, to be generated by the asset
are less than the carrying value of the asset. Such cash flows consider factors
such as expected future operating income and historical trends, as well as the
effects of demand and competition. To the extent impairment has occurred, the
loss will be measured as the excess of the carrying amount of the asset over the
fair value of the asset. Such estimates require the use of judgment and numerous
subjective assumptions, which, if actual experience varies, could result in
material differences in the requirements for impairment charges.
Goodwill
- --------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2001. Under SFAS No.
142, goodwill is no longer amortized but reviewed for impairment annually, or
more frequently if certain indicators arise.
The net carrying value of goodwill is $49,530,000 million as of July 1, 2001
(the Company's adoption date of SFAS 142). The Company completed the "first
step" impairment test as required under SFAS 142 at December 31, 2001 and
determined that the recognition of an impairment loss was not necessary. The
fair value of the Company's ten reporting units was estimated using the expected
present value of future cash flows. In estimating the present value the company
used assumptions based on the characteristics of the reporting unit including
discount rates (ranging from 12% to 25%) For two of the reporting units fair
value approximated their carrying value while for the remaining eight reporting
units fair value exceeded carrying value. For the two reporting units where fair
value approximated carrying value, goodwill allocated to these reporting units
totaled 7,900,000 and 4,339,000. Goodwill will be assessed for impairment at
least annually or upon an adverse change in operations. The annual impairment
testing required by SFAS No. 142 will also require us to use our judgment and
could require us to write down the carrying value of our goodwill and other
intangible assets in future periods.
18
Investment in TES:
The Company has a $2.5 million Note Receivable in the form of a Credit Agreement
with Total Education Solutions ("TES") due May 2005 which is also convertible
into 30% of TES. TES, established in 1997, provides special education services
to charter schools and public schools which, because of lack of internal
capabilities or other reasons, wish to out-source their provision of special
education programs (which, under federal law, they are required to provide to
select students). Prior to the financing provided from the Company in May 2002,
TES was marginally profitable as it provided its services to schools in a small
regional area of Southern California. The proceeds received by TES have been
used for the expansion of its product throughout California and plans to enter
other states. TES revenues have grown 54% since the origination of the credit
agreement. However, TES has also incurred losses as a result of building the
infrastructure to services other regions.
As part of our evaluation of the carrying value of TES, we consider a number of
positive and negative factors affecting TES including:
. Operating results and outlook for TES;
. Expected future cash flows
. Current conditions and trends in the industry;
. Other industry comparables; and
. Our plans and ability hold this investment.
In evaluating our investment in TES, we prepared discounted cash flow analyses
for TES based on a recent financing discussion memorandum. Our cash flow
analyses have indicated that our investment in TES has a value greater than our
current carrying value. In addition, we have looked at other objective evidence
including recent comparable transactions similar to TES, industry publications
supporting the market and growth rates and TES's ongoing discussions with third
parties regarding additional financing.
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.
We operate in and file a U.S. federal income tax return and in various U.S.
states, which are subject to examination by tax authorities. This process
involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. Our estimated tax liability is subject to change as
examinations of specific tax years are completed in the respective jurisdictions
including possible adjustments related to the nature and timing of deductions
and our local attribution of income.
19
Item 3. 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 12%, $10,000,000 senior subordinated debt at March 31, 2002 and
June 30, 2001. The Company also has no cash flow exposure on certain mortgages,
notes payable and subordinate debt agreements aggregating $2,453,000 at March
31, 2002. 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
$104,000 for the nine months ended March 31, 2002. During the nine months ended
March 31, 2002, the Company experienced a decrease in interest rates on its
LIBOR and prime borrowings of approximately 2%.
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 March 31, 2001 the Company's interest rate
swap contract outstanding had a total notional amount of $13,393,000 million and
became effective August 1, 2001. The notional amounts serves solely as a basis
for the calculation of payments to be exchanged and are not a measure of the
exposure of the Company through the use of derivatives. Under the interest rate
swap contract, the Company agrees to pay a fixed rate of 4.99% and the
counterparty agrees to make payments based on 3-month LIBOR.
20
Part II
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Other Information
Item 6. Exhibits and Reports on Form 8-K
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOBEL LEARNING COMMUNITIES, INC.
Dated: May 15, 2002 By: /s/ William E. Bailey
-----------------------------------------
William E. Bailey
Vice President/Chief Financial Officer
(duly authorized officer and
principal financial officer)
22
Exhibits
Exhibit
Number Description of Exhibit
Item 6. Exhibits and Reports on Form 8-K
None
23