SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Nobel Learning Communities, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Nobel Learning Communities, Inc. Common Stock par value $0.001 per
share; Series A Preferred Stock, par value $0.001 per share; Series C
Preferred Stock, par value $0.001 per share and Series D Preferred
Stock, par value $0.001 per share.
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(2) Aggregate number of securities to which transaction applies:
Common Stock: 6,201,461; Series A Preferred Stock: 496,194.11; Series C
Preferred Stock: 2,096,714; Series D Preferred Stock: 1,063,830;
Options to purchase Common Stock: 445,599; Warrants to purchase Common
Stock: 840,298.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
Pursuant to the terms of the Agreement and Plan of Merger by and
between Socrates Acquisition Corporation and Nobel Learning
Communities, Inc. dated as of August 5, 2002 and amended as of October
2, 2002, each issued and outstanding share of NLCI common stock and
preferred stock (calculated on an as-converted basis to the nearest
one-hundredth of a share), other than shares being exchanged for equity
interests in the surviving corporation and shares owned by stockholders
who are entitled to and have exercised and perfected dissenters'
rights, will be converted into the rights to receive $7.75 in cash. In
addition, pursuant to the terms of the Agreement and Plan of Merger,
each outstanding option and warrant will be canceled in exchange for
(i) the excess, if any, of $7.75 over the per share exercise price of
the option or warrant multiplied by (ii) the number of shares of common
stock subject to the option or warrant exercisable as of the effective
time of the merger. The filing fee was calculated based upon (i) an
aggregate cash payment of $55,315,446.75 for the proposed per share
cash payment of $7.75 for 7,137,477 outstanding shares of common stock
(including shares of preferred stock on an as-converted basis) (less
shares that will be held by the rollover stockholders upon completion
of the merger), (ii) an aggregate cash payment of $990,355.15 to
holders of outstanding options to purchase an aggregate of 445,599
shares of common stock with a per share exercise price of less than
$7.75 and (iii) an aggregate cash payment of $469,521.14 outstanding
warrants to purchase an aggregate of 840,298 shares of common stock
with a per share exercise price of less than $7.75.
(4) Proposed maximum aggregate value of transaction: $56,775,323.04
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(5) Total fee paid: $11,355.06
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Preliminary Copy
Filed on October 2, 2002
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THIS TRANSACTION, PASSED UPON THE MERITS
OR FAIRNESS OF THE TRANSACTION OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[LOGO]
NOBEL LEARNING COMMUNITIES, INC.
1615 West Chester Pike
West Chester, Pennsylvania 19382
PROPOSED MERGER--YOUR VOTE IS VERY IMPORTANT
, 2002
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Nobel Learning Communities, Inc., to be held on , 2002 at local
time at . At the special meeting, you will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as
of August 5, 2002, as amended as of October 2, 2002 between Nobel Learning
Communities, Inc., referred to as NLCI, and Socrates Acquisition Corporation,
referred to as Socrates, and the merger contemplated by the merger agreement.
Under the merger agreement, a corporation newly formed by Gryphon Partners II,
L.P. and Cadigan Investment Partners, Inc., to engage in the merger, will be
merged with and into NLCI, with NLCI as the surviving corporation.
If the merger is completed, each issued and outstanding share of NLCI common
stock and preferred stock (calculated on an as-converted basis to the nearest
one-hundredth of a share) owned by you will be converted into the right to
receive $7.75 in cash, without interest, unless you are one of the NLCI
directors and executive officers identified in the merger agreement as a
rollover stockholder exchanging your shares of NLCI common stock and/or
preferred stock for an equity interest in the surviving corporation or you are
a dissenting stockholder and exercise and perfect your appraisal rights under
Delaware law. Each outstanding option and warrant that is exercisable as of the
effective time of the merger will be canceled in exchange for (1) the excess,
if any, of $7.75 over the per share exercise price of the option or warrant,
multiplied by (2) the number of shares of common stock subject to the option or
warrant exercisable as of the effective time of the merger, net of any
applicable withholding taxes.
The board of directors of NLCI formed a special committee, composed of
independent directors who are not officers or employees of NLCI and who have no
financial interest in the proposed merger different from NLCI stockholders
generally, in order to eliminate any conflict of interest in evaluating,
negotiating and recommending the merger proposal, including the terms of the
merger agreement with Socrates.
THE BOARD OF DIRECTORS, ACTING ON THE UNANIMOUS RECOMMENDATION OF THE
SPECIAL COMMITTEE, HAS APPROVED THE MERGER AGREEMENT AND THE MERGER. THE
SPECIAL COMMITTEE, AND, BASED IN PART UPON THE DETERMINATION AND RECOMMENDATION
OF THE SPECIAL COMMITTEE, THE BOARD OF DIRECTORS BELIEVE THAT THE TERMS OF THE
MERGER AGREEMENT AND THE PROPOSED MERGER ARE FAIR TO, AND IN THE BEST INTERESTS
OF, NLCI STOCKHOLDERS OTHER THAN THE ROLLOVER STOCKHOLDERS. THEREFORE, THE
BOARD OF DIRECTORS, BASED IN PART ON THE UNANIMOUS RECOMMENDATION OF THE
SPECIAL COMMITTEE, RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE MERGER.
In reaching their decisions, the board of directors and the special
committee considered, among other things, the written opinion of Legg Mason
Wood Walker, Incorporated, the special committee's financial advisor, that,
based upon and subject to the considerations and limitations set forth in that
opinion, as of August 5, 2002, the $7.75 per share cash consideration to be
received by NLCI stockholders in the proposed merger was fair to NLCI
stockholders other than the rollover stockholders from a financial point of
view. The opinion is attached to the proxy statement as Appendix B.
Some of the members of NLCI's management who as of , the record date,
had the right to vote approximately 6.9% of the outstanding shares of voting
stock, have agreed to vote in favor of the merger agreement and the merger.
The enclosed proxy statement provides information about the proposed merger,
the merger agreement and the special meeting. In addition, you may obtain
additional information about NLCI from documents filed with the Securities and
Exchange Commission. PLEASE READ THE ENTIRE PROXY STATEMENT CAREFULLY,
INCLUDING THE APPENDICES.
YOUR VOTE IS VERY IMPORTANT. THE MERGER CANNOT BE COMPLETED UNLESS THE
MERGER AGREEMENT AND THE MERGER ARE APPROVED AND ADOPTED BY THE AFFIRMATIVE
VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF NLCI COMMON
STOCK AND PREFERRED STOCK (VOTING ON AN AS CONVERTED BASIS), VOTING AS A SINGLE
CLASS. REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD. IF YOU COMPLETE, SIGN AND
RETURN YOUR PROXY CARD WITHOUT INDICATING HOW YOU WISH TO VOTE, YOUR PROXY WILL
BE COUNTED AS A VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER. IF YOU FAIL TO RETURN YOUR PROXY CARD AND FAIL TO VOTE AT THE
SPECIAL MEETING, THE EFFECT WILL BE THE SAME AS A VOTE AGAINST APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER FOR PURPOSES OF THE VOTE
REFERRED TO ABOVE. RETURNING THE PROXY CARD DOES NOT DEPRIVE YOU OF YOUR RIGHT
TO ATTEND THE SPECIAL MEETING AND VOTE YOUR SHARES IN PERSON.
Sincerely,
/s/ A.J. CLEGG
Chief Executive Officer
West Chester, Pennsylvania
, 2002
This proxy statement is dated , 2002 and is first being mailed to
stockholders of NLCI on or about , 2002.
[LOGO]
NOBEL LEARNING COMMUNITIES, INC.
1615 West Chester Pike
West Chester, Pennsylvania 19382
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On , 2002
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Notice is hereby given that a special meeting of stockholders of Nobel
Learning Communities, Inc., a Delaware corporation, referred to as NLCI, will
be held on , 2002 at local time at , for the following
purposes:
. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of August 5, 2002, as amended as of October
2, 2002, between NLCI and Socrates Acquisition Corporation, referred to
as Socrates, and the merger contemplated by the merger agreement.
. To consider and vote upon such other matters as may properly come before
the meeting, including the approval of any adjournment or postponement of
the meeting.
Only holders of record of voting stock at the close of business on ,
2002, the record date, are entitled to notice of, and to vote at, the special
meeting or any adjournments or postponements thereof.
Stockholders of NLCI who do not vote in favor of approval and adoption of
the merger agreement and the merger will have the right to seek appraisal of
the fair value of their shares if the merger is completed, but only if they
submit a written demand for an appraisal before the vote is taken on the merger
agreement and the merger and they comply with Delaware law as explained in the
accompanying proxy statement.
THE BOARD OF DIRECTORS, ACTING ON THE UNANIMOUS RECOMMENDATION OF THE
SPECIAL COMMITTEE, HAS APPROVED THE TERMS OF THE MERGER AGREEMENT AND THE
PROPOSED MERGER. THE BOARD OF DIRECTORS, BASED IN PART ON THE UNANIMOUS
RECOMMENDATION OF THE SPECIAL COMMITTEE, RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
YOUR VOTE IS VERY IMPORTANT. THE MERGER CANNOT BE COMPLETED UNLESS THE
MERGER AGREEMENT AND THE MERGER ARE APPROVED AND ADOPTED BY THE AFFIRMATIVE
VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK AND
PREFERRED STOCK OUTSTANDING (VOTING ON AN AS CONVERTED BASIS), VOTING AS A
SINGLE CLASS. EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD TO ENSURE THAT YOUR
SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING. A RETURN ENVELOPE (WHICH IS
POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE.
IF YOU DO ATTEND THE SPECIAL MEETING AND WISH TO VOTE IN PERSON, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON. PLEASE NOTE, HOWEVER, THAT IF YOUR
SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO
VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN
YOUR NAME.
The merger is described in the accompanying proxy statement, which you are
urged to read carefully. A copy of the merger agreement is included as Appendix
A to the accompanying proxy statement.
By Order of the Board of Directors,
/s/ YVONNE DEANGELO
Secretary
West Chester, Pennsylvania
, 2002
TABLE OF CONTENTS
Page
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SUMMARY TERM SHEET.................................................. 1
QUESTIONS AND ANSWERS ABOUT THE MERGER.............................. 3
SUMMARY............................................................. 7
The Participants................................................. 7
The Merger....................................................... 8
Opinion of Financial Advisor..................................... 8
Interests of NLCI Directors and Officers in the Merger........... 8
Merger Financing................................................. 9
The Special Meeting.............................................. 9
Appraisal Rights................................................. 10
The Merger Agreement............................................. 10
Conditions to Completing the Merger.............................. 11
Limitation on Soliciting Transactions............................ 11
Termination...................................................... 12
Termination Fee and Expense Reimbursement........................ 12
Effects of the Merger............................................ 12
Federal Regulatory Matters....................................... 13
Material U.S. Federal Income Tax Consequences.................... 13
Accounting Treatment of the Merger............................... 13
Litigation Challenging the Merger................................ 13
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION......... 14
NLCI SELECTED HISTORICAL FINANCIAL DATA............................. 15
THE SPECIAL MEETING................................................. 16
General.......................................................... 16
Record Date and Voting Information............................... 16
Proxies; Revocation.............................................. 17
Expenses of Proxy Solicitation................................... 17
Adjournments..................................................... 18
THE PARTICIPANTS.................................................... 19
Nobel Learning Communities, Inc.................................. 19
Socrates Acquisition Corporation................................. 19
Gryphon Partners II, L.P......................................... 19
Gryphon Partners II-A, L.P....................................... 20
Cadigan Investment Partners, Inc................................. 20
Rollover stockholders............................................ 20
SPECIAL FACTORS..................................................... 21
Background of the Merger......................................... 21
Recommendation of the Board of Directors; Fairness of the Merger. 31
Forward-Looking Information...................................... 36
Opinion of Financial Advisor to the Special Committee............ 39
Purpose and Structure of the Merger.............................. 46
Effects of the Merger............................................ 47
Risks That the Merger Will Not Be Completed...................... 48
Interests of NLCI Directors and Officers in the Merger........... 49
Merger Financing................................................. 52
Estimated Fees and Expenses of the Merger........................ 55
Accounting Treatment of the Merger............................... 55
Federal Regulatory Matters....................................... 55
Material U.S. Federal Income Tax Consequences.................... 55
i
Page
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Litigation Challenging the Merger........................................................ 56
Appraisal Rights......................................................................... 56
THE MERGER AGREEMENT........................................................................ 61
The Merger............................................................................... 61
Effective Time of the Merger............................................................. 61
Certificate of Incorporation, Bylaws and Directors and Officers of NLCI as the Surviving
Corporation............................................................................ 61
Conversion of Common Stock and Preferred Stock........................................... 61
Treatment of Options and Warrants........................................................ 62
Payment for Shares, Options and Warrants................................................. 62
Transfer of Shares, Options and Warrants................................................. 63
Representations and Warranties........................................................... 63
Accuracy and Completeness of Information................................................. 65
Conduct of Business Pending the Merger................................................... 65
Notification............................................................................. 66
Preparation of Proxy Statement; Stockholders Meeting..................................... 67
Access to Information; Confidentiality................................................... 67
Limitation on Soliciting Transactions.................................................... 67
Director's and Officers' Indemnification and Insurance................................... 69
Further Action........................................................................... 70
Consents and Filings..................................................................... 70
Public Announcements..................................................................... 70
Employee Benefits Matters................................................................ 70
Rights Agreement......................................................................... 71
Stockholder Litigation................................................................... 71
Conditions to Completing the Merger...................................................... 71
Termination.............................................................................. 73
Termination Fee and Expense Reimbursement................................................ 74
Amendment................................................................................ 75
Waiver................................................................................... 75
Assignment............................................................................... 75
MARKETS AND MARKET PRICE.................................................................... 76
COMMON STOCK AND PREFERRED STOCK PURCHASE INFORMATION....................................... 77
Purchases By NLCI........................................................................ 77
Purchases By MCI Executive Officers and Directors........................................ 77
Recent Transactions...................................................................... 77
Purchases By Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan.................. 77
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................. 78
INDEPENDENT AUDITORS........................................................................ 85
FUTURE STOCKHOLDER PROPOSALS................................................................ 85
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION................................................ 85
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Appendix A The Agreement and Plan of Merger, as amended on October 2, 2002
Appendix B The fairness opinion of Legg Mason Wood Walker, Incorporated
Appendix C Section 262 of the Delaware General Corporation Law
Appendix D Annual Report of NLCI on Form 10-K filed with the Securities and
Exchange Commission on September 24, 2002
Appendix E Information relating to the directors and executive officers of NLCI
Appendix F Information relating to the directors, officers and affiliates of
Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan
ii
SUMMARY TERM SHEET
This Summary Term Sheet highlights selected information contained in this
proxy statement and may not contain all of the information that is important to
you. You are urged to read this entire proxy statement carefully, including the
Appendices. In this proxy statement, the term NLCI refers to Nobel Learning
Communities, Inc.
. Stockholder vote--You are being asked to consider and vote upon a
proposal to approve and adopt the merger agreement and the merger
contemplated by the merger agreement. Under the merger agreement,
Socrates Acquisition Corporation, referred to as Socrates, will be merged
with and into NLCI, with NLCI as the surviving corporation, referred to
as the surviving corporation. Approval and adoption of the merger
agreement and the merger require the affirmative vote of the holders of a
majority of the outstanding shares of common stock and preferred stock
(voting on an as-converted basis), voting as a single class. The common
stock and the preferred stock (on an as-converted basis) are referred to
as the voting stock. See "The Special Meeting" beginning on page 9.
. Payment--In the merger, each share of NLCI common stock will be converted
automatically into the right to receive $7.75 in cash, without interest,
and each share of NLCI preferred stock will be converted automatically
into the right to receive $7.75 in cash, without interest, for each whole
share of common stock into which the share of preferred stock is then
convertible under NLCI's certificate of incorporation plus the amount
determined by multiplying $7.75 by the fraction (rounded to the nearest
one-hundredth of a share) representing any fractional share of common
stock into which any share of preferred stock is then convertible under
NLCI's certificate of incorporation, in each case subject to adjustment
for any stock split, stock dividend or combination of stock that may
occur from the date of the merger agreement until the effective time of
the merger and referred to as the merger consideration, except for:
. 382,382 shares of voting stock held by certain NLCI directors and
executive officers that will be converted into equity interests in
the surviving corporation;
. treasury shares of NLCI, all of which will be canceled without any
payment; and
. shares of voting stock held by stockholders who properly exercise
and perfect appraisal rights that will be subject to appraisal in
accordance with Section 262 of the Delaware General Corporation Law.
See "Special Factors--Appraisal Rights" beginning on page 56.
Each outstanding option and warrant that is exercisable as of the
effective time of the merger will be canceled in exchange for an amount
in cash, if any, determined by multiplying (1) the excess, if any, of
$7.75 over the per share exercise price of the option or warrant, and (2)
the number of shares of common stock subject to the option or warrant net
of any applicable withholding taxes. See "The Merger Agreement" beginning
on page 61.
. Voting stock--The voting stock is the outstanding NLCI common stock
together with the NLCI common stock into which the outstanding NLCI
preferred stock is then convertible.
. Special committee--The special committee is the committee of the NLCI
board of directors formed to eliminate any conflict of interest in
evaluating, negotiating and recommending the merger proposal, including
the terms of the merger agreement and the proposed merger with Socrates.
The special committee consists solely of directors who are not officers
or employees of NLCI and who have no financial interest in the proposed
merger different from NLCI stockholders generally. The members of the
special committee are Peter H. Havens, Edward H. Chambers and Eugene
Monaco.
. Socrates--Socrates is Socrates Acquisition Corporation, a Delaware
corporation newly formed by Gryphon Partners II, L.P. and Cadigan
Investment Partners, Inc. See "The Participants" beginning on page 19.
. Gryphon--Gryphon is Gryphon Partners II, L.P., a Delaware limited
partnership which specializes in leveraged acquisitions. See "The
Participants" beginning on page 19.
. Gryphon Partners II-A, L.P.--Gryphon Partners II-A, L.P. is a Delaware
limited partnership that co-invests with Gryphon in leveraged
acquisitions. See "The Participants" beginning on page 19.
. Cadigan--Cadigan is Cadigan Investment Partners, Inc., a Delaware
corporation which principally engages in leveraged buyout transactions.
See "The Participants" beginning on page 19.
. Buying group--The buying group consists of Gryphon, Gryphon Partners
II-A, L.P. and Cadigan. See "The Participants" beginning on page 19.
. Rollover stockholders--A.J. Clegg, John Frock and Robert Zobel, each a
director and executive officer of NLCI, and D. Scott Clegg, an executive
officer of NLCI, have agreed to retain and/or purchase an equity interest
in the surviving corporation. These executive officers and directors are
referred to as the rollover stockholders. The rollover stockholders may
have interests that are different from, or in addition to, the interests
of NLCI stockholders generally. See "Special Factors--Interests of NLCI
Directors and Executive Officers in the Merger" beginning on page 49.
A.J. Clegg and John Frock, referred to together as the continuing
rollover stockholders, will acquire their interest in the surviving
corporation by exchanging NLCI stock owned by them representing
approximately 75% and 61.5%, respectively, of the value of the
consideration they would otherwise receive in the merger if they were not
exchanging their interests in NLCI for shares of capital stock of the
surviving corporation. Their remaining interest in NLCI will be exchanged
for the merger consideration. Robert Zobel and D. Scott Clegg, referred
to together as the purchasing rollover stockholders, will receive the
merger consideration for any common stock, preferred stock and options
they own and will each pay $74,100 to purchase shares of capital stock of
Socrates that will convert into capital stock of the surviving
corporation. The rollover stockholders together are expected to own
approximately 6.1% of the capital stock of the surviving corporation
outstanding immediately after the merger (excluding options and warrants).
. Fairness of the merger--The special committee and, based in part upon the
determination of the special committee, the board of directors of NLCI,
have each determined that the terms of the merger agreement and the
proposed merger are fair to, and in the best interests of, NLCI
stockholders other than the rollover stockholders. The special committee
received an opinion from Legg Mason Wood Walker, Incorporated, its
financial advisor, to the effect that as of the date of such opinion and
based upon and subject to the considerations and limitations set forth in
such opinion, the $7.75 per share merger consideration to be received by
the stockholders, other than the rollover stockholders, in the proposed
merger is fair to such stockholders from a financial point of view. The
rollover stockholders, Cadigan, Gryphon, Gryphon Partners II-A, L.P. and
Socrates also believe that the terms of the merger agreement and the
proposed merger are fair to NLCI stockholders other than the rollover
stockholders. See "Special Factors--Recommendation of the Board of
Directors; Fairness of the Merger" beginning on page 31.
. Tax consequences--The receipt of cash by you in the merger will be a
taxable transaction to you. See "Special Factors--Material U.S. Federal
Income Tax Consequences" beginning on page 55.
. Conditions--The merger agreement and the merger are subject to approval
by the holders of a majority of the outstanding shares of voting stock
voting as a single class, as well as other conditions, including
obtaining the necessary financing in accordance with the terms of
existing commitments to complete the merger and obtaining required
consents and approvals. See "The Merger Agreement--Conditions to
Completing the Merger" beginning on page 71.
. After the merger--Upon completion of the merger, the buying group and the
rollover stockholders are expected to own approximately 93.9% and 6.1%,
respectively, of the surviving corporation's capital stock outstanding
immediately after the merger (excluding options and warrants). In
addition, NLCI will no longer be a public company and NLCI's stock will
no longer be listed on the Nasdaq National Market. See "Special
Factors--Interests of NLCI's Directors and Executive Officers in the
Merger" beginning on page 49.
2
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What am I being asked to vote upon? (see page 16)
A: You are being asked to consider and vote upon a proposal to approve and
adopt the merger agreement and the merger contemplated by the merger
agreement. Under the merger agreement, Socrates will be merged with and into
NLCI, with NLCI as the surviving corporation. Socrates is a Delaware
corporation newly formed by Gryphon and Cadigan to engage in the merger. If
the merger agreement and the merger are approved and adopted and the merger
is completed, NLCI will no longer be a publicly held corporation and, unless
you are a rollover stockholder, you will no longer own NLCI capital stock.
Q: What will I receive in the merger? (see page 61)
A: In the merger, each share of NLCI common stock, other than shares owned by
the continuing rollover stockholders, treasury shares and shares of voting
stock as to which appraisal rights have been exercised and perfected, will
be converted automatically into the right to receive $7.75 in cash, without
interest, and each share of NLCI preferred stock will be converted
automatically into the right to receive $7.75 in cash, without interest, for
each whole share of common stock into which the share of preferred stock is
then convertible under NLCI's certificate of incorporation plus the amount
determined by multiplying $7.75 by the fraction (rounded to the nearest
one-hundredth of a share) representing any fractional share of common stock
into which any share of preferred stock is then convertible under NLCI's
certificate of incorporation, in each case subject to adjustment for any
stock split, stock dividend or combination of stock that may occur from the
date of the merger agreement until the effective time of the merger and
referred to as the merger consideration.
All outstanding options and warrants exercisable as of the effective time of
the merger will be canceled in exchange for an amount in cash, if any,
determined by multiplying (1) the excess, if any, of $7.75 over the per
share exercise price of the option or warrant, and (2) the number of shares
of common stock subject to the option or warrant, net of any applicable
withholding taxes.
Q: Who are the rollover stockholders? (see page 20)
A: The rollover stockholders are A.J. Clegg, John Frock and Robert Zobel, each
of whom is a director and executive officer of NLCI, and D. Scott Clegg, an
executive officer of NLCI.
Q: Can I choose to be a rollover stockholder?
A: No. The rollover stockholders will include only the individuals designated
in the merger agreement and described above.
Q: Why is the board of directors recommending that I vote in favor of the
merger agreement and the merger? (see page 31)
A: The special committee of the board of directors, consisting solely of
directors who are not officers or employees of NLCI and who have no interest
in the proposed merger different from NLCI stockholders generally, and,
based in part on the determination of the special committee, the board of
directors of NLCI, have each determined that the terms of the merger
agreement and the proposed merger are fair to, and in the best interests of,
NLCI stockholders other than the rollover stockholders. The board of
directors, based in part on the unanimous recommendation of the special
committee, recommends that you vote for the approval and adoption of the
merger agreement and the merger.
Q: What are the consequences of the merger to present members of management and
the board of directors? (see page 49)
A: It is expected that the members of our current management will continue as
management of the surviving corporation. Like all other NLCI stockholders,
members of management and the board of directors will be
3
entitled to receive $7.75 per share in cash for each of their shares of NLCI
common stock and preferred stock (calculated on an as-converted basis to the
nearest one-hundredth of a share), other than the shares that the continuing
rollover stockholders will exchange for equity interests in the surviving
corporation. With respect to options, like all other NLCI employees, the
members of management and the rollover stockholders who own eligible options
will receive an amount equal to (1) the excess, if any, of $7.75 over the
per share exercise price of the option, and (2) the number of shares of
common stock subject to the option exercisable as of the effective time of
the merger, net of any applicable withholding taxes. Upon completion of the
merger, the rollover stockholders collectively are expected to own
approximately 6.1% of the capital stock of the surviving corporation
outstanding immediately after the merger (excluding options and warrants).
Q: Is the merger subject to the satisfaction of any conditions? (see page 71)
A: Yes. Before completion of the transactions contemplated by the merger
agreement, a number of closing conditions must be satisfied or waived. These
conditions include, among others, obtaining all financing necessary to
complete the transactions contemplated by the merger agreement and obtaining
the requisite stockholder vote and other necessary consents and approvals.
If these conditions are not satisfied or waived, the merger will not be
completed even if the stockholders vote to approve and adopt the merger
agreement and the merger.
Q: When do you expect the merger to be completed?
A: The parties to the merger agreement are working toward completing the merger
as quickly as possible. If the merger agreement is approved and the other
conditions to the merger are satisfied or waived, the merger is expected to
be completed promptly after the special meeting.
Q: What are the U.S. federal income tax consequences of the merger to me? (see
page 55)
A: Stockholders of NLCI who receive cash for their shares will recognize gain
or loss for federal income tax purposes equal to the difference between
their basis for their shares and the amount of cash received. If a
stockholder holds NLCI shares as a capital asset, such gain or loss will be
capital gain or loss. If the stockholder has held the shares for one year or
less, the gain or loss will be short-term gain or loss. If the stockholder
has held the shares for more than one year, the gain or loss will be
long-term gain or loss. TAX MATTERS ARE VERY COMPLEX AND THE TAX
CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN
SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF
THE TAX CONSEQUENCES OF THE MERGER TO YOU.
Q: When and where is the special meeting?
A: The special meeting of NLCI stockholders will be held at local time
on , 2002 at .
Q: Who can vote on the merger agreement?
A: Holders of voting stock at the close of business on , 2002, the
record date for the special meeting, may vote in person or by proxy on the
merger agreement and the merger at the special meeting.
Q: How many votes do I have?
A: You have one vote for each share of common stock that you owned at the close
of business on , 2002 and, for each share of preferred stock that
you owned at the close of business on , 2002, you have the number
of votes equal to the number of shares of common stock into which your
preferred stock is then convertible.
Q: What vote is required to approve and adopt the merger agreement and the
merger?
A: The approval and adoption of the merger agreement and the merger require the
affirmative vote of the holders of at least a majority of the outstanding
shares of voting stock voting as a single class. The rollover
4
stockholders have entered into separate voting agreements with Socrates
under which each agreed to vote shares of voting stock owned by him in favor
of the merger and granted to Socrates an irrevocable proxy to vote shares of
voting stock owned by him for the adoption and approval of the merger
agreement and the merger.
Q: What do I need to do now?
A: You should read this proxy statement carefully, including its Appendices,
and consider how the merger affects you. Then, mail your completed, dated
and signed proxy card in the enclosed return envelope as soon as possible so
that your shares can be voted at the special meeting of NLCI stockholders.
Q: What happens if I do not return a proxy card?
A: The failure to return your proxy card will have the same effect as voting
against the merger agreement and the merger unless you vote for the merger
agreement and the merger in person at the special meeting.
Q: May I vote in person?
A: Yes. You may attend the special meeting of NLCI stockholders and vote your
shares in person regardless of whether you sign and return your proxy card.
If your shares are held of record by a broker, bank or other nominee and you
wish to vote at the meeting, you must obtain a proxy from the record holder.
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy card is voted at
the special meeting. You can do this in one of three ways. First, you can
send a written notice stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy card. Third, you can attend
the meeting and vote in person. Your attendance alone will not revoke your
proxy. If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change those instructions.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will not be able to vote your shares without instructions from
you. You should instruct your broker to vote your shares, following the
procedures provided by your broker.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, you will receive written instructions for
exchanging your shares of NLCI common stock and preferred stock for the
merger consideration, without interest.
Q: What rights do I have to seek an appraisal of my shares? (see page 56)
A: If you wish, you may seek an appraisal of the fair value of your shares, but
only if you comply with all requirements of Delaware law as described on
pages 56 through 60 and in Appendix C of this proxy statement. Depending
upon the determination of the Delaware Court of Chancery, the appraised fair
value of your shares of NLCI common stock or preferred stock, which will be
paid to you if you seek an appraisal, may be more than, less than or equal
to the per share consideration to be paid in the merger.
5
Q: Who can help answer my questions?
A: The information provided above in question-and-answer format is for your
convenience only and is merely a summary of the information contained in
this proxy statement. You should carefully read the entire proxy statement,
including the Appendices. If you would like additional copies, without
charge, of this proxy statement or if you have questions about the merger,
including the procedures for voting your shares, you should contact:
[Proxy Solicitor]
6
SUMMARY
This summary highlights selected information contained in this proxy
statement and may not contain all of the information that is important to you.
You are urged to read this entire proxy statement carefully, including the
Appendices.
The Participants (see page 19)
Nobel Learning Communities, Inc.
NLCI, headquartered in West Chester, Pennsylvania, is a for-profit provider
of education and school management services for the pre-elementary through 12th
grade market. NLCI's programs are offered through a network of private schools,
charter schools, schools for learning challenged students, and special purpose
high schools, under the global brand name "Nobel Learning Communities." These
schools typically provide summer camps and before-and-after school programs.
NLCI's credo is "Quality Education Maximizing a Child's Life Opportunities." As
of September 20, 2002, NLCI operated 179 schools in 15 states, with an
aggregate capacity of approximately 27,000 children. NLCI was organized in 1984
as the Rocking Horse Childcare Centers of America, Inc. In 1985, NLCI was
merged into the Petrie Corporation (originally incorporated under the name
Petrie Method, Inc., a Delaware corporation organized on March 30, 1983). In
1993, NLCI changed its name to Nobel Education Dynamics, Inc. and in 1998, NLCI
changed its name to Nobel Learning Communities, Inc. Information about the
directors and executive officers of NLCI is set forth as Appendix E to this
proxy statement.
Socrates Acquisition Corporation
Socrates Acquisition Corporation, referred to as Socrates, is a Delaware
corporation that was formed by Gryphon and Cadigan. Socrates was formed solely
for the purpose of completing the merger and has not participated in any
activities to date other than those incident to its formation and the
transactions contemplated by the merger agreement.
Gryphon Partners II, L.P.
Gryphon Partners II, L.P., referred to as Gryphon in this proxy statement,
is a Delaware limited partnership. Gryphon is a San Francisco-based private
equity fund specializing in leveraged acquisitions.
Gryphon Partners II-A, L.P.
Gryphon Partners II-A, L.P. is a Delaware limited partnership. Gryphon
Partners II-A, L.P. is a San Francisco-based private equity fund that
co-invests with Gryphon in leveraged acquisitions.
Cadigan Investment Partners, Inc.
Cadigan Investment Partners, Inc., referred to as Cadigan in this proxy
statement, is a Delaware corporation. Cadigan is a New York-based leveraged
buyout firm.
Rollover Stockholders
A.J. Clegg, John Frock and Robert Zobel, each a director and executive
officer of NLCI, and D. Scott Clegg, an executive officer of NLCI, have each
agreed to retain and/or purchase an equity interest in the surviving
corporation. These executive officers and directors are referred to as the
rollover stockholders. The rollover stockholders may have interests that are
different from, or in addition to, the interests of NLCI
7
stockholders generally. See "Special Factors--Interests of NLCI Directors and
Executive Officers in the Merger" beginning on page 49.
The Merger (see page 61)
Under the merger agreement, Socrates will merge with and into NLCI, and each
issued and outstanding share of NLCI common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
will be converted into the right to receive $7.75 in cash, without interest,
except that:
. 382,382 shares of NLCI common stock (including preferred stock
convertible into common stock) held by the continuing rollover
stockholders that will be converted into equity interests in the
surviving corporation;
. treasury shares of NLCI, all of which will be canceled without any
payment; and
. shares of common stock and preferred stock convertible into common stock
(on an as-converted basis) held by stockholders who properly exercise and
perfect appraisal rights that will be subject to appraisal in accordance
with Delaware law. See "Special Factors--Appraisal Rights" beginning on
page 56.
Payment for Stock Certificates
Promptly after the merger, the paying agent for the merger will send a
letter of transmittal to you to be used for surrendering your NLCI stock
certificates in exchange for the merger consideration. You should not send in
your NLCI stock certificates until you receive the letter of transmittal.
Recommendation of the Board of Directors; Fairness of the Merger (see page 31)
The special committee, composed solely of directors who are not officers or
employees of NLCI and who have no interest in the proposed merger different
from NLCI stockholders generally, and, based in part on the unanimous
determination of the special committee, the board of directors believe that the
terms of the merger agreement and the proposed merger are fair to, and in the
best interests of, NLCI stockholders other than the rollover stockholders. The
board of directors (with the three rollover stockholders who are directors
abstaining), based in part upon the unanimous recommendation of the special
committee, has approved the merger agreement and recommends that you vote FOR
the approval and adoption of the merger agreement and the merger.
Opinion of Financial Advisor (see page 39)
In deciding to approve the terms of the merger agreement and the merger, one
of the factors that the special committee and the NLCI board of directors
considered was the opinion of the special committee's independent financial
advisor, Legg Mason Wood Walker, Incorporated, referred to as Legg Mason, that,
based upon and subject to the considerations and limitations set forth in the
opinion, as of August 5, 2002, the $7.75 per share merger consideration to be
received by NLCI's stockholders in the proposed merger was fair, from a
financial point of view, to NLCI's stockholders other than the rollover
stockholders. The complete Legg Mason opinion, including applicable limitations
and assumptions, describes the basis for the opinion and is attached as
Appendix B to this proxy statement. YOU ARE URGED TO READ THE ENTIRE OPINION
CAREFULLY. Legg Mason's opinion is directed to the special committee and does
not constitute a recommendation to any stockholder as to any matter relating to
the merger.
Interests of NLCI Directors and Officers in the Merger (see page 49)
Some of NLCI's executive officers and members of NLCI's board of directors
have interests in the transaction that are different from, or in addition to,
the interests of NLCI's stockholders generally. For example:
. 382,382 shares of voting stock held by the continuing rollover
stockholders will be converted into equity interests in the surviving
corporation;
8
. the purchasing rollover stockholders will receive the merger
consideration for their common stock, preferred stock and options, and
will each purchase $74,100 of equity interests in Socrates that will
convert into shares of capital stock of the surviving corporation;
. A.J. Clegg, Chairman and Chief Executive Officer of NLCI will continue as
Chairman and Chief Executive Officer of NLCI after the merger and the
members of the current management of NLCI will continue as members of
management of the surviving corporation;
. Daniel Russell, a member of the NLCI board of directors, is also a
principal of Allied Capital Corporation, which holds warrants that will
become exercisable in connection with the merger and will be canceled in
exchange for cash in the merger;
. some members of management are entitled to severance payments and/or
change in control payments if their employment is terminated within a
specified time after completion of the merger;
. the rollover stockholders and other executive officers are expected to
continue their employment with NLCI, or will be entitled to severance
payments in the event their employment is terminated;
. in connection with the merger, all outstanding options (including those
held by NLCI's directors and executive officers) will become immediately
exercisable and canceled in exchange for (1) the excess, if any, of $7.75
over the per share exercise price of the option, multiplied by (2) the
number of shares of common stock subject to the option exercisable as of
the effective time of the merger; and
. the rollover stockholders and some other members of management will be
granted options to purchase shares of capital stock of the surviving
corporation after the merger is completed.
These interests are more fully described under "Special Factors--Interests
of NLCI Directors and Officers in the Merger" beginning on page 49.
The special committee and NLCI's board of directors were aware of these
interests and considered them, among other factors, when approving the merger
agreement.
Merger Financing (see page 52)
It is anticipated that the total amount of funds necessary to consummate the
merger and related transactions will be approximately $110 million. Socrates
expects that this amount will be funded through equity commitments, new credit
facilities, and the issuance by NLCI of senior subordinated notes and warrants.
Socrates has received equity commitment letters from each of Gryphon and
Cadigan, subject to the satisfaction of all conditions precedent to Socrates'
obligations under the merger agreement (excluding the equity financing
condition). Socrates has also received commitment letters from each of the
rollover stockholders, which are subject to each of Gryphon and Cadigan
fulfilling their obligations under their respective commitment letters. Gryphon
and Cadigan have received a commitment letter from BNP Paribas to provide up to
$50 million in senior secured financing to fund a portion of the merger
consideration and related expenses. The commitment letter also includes a
commitment from BNP Paribas to provide $20 million in senior subordinated
financing in the form of senior subordinated notes to be issued by NLCI and
warrants to purchase the capital stock of NLCI. Receipt of third-party
financing in accordance with the terms of the equity and debt commitment
letters or substitute financing on terms no less favorable in the aggregate to
the buying group is a condition to completion of the merger. Following
completion of the merger, the senior credit facility and senior subordinated
notes are expected to be repaid through cash flow generated from operations in
the ordinary course of business and/or through refinancing.
The Special Meeting (see page 16)
Time, Date and Place. A special meeting of the stockholders of NLCI will be
held on , 2002, at at local time, to consider and
vote upon the proposal to approve and adopt the merger agreement and the merger.
9
Record Date and Voting Information. You are entitled to vote at the special
meeting if you owned shares of voting stock at the close of business on ,
2002, which is the record date for the special meeting. You will have one vote
at the special meeting for each share of common stock you owned at the close of
business on the record date and the number of votes equal to the number of
shares of common stock into which your preferred stock is then convertible. On
the record date, there were shares of voting stock (common stock and
preferred stock, calculated on as an as-converted basis) entitled to be voted
at the special meeting.
Required Vote. The approval and adoption of the merger agreement and the
merger requires the affirmative vote of the holders of a majority of the shares
of voting stock, voting together as a single class, outstanding at the close of
business on the record date. Abstentions and broker non-votes are not included
as votes cast on the proposal.
Voting Agreements by the Rollover Stockholders. The rollover stockholders,
who, as of the record date, had the right to vote approximately 6.9% of the
outstanding shares of voting stock, have agreed to vote shares of voting stock
owned by them in favor of the merger agreement and merger, and have granted to
Socrates an irrevocable proxy to vote shares of voting stock owned by them for
the adoption and approval of the merger agreement and the merger.
Appraisal Rights (see page 56)
NLCI is a corporation organized under Delaware law. Under Section 262 of the
Delaware General Corporation Law, if you do not vote in favor of the merger and
instead follow the appropriate procedures for demanding and perfecting
appraisal rights as described on pages 56 through 60 and in Appendix C, you
will receive a cash payment for the "fair value" of your shares of voting
stock, as determined by the Delaware Court of Chancery, instead of the $7.75
per share merger consideration to be received by the NLCI stockholders in
connection with the merger. The price determined by the Delaware Court of
Chancery may be more than, less than or equal to the merger consolidation you
would have received for each of your shares of common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
in the merger if you had not exercised your appraisal rights. Generally, in
order to exercise appraisal rights, among other things:
. you must not vote for approval and adoption of the merger agreement and
the merger; and
. you must make written demand for appraisal in compliance with Delaware
law prior to the vote on the merger agreement and the merger.
Merely voting against the merger agreement and the merger will not preserve
your appraisal rights under Delaware law. Appendix C to this proxy statement
contains the Delaware statute relating to your appraisal rights. IF YOU WANT TO
EXERCISE YOUR APPRAISAL RIGHTS, PLEASE READ AND CAREFULLY FOLLOW THE PROCEDURES
DESCRIBED ON PAGES 56 THROUGH 60 AND IN APPENDIX C. FAILURE TO TAKE ALL OF THE
STEPS REQUIRED UNDER DELAWARE LAW MAY RESULT IN THE LOSS OF YOUR APPRAISAL
RIGHTS.
The Merger Agreement (see page 61)
The merger agreement, including the conditions to the closing of the merger,
is described on pages 61 through 75 and is attached as Appendix A to this proxy
statement. You should carefully read the entire merger agreement as it is the
legal document that governs the merger. In addition to other termination rights
provided in the merger agreement, and subject to the exceptions listed in the
merger agreement, each of the parties has the right to terminate the merger
agreement if the merger is not completed on or before January 31, 2003.
10
Conditions to Completing the Merger (see page 71)
The obligations of NLCI and Socrates to complete the merger are each subject
to the satisfaction or waiver of certain conditions, including but not limited
to the following:
. the merger agreement and the merger must have been approved by the
affirmative vote of the holders of at least a majority of NLCI's
outstanding voting stock, voting together as a single class;
. the representations and warranties in the merger agreement made by the
other party must be true and correct at the effective time of the merger,
or as of the date specified in the merger agreement, subject to specified
materiality qualifications;
. the other party must have performed or complied with the agreements and
covenants in the merger agreement;
. no law, rule, regulation, judgment, decree, injunction, executive order,
award of any court or governmental entity or court order can be in effect
which prohibits the merger;
. the applicable waiting period (including any extension) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, referred to as the
HSR Act, and any applicable foreign regulations must have expired,
terminated or been waived;
. all consents, approvals and authorizations legally required to be
obtained to consummate the merger must have been obtained from all
governmental entities; and
. no litigation, suit, claim, action, proceeding or investigation may have
been brought by any governmental entity and remain pending that seeks to
prevent the merger.
In addition, the obligation of Socrates to complete the merger is subject to
the satisfaction or waiver of the following conditions:
. NLCI must have obtained all third-party consents required by the merger
agreement;
. there must not have occurred any event, change or circumstance that would
reasonably be expected to have a material adverse effect on NLCI;
. there must not be any claim or proceeding brought by a government entity
or any other person that would reasonably be expected to have a material
adverse effect on NLCI; and
. either (1) the funding by BNP Paribas, Gryphon and Cadigan, in accordance
with the terms of their commitment letters must have been consummated, or
(2) Socrates must have used its commercially reasonable efforts to obtain
financing on terms no less favorable in the aggregate to those contained
in the commitment letters.
In addition, the obligation of NLCI to complete the merger is subject to the
satisfaction or waiver of the condition that NLCI receive a certificate of
Socrates regarding its solvency after the merger.
Limitation on Soliciting Transactions (see page 67)
NLCI has agreed that, except as otherwise provided in the merger agreement,
until the effective time of the merger or the termination of the merger
agreement, it and its subsidiaries will not initiate, solicit, negotiate,
encourage or provide nonpublic or confidential information to facilitate, an
acquisition transaction. NLCI has also agreed that it will, and will use its
reasonable best efforts to cause any officer, director or employee of NLCI, or
any attorney, accountant, investment banker, financial advisor or other agent
retained by it or any of its subsidiaries, not to directly or indirectly
initiate, solicit, negotiate, encourage or provide nonpublic or confidential
information to facilitate, any acquisition transaction. In addition, NLCI
agreed immediately to cease and terminate all activities, discussions or
negotiations with respect to any acquisition proposal.
11
Termination (see page 73)
The merger agreement can be terminated and the merger abandoned at any time
by mutual written consent of the boards of directors of each of NLCI and
Socrates. In addition, either party may terminate the merger agreement if:
. the merger is not completed on or before January 31, 2003;
. NLCI stockholders do not approve and adopt the merger agreement and the
merger;
. a court or other governmental entity issues a law or order which is final
and nonappealable preventing the completion of the merger; or
. the other party breaches any representation, warranty, covenant or
agreement in the merger agreement such that a closing condition is not
satisfied, and the breach is not cured within 15 days.
Socrates may terminate the merger agreement if:
. the special committee or NLCI board of directors withdraws or modifies in
a manner adverse to Socrates its approval or recommendation of the merger
agreement or the merger;
. the special committee or NLCI board of directors approves, recommends, or
enters into an agreement regarding, an alternative proposal from another
person or entity;
. another person or entity announces an alternative acquisition proposal
and the special committee or NLCI does not affirm its recommendation of
the merger agreement or the merger or recommend against the alternative
proposal, in either case after being asked to do so by Socrates;
. NLCI materially or intentionally breaches its agreement not to initiate,
solicit, negotiate, encourage or discuss with any third party any
alternative acquisition proposal, or its agreement not to provide any
non-public or confidential information to any third party; or
. a tender offer or exchange offer for 30% or more of the outstanding
shares of the common stock of NLCI is commenced.
NLCI may terminate the merger agreement if prior to the effective time of
the merger, the NLCI board of directors approves a superior proposal from
another person or entity subject to the conditions in the merger agreement.
Termination Fee and Expense Reimbursement (see page 74)
If the merger agreement is terminated, all fees and expenses will be paid in
the manner described in the merger agreement. Certain terminations require the
payment by NLCI of a termination fee of $1,500,000 and/or an expense
reimbursement of up to $1,500,000.
Effects of the Merger (see page 47)
Upon the effective time of the merger, current NLCI stockholders, other than
the rollover stockholders, will cease to have ownership interests in NLCI or
rights as NLCI stockholders. Therefore, the current stockholders of NLCI, other
than the rollover stockholders, will not participate in any future earnings or
growth of NLCI and will not benefit from any appreciation in value of NLCI.
Upon completion of the merger, the buying group, and rollover stockholders are
expected to own approximately 93.9% and 6.1%, respectively, of the capital
stock of the surviving corporation outstanding immediately after the merger
(excluding options and warrants). As a result of the merger, NLCI will be a
privately held corporation, and there will be no public market for its common
stock. After the merger, the common stock will cease to be quoted on the Nasdaq
National Market, and price quotations
12
with respect to sales of shares of common stock in the public market will no
longer be available. In addition, registration of the common stock under the
Securities Exchange Act of 1934, as amended, referred to as the Exchange Act,
will be terminated.
Federal Regulatory Matters (see page 55)
The HSR Act, and the rules and regulations promulgated thereunder, require
that NLCI and the ultimate parent entity of Socrates file notification and
report forms with respect to the merger and related transactions with the
Antitrust Division of the United States Department of Justice and the U.S.
Federal Trade Commission. The parties thereafter are required to observe a
waiting period before completing the merger. NLCI and Gryphon plan to file with
the Department of Justice and the Federal Trade Commission the forms necessary
to comply with the HSR Act. NLCI and Gryphon expect to request early
termination of the waiting period. However, the Department of Justice and the
Federal Trade Commission, state antitrust authorities or a private person or
entity could seek to enjoin the merger under the antitrust laws at any time
before its completion or to compel rescission or divestiture at any time
subsequent to the merger.
Material U.S. Federal Income Tax Consequences (see page 55)
Stockholders of NLCI who receive cash for their shares will recognize gain
or loss for federal income tax purposes equal to the difference between their
basis for their shares and the amount of cash received. If a stockholder holds
NLCI shares as a capital asset, such gain or loss will be capital gain or loss.
If the stockholder has held the shares for one year or less, the gain or loss
will be short-term gain or loss. If the stockholder has held the shares for
more than one year, the gain or loss will be long-term gain or loss. TAX
MATTERS ARE VERY COMPLEX AND THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL
DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR
FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
Accounting Treatment of the Merger (see page 55)
The merger will be accounted for under the purchase method of accounting in
accordance with United States generally accepted accounting principles, whereby
the value of the consideration paid in the merger will be allocated based upon
the estimated fair values of the assets acquired and liabilities assumed at the
effective time of the merger.
Litigation Challenging the Merger (see page 56)
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of NLCI. Named as
defendants in the complaint are NLCI, members of the NLCI board of directors
and one former member of the NLCI board of directors. The plaintiff alleges,
among other things, that the proposed merger is unfair and that the current and
former NLCI directors breached their fiduciary duties by failing to disclose
fully material non-public information related to the value of NLCI and by
engaging in self-dealing. The complaint seeks an injunction, damages and other
relief. NLCI was served with the complaint on August 22, 2002. While no
response is yet due, NLCI believes that the complaint lacks merit.
13
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement includes statements that are not historical facts.
These forward-looking statements are based on NLCI's current estimates and
assumptions and, as such, involve uncertainty and risk. Forward-looking
statements would include the projections under the caption "Forward Looking
Information" and other information concerning NLCI's possible or assumed future
results of operations and also include those statements preceded or followed by
the words "anticipates," "believes," "could," "estimates," "expects,"
"intends," "may," "should," "plans," "targets" and/or similar expressions.
The forward-looking statements are not guarantees of future performance, and
actual results may differ materially from those contemplated by these
forward-looking statements. In addition to the factors discussed elsewhere in
this proxy statement, other factors that could cause actual results to differ
materially include the performance of any schools, particularly new schools,
the impact of potential regulatory and licensing developments, the hiring and
retention of skilled principals and teachers, the loss of key personnel,
competitive factors, NLCI's ability to execute its business strategy,
fluctuations in enrollment, price and general and administrative expenses, and
general economic conditions. In addition, NLCI's plans for new school locations
and timing of openings depend upon, among other things, successful completion
of lease negotiations, timely project development and school construction,
obtaining appropriate regulatory approvals, management of costs and recruitment
of qualified operating personnel. These and other factors are discussed in
Appendix D and elsewhere in this proxy statement. Except to the extent required
under the federal securities laws, NLCI does not intend to update or revise the
forward-looking statements to reflect circumstances arising after the date of
the preparation of the forward-looking statements.
14
NLCI SELECTED HISTORICAL FINANCIAL DATA
The NLCI selected historical financial data presented below as of and for
the five fiscal years ended June 30, 2002 are derived from the audited
financial statements of NLCI. The following selected historical financial data
should be read in conjunction with NLCI's financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in NLCI's Annual Report on Form 10-K for the
year ended June 30, 2002, which is attached as Appendix D to this proxy
statement.
Six Months
For the fiscal years ending June 30, Ended Year Ended
-------------------------------------- ---------- ------------
June 30, December 31,
2002 2001 2000 1999 1998 1997
-------- -------- -------- -------- ---------- ------------
(in thousands, except per share data)
Selected Financial Data
Revenue...................................................... $156,279 $147,952 $127,407 $109,762 $ 48,995 $80,980
School operating expenses.................................... 136,190 129,786 110,078 96,475 42,643 70,258
School operating profit...................................... 20,089 18,166 17,329 13,287 6,352 10,722
General and administrative expenses.......................... 11,776 11,004 9,742 7,717 3,391 5,973
Restructuring expense........................................ -- -- -- -- -- 2,960
Operating income............................................. 8,313 7,162 7,587 5,570 2,961 1,789
Interest expense............................................. 3,637 4,171 3,373 2,998 1,044 2,047
Other income................................................. (160) (424) (145) (248) (102) (158)
Minority interest............................................ 34 23 88 74 35 86
Income (loss) before income taxes............................ 4,802 3,392 4,271 2,746 1,984 (186)
Income tax expense........................................... 1,968 1,596 1,793 1,153 833 250
Net (loss) income before Cumulative effect of change in
accounting principle and extraordinary item................. 2,834 1,796 2,478 1,593 1,151 (436)
Cumulative effect of accounting change....................... -- 295 -- -- -- --
Extraordinary item........................................... -- -- -- -- -- 449
Net income (loss)............................................ 2,834 1,501 2,478 1,593 1,151 (885)
Preferred dividends.......................................... 82 81 82 83 51 102
Net income available to common stockholders.................. $ 2,752 $ 1,420 $ 2,396 $ 1,510 $ 1,100 $ (987)
Basic earnings per share:
Net income (loss) before Cumulative effect of change in
accounting principle and extraordinary item................. $ 0.44 $ 0.29 $ 0.40 $ 0.25 $ 0.18 $ (0.09)
Cumulative effect of accounting change (a)................... -- (0.05) -- -- -- --
Extraordinary item........................................... -- -- -- -- -- (0.07)
Net income (loss)............................................ $ 0.44 $ 0.24 $ 0.40 $ 0.25 $ 0.18 $ (0.16)
Dilutive earnings per share:
Net income (loss) before Cumulative effect of change in
accounting principle and extraordinary item................. $ 0.38 $ 0.24 $ 0.33 $ 0.22 $ 0.15 $ (0.09)
Cumulative effect of accounting change....................... -- (0.04) -- -- -- --
Extraordinary item........................................... -- -- -- -- -- (0.07)
Net income (loss)............................................ $ 0.38 $ 0.20 $ 0.33 $ 0.22 $ 0.15 $ (0.16)
EBITDA (b) (earnings before interest, taxes, depreciation and
amortization expenses)...................................... $ 14,514 $ 14,624 $ 13,943 $ 11,123 $ 5,243 $ 4,803
Balance Sheet Data:
Working capital deficit...................................... $(13,325) $(15,453) $(16,946) $(12,087) $(10,221) $(7,946)
Goodwill and intangibles, net................................ 49,521 50,012 51,447 47,319 43,754 37,923
Total assets................................................. 102,980 101,784 98,618 81,025 75,020 74,398
Short-term debt and current portion of long-term debt........ 4,488 6,414 6,293 2,209 2,031 2,793
Long-term debt............................................... 35,729 36,941 36,509 29,147 26,477 28,470
Stockholders' equity......................................... 42,487 38,601 36,558 34,145 32,736 31,636
- --------
(a) Cumulative effect of accounting change represents the effect of the
adoption of Staff Accounting Bulletin 101, Revenue Recognition.
(b) EBITDA is defined by NLCI as its net income before interest expense, income
taxes, depreciation, amortization and cumulative effect of a change in
accounting principle. EBITDA is not intended to indicate that cash flow is
sufficient to fund all of NLCI's cash needs or represent cash flow from
operations as defined by accounting principles generally accepted in the
United States. EBITDA should not be used as a tool for comparison as the
computation may not be similar for all companies.
NLCI's book value per share of common stock was $6.29 at June 30, 2002. No pro
forma data is provided. NLCI does not believe that pro forma data is material
to stockholders in evaluating the merger and the merger agreement because the
merger consideration is all cash and, if the merger is completed, NLCI
stockholders, other than the rollover stockholders, will no longer have any
equity interest in NLCI.
15
THE SPECIAL MEETING
General
The enclosed proxy is solicited by NLCI on behalf of the board of directors
of NLCI for use at a special meeting of stockholders to be held on , 2002,
at local time at , or at any adjournments or postponements
thereof, for the purposes set forth in this proxy statement and in the
accompanying notice of special meeting. NLCI intends to mail this proxy
statement and accompanying proxy card on or about , 2002 to all
stockholders entitled to vote at the special meeting.
At the special meeting, the stockholders of NLCI are being asked to consider
and vote upon a proposal to approve and adopt the merger agreement and the
merger contemplated by the agreement and plan of merger dated as of August 5,
2002 between Socrates and NLCI, as amended, referred to as the merger
agreement. Under the merger agreement, Socrates will be merged with and into
NLCI and each issued and outstanding share of NLCI common stock will be
converted into the right to receive $7.75 in cash, without interest, and each
issued and outstanding share of NLCI preferred stock will be converted into the
right to receive $7.75 in cash, without interest, for each whole share of
common stock into which the share of preferred stock is then convertible under
NLCI's certificate of incorporation plus the amount determined by multiplying
$7.75 by the fraction (rounded to the nearest one-hundredth of a share)
representing any fractional share of common stock into which any share of
preferred stock is then convertible under NLCI's certificate of incorporation,
except for:
. 382,382 shares of voting stock held by the continuing rollover
stockholders that will continue as, or be converted into, equity
interests in the surviving corporation;
. treasury shares of NLCI, all of which will be canceled without any
payment; and
. shares of voting stock held by stockholders who properly exercise and
perfect appraisal rights that will be subject to appraisal in accordance
with Delaware law.
At the effective time of the merger, each outstanding option and warrant
then exercisable will be canceled in exchange for an amount in cash, if any,
determined by multiplying (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant, and (2) the number of shares of common
stock subject to the option or warrant, net of any applicable withholding taxes.
NLCI is also soliciting proxies to grant discretionary authority to vote in
favor of adjournment of the special meeting. NLCI does not expect a vote to be
taken on any other matters at the special meeting. However, if any other
matters are properly presented at the special meeting for consideration, the
holders of the proxies will have discretion to vote on these matters in
accordance with their best judgment.
THE BOARD OF DIRECTORS, ACTING ON THE UNANIMOUS RECOMMENDATION OF THE
SPECIAL COMMITTEE, HAS APPROVED THE TERMS OF THE MERGER AGREEMENT AND THE
PROPOSED MERGER. THE BOARD OF DIRECTORS, BASED IN PART ON THE UNANIMOUS
RECOMMENDATION OF THE SPECIAL COMMITTEE, RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
Record Date and Voting Information
Only holders of record of voting stock at the close of business
on will be entitled to notice of and to vote at the special meeting. At
the close of business on September 20, 2002, there were outstanding and
entitled to vote 6,327,952 shares of NLCI common stock, 1,023,694.11 shares of
NLCI Series A preferred stock (which were convertible into 300,966 shares of
common stock), 2,499,940 shares of NLCI Series C preferred stock (which were
convertible into 624,985 shares of common stock) and 1,063,830 shares of NLCI
Series D preferred stock (which were convertible into 265,957 shares of common
stock) (in the aggregate, 7,519,860 shares of voting common stock). There are
no shares of NLCI Series B preferred stock issued and outstanding. A list of
the NLCI stockholders will be available for review at NLCI's executive offices
during regular business
16
hours for a period of 10 days before the special meeting. Each holder of record
of voting stock on the record date will be entitled to one vote for each share
held. The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of voting stock entitled to vote at the special meeting is
necessary to constitute a quorum for the transaction of business at the special
meeting.
All votes will be tabulated by the inspector of election appointed for the
special meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Brokers who hold shares in street name for
clients typically have the authority to vote on "routine" proposals when they
have not received instructions from beneficial owners. However, absent specific
instructions from the beneficial owner of the shares, brokers are not allowed
to exercise their voting discretion with respect to the approval and adoption
of non-routine matters, such as the merger agreement and the merger; proxies
submitted without a vote by the brokers on these matters are referred to as
broker non-votes. Abstentions and broker non-votes are counted for purposes of
determining whether a quorum exists at the special meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of voting stock voting as a single class is required to approve and adopt the
merger agreement and the merger. Accordingly, proxies that reflect abstentions
and broker non-votes, as well as proxies that are not returned, will have the
same effect as a vote AGAINST approval and adoption of the merger agreement and
the merger. Accordingly, the special committee and the board of directors urge
the stockholders to complete, sign, date and return the enclosed proxy card in
the accompanying self-addressed postage prepaid envelope as soon as possible.
The rollover stockholders each have entered into separate voting agreements
with Socrates under which each agreed to vote shares of voting stock owned by
him in favor of the merger and granted to Socrates an irrevocable proxy to vote
shares of voting stock owned by him for the adoption and approval of the merger
agreement and the merger and, with respect to certain other extraordinary
corporate transactions, in any manner Socrates in its sole discretion may deem
fit. As of the record date, the rollover stockholders had the right to vote
515,925 shares of voting stock, representing approximately 6.9% of the
outstanding shares of voting stock. See "Special Factors--Interests of NLCI
Directors and Officers in the Merger."
Stockholders who do not vote in favor of approval and adoption of the merger
agreement and the merger, and who otherwise comply with the applicable
statutory procedures of the Delaware General Corporation Law summarized
elsewhere in this proxy statement, will be entitled to seek appraisal of the
value of their shares as set forth in Section 262 of the Delaware General
Corporation Law. See "Special Factors--Appraisal Rights."
Proxies; Revocation
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. A proxy may be revoked by filing with
the Secretary of NLCI at NLCI's executive offices located at 1615 West Chester
Pike, West Chester, Pennsylvania, 19382, a written notice of revocation or a
duly executed proxy bearing a later date, or a proxy may be revoked by
attending the special meeting and voting in person. Attendance at the special
meeting will not, by itself, revoke a proxy. Furthermore, if a stockholder's
shares are held of record by a broker, bank or other nominee and the
stockholder wishes to vote at the meeting, the stockholder must obtain from the
record holder a proxy issued in the stockholder's name.
Expenses of Proxy Solicitation
Except as provided below, NLCI will bear the entire cost of solicitation of
proxies, including preparation, assembly, printing and mailing of this proxy
statement, the proxy and any additional information furnished to stockholders.
NLCI has retained to assist in the solicitation of proxies. The buying
group will pay the cost of $ plus reimbursement of expenses of the proxy
solicitor. Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
voting stock beneficially owned by others to forward to the beneficial owners.
NLCI may reimburse persons representing
17
beneficial owners of voting stock for their costs of forwarding solicitation
materials to the beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of NLCI or by representatives
of . No additional compensation will be paid to directors, officers or other
regular employees for their services in connection with the solicitation of
proxies.
Adjournments
Although it is not expected, the special meeting may be adjourned for the
purpose of soliciting additional proxies. Any adjournment of the special
meeting may be made without notice, other than by an announcement made at the
special meeting, by approval of the holders of a majority of the outstanding
shares of voting stock present in person or represented by proxy at the special
meeting, whether or not a quorum exists. NLCI is soliciting proxies to grant
discretionary authority to vote in favor of adjournment of the special meeting.
In particular, discretionary authority is expected to be exercised if the
purpose of the adjournment is to provide additional time to solicit votes to
approve and adopt the merger agreement and the merger. THE BOARD OF DIRECTORS
RECOMMENDS THAT NLCI STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO GRANT
DISCRETIONARY AUTHORITY TO ADJOURN THE MEETING.
PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME. IN THE EVENT THE
MERGER IS COMPLETED, NLCI WILL DISTRIBUTE INSTRUCTIONS REGARDING THE PROCEDURES
FOR EXCHANGING EXISTING NLCI STOCK CERTIFICATES FOR THE MERGER CONSIDERATION.
18
THE PARTICIPANTS
Nobel Learning Communities, Inc.
1615 West Chester Pike
West Chester, Pennsylvania, 19382
(484) 947-2000
NLCI is a for-profit provider of education and school management services
for the pre-elementary through 12th grade market. NLCI's programs are offered
through a network of private schools, charter schools, schools for learning
challenged students, and special purpose 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 Arizona,
California, Florida, Georgia, Illinois, Maryland, Nevada, New Jersey, North
Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, 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 Saber Academy (special
purpose high schools). As of September 20, 2002, NLCI operated 179 schools in
15 states, with an aggregate capacity of approximately 27,000 children.
If the merger agreement and the merger are approved and adopted by the NLCI
stockholders at the special meeting and the merger is completed as
contemplated, NLCI will continue its operations following the merger as a
private company. NLCI was organized in 1984 as the Rocking Horse Childcare
Centers of America, Inc. In 1985, NLCI was merged into The Petrie Corporation
(originally incorporated under the name Petrie Method, Inc.), a Delaware
corporation organized on March 30, 1983. In 1993 NLCI changed its name to Nobel
Education Dynamics, Inc. and in 1998, NLCI changed its name to Nobel Learning
Communities, Inc.
A more detailed description of NLCI's business and financial results is
contained in NLCI's Annual Report on Form 10-K for the fiscal year ended June
30, 2002, which is included in this proxy statement as Appendix D. See also
"Where Stockholders Can Find More Information."
Socrates Acquisition Corporation
c/o Gryphon Partners II, L.P.
One Embarcadero Center
San Francisco, California, 94111
(415) 217-7400
Socrates Acquisition Corporation, referred to as Socrates, is a Delaware
corporation that was organized by Gryphon and Cadigan. Socrates was formed
solely for the purpose of engaging in the merger and has not participated in
any activities to date other than those incident to its formation and the
transactions contemplated by the merger agreement. Information regarding the
directors and executive officers of Socrates is set forth in Appendix F to this
proxy statement.
Gryphon Partners II, L.P.
One Embarcadero Center
San Francisco, California, 94111
(415) 217-7400
Gryphon Partners II, L.P., referred to as Gryphon, is a Delaware limited
partnership. Gryphon is a private equity fund specializing in leveraged
acquisitions, principally of middle-market companies, often in partnership with
experienced management. Information regarding the affiliates of Gryphon is set
forth in Appendix F to this proxy statement.
19
Gryphon Partners II-A, L.P.
One Embarcadero Center
San Francisco, California, 94111
(415) 217-7400
Gryphon Partners II-A, L.P. is a Delaware limited partnership. Gryphon
Partners II-A, L.P. is a private equity fund that co-invests with Gryphon in
leveraged acquisitions, principally of middle-market companies, often in
partnership with experienced management. The investors in Gryphon Partners
II-A, L.P. are employees of affiliates of Gryphon. Information regarding the
affiliates of Gryphon Partners II-A, L.P. is set forth in Appendix F to this
Proxy Statement.
Cadigan Investment Partners, Inc.
712 Fifth Avenue, 45th Floor
New York, New York, 10019
(212) 405-5053
Cadigan Investment Partners, Inc, referred to as Cadigan, is a Delaware
corporation. Cadigan is a leveraged buyout firm. Cadigan's principals
collectively have over 40 years of experience in private equity investments and
management buyouts, and have made these investments across widely varying
economic climates, stock market conditions and interest rate environments.
Information regarding the directors and executive officers of Cadigan is set
forth in Appendix F to this proxy statement.
Rollover stockholders
A.J. Clegg, John Frock and Robert Zobel, each a director and executive
officer of NLCI, and D. Scott Clegg, an executive officer of NLCI, have agreed
to retain an equity interest in the surviving corporation. These executive
officers and directors are referred to as the rollover stockholders. The
rollover stockholders may have interests that are different from, or in
addition to, the interests of NLCI stockholders generally. See "Special
Factors--Interests of NLCI Directors and Officers in the Merger."
A.J. Clegg and John Frock, referred to together as the continuing rollover
stockholders, will acquire their shares in the surviving corporation by
exchanging NLCI stock owned by them representing approximately 75% and 61.5%,
respectively, of the value of the consideration they would otherwise receive in
the merger if they were not exchanging their interests in NLCI for shares of
capital stock of the surviving corporation. Robert Zobel and D. Scott Clegg,
referred to together as the purchasing rollover stockholders, will receive the
merger consideration for any common stock, preferred stock and options they
own, and will each pay $74,100 to purchase equity interests in Socrates that
will convert into shares of capital stock of the surviving corporation. The
rollover stockholders together are expected to own approximately 6.1% of the
shares of capital stock of the surviving corporation outstanding immediately
after the merger (excluding options and warrants).
20
SPECIAL FACTORS
Background of the Merger
NLCI has been engaged in an on-going effort to raise additional growth
capital almost every year since 1992. From 1993 through 2001, NLCI engaged in
discussions with a wide variety of potential strategic as well as financial
partners about possible debt or equity funding or acquisition transactions,
including Children's Discovery Centers, a subsidiary of Knowledge Universe,
Inc., referred to as KU, Goldman Sachs, Leeds Weld & Co., referred to as Leeds,
and Sylvan Learning Systems, Inc., referred to as Sylvan.
During this process, in order to protect stockholder value, NLCI approved a
stockholder rights plan, referred to as the rights agreement, in May 2000,
under which preferred stock purchase rights were distributed to its
stockholders. The rights are activated when a person or group acquires a
specified percentage (based on the acquiring person's or group's interest in
NLCI on May 16, 2000) of NLCI's outstanding common stock, and by other triggers
listed in the rights agreement. In June 2000, NLCI engaged an investment bank
other than Legg Mason on an exclusive basis to assist and advise NLCI in
connection with a possible private placement of equity securities of NLCI or a
sale or merger of NLCI. This arrangement was terminated on or about December
2000. As a result of the discussions regarding possible funding or acquisition
transactions, some of the parties presented to NLCI term sheets for possible
transactions. However, prior to 2001, NLCI did not enter into any term sheets
or engage in any transactions as a result of these discussions.
From time to time commencing in 1999, members of management and the NLCI
board of directors had multiple meetings and discussions with representatives
of KU, a stockholder of NLCI holding approximately 25.3% of the NLCI voting
stock. On or about March, 2001, the conversations between KU and NLCI began to
focus on the possible merger of KU's childcare operations with and into NLCI,
with NLCI as the surviving entity. Due diligence and negotiations continued for
approximately eight months, whereupon the negotiations terminated due to NLCI's
and KU's inability to reach agreement over relative values and strategy
considerations.
During the time that NLCI was in discussions with KU, NLCI engaged two
investment banking firms other than Legg Mason, one on June 28, 2001 and the
other on July 24, 2001, to assist and advise NLCI, on a non-exclusive basis, in
connection with a possible private placement of equity or equity-linked
securities of NLCI. As a result of introductions made by one of the firms, NLCI
or its representatives met or had telephone conversations with at least nine
entities in 2001 and at least six entities in 2002, to explore the possibility
of engaging in financing or other transactions with NLCI. Although all of these
entities entered into confidentiality agreements with NLCI, and several of
these entities conducted due diligence on NLCI, none of these discussions
culminated in an offer for a transaction.
In November 2001, Mr. William Walton, then a member of the NLCI board of
directors and Chief Executive Officer of Allied Capital Corporation, referred
to as Allied, requested that the NLCI board of directors discuss the
possibility of a going private transaction for NLCI. On November 14, 2001, the
NLCI board of directors discussed strategic alternatives including going
private in a leveraged buyout transaction. Mr. Walton recommended the going
private alternative, and indicated that Allied would be interested in providing
debt or equity financing for a going private transaction. At the NLCI annual
stockholder meeting on November 15, 2001, management discussed the frustration
of investors and management with NLCI's stock performance, the potential causes
and the various strategic alternatives NLCI was investigating to maximize
stockholder value, including a going private transaction. The meeting was
broadcast via the internet.
On November 28, 2001, Mr. A.J. Clegg and Mr. Rusty Bailey, then NLCI's Chief
Financial Officer, were introduced to Mr. Pericles Navab and other members of
Cadigan. At that time, Cadigan delivered a confidentiality agreement to NLCI.
After Cadigan expressed an initial interest in exploring a leveraged buyout of
NLCI, Mr. A.J. Clegg introduced Cadigan to Allied, who had expressed their own
interest in funding this type of transaction to members of the NLCI board of
directors. Cadigan and Allied had numerous conversations regarding their joint
participation in a possible leveraged buyout transaction. During these
discussions, Cadigan and Allied considered an $8.00 per share figure, and
discussed with each other a leveraged buyout at that price.
21
In early December, 2001, Mr. Navab, after evaluating the different financing
structures required to execute the transaction, concluded that it would be
beneficial to invite another equity investor to participate in the transaction.
Cadigan began discussions in mid-December 2001 with Mr. Jeff Ott and other
representatives of Gryphon as a potential equity co-sponsor for the leveraged
buyout transaction being discussed, and in early January 2002 came to an
agreement with Gryphon to pursue such a transaction jointly.
During its January 9, 2002 meeting, the NLCI board of directors discussed
the going private conversations in which management and Allied had
participated. Mr. A.J. Clegg informed the board that some members of management
were considering participating in a leveraged buyout transaction. Mr. Daniel
Russell, a member of the NLCI board of directors and principal of Allied,
informed the board that Allied was in discussions regarding its participation
in a leveraged buyout transaction. Mr. Russell stated that Allied had
discussions with representatives of KU and Edison Venture Fund, another
significant stockholder of NLCI, regarding whether they would be interested in
selling their interests in NLCI at a per share price of $8.00, but that neither
of them viewed the price favorably. The NLCI board of directors formed an
independent special committee to consider a leveraged buyout transaction if one
were to be proposed which involved members of the NLCI board of directors. The
members of the special committee are Mr. Edward Chambers, Mr. Peter Havens and
Mr. Eugene Monaco. Mr. Havens was elected as Chairman of the special committee.
In connection with this meeting, Mr. Frock sent a memo to the NLCI board of
directors, informing the directors that the cash situation at NLCI was very
tight, and recommending that the special committee consider NLCI's cash
position and be prudent relative to expense and cash commitments.
In early February, Mr. Havens and Mr. Chambers met with law firms to select
legal advisors for the special committee, and thereafter, the special committee
engaged Dechert.
During February 2002, members of management of NLCI had discussions with
several parties regarding alternative transactions with NLCI. During a meeting,
one of these parties asked Mr. A.J. Clegg if he would step down as NLCI's Chief
Executive Officer in connection with a transaction, and he responded that he
would if requested to do so and if the stockholders were offered a fair price
to sell their shares. Cadigan continued its discussions with NLCI and
introduced NLCI to representatives of Gryphon, as a potential equity sponsor
for the leveraged buyout transaction that was being discussed. The buying group
began conducting due diligence and expressed increased interest in a possible
transaction.
On February 1, 2002, Mr. Randy Read of KU contacted Mr. A.J. Clegg to
schedule a meeting for the middle of February to discuss maximizing shareholder
value. After consulting with legal counsel, Mr. A.J. Clegg had a discussion
with Mr. Read to arrange the meeting. During this call, Mr. Read acknowledged
that he was aware that NLCI was considering a leveraged buyout transaction and
that he wanted to arrange the meeting to discuss how to achieve maximum value
for NLCI stockholders during the negotiations. Mr. A.J. Clegg invited Mr. Read
and representatives of KU to meet with the NLCI board of directors on February
19 or 20. Before KU would attend the meeting, Mr. Read wanted the NLCI board of
directors to waive the provisions of the rights agreement, insofar as the
provisions might apply to KU, and forwarded a draft waiver for NLCI to sign.
The NLCI board of directors determined, on the advice of legal counsel, not to
sign the requested waiver because it was broader than necessary and so informed
the KU representatives. On February 20, 2002, representatives of NLCI had a
telephone conversation with KU inviting them to an NLCI board meeting to
discuss strategic alternatives and maximizing shareholder value. KU and Mr.
A.J. Clegg corresponded through the middle of March regarding a possible
meeting and the requested rights agreement waiver but were not able to come to
an agreement as to the terms of a waiver and therefore a meeting did not take
place.
On March 1, 2002, Mr. A.J. Clegg and Mr. John Frock filed an amendment to
the Schedule 13D that they had previously filed with the Securities and
Exchange Commission, referred to as the Commission, to update
22
their holdings in NLCI. In addition, the filing stated that the two of them
might, from time to time, acquire additional shares of common stock by various
means, including in open market or private transactions, or pursuant to a
tender offer, exchange offer or similar means (the result of which might be
that they would own a controlling interest in NLCI). Although no final terms
for any transaction had been proposed or agreed to, the filing also stated that
Messrs. A.J. Clegg and Frock had, and may in the future continue to have,
discussions with the NLCI board of directors, other key employees of NLCI,
potential investors, including groups specializing in management-led buyouts,
and outside advisors regarding the possibility of engaging in a management-led
buyout of NLCI. The filing of the amendment was covered by the press and the
closing price of NLCI's common stock increased from $5.50 per share on February
28 to $6.70 per share on March 4.
On March 4, 2002, the buying group submitted a bid letter to the special
committee offering to acquire all of the outstanding NLCI common stock through
the merger of a newly-formed company owned by the buying group with and into
NLCI at a price per share of $7.75 and requesting a period of exclusivity to
negotiate a transaction. The bid letter indicated that the buying group
expected to offer senior management and some other stockholders the opportunity
to participate in a portion of the transaction as equity investors or financing
sources. The buying group planned to finance the acquisition with equity of $40
million, subordinated debt of $20 million and senior secured debt of $40
million. The bid letter further provided that the buying group expected to
deliver a draft merger agreement and debt commitment letters over the next week.
On March 7, 2002, Mr. Havens met with Mr. Navab and Mr. Ott to discuss the
terms of the bid letter and the process the special committee would undertake
to evaluate the proposal. Mr. Havens informed Mr. Navab that the special
committee intended to meet with several potential financial advisors the
following week and that the special committee would not respond to the buying
group until after the special committee engaged a financial advisor.
On March 12, the NLCI board of directors met. Prior to the meeting, the
special committee requested the authority to solicit other bidders if it deemed
appropriate. Because Mr. A.J. Clegg did not attend this meeting, he delivered
to Mr. Frock a memo to be read into the minutes that expressed Mr. A.J. Clegg's
concerns that the special committee carry out its duties in the most cost
efficient manner possible. Discussed at the meeting were the extreme adverse
economic impact which permitting the special committee to solicit bids from
third parties would have on NLCI, and the fact that other entities were
currently expressing an interest in the transaction. Following this discussion,
the board of directors determined that any further expansion of the special
committee's powers would require further approval of the NLCI board of
directors. The board of directors then approved resolutions forming the special
committee and authorizing it to negotiate with the buying group for the purpose
of making a recommendation with respect to the proposal. The resolutions
provided that upon consent of the NLCI board of directors, the special
committee would have the sole power and authority to negotiate any other offer
presented to NLCI while the special committee was considering the buying
group's offer (because members of NLCI's board of directors were expected to
participate in the transaction with the buying group). The resolutions also
conferred upon the special committee the power to reject an offer which the
special committee determined that it could not favorably recommend to the NLCI
board of directors. Additionally on March 12, the special committee received
the draft merger agreement from the buying group.
On March 13, the buying group presented the special committee with debt
financing term sheets. One of the term sheets contained a proposal from Allied
to acquire $20 million of subordinated notes in connection with the buying
group transaction which was subject to the approval of its credit committee and
due diligence. Fleet National Bank, referred to as Fleet, also provided a
non-binding term sheet to arrange $30 million of senior secured debt financing,
with Fleet providing up to $20 million of that financing. Fleet's proposal also
was subject to its successful completion of due diligence and credit committee
approval.
On March 15, the special committee had its organizational meeting, during
which it was advised by Dechert of its fiduciary duties. After the meeting, the
special committee and Dechert interviewed potential financial
23
advisors. As a result of Legg Mason's familiarity with NLCI and the education
industry and the presentations made at the interviews, the special committee
selected Legg Mason as its financial advisor. Legg Mason had been selected by
NLCI previously to assist NLCI in its evaluation of the potential transaction
with KU in 2001. Legg Mason was not engaged in connection with that
transaction. Legg Mason had previously assisted NLCI in connection with
financing transactions with Allied and Summit Bank in 1995.
In March, members of NLCI management were contacted by other parties about
potential financing and acquisition transactions. NLCI continued to have
preliminary discussions with these and other parties from time to time over the
next few months, and where interest was expressed, these parties were referred
to Mr. Havens for consideration by the special committee.
On March 21, the buying group submitted to NLCI's senior management the
terms that the buying group proposed for management's participation in the
transaction.
The special committee negotiated an engagement letter pursuant to which Legg
Mason agreed to advise the special committee for a retainer of $100,000, a fee
upon delivery of a fairness opinion of $200,000 and a fee upon closing of a
transaction with the buying group for which a fairness opinion had been
delivered of $50,000. On April 5, 2002, the NLCI board of directors met at the
request of the special committee to consider the proposed engagement of Legg
Mason. During the meeting, the NLCI board of directors discussed the buying
group's bid of $7.75 per share and all agreed that they could not then support
a transaction with the buying group at that price. The NLCI board of directors
unanimously authorized the engagement of Legg Mason by the special committee
subject to an increase in the buying group's offer price from $7.75 to at least
$8.00 per share. Mr. Havens then informed Mr. Navab by telephone call that the
offer would have to be increased before the special committee could engage Legg
Mason.
The buying group submitted a bid letter on April 9 with a revised per share
purchase price of $8.00, and with revised financing of $50 million of equity,
$20 million of subordinated debt and $35 million of senior secured debt. The
offer was conditioned upon the buying group's receipt of NLCI's comments to the
draft merger agreement and agreement on the per share price by April 24, as
well as the grant by NLCI of an exclusivity period. The revised bid letter was
accompanied by several alternate non-binding proposals from financing sources
for the debt financing. Also on April 9, 2002, the special committee engaged
Legg Mason to act as its financial advisor. Over the next two weeks, Legg Mason
met with representatives from NLCI and received information regarding NLCI's
financial condition and its prior discussions with third parties about
acquisition and financing transactions.
On April 19, Mr. A.J. Clegg sent a letter to the special committee
expressing concern about legal costs given NLCI's goal to keep its costs down
relative to its revenues, and stating that the members of the special
committee, as directors of NLCI, have the fiduciary responsibility to keep
costs at reasonable levels. Mr. Havens sent a response to Mr. A.J. Clegg on
April 22, 2002, stating that he was aware of the legal costs and that the
special committee was fulfilling its fiduciary responsibility to the NLCI
stockholders by properly using legal counsel to guide the special committee
throughout the process.
On April 23, 2002, Legg Mason presented its preliminary valuation analysis
in a meeting with the special committee and representatives of Dechert. Legg
Mason described the methodologies it used, including the analysis of
information it received from NLCI as well as publicly available information
about NLCI and other public companies and transactions in the education
industry. Legg Mason gave the special committee its initial view of the $8.00
per share price that had been proposed by the buying group. Representatives of
Legg Mason and Dechert also reported their findings about NLCI's prior
discussions regarding acquisition and financing transactions to the special
committee. Based on the information discussed at the meeting, the special
committee instructed Legg Mason to inform the buying group that the special
committee was not satisfied with the proposed price of $8.00 per share but
would proceed with negotiations at a price of at least $9.00 per share.
24
On April 24, 2002, Legg Mason informed Mr. Navab and Mr. Ott that the
special committee would proceed with negotiations only if the per share
purchase price were increased to $9.00. The buying group informed Legg Mason
that it was their view that the valuation of NLCI would not support a price
that high. Legg Mason subsequently had conversations with representatives of
Ernst & Young, referred to as E&Y, and Marsh McClennan, who had conducted
diligence for the buying group to discuss the diligence findings, and relayed
these conversations to members of the special committee. Members of the special
committee discussed selected E&Y and Marsh McClennan findings with NLCI to
obtain management's and NLCI's auditors' point of view about the issues raised.
On April 25, Mr. A.J. Clegg sent a letter to the special committee
expressing concern that a negative impact on the morale of management was being
created by rumors about the special committee's conclusions regarding the
proposed transaction. Mr. A.J. Clegg requested that the special committee
provide management with whatever information was possible regarding whether the
special committee had reached a decision whether to recommend the proposed
transaction. Mr. Havens subsequently spoke with Mr. A.J. Clegg and informed him
of the status of discussions with the buying group.
On May 2, the special committee had a telephonic meeting with
representatives of Legg Mason and Dechert. Legg Mason reported to the special
committee about information that it had received from NLCI about the
discussions with KU in 2001 regarding a business combination with Knowledge
Learning Corporation and the terms for two proposed financings that NLCI had
received within the prior year and a half, as well as the discussions with E&Y
and Marsh McClennan. Legg Mason stated that the additional information
supported its initial view on valuation of $8.00 per share. Legg Mason also
discussed recent comparable transactions and recent comparable termination fees
with the special committee. Based on these discussions with its advisors and
its own views, the special committee instructed Legg Mason that the special
committee would require a per share price of at least $8.25 and would agree to
a termination fee only if the per share price were closer to $9.00. In
addition, the special committee told Legg Mason that the $4 million termination
fee originally requested by the buying group in the draft merger agreement was
too high.
At the special committee's request, a board meeting was held on May 3. That
morning, all of the members of the NLCI board of directors received a letter
from counsel for KU. The letter stated that KU understood that management was
continuing to pursue a buyout transaction and advised management that it should
actively pursue strategic alternatives and not enter into any agreement that
would adversely affect other acquisition proposals or dissipate corporate
assets. The letter requested a discussion with NLCI. At the May 3 board
meeting, the special committee requested authority to approach KU to discuss
whether KU would be supportive of $8.00 per share in connection with the
transaction. After discussing its concerns about selective disclosure to KU, as
only one of its stockholders, the NLCI board of directors did not grant this
authority. The NLCI board of directors authorized Mr. A.J. Clegg to send a
letter in response to KU's letter stating that NLCI continued to be willing to
meet with KU at any time, but was unwilling to agree to the waiver to its
rights agreement previously requested by KU. On May 6, Mr. A.J. Clegg sent this
letter to counsel for KU.
Over the next several days, Legg Mason had numerous pricing discussions with
the buying group. Legg Mason informed them that the special committee would be
willing to proceed at a per share price of $9.00 with a customary termination
fee but at any price less than that the special committee would not agree to a
termination fee. In either case, any expense reimbursement obligation would be
capped at $1 million. The buying group ultimately proposed a per share price of
$8.25 with no termination fee and a cap on expense reimbursement of $1.5
million on the condition that NLCI grant the buying group exclusivity to
negotiate an agreement. After consultation with Mr. Havens, Legg Mason informed
the buying group that the special committee would request that the board grant
the buying group exclusivity on these terms. The special committee requested a
board meeting for the afternoon of May 7. On May 6, the buying group presented
the special committee with a letter of intent that set forth the $8.25 price
and the previously agreed upon expense reimbursement, but also included a
binding obligation on the special committee to negotiate in good faith and a
minimum three and a half week exclusivity provision with no exceptions. The
special committee objected to the good faith provision and the exclusivity
provisions in the form presented by the buying group.
25
On May 6, Messrs. A.J. Clegg, John Frock and Robert Zobel met with Mr.
Douglas Becker, Chairman and Chief Executive Officer of Sylvan, and Peter
Cohen, also from Sylvan, to discuss a potential transaction between the
companies and the companies entered into a confidentiality agreement. Sylvan
expressed interest in a potential transaction and Mr. A.J. Clegg immediately
advised Mr. Becker to contact Mr. Havens. On May 7, Mr. Havens received a voice
message from Mr. Becker informing Mr. Havens of the meeting with management of
NLCI on May 6 and his desire to discuss a potential transaction with the
special committee.
On May 8, Legg Mason informed the buying group that the NLCI board of
directors was not willing to grant exclusivity but that the special committee
remained willing to move forward on the economic terms discussed and would
present a markup of the draft merger agreement to the buying group if it
remained willing to proceed. In subsequent discussions, representatives of the
buying group stated that without exclusivity they would only proceed with a
termination fee of $3 million plus the expense reimbursement of up to $1.5
million. The special committee continued to advise the buying group that any
termination fee was unacceptable but agreed to provide a markup of the draft
merger agreement.
Again at the request of the special committee, a board meeting was held on
May 8. Members of management of NLCI referred to the special committee the two
inquiries that they had received from Sylvan and Leeds. Mr. Havens informed the
NLCI board of directors about the call he received from Mr. Becker. Mr. A.J.
Clegg informed the NLCI board of directors that representatives of Sylvan had
been given a tour of NLCI's school facilities. The NLCI board of directors
authorized the special committee to engage in discussions with Sylvan and also
with Jeffrey Leeds, of Leeds, who had recently contacted NLCI about a potential
transaction. The special committee then requested authority to approach other
parties who had not contacted NLCI. After discussing the impact on NLCI in
conducting an auction, the NLCI board of directors did not grant the authority.
As a result of the NLCI board of directors' decision to authorize the special
committee to enter into discussions with those potentially interested parties,
the board did not grant exclusivity to the buying group.
Later that week, Mr. Havens spoke to Mr. Becker. Mr. Becker informed Mr.
Havens that his team would conduct its due diligence review and he would
contact Mr. Havens thereafter. On May 14, NLCI entered into a confidentiality
agreement with Leeds, and began providing requested information to them.
Mr. A.J. Clegg sent a letter to the special committee on May 13 raising
concerns about the mounting costs and the strains on NLCI and management as a
result of the uncertainty with the buying group transaction and its involvement
in a lengthy, time-consuming diligence process. The special committee convened
to discuss Mr. A.J. Clegg's letter and determined to request a meeting of the
board to discuss questions raised by Mr. A.J. Clegg's letter. A board meeting
was scheduled for May 20. Mr. Havens responded to the letter on May 15
informing Mr. Clegg that the special committee was carrying out the
responsibilities delegated to it by the NLCI board of directors and requesting
a meeting of the board to discuss questions raised by Mr. Clegg's letter.
On May 15, Dechert delivered a markup of the draft merger agreement to Ropes
& Gray, counsel to the buying group. During a conference call on May 17, Mr.
Navab informed Mr. Havens, Ms. Kathy Herman, General Counsel of NLCI, Dechert
and Legg Mason that the buying group objected to the markup of the merger
agreement. Mr. Navab also questioned NLCI's recent performance and its affect
on the buying group's valuation analysis. Mr. Navab stated that the buying
group was reconsidering whether it was interested in pursuing a transaction
with NLCI given the "value gap" resulting from the recent drop in projected
EBITDA for fiscal 2002. The buying group was planning to meet with NLCI on May
21 to discuss NLCI's financial condition and would let the special committee
know sometime after that meeting if the group was still interested in pursuing
a transaction.
On May 19, the buying group delivered a letter to the NLCI board of
directors containing the buying group's key issues raised by the merger
agreement markup. The buying group letter further requested a revised markup of
the merger agreement to reflect the positions set forth in the letter.
26
On May 20, the NLCI board of directors met to discuss the concerns raised in
Mr. A.J. Clegg's May 13 letter to the special committee. Present at the meeting
at the invitation of the NLCI board of directors were representatives of
Dechert and Morgan Lewis, counsel to NLCI. The NLCI board of directors also
discussed the May 19 letter from the buying group, the closing conditions
requested by the buying group and the buying group's position that it would not
provide a "parent" guarantee. Counsel for the special committee described the
overall terms of the proposal including the financing condition contained in
the draft merger agreement and the financing letters received with the most
recent bid letter. The special committee asked members of management to inform
the NLCI board of directors of their interest in participating in a merger and
to report on any additional contacts with KU since May 3. Mr. A.J. Clegg
informed the NLCI board of directors that the management team had not reached
any agreement with the buying group and had not had further contacts with KU.
The special committee requested that Mr. A.J. Clegg send another letter to KU
inviting them to meet with NLCI. After the board meeting, the special committee
met with Dechert to discuss the May 19 letter. The special committee requested
that Mr. Havens follow up with Mr. Ott and Mr. Navab.
On May 21, Mr. A.J. Clegg informed Mr. Havens that management had
discussions with the buying group and expected to agree to terms upon which
management would participate in the proposed transaction. Mr. A.J. Clegg also
sent a letter to Mr. Read of KU inviting KU to meet with NLCI, and indicated
that NLCI did not believe that such a meeting would trigger the provisions of
the rights agreement. Mr. A.J. Clegg did not receive a response to that letter,
although Mr. Russell informed Mr. A.J. Clegg that Mr. Read indicated that he
was checking his schedule to get back to Mr. A.J. Clegg.
On May 21, NLCI provided the buying group with revised projections
reflecting lower projected earnings in all periods. The drop in projected
earnings was due to the fact that NLCI was experiencing softness in enrollment
all year but even more dramatically in the last quarter, which reduced
materially revenue and EBITDA projections. In addition, preschool enrollments
had declined from the end of the second quarter due to economic conditions in
the geographic areas in which NLCI has the highest concentration of
schools--North Carolina, Northern Virginia, Northern California and Seattle.
Further, although NLCI instituted a reduction in force, it was not able to cut
costs as quickly as revenue dropped due to regulated coverage ratios in its
preschools and fixed teacher contracts in its elementary schools.
On May 23, Legg Mason discussed with Mr. Havens, Mr. Monaco and Dechert the
impact on valuation of NLCI's revised projections and recent downward trends in
the trading price of stock of comparable public companies. Legg Mason informed
the special committee that financial buyers generally would determine a price
for NLCI as a multiple of EBITDA. On that basis, the reduction in NLCI's
projected EBITDA would lead to a corresponding reduction in the per share price
from $8.25 to $7.60.
Over the next couple of weeks, Mr. Havens and representatives of Legg Mason
had several discussions with Mr. Ott of Gryphon, and Mr. Navab and Mr. Luttway
of Cadigan. On May 28, Mr. Navab informed Legg Mason that the buying group
would not continue to evaluate an appropriate price for NLCI unless it knew the
special committee would agree to the merger agreement points raised in the
buying group's May 19 letter. Mr. Havens informed the buying group that the
special committee was willing to entertain entering into a merger transaction
on the financial terms previously agreed to (including formation of a merger
subsidiary and a financing condition) if the buying group presented the special
committee with satisfactory binding commitments for the debt financing and
satisfactory commitments for the equity financing from Gryphon and Cadigan. The
special committee was willing to discuss the other issues raised in the May 19
letter regarding the non-solicitation covenant, termination provisions,
representations and warranties, closing conditions and covenants pending
closing but requested a specific list of points that the buying group required
in order to proceed. On May 30, Mr. Havens sent a letter to the buying group
responding to its May 19 letter.
On June 4, as a result of these discussions, the buying group sent a letter
to Mr. Havens explaining its view on provisions of the merger agreement
relating principally to non-solicitation, termination and closing conditions.
Mr. Havens met with representatives of Legg Mason and Dechert on June 5 to
review the issues
27
presented in the June 4 letter. On June 6, Mr. Havens and Legg Mason spoke to
the buying group to discuss the issues from the June 4 letter as well as
purchase price. The buying group stated that an acceptable range of per share
purchase prices for NLCI was, as a result of the deterioration in NLCI's
EBITDA, $7.60 to $7.80 and that an appropriate termination fee under the merger
agreement would be $3 million plus expense reimbursement of up to $1.5 million.
The parties discussed the June 4 letter and Mr. Havens told the buying group
that the special committee would be willing to discuss most of the points
raised in the letter if the parties reached agreement on purchase price.
On June 10, the special committee met with Legg Mason and Dechert to discuss
the new offer terms. Legg Mason advised the special committee with respect to
recent stock performance of comparable companies and the size and nature of
termination fees in comparable transactions. Mr. Havens then informed the
special committee about the status of negotiations with other potential
bidders. Mr. Havens had called Mr. Becker from Sylvan but Mr. Becker never
returned the call. KU had not made further attempts to contact NLCI. Mr. Havens
had spoken with a representative of Leeds who was waiting for a meeting with
NLCI that was being rescheduled. In addition, Mr. Havens had been contacted by
Mr. Steve Hart of Hart Capital who had previously had discussions with NLCI and
Goldman Sachs about a potential "going-private" transaction. Mr. Hart informed
Mr. Havens that Goldman Sachs was no longer interested in pursuing the
transaction but that Hart Capital remained interested and would explore the
opportunity. The special committee scheduled a meeting for June 12 and
requested that Legg Mason engage in discussions with NLCI prior to the meeting
to better understand the basis for the revised projections.
At the June 12 meeting of the special committee, Legg Mason reported on
discussions with Mr. Zobel, NLCI's Chief Financial Officer, about the drop in
NLCI's projected earnings and the reasons for the earnings drop. The special
committee discussed the buying group's proposed price range and termination fee
and the special committee's view of the importance of a low termination fee.
Legg Mason was instructed to negotiate price and termination fees with the
buying group.
On June 12, Legg Mason had discussions with the buying group who agreed to a
price of $7.75 per share with a termination fee of $1.5 million and
reimbursement for reasonable and ordinary expenses related to the transaction
of up to $1.5 million. The parties agreed to have their legal advisors discuss
the issues raised in the June 4 letter. Representatives of Dechert and Ropes &
Gray discussed the issues on June 14 but did not come to any agreement. An all
hands meeting was scheduled for June 18 to attempt to resolve the issues.
Over the next several weeks, the buying group and the special committee, and
their representatives, had meetings and phone calls to negotiate the terms of
the merger agreement.
Beginning in mid-June and continuing through the end of July, management had
several discussions and due diligence meetings with Leeds and provided Leeds
with requested information.
On June 19, Allied told NLCI management that it had been informed by KU that
KU would schedule a meeting with the NLCI board of directors. KU never followed
up to schedule a meeting. Mr. Russell informed Mr. A.J. Clegg, Mr. Frock and
Mr. Zobel that Allied was no longer interested in participating in the
subordinated debt portion of the leveraged buyout transactions proposed by the
buying group at the levels previously contemplated.
On June 24, Messrs. A.J. Clegg, Frock, Zobel and Bailey met with Messrs.
Leeds, Andrees Nessen and Robert Bernstein of Leeds, to discuss a potential
transaction, and Mr. A.J. Clegg advised Mr. Leeds to contact Mr. Havens
regarding any future interest.
On June 27, the United States Supreme Court rendered a favorable opinion in
Zelman v. Simmons-Harris regarding school vouchers. On June 28, NLCI issued a
press release announcing NLCI's position regarding this decision. On the day
before the press release, NLCI stock closed at $5.65 per share, and on the day
that the press release was issued, NLCI stock closed at $5.79 per share.
28
On July 8, the buying group delivered to the special committee a non-binding
financing letter from BNP Paribas. The letter was subject to the approval of
BNP Paribas' credit committee and due diligence.
On July 13, the special committee received a letter from Leeds indicating
its interest in pursuing a transaction to acquire NLCI at a per share price of
$7.75. The letter was non-binding and the proposal was subject to completion of
due diligence. On July 15, the special committee met with Legg Mason and
Dechert by conference call to discuss the Leeds indication of interest. After
discussion and consultation with its advisors, the special committee determined
that Mr. Havens should request Leeds' best offer and ask Leeds what additional
diligence it would have to complete to confirm the offer. Mr. Havens had a
subsequent discussion with Leeds during which Leeds agreed to move forward with
diligence and to submit a request list to management of NLCI. In addition, the
special committee instructed Legg Mason to inform the buying group that the
special committee received another offer and that the buying group should be
prepared to submit their best and final offer, to deliver equity and debt
commitments and to resolve any open items on the agreements. Mr. Navab and Mr.
Ott told Legg Mason they would review the overall status of the potential
transaction and get back to the special committee. In a call on July 18, Mr.
Navab and Mr. Ott informed Legg Mason that $7.75 per share was their best and
final offer.
On July 17, Leeds submitted a due diligence request list to NLCI. Mr. A.J.
Clegg sent a memo to the special committee on July 18 expressing concern about
the increasing demands on the management of NLCI and the negative impact on
their capacity to operate NLCI as a result of the scope of diligence being
conducted by the buying group and the new request from Leeds. Mr. Havens spoke
with Mr. A.J. Clegg and asked that management do their best to cooperate with
all requests by providing all readily available information. Management
complied with Mr. Havens' request. At this time and in subsequent
conversations, Mr. Havens informed Leeds that Leeds needed to proceed quickly
because the special committee was considering alternative transactions and
might need to act on them.
Throughout the month of July, the buying group, the special committee and
their respective advisors worked together to finalize the terms of the merger
agreement and discussed proposed terms for voting agreements to be entered into
by the rollover stockholders.
On July 29, the buying group delivered a debt financing commitment letter
from BNP Paribas and draft equity commitments from Cadigan and Gryphon. NLCI
delivered an initial draft of the merger agreement disclosure schedules to the
buying group. Pursuant to the debt commitment letter, BNP Paribas agreed to
provide $50 million of senior secured debt financing and $20 million of
subordinated debt financing. The commitment was subject to specified
conditions, including absence of changes in NLCI, BNP Paribas' satisfaction
with results of diligence, receipt by BNP Paribas of syndication marketing
materials from Socrates by a specified date, and absence of adverse market
conditions (including adverse changes in the syndication market). The special
committee's markup of the debt commitment letter, among other things, requested
deletion of the diligence and syndication-related conditions in the letter. Mr.
Navab and Mr. Ott informed Mr. Havens that the debt commitment letter had
already been fully negotiated and that the buying group would not be able to
obtain the changes requested by the special committee. After discussions with
its legal and financial advisors, the special committee accepted the BNP
Paribas commitment in the form provided.
The special committee objected to the form of the draft equity commitments
to the extent they contained conditions in addition to Socrates' conditions
under the merger agreement, that they were not enforceable by NLCI, and that
they did not provide recourse by NLCI for a default by Socrates. Over the next
three days, the parties had numerous discussions about NLCI's ability to
recover for a breach by Socrates under the merger agreement. The buying group
objected to any guarantee of Socrates' obligations. The special committee met
by conference call on August 1 with Dechert to discuss this issue. Also on
August 1, the special committee informed Mr. A.J. Clegg about the buying
group's unwillingness to guarantee the obligations of Socrates. At the request
of the special committee, further conversations occurred among the buying
group, the special committee and Mr. A.J. Clegg, as a result of which the
buying group agreed that if Socrates were to willfully and materially breach
29
its obligations under the merger agreement and, as a result, the closing of the
transactions contemplated by the merger agreement did not occur, the buying
group would pay up to an aggregate amount of $1.5 million of the damages, if
any, that Socrates becomes obligated to pay to NLCI as a result of the breach.
The members of the special committee discussed this proposal and agreed to
accept it.
Prior to entering into discussions with the rollover stockholders, the
buying group presented the special committee with an amendment containing a
limited waiver to NLCI's rights agreement to permit it to finalize discussions
with management without raising a concern about triggering the rights. The
buying group also provided the special committee with a rights agreement
amendment in connection with the execution of the merger agreement and the
consummation of the merger and related transactions. On August 1, Dechert
provided comments to Ropes & Gray on the proposed form of amendments. The
comments were intended to narrow the scope of waiver requested and to make a
further change to amend the definition of "Acquiring Person" under the rights
agreement so that the dilutive effect of the rights was not triggered by the
announcement of a public bid. NLCI made the latter change to address the
provision in the rights agreement to which KU had objected. The buying group
initially objected to this amendment but ultimately agreed to go forward with
the buying group's acquisition proposal despite the amendment.
On August 2, Mr. Havens contacted representatives of Leeds, informing them
that they needed to deliver their best and final offer. Leeds informed Mr.
Havens that it was not prepared to submit an offer at that time.
Over the next few days, the merger agreement and the related documents were
substantially completed. The amendment to the rights agreement to permit
discussions among the buying group and management was entered into on August 4,
2002.
On August 5, 2002, the special committee met with its financial and legal
advisors to consider the merger, the merger agreement and the related
agreements. Mr. Havens reviewed the recent negotiations with the buying group
and the status of discussions with other potential bidders and Dechert
summarized for the special committee the principal terms of the merger
agreement and related agreements, including those in which the rollover
stockholders had a personal interest. Mr. A.J. Clegg was asked to give a report
to the special committee on the status of discussions regarding alternative
transactions with third parties and management's proposed arrangements with the
buying group. Legg Mason provided the special committee with an update to Legg
Mason's financial analysis of the proposed merger and rendered its verbal
opinion (subsequently confirmed in writing) to the special committee to the
effect that, based upon its analysis and subject to the qualifications,
assumptions and limitations set forth in its opinion, as of August 5, 2002, the
amount of consideration to be paid to the stockholders (other than the rollover
stockholders) in the merger was fair to them, from a financial point of view.
The special committee also discussed with its advisors the conditions to the
merger. Following discussion among members of the committee, and based in part
on the opinion of Legg Mason, the special committee unanimously (1) determined
that the merger and the merger agreement are fair from a financial point of
view to, and in the best interests of, the stockholders (other than the
rollover stockholders), (2) approved the merger and the merger agreement, and
(3) decided to recommend that NLCI's board of directors approve the merger and
merger agreement. The special committee's recommendation was contingent on the
amendment to the rights plan so that the dilutive effect of the rights was not
triggered by the announcement of a public bid.
Following the special committee meeting, a meeting of the full board of
directors was convened. All directors were present and were joined by
representatives of Dechert, Morgan Lewis and Legg Mason. The special committee
advised the NLCI board of directors of its recommendation. Dechert reviewed
with the directors the terms of the merger agreement and related agreements,
and the activities of the special committee over the preceding five months.
Management reported on the status of discussions regarding alternative
transactions with third parties and the terms of their proposed arrangements
with the buying group. Mr. Russell confirmed to the board that Allied would not
be participating in the proposed transaction. Legg Mason then reviewed with the
NLCI board of directors the verbal opinion (subsequently confirmed in writing)
it gave the
30
special committee to the effect that the amount of consideration to be paid to
the stockholders (other than the rollover stockholders) in the merger was fair
to them, from a financial point of view. Morgan Lewis then summarized the
fiduciary standard applicable to directors in approving transactions of this
nature.
After consideration of all the factors, including the facts and
circumstances, the special committee's recommendation and its own review of the
proposed merger agreement, the board of directors approved the merger agreement
and related transactions and the amendment to the rights agreement, by the
affirmative vote of the special committee members and Mr. Russell, with A.J.
Clegg, John Frock and Robert Zobel abstaining from the vote.
On August 5, 2002, the merger agreement was executed by both parties, the
voting agreements were executed by Socrates and the rollover stockholders and
the second amendment to the rights agreement was entered into.
In September 2002, Mr. A.J. Clegg discovered an error in his equity
commitment letter with Socrates, dated August 5, 2002, with respect to the
amount of shares which Mr. A.J. Clegg had committed to convert into equity
interests of the surviving corporation. Subsequently, Mr. A.J. Clegg discussed
his concerns with the buying group, and the parties agreed that Mr. A.J.
Clegg's commitment letter would be amended to reflect the appropriate number of
shares of NLCI common stock and preferred stock he would convert into equity
interests of the surviving corporation. In addition, Gryphon agreed to amend
its commitment letter to increase its commitment as a result of the amendment
of Mr. A.J. Clegg's commitment letter.
On October 2, 2002, NLCI and Socrates entered into an amendment to the
merger agreement. The amendment was approved by the NLCI board of directors and
special committee, and the Socrates board of directors. The amendment reflected
the amount of shares Mr. A.J. Clegg committed to convert into equity interests
of the surviving corporation in his amended commitment letter. In addition, the
amendment extended from December 5, 2002 to January 31, 2003 the date after
which either party may terminate the merger agreement, so long as the
terminating party's improper action or failure to act did not cause the failure
of the merger to occur on or before that date. The amendment also corrected the
disclosure schedule relating to NLCI options. Also on October 2, 2002, the
buying group obtained an extension of the financing commitment from BNP Paribas
until January 31, 2002.
Recommendation of the Board of Directors; Fairness of the Merger
The special committee of the board of directors has unanimously determined
that the terms of the merger agreement, including the merger consideration of
$7.75 per share of common stock and preferred stock (calculated on an
as-converted basis to the nearest one-hundredth of a share), and the proposed
merger are fair to, and in the best interests of, NLCI stockholders other than
the rollover stockholders. The special committee unanimously recommended to the
board of directors that the merger agreement and the merger be approved and
adopted. The special committee considered a number of factors, as more fully
described above under "--Background of the Merger" and as described below under
"--Reasons for the special committee's determination," in determining to make
its recommendation. The board of directors, based in part upon the
determination and unanimous recommendation of the special committee, determined
that the terms of the merger agreement and the proposed merger are fair to, and
in the best interests of, NLCI stockholders other than the rollover
stockholders and approved the merger agreement and the merger. The board of
directors, based in part upon the unanimous recommendation of the special
committee, recommends that NLCI stockholders vote FOR the approval and adoption
of the merger agreement and the merger.
Reasons for the special committee's determination. In recommending approval
and adoption of the merger agreement and the merger to the board of directors,
the special committee considered a number of factors that it believed supported
its recommendation, including:
. the fact that the merger consideration of $7.75 per share represented a
substantial premium over the market price of NLCI common stock before the
public announcement of the merger agreement, namely a 32.5% premium over
the market closing price of $5.85 per share on August 2, 2002;
31
. the fact that historical market prices for NLCI common stock from
late-2001 until the public announcement of the merger agreement in August
2002 were largely below the merger consideration of $7.75 per share;
. current market and economic conditions and negative performance trends
for education companies in the pre-elementary through 12/th/ grade market;
. Legg Mason's written valuation analysis presented at the August 5, 2002
meeting, including the opinion of Legg Mason as to the fairness, from a
financial point of view, of the $7.75 per share merger consideration to
the holders of voting stock other than the rollover stockholders, which
valuation analysis the special committee relied on in its totality,
rather than relying on one analysis or subgroup of analyses;
. that the terms of the merger agreement were reasonable insofar as they
would not likely deter a third party from offering a proposal that is
more favorable;
. that the merger agreement permits NLCI to terminate the merger agreement
to accept a superior acquisition proposal;
31.1
. that the merger agreement permits NLCI to provide information and
participate in negotiations with respect to unsolicited acquisition
proposals in the circumstances described in the merger agreement;
. that the termination fee of $1.5 million plus capped expenses represents
1.4% of NLCI's enterprise value, which is significantly less than
publicly-disclosed termination fees in comparable deals involving
education companies;
. the fact that since January, 2002, NLCI and the special committee had
received unsolicited inquiries from, and held discussions with, several
prospective financial and strategic buyers, and that all but one of these
prospective buyers ultimately declined to pursue a possible transaction
with NLCI;
. that one other prospective buyer had submitted an indication of interest
to purchase NLCI for $7.75 per share, the same per share price as the
merger consideration;
. the nature of the financing commitments received by Socrates with respect
to the merger, including the conditions to the obligations of the
institutions to fund the commitments; and
. the limitations that NLCI suffered and would likely continue to suffer as
a public company, including its low trading volume, limited institutional
sponsorship and lack of attention from research analysts for NLCI's
common stock, all of which adversely affects the trading market and
market value of NLCI common stock.
The special committee also determined that the merger is procedurally fair
because, among other things:
. the NLCI board of directors established a special committee to consider
and negotiate the merger agreement;
. the resolutions establishing the special committee also conferred upon
the special committee the power to reject an offer which the special
committee determined that it could not favorably recommend to the NLCI
board of directors;
. the special committee, which consists solely of directors who are not
officers or employees of NLCI and have no financial interest in the
proposed merger different from NLCI stockholders generally, was given
exclusive authority to, among other things, evaluate, negotiate and
recommend the terms of any proposed transaction;
. members of the special committee will have no continuing interest in NLCI
after completion of the merger;
. the special committee retained and received advice from its own
independent legal counsel and financial advisor in evaluating,
negotiating and recommending the terms of the merger agreement;
. the $7.75 per share merger consideration and other terms and conditions
of the merger agreement resulted from arm's-length bargaining between the
special committee and its representatives, and the buying group and its
representatives;
. under Delaware law, NLCI stockholders have the right to demand appraisal
of their shares; and
. the affirmative vote of the holders of a majority of the outstanding NLCI
shares entitled to vote on the matter is required under Delaware law to
approve and adopt the merger agreement.
The special committee also considered a variety of risks and other
potentially negative factors concerning the merger, including, among other
things:
. if the merger is not consummated under circumstances further discussed in
"The Merger Agreement -- Termination" and "The Merger
Agreement--Termination Fee and Expense Reimbursement," NLCI may be
required to pay to Socrates specified termination fees and expenses;
. certain terms in the merger agreement prohibit NLCI and its
representatives from soliciting third-party bids and accepting, approving
or recommending third-party bids except in specified circumstances and
32
upon payment to Socrates of specified termination fees and expenses, and
these terms could have the effect of discouraging a third party from
making a bid to acquire NLCI;
. as discussed in "--Interests of NLCI Directors and Officers in the
Merger," the rollover stockholders have potential conflicts of interest,
including equity interests in and continued employment with the surviving
corporation;
. the obligation of Socrates to complete the merger is conditioned upon
financing being made available to Socrates, as discussed in "--Merger
Financing," and Socrates may not secure financing for a variety of
reasons, including reasons beyond the control of NLCI or Socrates;
. in the event of a willful or material breach of the merger agreement, the
amount of damages NLCI can recover from Socrates and the buying group is
capped at $1.5 million; and
. following the merger, NLCI stockholders, other than the rollover
stockholders, will cease to participate in any future earnings growth of
NLCI or benefit from any increase in the value of NLCI.
The special committee did not ask Legg Mason to attempt to determine the
liquidation value of NLCI and gave little consideration to the book value of
NLCI (which was $6.29 per share at March 31, 2002) because it believed that
those measures of asset value were not relevant to the market value of NLCI's
business and would be less than the merger consideration of $7.75 per share.
While the special committee reviewed with Legg Mason its various financial
analyses and reviewed with the executive officers of NLCI its historical and
projected results, the special committee did not independently generate its own
separate financial analysis of the merger.
After considering these factors, the special committee concluded that the
positive factors relating to the merger outweighed the negative factors.
Because of the variety of factors considered, the special committee did not
find it practicable to quantify or otherwise assign relative weights to, and
did not make specific assessments of, the specific factors considered in
reaching its determination. In addition, individual members of the special
committee may have assigned different weights to various factors. The
determination of the special committee was made after consideration of all of
the factors together.
Reasons for the board of directors' determination. The NLCI board of
directors consists of seven directors, three of whom serve on the special
committee. Of the remaining directors, three are rollover stockholders and one,
Daniel Russell, is a non-employee member of the board who is also a principal
of Allied. In 1998, NLCI issued a $10 million senior subordinated note to
Allied, the principal and interest of which it is anticipated will be repaid in
connection with the closing of the merger. In 1995 and in 1998, NLCI issued
Common Stock Purchase Warrants in favor of Allied, which will become
exercisable at the time of the merger and canceled in exchange for
approximately $469,521 in cash in the merger. Mr. Russell, because of his
position with Allied, may have a financial interest in the proposed merger
different from, or in addition to, the NLCI stockholders generally. In
reporting to NLCI's board of directors regarding its determination and
recommendation, the special committee, with its independent legal and financial
advisors participating, advised the other members of the board of directors of
the course of negotiations with the buying group and its legal counsel, its
review of the merger agreement and the related financing commitments and the
factors it took into account in reaching its determination that the terms of
the merger agreement, including the offer price of $7.75 per share, and the
merger are fair to, and in the best interests of, NLCI stockholders other than
the rollover stockholders. In view of the wide variety of factors considered in
its evaluation of the proposed merger, the board of directors did not find it
practicable to quantify or otherwise assign relative weights to, and did not
make specific assessments of, the specific factors considered in reaching its
determination. Rather, the board based its position on the totality of the
information presented and considered. In connection with its consideration of
the determination by the special committee, as part of its determination with
respect to the merger, the board of directors adopted the conclusion, and the
analysis underlying such conclusion, of the special committee based upon its
view as to the reasonableness of that analysis.
At the August 5, 2002 meeting of the board of directors, the merger was
approved by Messrs. Havens, Chambers and Monaco (the three members of the
special committee) and by Mr. Russell. The remaining three
33
members of the board of directors, A.J. Clegg, John Frock and Robert Zobel,
abstained from the vote approving the merger transaction because they had
agreed to retain and/or purchase equity interests in the surviving corporation
and may have other interests in the merger that are different from, or in
addition to, the interests of NLCI stockholders generally.
Board of directors position as to fairness of the merger to disinterested
stockholders. The board of directors believes that the merger agreement and
the proposed merger are substantively and procedurally fair to, and in the best
interests of, NLCI stockholders other than the rollover stockholders for all of
the reasons set forth above. In addition, with respect to procedural fairness,
the board established the special committee, consisting of three directors of
NLCI, none of whom is an officer or employee of NLCI or has an interest in the
proposed merger different from that of NLCI stockholders generally.
In reaching these conclusions, the board of directors considered it
significant that:
. the merger consideration of $7.75 in cash per share of common stock and
preferred stock (calculated on an as-converted basis to the nearest
one-hundredth of a share) was the highest price the buying group
indicated it was then willing to pay, following arm's-length negotiations
between the special committee and representatives of the buying group;
. no member of the special committee has an interest in the proposed merger
different from that of NLCI stockholders generally;
. the special committee retained its own financial and independent legal
advisors who have extensive experience with transactions similar to the
merger and who assisted the special committee in its negotiations with
the buying group; and
. Legg Mason was retained to advise the special committee as to the
fairness, from a financial point of view, of the proposal received from
the buying group, and Legg Mason had reached the conclusion expressed in
its written opinion dated August 5, 2002, that, subject to the
considerations and limitations set forth in the opinion, the $7.75 per
share merger consideration was fair, from a financial point of view, to
the stockholders of NLCI other than the rollover stockholders.
The board of directors believes that the merger agreement and the proposed
merger are substantively and procedurally fair to NLCI stockholders other than
the rollover stockholders for all of the reasons and factors described above,
even though no disinterested representative, other than the special committee
and its advisors, was retained to act solely on behalf of the disinterested
stockholders.
THE BOARD OF DIRECTORS, BASED ON THE UNANIMOUS RECOMMENDATION OF THE SPECIAL
COMMITTEE, RECOMMENDS THAT NLCI STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND THE MERGER.
Position of the rollover stockholders as to the fairness of the
merger. Under a potential interpretation of the Exchange Act rules governing
"going private" transactions, one or more of the rollover stockholders may be
deemed affiliates of NLCI. The rollover stockholders are making the statements
included in this subsection solely for purposes of complying with the
requirements of Rule 13e-3 and related rules under the Exchange Act. Although
the rollover stockholders may have interests in the merger that are different
from, or in addition to, the interests of NLCI stockholders generally, each of
the rollover stockholders believes that the terms of the merger agreement and
the proposed merger are substantively and procedurally fair to the
disinterested NLCI stockholders based on the facts and information available to
him.
Although the rollover stockholders were not members of the special committee
and did not participate in the deliberations of the special committee, the
rollover stockholders have considered the same factors examined by the special
committee described above under "--Reasons for the special committee's
determination" and have adopted the conclusion, and the analysis underlying the
conclusion, of the special committee, based upon their
34
view as to the reasonableness of that analysis. In addition, A.J. Clegg, John
Frock and Robert Zobel, as members of the board of directors, participated in
the consideration of the merger transaction by the board of directors as
discussed above under "--Reasons for the board of directors' determination."
Based on these factors, as well as all of the reasons and factors described
above under "--Reasons for the special committee's determination," considered
together, the rollover stockholders believe that the terms of the merger
agreement and the proposed merger are substantively and procedurally fair to
NLCI stockholders other than the rollover stockholders. They have formed this
belief with respect to substantive and procedural fairness even though no
disinterested representative, other than the special committee and its
advisors, was retained to act solely on behalf of the disinterested
stockholders.
The rollover stockholders believe these analyses and factors provide a
reasonable basis to form their belief that the merger is fair to NLCI's
stockholders other than the rollover stockholders. This belief should not,
however, be construed as a recommendation by the directors and executive
officers who are also rollover stockholders to NLCI's public stockholders to
vote to approve and adopt the merger agreement and the merger.
Position of Socrates and the buying group as to fairness of the
merger. Socrates and each member of the buying group believes that the merger
is substantively and procedurally fair to NLCI stockholders other than the
rollover stockholders. However, neither Socrates nor the members of the buying
group has undertaken any formal evaluation of the fairness of the merger to
NLCI stockholders. With respect to the substantive fairness of the merger,
Socrates and each member of the buying group considered the factors examined by
the special committee and the board of directors described in detail above. In
particular, Socrates and each member of the buying group observed the following:
. The $7.75 per share merger consideration represents a 32.5% premium over
the market closing price of $5.85 per share on August 2, 2002, the last
trading day prior to the public announcement of the merger. This was
viewed as a substantial premium to the trading value and therefore
indicated that the consideration offered in the merger is fair.
. A special committee of independent directors was established to negotiate
at arm's-length and evaluate the merger.
. The special committee unanimously recommended to the board of directors
that the merger and the merger agreement be approved and adopted. Both
the special committee and the NLCI board of directors have determined
that the merger and the merger agreement are advisable and in the best
interests of NLCI stockholders other than the rollover stockholders and
recommend that stockholders approve and adopt the merger agreement and
the merger. In light of their fiduciary duties to the NLCI stockholders
and their careful consideration of the proposed transaction, the fact
that the special committee and the board of directors reached these
conclusions indicated that the merger and the consideration offered in
the merger are fair.
. Socrates and each member of the buying group believes that, under present
circumstances, NLCI can be operated more efficiently as a private company
than as a public company, in part because it can focus on long-term
initiatives rather than quarter-to-quarter results that the public
markets often demand.
. As of August 5, 2002, to the knowledge of Socrates and each member of the
buying group, no third party had proposed a superior transaction. The
fact that no other party was willing to propose a superior transaction
for NLCI indicated that the consideration offered in the merger is fair.
. Legg Mason opined on August 5, 2002, that, as of that date, the $7.75 per
share merger consideration to be received by the holders of voting stock
other than the rollover stockholders was fair, from a financial point of
view, to the stockholders. While the buying group did not specifically
adopt the analyses and conclusions of Legg Mason, each member of the
buying group observed that, in view of Legg Mason's reputation and
expertise, the fact that Legg Mason reached the conclusions it did helps
to support a conclusion that the consideration offered in the merger is
fair.
35
With respect to the procedural fairness of the merger, Socrates and each
member of the buying group considered the factors examined by the special
committee and the board of directors described in detail above. In particular,
Socrates and each member of the buying group observed the following:
. A special committee of independent directors was established. The special
committee retained its own financial and legal advisors and conducted a
vigorous and lengthy arm's length process of evaluation and negotiation
of the transaction. Arm's-length negotiations were considered to be an
important element of a fair bargaining process and the fact that there
were effective arm's length negotiations in this case indicated that the
process leading to the execution of the merger agreement was fair.
. NLCI and the special committee had received unsolicited inquiries from,
and held discussions with, several prospective financial and strategic
buyers, and all but one of these prospective buyers ultimately declined
to pursue a possible transaction with NLCI. One other prospective buyer
submitted an indication of interest to purchase NLCI for $7.75 per share,
the same per share price as the merger consideration. The fact that third
parties that were likely to have been willing and able to propose a
competing transaction were given ample opportunity to do so and the fact
that the one other prospective buyer submitted an indication of interest
to purchase NLCI for the same per share price as the merger consideration
indicated that the process leading to the execution of the merger
agreement was fair.
. Under Delaware law, NLCI stockholders have the right to demand appraisal
of their shares.
. The affirmative vote of the holders of a majority of the outstanding NLCI
shares entitled to vote on the matter is required under Delaware law to
approve and adopt the merger agreement and the merger.
Socrates and each member of the buying group believes that these analyses
and factors considered together provide a reasonable basis for them to believe
that the merger is substantively and procedurally fair to NLCI's stockholders
other than the rollover stockholders, even though no disinterested
representative, other than the special committee and its advisors, was retained
to act solely on behalf of the disinterested stockholders. Socrates and the
members of the buying group did not consider the net book value, liquidation
value or going concern value of NLCI in evaluating the fairness of the merger
to NLCI's disinterested stockholders. Socrates and the members of the buying
group do not believe that these factors have any significant impact on the
market value of NLCI's business. In view of the variety of factors considered
in reaching its decision, Socrates and the members of the buying group did not
find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered reaching its conclusions and
recommendations.
The rollover stockholders have granted Socrates an irrevocable proxy to vote
shares of voting stock owned by them in favor of the adoption and approval of
the merger agreement and the merger, and Socrates intends to vote the shares in
favor of the adoption and approval of the merger agreement and the merger.
Neither Socrates nor any member of the buying group makes any recommendation as
to how you should vote on the merger agreement and the merger.
Forward-Looking Information
NLCI does not, as a matter of course, make public projections as to future
sales, earnings or other results. However, in connection with the possible
merger, NLCI's management prepared and, in March 2002, provided to Legg Mason
and Socrates the projections set forth below under the caption "Projections
Prepared by NLCI--March 2002" for the five fiscal years ending June 30, 2007.
Later in June 2002, NLCI's management prepared another set of projections,
through the five fiscal years ending June 30, 2007, which were furnished to
Legg Mason and Socrates. These projections assumed that the merger had occurred
and that NLCI would be operated as a privately held entity. In addition, in
June 2002, NLCI's management prepared and provided to the NLCI board of
directors the projections set forth below under the caption "Projections
Prepared by NLCI Assuming Continued Operation as a Public Company--June 2002."
These projections assumed that the merger had not occurred and that NLCI would
continue to operate as a public company.
36
The projections below were not prepared with a view to public disclosure or
compliance with published guidelines of the Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
projections. Neither NLCI's independent auditors, nor any other independent
accountants, have compiled, examined or performed any procedures with respect
to these projections, nor have they expressed any opinion or other form of
assurance with respect to these projections or their achievability, and assume
no responsibility for, and disclaim any association with, them. The inclusion
of these projections in this proxy statement should not be regarded as a
representation by NLCI, the NLCI board of directors, the special committee,
Socrates or any of their advisors, agents or representatives that these
projections are or will prove to be correct. Projections of this type are based
on a number of significant uncertainties and contingencies, all of which are
difficult to predict and most of which are beyond NLCI's control. As a result,
there can be no assurance that any of these projections will be realized.
The projections below are or involve forward-looking statements and are
based upon a variety of assumptions, including NLCI's ability to achieve
strategic goals, objectives and targets over the applicable period. These
assumptions involve judgments with respect to future economic, competitive and
regulatory conditions, financial market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond NLCI's control. Many important factors, in addition to
those discussed elsewhere in this proxy statement, could cause NLCI's results
to differ materially from those expressed or implied by the forward-looking
statements. These factors include NLCI's competitive environment, its ability
to open new schools on a timely basis and the performance of those schools,
general economic and other market conditions in which it operates and matters
affecting business generally, all of which are difficult to predict and many of
which are beyond NLCI's control. Accordingly, there can be no assurance that
any of the projections are indicative of NLCI's future performance or that
actual results will not differ materially from those in the projections set
forth below. See "Cautionary Statement Concerning Forward-Looking Statements."
Projections Prepared by NLCI--March 2002
(Dollars in thousands, except school data)
FY Ended June 30
------------------------------------------------
2003 2004 2005 2006 2007
-------- -------- -------- -------- --------
Schools.................. 188 202 214 226 238
Revenue.................. $168,149 $185,389 $209,454 $236,640 $265,098
School Contribution(a)... 20,715 26,535 31,854 38,930 46,142
EBITDA(b)................ 15,153 21,149 24,542 30,452 36,605
Capital Expenditures..... 7,729 8,257 8,798 9,722 10,549
Change in Working Capital (1,140) (1,254) (1,379) (1,517) (1,668)
Cash Taxes............... 905 2,811 4,348 6,558 8,749
Depreciation............. 6,315 7,001 7,887 8,760 9,836
Interest Expense......... 5,119 4,811 4,405 3,837 3,351
Total Senior Debt........ 34,440 24,023 16,531 5,490 0
Total Debt............... 56,372 46,902 40,662 31,020 27,015
Total Net Debt(c)........ 55,051 45,581 39,341 29,699 16,371
- --------
(a) School Contribution is defined as income from school operations before
general and administrative expenses and interest expense.
(b) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization.
(c) Total Net Debt is defined as total debt less cash and cash equivalents.
In preparing the above financial projections, NLCI employed the following
key assumptions:
GENERAL. Each existing school was projected individually for each of the
five years. New schools were projected based on new school projections for each
type of school (i.e., pre-elementary schools, elementary schools, schools for
learning challenged and special purpose high schools).
37
PROJECTED SCHOOL OPENINGS. The projections assumed that 15 new schools
would be opened in fiscal year 2003, 14 new schools would be opened in fiscal
year 2004 and 13 new schools would be opened in each of fiscal years 2005, 2006
and 2007.
REVENUE. Revenue projections were based on projected comparable school
revenue growth, together with projected annual school revenues for new schools.
Tuition increases for comparable schools were projected to be 4% for fiscal
years 2003, 2004, 2005 and 5% for fiscal year 2006 and 2007. Total revenues
were projected to increase at a compound annual growth rate of 10.2%.
EXPENSES. Expenses for comparable schools were projected to increase year
over year by approximately the same percentage increase as revenue. General and
administrative expenses were projected to be 7.5% of revenue for each year in
the projection.
EBITDA. EBITDA was projected to increase at a compound annual growth rate
of 16.5%.
Projections Prepared by NLCI--June 2002
(Dollars in thousands, except school data)
FY Ended June 30
------------------------------------------------
2003 2004 2005 2006 2007
-------- -------- -------- -------- --------
Schools.................. 188 202 214 226 238
Revenue.................. $171,625 $187,352 $210,053 $235,934 $263,026
School Contribution...... 20,487 24,954 28,947 34,659 40,499
EBITDA................... 15,108 19,180 23,090 28,506 34,141
Capital Expenditures..... 7,779 8,322 8,834 9,697 10,503
Change in Working Capital (1,140) (1,254) (1,379) (1,517) (1,668)
Cash Taxes............... 518 1,523 2,959 4,658 6,351
Depreciation............. 7,238 8,196 9,839 11,511 13,311
Interest Expense......... 5,119 4,829 4,447 3,889 3,378
Total Senior Debt........ 34,147 24,494 17,143 6,177 0
Total Debt............... 56,079 47,373 41,275 31,707 27,015
Total Net Debt........... 54,758 46,052 39,954 30,386 17,106
In preparing the above financial projections, NLCI employed the following
key assumptions:
GENERAL. Each existing school was projected individually for each of the
five years. New schools were projected based on new school projections for each
type of school (i.e., pre-elementary schools, elementary schools, schools for
learning challenged and special purpose high schools).
PROJECTED SCHOOL OPENINGS. The projections assumed that 15 new schools
would be opened in fiscal year 2003, 14 new schools would be opened in fiscal
year 2004 and 13 new schools would be opened in each of fiscal years 2005, 2006
and 2007.
REVENUE. Revenue projections were based on projected comparable school
revenue growth, together with projected annual school revenues for new schools.
Tuition increases for comparable schools were projected to be 4% for fiscal
years 2003, 2004, 2005 and 5% for fiscal years 2006 and 2007. Total revenues
were projected to increase at a compound annual growth rate of 10.1%.
EXPENSES. Expenses for comparable schools were projected to increase year
over year by approximately the same percentage increase as revenue. General and
administrative expenses were projected to be 7.5% of revenue for each year in
the projection.
EBITDA. EBITDA was projected to increase at a compound annual growth rate
of 15.2%.
38
Projections Prepared by NLCI Assuming Continued Operation as a Public
Company--June 2002
(Dollars in thousands, except school data)
FY Ended June 30
------------------------------------------------
2003 2004 2005 2006 2007
-------- -------- -------- -------- --------
Schools.................. 188 188 188 188 188
Revenue.................. $171,469 $181,149 $192,669 $205,933 $218,919
School Contribution...... 20,569 26,525 29,280 32,941 35,909
EBITDA................... 14,690 20,307 23,414 27,284 30,732
Capital Expenditures..... 7,764 6,514 6,753 7,272 7,705
Change in Working Capital (2,768) (1,602) (1,762) (1,938) (2,132)
Cash Taxes............... 1,516 3,430 4,807 6,301 7,605
Depreciation............. 7,220 7,835 9,073 10,304 11,731
Interest Expense......... 3,563 3,126 2,654 1,676 490
Total Senior Debt........ 23,524 17,698 12,236 3,279 0
Total Debt............... 34,465 28,446 23,009 9,022 713
Total Net Debt........... 32,465 18,661 7,710 (6,277) (23,329)
In preparing the above financial projections, NLCI employed the following
key assumptions:
MERGER. The projections assumed that the merger had not occurred and that
NLCI would continue to operate as a public company.
GENERAL. Each existing school was projected individually for each of the
five years.
PROJECTED SCHOOL OPENINGS. The projections assumed that 13 new schools
would be opened in fiscal year 2003 and that no new schools would be opened in
fiscal years 2004 through 2007.
REVENUE. Revenue projections were based on projected comparable school
revenue growth, together with projected annual school revenues for new schools.
Tuition increases for comparable schools were projected to be 4% for fiscal
years 2003, 2004, 2005 and 5% for fiscal years 2006 and 2007. Total revenues
were projected to increase at a compound annual growth rate of 6.7%.
EXPENSES. Expenses for comparable schools were projected to increase year
over year by approximately the same percentage increase as revenue. General and
administrative expenses were projected to be 7.5% of revenue for each year in
the projection.
EBITDA. EBITDA was projected to increase at a compound annual growth rate
of 13.2%.
Opinion of Financial Advisor to the Special Committee
Introduction
In March 2002, NLCI's Chairman and Chief Executive Officer, A.J. Clegg, and
John Frock filed a Schedule 13D/A in which they disclosed that there had been,
and could be more, conversations regarding a potential management-led buyout of
NLCI. In April 2002, the special committee of the NLCI board of directors
retained Legg Mason to act as the special committee's independent financial
advisor to assist the special committee in evaluating and negotiating the terms
of the merger and, if requested by the special committee or the NLCI board of
directors, to provide Legg Mason's opinion as to the fairness, from a financial
point of view, of the merger consideration to be received in the merger by
NLCI's stockholders, other than the rollover stockholders. The special
committee and the NLCI board of directors selected Legg Mason to serve as
financial advisor with
39
respect to the merger based on Legg Mason's prior experiences with NLCI as well
Legg Mason's reputation as a nationally recognized investment banking firm that
has substantial experience in the valuation of education companies and
securities in connection with mergers and acquisitions. Legg Mason has
represented NLCI in the past for which Legg Mason has received customary fees.
At the August 5, 2002 meeting of the NLCI board of directors, Legg Mason
delivered its opinion to the special committee and the NLCI board of directors
that, based on and subject to the assumptions and conditions set forth therein,
as of August 5, 2002, the merger consideration of $7.75 per share to be paid to
NLCI's stockholders, other than the rollover stockholders, is fair to such
stockholders, from a financial point of view.
The full text of the opinion, which sets forth the assumptions made, matters
considered and the scope and limitations of the review undertaken by Legg Mason
in rendering its opinion, is attached as Appendix B to this proxy statement,
and Legg Mason has consented to its attachment to this proxy statement. You are
urged to read the entire Legg Mason opinion carefully. The opinion is directed
only to the fairness, from a financial point of view, to NLCI stockholders,
other than the rollover stockholders, of the merger consideration of $7.75 per
share to be paid to such stockholders. The opinion does not constitute a
recommendation of the merger over any other alternative transaction (including
the alternative to not effect the merger) that may be available to NLCI and
does not address the underlying business decision of the special committee and
the NLCI board of directors to proceed with or to effect the merger. Also, Legg
Mason is not making any recommendation to NLCI's stockholders as to whether or
not they should vote for or against the merger or seek their statutory
appraisal rights in respect of the merger. In requesting Legg Mason's opinion,
the special committee did not give any special instructions to Legg Mason or
impose any limitation upon the scope of investigation that Legg Mason deemed
necessary to enable it to deliver its opinion.
In arriving at its opinion, Legg Mason has, among other things:
. reviewed the material terms of the merger, including a draft dated July
12, 2002, of the merger agreement and the commitment letter of the lender;
. reviewed certain publicly available audited and unaudited financial
statements of NLCI and certain other publicly available information
concerning NLCI;
. reviewed certain internal information, primarily financial in nature,
concerning NLCI prepared by its management;
. reviewed forecasted financial statements of NLCI prepared and furnished
to Legg Mason by the senior management of NLCI;
. held discussions with certain executive officers and employees of NLCI
concerning the operations, financial condition and future prospects of
NLCI;
. reviewed certain publicly available financial and stock market data
relating to selected public companies that Legg Mason considered relevant
to its inquiry;
. reviewed certain publicly available data regarding transactions that Legg
Mason considered relevant to its inquiry; and
. conducted such other financial studies, analyses and investigations and
considered such other information as Legg Mason deemed necessary or
appropriate.
In connection with its evaluation and preparation of the opinion, Legg Mason
assumed and relied upon the accuracy and completeness of all financial and
other information supplied to Legg Mason by NLCI's management and all publicly
available information, and did not independently verify the information. Legg
Mason also relied upon NLCI's management as to the reasonableness and
achievability of the financial projections (and the assumptions and bases in
the projections) that the senior management of NLCI provided to Legg Mason, and
Legg Mason assumed that the projections were reasonably prepared on bases
reflecting the best
40
currently available estimates and judgments of NLCI's management as to NLCI's
future operating performance. In arriving at its opinion, Legg Mason relied
upon the financial data for 2001 through 2007 presented to the NLCI board of
directors at its meeting on August 5, 2002. The projected financial data for
2002 through 2007 were NLCI's latest available projections provided to Legg
Mason by NLCI's management as of the date the opinion was rendered. NLCI does
not customarily disclose internal management projections of the type provided
to Legg Mason in connection with the evaluation and preparation of the opinion.
These projections were not prepared with the expectation of public disclosure.
The projections were based on numerous variables and assumptions that are
inherently uncertain, including factors related to general economic and
competitive conditions. Accordingly, actual results could vary significantly
from those set forth in the projections. Legg Mason was not requested to make,
and did not make, an independent appraisal or evaluation of NLCI's assets,
properties, facilities or liabilities, and Legg Mason has not been furnished
with any appraisals or evaluations.
The Legg Mason opinion is necessarily based on economic and other conditions
and circumstances as they existed or were in effect on, and the information
made available to it as of July 31, 2002. Legg Mason expressed no opinion as to
what the value of voting stock actually would be when the merger is consummated
or as to the price or trading range at which NLCI's common stock was expected
to trade following the announcement of the merger.
In connection with rendering its opinion, Legg Mason assumed in all respects
material to its analyses, that the merger will be consummated according to the
terms and conditions described in the merger agreement without any waiver of
material terms or conditions by any party thereto, including NLCI and the
buying group, and that satisfying any other conditions for completing the
merger would not have an adverse effect on NLCI.
The following is a summary of the principal financial and valuation analyses
performed by Legg Mason in connection with its preparation of the opinion.
These analyses were presented to the special committee and the NLCI board of
directors at their meetings on August 5, 2002.
Summary of Legg Mason's Valuation Analysis
Legg Mason utilized a series of valuation methodologies customary among
investment professionals to determine an estimated value for NLCI before giving
effect to the merger. These valuation methodologies included (1) comparable
public companies analysis, (2) premium paid analysis, (3) comparable
transactions analysis, (4) discounted cash flow, or DCF analysis, and (5)
leveraged buyout, or LBO analysis. Legg Mason regarded each of these analyses
to be appropriate and reflective of generally accepted valuation methodologies
given NLCI's trading volume relative to total shares outstanding, the
accessibility of comparable publicly traded companies and available information
regarding similar transactions in the education industry. In each analysis,
Legg Mason calculated the implied equity value per share of NLCI common stock.
Legg Mason then compared the implied equity values that it calculated to the
$7.75 per share merger consideration.
Comparable Companies Analysis
Legg Mason compared NLCI's relevant historical and current financial and
operating results with the operating results of selected publicly traded
companies that are engaged in K-12 education, collectively referred to as the
comparable companies. The comparable companies were chosen by Legg Mason based
on general business, operating and financial characteristics representative of
companies in the industry in which NLCI operates. No company or business used
in the analysis of comparable companies is identical or substantially identical
to NLCI.
In performing its analysis, Legg Mason calculated multiples of, among other
things, each comparable company's TTM Revenues (trailing twelve months ended
March 31, 2002 revenues), TTM EBITDA (earnings before interest, taxes,
depreciation and amortization) and TTM EBIT (earnings before interest and
taxes), collectively referred to as the Enterprise Value Multiples.
41
In using the comparable companies analysis to value NLCI before giving
effect to the merger, Legg Mason analyzed financial information, which included:
. operating performance;
. growth rates;
. capitalization ratios; and
. ratios of enterprise value to TTM Revenues, TTM EBITDA and TTM EBIT.
For the purposes of this analysis, the comparable companies selected by Legg
Mason were three companies that operate in the K-12 industry as listed below:
. Bright Horizons Family Solutions, Inc.;
. Childtime Learning Centers, Inc., referred to as Childtime; and
. Edison Schools, Inc.
This analysis produced the following valuation data:
TTM TTM TTM
Enterprise Value Multiples Revenues EBITDA EBIT
-------------------------- -------- ------ -----
Mean............................. 0.4x 7.5x 16.1x
Childtime Learning Centers, Inc.. 0.1 3.8 NMF
Using the above-referenced information, Legg Mason derived a range of
estimated values by applying the above-referenced mean Enterprise Value
Multiples of the comparable companies to NLCI's appropriate financial
statistics. Legg Mason ultimately derived an equity value per share for each
multiple after taking into account NLCI's cash of $1.9 million as of March 31,
2002, NLCI's debt of $40.7 million as of March 31, 2002 and NLCI's diluted
number of shares outstanding of 7,710,779 as of March 31, 2002. In cases where
Legg Mason's analysis indicated that the multiple for a particular comparable
company was not meaningful (e.g., because of recently depressed financial and
operating performance), Legg Mason excluded that multiple and relied upon the
mean multiples of the other comparable companies. Legg Mason applied the
comparable companies' mean multiples to NLCI's TTM Revenues, TTM EBITDA and TTM
EBIT and calculated an equity value per share. The resulting implied equity
values per share were $3.04, $9.45 and $12.55, respectively.
In general, the data in the comparable companies analysis was compromised by
the lack of ample data points. For example, Bright Horizons Family Solutions,
Inc., a solid and consistent financial performer with broad analyst coverage,
was the only comparable company yielding an EBIT multiple. Additionally, Edison
Schools, Inc.'s stock price on August 5, 2002 had decreased approximately 95.5%
since August 6, 2001. Legg Mason therefore performed a second comparable
companies analysis by eliminating all of the comparable companies except
Childtime, which Legg Mason believed was most comparable to NLCI. Childtime,
like NLCI, has been characterized by lack of research analyst coverage, low
trading volume, market capitalization below $100 million and the announcement
of organizational and strategic changes.
Legg Mason applied Childtime's mean multiples to NLCI's TTM Revenues and TTM
EBITDA (Childtime has negative EBIT and thus does not yield a meaningful EBIT
multiple) and calculated an equity value per share. The resulting implied
equity values per share were $(3.29) and $2.43, respectively.
42
Premium Paid Analysis
Legg Mason conducted an analysis of premiums paid in merger and acquisition
transactions involving K-12 education companies as a method of valuing NLCI. A
premium paid analysis reviews and analyzes transactions and the resulting
implied share prices involving comparable public companies that have been
acquired. By comparing a target's share price prior to the announcement date of
the acquisition to the price at which it is acquired, a premium paid analysis
determines what percentage of a premium or discount the acquiror paid.
In performing this analysis, Legg Mason analyzed the five public target
acquisitions that were used in the comparable transactions analysis discussed
below to derive mean and median percentage premiums paid on a one day, one week
and one month prior to announcement date and compared these results to NLCI's
price on July 31, 2002.
For the purposes of this analysis, the transactions selected by Legg Mason
were the following acquisitions of K-12 companies:
. Kids Holdings, Inc. & Ameris Acquisition, Inc.'s acquisition of
Children's Comprehensive Services, Inc.;
. Correctional Services Corp.'s acquisition of Youth Services
International, Inc.;
. Corporate Family Solutions, Inc.'s acquisition of Bright Horizons, Inc.;
. Knowledge Universe, LLC's acquisition of Children's Discovery Centers of
America; and
. Kohlberg Kravis Roberts & Co.'s acquisition of KinderCare Learning
Centers, Inc.
This analysis produced the following valuation data:
One Day One Week One Month
% Premium Prior Prior Prior
--------- ------- -------- ---------
Mean... 18.6% 17.4% 22.0%
Median. 17.8% 16.7% 22.0%
Using the above-mentioned information, Legg Mason derived a range of
estimated equity share prices based upon applying the above-mentioned mean and
median premiums paid to NLCI's share price as of July 31, 2002. The resulting
implied equity values per share ranged from $7.00 to $7.32.
Comparable Transactions Analysis
Legg Mason conducted an analysis of merger and acquisition transactions
involving K-12 education companies, collectively referred to as the comparable
transactions, as a method of valuing NLCI. A comparable transactions analysis
reviews and analyzes transactions and the resulting implied multiples,
involving companies in the same or similar industries as NLCI. In performing
this analysis, Legg Mason considered that the merger and acquisition
transaction environment varies over time because of, among other things,
interest rate and equity market fluctuations and industry results and growth
expectations. Likewise, valuations and their implied multiples will vary over
time with market conditions. No acquired company or business used in the
comparable transactions analysis is identical or substantially identical to
NLCI.
Legg Mason analyzed the acquisition of publicly traded and privately held
K-12 companies and calculated the acquisition multiples paid for these
companies. The range of multiples of these transactions was then applied to
NLCI's financial results. These multiples included enterprise value to TTM
Revenues, enterprise value to TTM EBITDA and enterprise value to TTM EBIT. Legg
Mason calculated the mean and median multiples for each of these categories
based on these comparable transactions.
For the purposes of this analysis, the comparable transactions selected by
Legg Mason were the following acquisitions of K-12 companies:
. Kids Holdings, Inc. & Ameris Acquisition, Inc.'s acquisition of
Children's Comprehensive Services, Inc.;
43
. Correctional Services Corp.'s acquisition of Youth Services
International, Inc.;
. Corporate Family Solutions, Inc.'s acquisition of Bright Horizons, Inc.;
. Chase Manhattan Corp./Chase Capital Partners' acquisition of La Petite
Academy, Inc.;
. Knowledge Universe, LLC's acquisition of Children's Discovery Centers of
America; and
. Kohlberg Kravis Roberts & Co.'s acquisition of KinderCare Learning
Centers, Inc.
This analysis produced the following valuation data:
TTM TTM TTM
Enterprise Value Multiples Revenues EBITDA EBIT
-------------------------- -------- ------ -----
Mean........... 1.0x 6.7x 12.9x
Median.......... 0.9x 6.8x 11.3x
Using the above-mentioned information, Legg Mason derived a range of
estimated values based upon implied enterprise values and equity values derived
by applying the above-mentioned mean and median Enterprise Value Multiples of
the comparable transactions analysis to NLCI's appropriate financial
statistics. In cases where Legg Mason's analysis indicated that the multiple
for a particular comparable transaction was not meaningful, Legg Mason excluded
that multiple and relied upon the multiples of the other comparable
transactions.
Legg Mason then applied the comparable transactions multiples obtained to
NLCI's TTM Revenues, TTM EBITDA and TTM EBIT to determine an approximate
valuation after taking into account NLCI's cash of $1.9 million and NLCI's debt
of $40.7 million as of March 31, 2002. In deriving the equity value per share,
Legg Mason used the fully-diluted number of NLCI shares of common stock
outstanding of 7,710,779 as of March 31, 2002. The resulting implied equity
values per share ranged from $7.38 to $14.05. Legg Mason placed little emphasis
on the per share values implied by the revenue mean and median multiples
($14.05 and $13.58), primarily because merger transactions involving companies
with positive cash flow are generally valued on multiples of EBITDA and EBIT
rather than revenue.
Discounted Cash Flow Analysis
Legg Mason performed a discounted cash flow analysis premised upon the
assumptions summarized below. The discounted cash flow analysis was based upon
the financial and operating information relating to NLCI's business, operations
and prospects supplied by NLCI's management and covering fiscal years 2003
through 2007.
Using a discount rate of 10%, Legg Mason calculated the present value of the
projected stream of net unlevered cash flow (as defined below) for fiscal years
2003 through 2007 and the present cash value of NLCI's terminal value at June
30, 2007. Legg Mason applied the discount rate derived from NLCI's implied
weighted average cost of capital (using a pricing model known as the capital
asset pricing model and based on general and systemic risk factors reflected by
NLCI). "Net unlevered cash flow," as used in the analysis, means, for each
period, projected EBIT, less taxes at an estimated rate of 41.0%, plus
projected depreciation and amortization, less projected capital expenditures,
plus or minus projected changes in non-cash working capital. The terminal value
was computed by multiplying NLCI's projected EBITDA by terminal multiples of
4.0x to 6.0x. Legg Mason adjusted the calculated present value of the net
unlevered cash flow and terminal value by adding NLCI's cash and cash
equivalents and subtracting NLCI's debt, to calculate a range of equity values
for NLCI.
This analysis produced the following valuation data:
Terminal EBITDA Multiple
------------------------
Discount Rate 10% 4.0x 5.0x 6.0x
----------------- ------ ------ ------
Implied Equity Value per Share $10.78 $13.52 $16.25
44
Based on the discount rate and range of terminal multiples referred to
above, Legg Mason calculated a range of equity values of $83.1 million to
$125.3 million, after adding NLCI's cash of $1.9 million as of March 31, 2002
and subtracting its debt of $40.7 million as of March 31, 2002. Legg Mason then
derived the implied equity value per share using the fully-diluted number of
NLCI shares of common stock outstanding as of March 31, 2002. The implied
equity value per share is a range of $10.78 to $16.25. Legg Mason placed little
emphasis on this analysis primarily because the resulting implied per share
values were based on management prepared financial projections, which reflected
substantial increases in EBITDA from 2003 through 2007 in contrast to NLCI's
historical results for the last two years.
Leveraged Buyout Analysis
Legg Mason performed a leveraged buyout analysis as a means of establishing
NLCI's value assuming that NLCI was purchased by a financial buyer. A leveraged
buyout involves the acquisition or recapitalization of a company financed
primarily by incurring debt that is serviced by the post-leveraged buyout
operating cash flow of NLCI.
Legg Mason calculated three leveraged buyout analysis scenarios based on
different required investor returns on investments. Scenario 1 assumes that at
a 4.0x EBITDA multiple, there will be a 33.0% rate of return to equity
investors and a 22.0% return to subordinated debt holders. Scenario 2 assumes
that at a 5.0x EBITDA multiple, there will be a 33.0% rate of return to equity
investors and a 22.0% return to subordinated debt holders. Scenario 3 assumes
that at a 6.0x EBITDA multiple, there will be a 33.0% rate of return to equity
investors and a 22.0% return to subordinated debt holders.
These analyses produced the following valuation data:
Scenario Scenario Scenario
1 2 3
-------- -------- --------
Implied NLCI Enterprise Value $83.05 $91.20 $99.30
Implied NLCI Equity Value.... $44.25 $52.40 $60.50
Implied NLCI Share Price..... $ 5.74 $ 6.80 $ 7.85
Based on these analyses, Legg Mason calculated NLCI's equity value as
ranging between $44.3 million and $60.5 million. The implied equity range of
value per share calculated using the number of NLCI's diluted shares
outstanding as of March 31, 2002 is $5.74 to $7.85.
The above summary does not purport to be a complete description of the
analyses performed by Legg Mason or of its presentation to the special
committee. The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analysis or the
summary set forth above, without considering the analysis as a whole, could
create an incomplete view of the processes underlying the opinion of Legg
Mason. In arriving at its fairness determination, Legg Mason considered the
results of all these constituent analyses and did not attribute any particular
weight to any particular factor or analysis considered by it; rather, Legg
Mason made its determination as to fairness on the basis of its experience and
professional judgment after considering, among other things, that the merger
consideration of $7.75 per share to be received by holders of voting stock,
other than the rollover stockholders, fell within the range implied by the
results of such analyses. No company or transaction used in any of the above
analyses as a comparison is directly comparable to NLCI or the merger. Analyses
based upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than
suggested by such analyses.
In consideration of Legg Mason's services as the special committee's
financial advisor, NLCI paid Legg Mason a nonrefundable fee of $100,000 upon
execution of the engagement letter and $200,000 upon its delivery
45
of the Legg Mason Opinion. No portion of the initial fee would have been
refundable if Legg Mason was unable to provide an opinion that the
consideration to be paid in the merger was fair, from a financial point of
view, and no portion of either fee would have been refundable if NLCI
determined not to proceed with the merger. If the merger closes, NLCI has
agreed to pay Legg Mason an additional fee of $50,000.
NLCI has also agreed to reimburse Legg Mason for up to $50,000 of its
out-of-pocket expenses incurred in connection with the performance of its
services rendered under the engagement letter, and to indemnify Legg Mason and
certain affiliated parties against certain liabilities, including liabilities
under the federal securities laws, arising out of or in connection with the
services rendered by Legg Mason under its engagement letter.
Purpose and Structure of the Merger
The purpose of the merger for NLCI is to allow its stockholders (including
the rollover stockholders with respect to the shares owned by them for which
they will receive the merger consideration) to realize the value of their
investment in NLCI in cash at a price that represents a premium to the market
price of NLCI common stock before the public announcement of the merger. For
the rollover stockholders, the purpose of the merger is also to allow them to
share in any future earnings and growth of NLCI after its common stock ceases
to be publicly traded. The rollover stockholders have determined to participate
in the merger at this time because the merger provides an opportunity to retain
an equity interest in the surviving corporation. Moreover, management and the
NLCI board of directors had originally determined to pursue the merger because
they believed that, for a variety of reasons, NLCI common stock was undervalued
in the public market and NLCI's past efforts to enhance stockholder value had
been disappointing. At the same time, public company status imposed a number of
limitations on NLCI and its management in conducting NLCI's operations,
including restraints associated with meeting the expectations of market
analysts and the costs of being a public company such as accounting and
transfer agent fees and expenses associated with the reporting obligations
under the Exchange Act. Accordingly, one of the purposes of the merger for the
rollover stockholders is to afford greater operating flexibility, allowing
management to concentrate on long-term growth and to reduce its focus on the
quarter-to-quarter performance often emphasized by the public markets. The
merger is also intended to enable NLCI to use in the operations of NLCI those
funds that would otherwise be expended in complying with requirements
applicable to public companies. The immediate availability of liquidity for
stockholders, particularly in light of the relatively low volume of trading in
the common stock, is also a factor. The special committee and the board of
directors believe that these factors continue to be of consequence to NLCI at
this time. As a result, the special committee and the board of directors
believe, notwithstanding the reduction in the offer price to $7.75 per share,
that the merger continues to be in the best interests of the stockholders at
this time.
The purpose of the merger for Socrates and the buying group is to acquire
93.9% of the capital stock of the surviving corporation outstanding immediately
after the merger (excluding options and warrants). Despite NLCI's impressive
financial performance during the last four years, NLCI's stock price has
generally declined since late 2001 and NLCI's past efforts to enhance
stockholder value have been disappointing. NLCI also suffers from a low trading
volume, limited institutional sponsorship and lack of attention from research
analysts for NLCI's common stock. The buying group believes that these factors
have prevented stockholders from realizing appropriate value for their
interests in NLCI. As a private company, NLCI will have the flexibility to
focus on continuing improvements to its business without the constraints and
distractions caused by the public market's present disfavor of education
companies in the pre elementary to 12th grade market, and without the various
and substantial costs of remaining a public company, including the legal,
accounting and transfer agent fees and expenses and printing costs necessary to
satisfy the reporting obligations under the Exchange Act. Each member of the
buying group, in deciding to engage in the merger, considered these factors as
well as the projections for revenues and earnings prepared by NLCI's management
described under the caption "Forward-Looking Statements."
The transaction has been structured as a cash merger in order to provide the
public stockholders of NLCI with cash for all of their shares and to provide a
prompt and orderly transfer of ownership of NLCI with reduced transaction costs.
46
Effects of the Merger
Upon the effective time of the merger, current NLCI stockholders, other than
the rollover stockholders, will cease to have ownership interests in NLCI or
rights as NLCI stockholders. Therefore, the current stockholders of NLCI, other
than the rollover stockholders, will not participate in any future earnings or
growth of NLCI and will not benefit from any appreciation in value of NLCI.
Upon completion of the merger, the buying group and the rollover stockholders
are expected to own approximately 93.9% and 6.1%, respectively, of the capital
stock of the surviving corporation outstanding immediately after the merger
(excluding options and warrants). The rollover stockholders intend to retain
their equity investment in the surviving corporation. Although their equity
investment in NLCI involves substantial risk resulting from the limited
liquidity of the investment, the high debt-to-equity ratio and consequent
substantial fixed charges that will apply to NLCI following the merger, if NLCI
is able to increase earnings and cash flow sufficient to retire its debt,
Socrates, the rollover stockholders and any other holder of the surviving
corporation's equity interests will be the sole beneficiaries of the future
earnings and growth of NLCI, if any.
NLCI's common stock is currently registered under the Exchange Act and is
quoted on the Nasdaq National Market under the symbol "NLCI". As a result of
the merger, NLCI will be a privately held corporation, and there will be no
public market for its common stock. After the merger, the common stock will
cease to be quoted on the Nasdaq National Market, and price quotations with
respect to sales of shares of common stock in the public market will no longer
be available. In addition, registration of the common stock under the Exchange
Act will be terminated. This termination will make certain provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) and the requirement of furnishing a proxy or information statement in
connection with stockholders' meetings, no longer applicable to NLCI. After the
effective time of the merger, NLCI will also no longer be required to file
periodic reports with the Commission.
At the effective time of the merger, the directors of the surviving
corporation will be Jeff Ott, David Andrews, Will Lynn, Bruce Krysiak, Pericles
Navab, Jack Clegg and John Frock, and the officers of NLCI immediately prior to
the effective time of the merger will remain the officers of the surviving
corporation. At the effective time of the merger, the certificate of
incorporation of NLCI as in effect immediately prior to the effective time of
the merger will be amended to be identical to the certificate of incorporation
of Socrates (except that the name of Socrates will be changed to Nobel Learning
Communities, Inc.) and will become the certificate of incorporation of the
surviving corporation. The by-laws of Socrates in effect immediately prior to
the effective time of the merger will become the by-laws of the surviving
corporation.
It is expected that, following completion of the merger, the operations of
NLCI will be conducted substantially as they are currently being conducted.
Neither NLCI, Socrates nor any of the continuing directors and officers has any
present plans or proposals that relate to or would result in an extraordinary
corporate transaction following completion of the merger that would involve
NLCI's corporate structure, business or management, such as a merger,
reorganization, liquidation, relocation of any operations or sale or transfer
of a material amount of assets. However, NLCI, the buying group and the
continuing directors and officers will continue to evaluate NLCI's business and
operations after the merger and may develop new plans and proposals that NLCI,
Socrates, the buying group or the continuing directors and officers consider to
be in the best interests of NLCI and its stockholders.
Each outstanding option and warrant exercisable as of the effective time of
the merger will be canceled in exchange for an amount in cash, if any,
determined by multiplying (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant, and (2) the number of shares of common
stock subject to the option or warrant, net of any applicable withholding taxes.
Upon completion of the merger, Gryphon and Cadigan will receive transaction
fees of approximately $2.6 million and $1.7 million, respectively, for various
advisory services they provided to NLCI related to the merger. These services
include arranging and negotiating the financing of the merger, arranging and
structuring the transaction, including forming Socrates and planning the
capital structure of Socrates and the surviving
47
corporation, and related services. In addition, A.J. Clegg and John Frock will
receive transaction fees of approximately $108,557 and $9,982, respectively,
and Robert Zobel and D. Scott Clegg will each receive a transaction fee of
approximately $2,964.
The following table sets forth for each of the rollover stockholders, his
interest in the net book value and net income of NLCI, based upon the
approximate percentage of his beneficial ownership of NLCI common and preferred
stock as of June 30, 2002:
Ownership Net Book Net
Percent Value (1) Income (2)
--------- ---------- ----------
A.J. Clegg.... 5.91% $2,509,531 $167,393
John Frock.... 0.43% $ 181,929 $ 12,135
Robert Zobel.. 0.12% $ 49,177 $ 3,280
D. Scott Clegg 0.0% -- --
- --------
(1) Based on NLCI stockholders' equity as of June 30, 2002.
(2) Based on NLCI's net income for the fiscal year ended June 30, 2002.
The following table sets forth for each of the rollover stockholders and
Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan, his or its interest
in the net book value and net income of NLCI after the merger, based upon the
approximate percentage of his or its expected ownership of the capital stock of
the surviving corporation outstanding immediately after the merger (assuming,
for the purpose of this table, that different classes of common stock of the
surviving corporation represent equivalent interests and thus can be combined
to determine a stockholder's percentage ownership interests):
Ownership Net Book Net
Percent Value (1) Income (2)
--------- ----------- ----------
A.J. Clegg...................... 5.29% $ 2,298,822 $ 10,633
John Frock...................... 0.49% $ 212,934 $ 985
Robert Zobel.................... 0.14% $ 60,838 $ 281
D. Scott Clegg.................. 0.14% $ 60,838 $ 281
Socrates Acquisition Corporation 0% $ 0 $ 0
Gryphon Partners II, L.P........ 82.30% $35,764,288 $165,423
Gryphon Partners II-A, L.P...... 5.79% $ 2,516,102 $ 11,638
Cadigan Investment Partners..... 5.85% $ 2,542,176 $ 11,759
- --------
(1) Based on the surviving corporation's projected pro-forma net book value of
approximately $43,456,000 as of September 30, 2002, which gives effect to
the merger as if it occurred on September 30, 2002.
(2) Based on the surviving corporation's projected pro-forma net income of
approximately $201,000 for the twelve months ending September 30, 2002,
which gives effect to the merger as if it occurred on September 30, 2001.
Risks that the Merger will not be Completed
Completion of the merger is subject to various risks, including, but not
limited to, the following:
. that the merger agreement and the merger will not be approved and adopted
by the holders of at least a majority of the outstanding shares of voting
stock voting together as a single class;
. that NLCI will experience a circumstance, event, occurrence, change or
effect that, individually or in the aggregate has, or would reasonably be
expected to have, a material adverse effect on NLCI;
. that Socrates will not secure the financing necessary to complete the
merger on the terms and conditions set forth in the current financing
commitments already obtained or other financing arrangements with no
48
greater cost of capital and upon other terms no less favorable in the
aggregate to Socrates than those of the original financing commitments,
as further described in "--Merger Financing;"
. that the parties will not have performed in all material respects their
obligations contained in the merger agreement at or before the effective
time of the merger;
. that NLCI will not secure required governmental and third-party consents
to and authorizations for the merger;
. that the representations and warranties made by the parties in the merger
agreement will not be true and correct to the extent provided in the
merger agreement immediately before the effective time of the merger; and
. that there may be brought or pending any action or proceeding that has,
or would reasonably be expected to have, a material adverse effect on
NLCI.
As a result of various risks to the completion of the merger, there can be
no assurance that the merger will be completed even if the requisite
stockholder approval is obtained. It is expected that, if NLCI stockholders do
not approve and adopt the merger agreement and the merger or if the merger is
not completed for any other reason, the current management of NLCI, under the
direction of the board of directors, will continue to manage NLCI as an ongoing
business.
Interests of NLCI Directors and Executive Officers in the Merger
In considering the recommendations of the board of directors, NLCI
stockholders should be aware that some of NLCI's executive officers and members
of NLCI's board of directors have interests in the transaction that are
different from, or in addition to, the interests of NLCI stockholders
generally. The board of directors appointed the special committee, consisting
solely of directors who are not officers or employees of NLCI and who have no
financial interest in the proposed merger different from NLCI stockholders
generally, to evaluate, negotiate and recommend the merger agreement and to
evaluate whether the merger is in the best interests of NLCI stockholders other
than the rollover stockholders. The special committee was aware of these
differing interests and considered them, among other matters, in evaluating and
negotiating the merger agreement and the merger and in recommending to the
board of directors that the merger agreement and the merger be approved and
adopted.
Special Committee Fees. The board of directors determined that the chairman
of the special committee would receive $25,000 and each other member of the
special committee would receive $15,000 for his service on the special
committee, regardless of whether any proposed transaction was entered into or
completed.
Executive Officers of the Surviving Corporation. It is currently expected
that the members of the current management of NLCI will remain as members of
management of the surviving corporation. The executive officers of NLCI that
are expected to remain officers of NLCI following completion of the merger are
A.J. Clegg (chairman and chief executive officer), John Frock (vice
chairman--corporate development), Robert Zobel (vice chairman--corporate
affairs and chief financial officer) and D. Scott Clegg (vice
chairman--operations, president and chief operating officer).
Options. In connection with the merger, all outstanding options (including
those held by NLCI's directors and executive officers) will become immediately
exercisable and canceled in exchange for (1) the excess, if any, of $7.75 over
the per share exercise price of the option, multiplied by (2) the number of
shares of common stock subject to the option exercisable as of the effective
time of the merger.
Interests of Daniel Russell. Daniel Russell is a non-employee member of the
NLCI board of directors who is also a principal of Allied. In 1998, NLCI issued
a $10 million senior subordinated note to Allied, the principal and interest of
which it is anticipated will be repaid in connection with the closing of the
merger. In 1995 and the 1998, NLCI issued Common Stock Purchase Warrants in
favor of Allied, which will become
49
exercisable at the time of the merger and be canceled in exchange for
approximately $469,521 cash in the merger. Mr. Russell, because of his position
with Allied, may have a financial interest in the proposed merger different
from, or in addition to, the NLCI stockholders generally.
Interests of Rollover Stockholders. A.J. Clegg, John Frock and Robert
Zobel, each a director and executive officer of NLCI, and D. Scott Clegg, an
executive officer of NLCI, have agreed to retain and/or purchase an equity
interest in the surviving corporation as follows:
. A.J. Clegg has agreed to convert 350,182 shares of voting stock that he
owns, either solely or jointly with his wife (consisting of 108,991
shares of NLCI common stock, 477,500 shares of NLCI Series A preferred
stock and 403,226 shares of NLCI Series C preferred stock), which
represents approximately 75% of the value of the consideration he would
otherwise receive in the merger if he were not exchanging his interest in
NLCI, into shares of capital stock of the surviving corporation
representing approximately 5.29% of the capital stock of the surviving
corporation outstanding immediately after the merger (excluding options
and warrants), instead of receiving merger consideration for the shares.
Mr. A.J. Clegg will receive approximately $904,636 in merger
consideration for his remaining equity interest in NLCI.
. John Frock has agreed to convert 32,200 shares of voting stock owned by
him (consisting of 17,500 shares of NLCI common stock and 50,000 shares
of NLCI Series A preferred stock), which represents approximately 61.5%
of the value of the consideration he would otherwise receive in the
merger if he were not exchanging his interest in NLCI, into shares of
capital stock of the surviving corporation representing approximately
0.49% of the capital stock of the surviving corporation outstanding
immediately after the merger (excluding options and warrants), instead of
receiving merger consideration for the shares. Mr. Frock will receive
approximately $156,583 in merger consideration for his remaining equity
interest in NLCI.
. Robert Zobel has agreed to pay $74,100 to purchase shares of capital
stock of Socrates immediately prior to the merger that will convert into
shares of capital stock of the surviving corporation representing
approximately 0.14% of the capital stock of the surviving corporation
outstanding immediately after the merger (excluding options and
warrants). Mr. Zobel will receive approximately $190,956 in merger
consideration for his equity interest in NLCI.
. D. Scott Clegg has agreed to pay $74,100 to purchase shares of capital
stock of Socrates immediately prior to the merger that will convert into
shares of capital stock of the surviving corporation representing
approximately 0.14% of the capital stock of the surviving corporation
outstanding immediately after the merger (excluding options and
warrants). Mr. D. Scott Clegg will receive approximately $123,500 in
merger consideration for his equity interest in NLCI.
In addition, A.J. Clegg and John Frock will receive transaction fees of
approximately $108,557 and $9,982, respectively, and Robert Zobel and D. Scott
Clegg will each receive a transaction fee of approximately $2,964.
The buying group expects that the rollover stockholders will enter into a
shareholders agreement with the buying group that will provide for a customary
voting agreement regarding the election of directors, transfer restrictions,
tag-along rights, drag-along rights, preemptive rights, registration rights and
call rights on the capital stock held by the rollover stockholders upon
termination of their employment for cause.
The rollover stockholders, who, as of the record date, had the right to vote
approximately 6.9% of the outstanding shares of voting stock, have entered into
voting agreements with Socrates. Subject to the terms of the voting agreements,
the rollover stockholders have agreed to grant an irrevocable proxy to Socrates
to vote all of the capital stock of NLCI that they own for the adoption and
approval of the merger agreement, and in any manner as Socrates, in its sole
discretion, may see fit with respect to any extraordinary corporate transaction
(other than the merger). In addition, if Socrates elects not to exercise its
right to vote the capital stock pursuant to the irrevocable proxies, the
rollover stockholders will vote all of the capital stock of NLCI that they own
for the adoption and approval of the merger agreement or as otherwise directed
by Socrates if the issue on which the
50
rollover stockholder is requested to vote is an extraordinary corporate event.
The voting agreements were entered into by the rollover stockholders in
consideration of the execution and delivery by Socrates of the merger agreement
and Socrates did not pay additional consideration in connection with the
execution and delivery of the voting agreements.
The rollover stockholders have understandings with Socrates as to the
management of the surviving corporation after the consummation of the merger,
as reflected in signed term sheets between each of the rollover stockholders,
on the one hand, and the buying group, on the other hand. The term sheets
provide for employment arrangements, including salary and benefits. The buying
group expects that the rollover stockholders will receive salaries at the
following annual rates: A.J. Clegg--$330,000, John Frock--$180,000 (based on a
four-day work week), Robert Zobel--$250,000 and D. Scott Clegg--$225,000, each
with a bonus potential of up to 125% of their base salary. In addition, the
buying group expects that the rollover stockholders will receive options to
purchase equity securities of the surviving corporation, half of which will be
subject to four-year time-based vesting and half of which will be subject to
performance-based vesting (based on achieved earnings targets) with a six-year
cliff vesting period. The buying group anticipates that the rollover
stockholders will be granted options representing the following percentage of
the outstanding equity (on a fully-diluted basis) of the surviving corporation:
A.J. Clegg--4.75%, John Frock--1.49%, Robert Zobel--1.49% and D. Scott
Clegg--1.49%. A.J. Clegg will have discretion to allocate options to purchase
an additional 1.53% of the equity of the surviving corporation to other members
of NLCI management.
Item 11 of NLCI's Annual Report on Form 10-K for fiscal year ended June 30,
2002, filed with the Commission on September 24, 2002, discusses severance
arrangements NLCI has in place for its executive officers under the headings
"Executive Severance Plan," "Senior Executive Severance Plan," "Employment
Agreements with Executive Officers," and "Other Agreements with Executive
Officers." Each of these paragraphs is incorporated by this reference into this
proxy statement.
Indemnification of Directors and Officers; Directors' and Officers'
Insurance. The merger agreement provides that, from and after the effective
time of the merger, and to the fullest extent permitted by law, Socrates will
cause the surviving corporation to honor all of NLCI's obligations to
indemnify, defend and hold harmless (including advancing funds for expenses)
the current and former directors and officers of NLCI and its subsidiaries
against all losses, claims, damages or liabilities arising out of their acts or
omissions occurring prior to the effective time of the merger to the maximum
extent that the obligations exist on the date of the merger agreement, whether
under NLCI's certificate of incorporation, by-laws or contracts or the Delaware
General Corporation Law. The indemnification obligation will survive the merger
and will continue in full force and effect in accordance with the terms of
NLCI's certificate of incorporation, by-laws or contracts or the Delaware
General Corporation Law until the expiration of the applicable statute of
limitations. If the enforcement of the indemnification obligation is required,
the surviving corporation is required to reimburse the officer or director for
reasonable attorney's fees and expenses, including advance payment of fees and
expenses upon receipt of an undertaking to repay the payment except upon
adjudication that the director or officer was entitled to payment.
NLCI will maintain, through the effective time of the merger, NLCI's
existing directors' and officers' insurance in full force and effect without
reduction of coverage. For six years after the effective time of the merger,
Socrates will cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by NLCI (or substitute
policies with reputable and financially sound carriers of at least the same
coverage and amounts containing terms and conditions which are no less
advantageous to the insured) covering claims arising from or related to facts
or events which occurred at or before the effective time of the merger, but
Socrates is not obligated to make annual premium payments for the insurance to
the extent premiums exceed 200% of the current annual premiums paid. If
insurance coverage cannot be obtained at all, or can only be obtained with an
annual premium in excess of 200% of the current premium, Socrates must maintain
the most advantageous policies of directors' and officers' insurance obtainable
for an annual premium equal to 200% of the current annual premium.
The certificate of incorporation or by-laws of the surviving corporation
will contain the indemnification provisions contained in NLCI's current
by-laws, which provisions will not be amended, repealed or otherwise
51
modified for a period of six years from the effective time of the merger in any
manner that would affect adversely the rights of individuals who at or at any
time prior to the effective time of the merger were directors, officers,
employees or other agents of NLCI (and during this period the certificate of
incorporation of the surviving corporation will not be amended, repealed or
otherwise modified in any manner that would have the effect of so amending,
repealing or otherwise modifying any such provisions of the by-laws).
If the surviving corporation or any of its successors or assigns (1)
consolidates with or merges into any other person and is not the continuing or
surviving corporation or entity and the continuing or surviving entity does not
assume the indemnification obligations of the surviving corporation, or (2)
transfers all or substantially all of its properties and assets to any person,
then, proper provision must be made so that the successors and assigns of the
surviving corporation assume the indemnification obligations.
Merger Financing
The buying group anticipates that the total amount of funds necessary to
complete the merger and the related transactions is approximately $110 million
(assuming that no NLCI stockholders exercise and perfect their appraisal
rights), including approximately $59.7 million to pay NLCI's stockholders and
certain option holders, other than the rollover stockholders, approximately
$38.6 million of debt to be refinanced, $1.7 million of existing promissory
notes that will remain outstanding and between $9 million and $10 million to
pay fees and expenses related to the merger. These funds are currently expected
to come from the following sources:
. equity investments by Gryphon, Gryphon Partners II-A, L.P, Cadigan and
the rollover stockholders;
. borrowings by NLCI from BNP Paribas under a senior secured credit
facility; and
. the issuance by NLCI of senior subordinated notes and warrants to BNP
Paribas.
Equity Commitments.
Socrates has received a commitment letter from Gryphon to purchase equity
securities of Socrates for an aggregate purchase price of $45.2 million and a
commitment letter from Cadigan to purchase equity securities of Socrates for an
aggregate purchase price of $3 million, which equity securities will convert
into the capital stock of the surviving corporation as described in the merger
agreement. Gryphon and Cadigan may allocate a portion of their respective
investments to other investors. It is expected that Gryphon Partners II-A, L.P.
will purchase $3.0 million of the $45.2 million of equity securities to be
purchased by Gryphon. Gryphon's and Cadigan's obligations under the commitment
letters are subject to the satisfaction of all conditions precedent to
Socrates' obligations under the merger agreement (but excluding the equity
financing condition). The obligations of Gryphon and Cadigan under the
commitment letters will terminate upon the termination of Socrates' obligations
under the merger agreement except in the event of a willful and material breach
of the merger agreement by Socrates, in which case Gryphon and Cadigan may be
liable for up to $1.5 million in damages, if any, suffered by NLCI.
Socrates has received a commitment letter from A.J. Clegg to convert shares
of NLCI common stock, shares of Series A preferred stock and shares of Series C
preferred stock into the capital stock of the surviving corporation as
described in the merger agreement in lieu of receiving cash for such shares.
Socrates has also received a commitment letter from John Frock to convert
shares of NLCI common stock and shares of Series A preferred stock into the
capital stock of the surviving corporation as described in the merger agreement
in lieu of receiving cash for such shares. Socrates has also received
commitment letters from Robert Zobel and D. Scott Clegg to purchase equity
securities of Socrates for a purchase price of $74,100 each, which equity
securities will convert into the capital stock of the surviving corporation as
described in the merger agreement. The obligations of each of A.J. Clegg, John
Frock, Robert Zobel and D. Scott Clegg under their respective commitment
letters are subject to each of Gryphon and Cadigan fulfilling their obligations
under their respective commitment letters described above. The obligations of
each of A.J. Clegg, John Frock, Robert Zobel and D. Scott Clegg under their
respective commitment letters will terminate upon the termination of Socrates'
obligations under the merger agreement.
52
Senior Secured Credit Facility
Gryphon and Cadigan have received a commitment letter from BNP Paribas to
provide up to $50 million in senior secured financing to fund a portion of the
merger consideration and related expenses and to provide for the ongoing
working capital needs of the surviving corporation. It is expected that the
senior secured financing will be in the form of a $35 million term loan
facility and a $15 million revolving facility ($2 million of which will be
drawn upon at the effective time of the merger). The term and revolving
facilities are expected to mature on June 30, 2008. Amounts borrowed under the
revolving facilities are expected to bear interest initially at a rate of 4.25%
over the reserve adjusted interbank Eurodollar rate, or, in the alternative,
3.0% over the base rate as defined in a customary manner in the senior secured
credit agreement, in each case the margin is subject to reduction if NLCI's
leverage ratio decreases. Amounts borrowed under the term facilities are
expected to bear interest at a rate of 4.25% over the reserve adjusted
interbank Eurodollar rate, or, in the alternative, 3.0% over the base rate as
defined in a customary manner in the senior secured credit agreement.
The senior secured credit facility will be secured by a first priority lien
on substantially all of the existing and after-acquired tangible and intangible
property of NLCI and its subsidiaries and a pledge of all the capital stock of
NLCI and its subsidiaries, subject to customary exceptions to be agreed upon.
Additionally, NLCI's subsidiaries will guarantee the loans under the senior
secured credit facility. The senior secured credit facility will contain
customary financial and other covenants, including a minimum fixed charge
coverage test, a minimum interest coverage test, a minimum EBITDA test and a
maximum leverage test and restrictions on liens, investments, mergers,
consolidations and sales of assets, the payment of dividends and the incurrence
of other debt.
The commitment for the senior secured financing is subject to customary
conditions, including the preparation and execution of definitive loan
agreements and related documents and the absence of any material adverse change
in the business, assets, condition, operations, liabilities, properties,
projections or prospects of NLCI, Socrates and their respective subsidiaries
taken as a whole. The following is a summary of certain of the other material
conditions to be satisfied in order for BNP Paribas to fund the amounts
contemplated by the commitment letter:
. the absence of any material disruption or material adverse change in the
financial or capital markets generally or in the market for syndicated
credit facilities that could be expected to materially adversely affect
the syndication of the senior secured credit facility;
. the receipt of at least $45.1 million in equity contributions described
under "Equity Commitments" above and the receipt of cash proceeds of $20
million from the issuance of the senior subordinated notes and warrants
described under "Senior Subordinated Notes/Warrants" below, in each case
on terms and conditions satisfactory to BNP Paribas;
. the refinancing and/or repayment of NLCI's existing debt, except for
certain existing indebtedness to be mutually agreed upon;
. the satisfactory completion by BNP Paribas of its legal and environmental
due diligence;
. BNP Paribas not becoming aware of any material information not previously
disclosed to BNP Paribas, or constituting material new information or
material additional developments concerning conditions or events
previously disclosed to BNP Paribas;
. all governmental, stockholder and third party approvals necessary or
desirable in connection with the merger being obtained, and all
applicable waiting periods expiring without any action being taken or
threatened which would restrain, prevent or impose adverse conditions on
the merger or its financing, and no law or regulation then applicable
which could reasonably be expected to have such effect;
. BNP Paribas receiving and being satisfied with the audited financial
statements of NLCI and its subsidiaries for the fiscal year ended June
30, 2002, and pro-forma financial statements for the 12-months ending on
the closing date giving effect to the merger and the financing of the
merger, in each case consistent with financial statements and projected
results previously provided to BNP Paribas;
53
. NLCI achieving pro-forma earnings before interest, taxes, depreciation
and amortization of not less than $14.7 million for the 12-month period
ended September 30, 2002; and
. the absence of any pending or threatened action, suit, litigation or
investigation that could reasonably be expected to have a material
adverse effect on the merger or its financing, or any of the parties
thereto.
Senior Subordinated Notes/Warrants
The commitment letter received by Gryphon and Cadigan from BNP Paribas also
includes a commitment by BNP Paribas to provide $20 million in senior
subordinated financing in the form of senior subordinated notes to be issued by
the surviving corporation and warrants to purchase the capital stock of the
surviving corporation. It is anticipated that the senior subordinated notes
will have the following features:
. a maturity of seven years from the issue date;
. bear interest at a rate of 12%;
. be unsecured obligations and rank equal in right of payment with all
other senior subordinated indebtedness of NLCI;
. be subordinated to all existing and future senior debt obligations of
NLCI, including the senior secured credit facility; and
. be guaranteed by NLCI's subsidiaries.
The buying group expects that the senior subordinated notes will also
contain covenants that are customary for this type of financing. The commitment
for the senior subordinated financing is subject to the same conditions as the
senior secured financing.
Holders of the senior subordinated notes will receive warrants exercisable
to purchase an equity interest in NLCI as the surviving corporation that will
contain customary anti-dilution provisions. The warrants will expire on the
tenth anniversary of the closing of the financing and will be exercisable at a
nominal per share price.
Repayment of Indebtedness
The senior secured credit facility and the senior subordinated notes are
expected to be repaid through cash flow generated from operations in the
ordinary course of business and/or through refinancing. Although there can be
no assurance, the buying group believes that cash flow from operations should
be sufficient to service its interest and principal repayment obligations under
the indebtedness incurred to effect the merger.
54
Estimated Fees and Expenses of the Merger
Regardless of whether the merger is completed, in general, all fees and
expenses incurred in connection with the merger will be paid by the party
incurring those fees and expenses. Under certain circumstances described in
"The Merger Agreement--Termination Fee and Expense Reimbursement," NLCI will
reimburse Socrates for its reasonable out-of-pocket expenses incurred in
connection with the merger and proposed financing. Fees and expenses of the
merger are estimated at this time to be as follows:
Description Amount
- ----------- ----------
Filing Fees (Commission and HSR)..................................................... $56,355.06
Debt financing fees and expenses..................................................... *
NLCI's and the special committee's legal, accounting and financial advisors' fees and
expenses........................................................................... *
NLCI's printing, mailing, solicitation and other costs associated with the special
meeting............................................................................ *
Special committee fees and expenses.................................................. *
Total................................................................................ $ *
==========
- --------
* To be added by amendment of this proxy statement.
These expenses will not reduce the merger consideration to be received by
the NLCI stockholders.
Accounting Treatment of the Merger
The merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles, whereby the value of
the consideration paid in the merger will be allocated based upon the estimated
fair values of the assets acquired and liabilities assumed at the effective
time of the merger.
Federal Regulatory Matters
The HSR Act and the rules and regulations promulgated thereunder require
that NLCI and Gryphon, as the ultimate parent entity of Socrates, file
notification and report forms with respect to the merger and related
transactions with the Antitrust Division of the U.S. Department of Justice and
the U.S. Federal Trade Commission. The parties thereafter are required to
observe a waiting period before completing the merger. NLCI and Gryphon plan to
file with the Department of Justice and the Federal Trade Commission the forms
necessary to comply with the HSR Act. NLCI and Gryphon expect to request early
termination of the waiting period. However, the Department of Justice, the
Federal Trade Commission, state antitrust authorities or a private person or
entity could seek to enjoin the merger under the antitrust laws at any time
before its completion or to compel rescission or divestiture at any time
subsequent to the merger.
Material U.S. Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income tax
consequences of the merger that are generally applicable to stockholders of
NLCI. This discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, referred to as the Code, existing and proposed Treasury
Regulations promulgated under the Code, and current administrative rulings and
court decisions, all of which are subject to change. Any change, which may or
may not be retroactive, could alter the tax consequences to the NLCI
stockholders.
The following discussion does not address tax issues relevant to certain
classes of taxpayers, such as banks, insurance companies, tax-exempt investors,
S corporations, entities classified as partnerships for federal income tax
purposes or taxpayers who hold NLCI shares as dealers. It does not address
issues raised for taxpayers who hold NLCI shares as part of a "straddle," a
"hedge" or a "conversion transaction" as those terms are defined under the
Code. It does not address tax consequences to warrant holders, stockholders who
acquired their shares
55
through the exercise of employee or director stock options or other
compensation arrangements, stockholders whose stock is "qualified small
business stock" within the meaning of Section 1202 of the Code, or stockholders
subject to the alternative minimum tax. Nor does it deal with tax issues
relevant to stockholders who are neither citizens nor residents of the United
States. ALL SUCH STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
SITUATIONS.
Stockholders of NLCI who receive cash for their shares will recognize gain
or loss for federal income tax purposes equal to the difference between their
basis for their shares and the amount of cash received. If a stockholder holds
NLCI shares as a capital asset, the gain or loss will be capital gain or loss.
If the stockholder has held the shares for one year or less, the gain or loss
will be short-term gain or loss. If the stockholder has held the shares for
more than one year, the gain or loss will be long-term gain or loss.
The merger may result in state and/or local income (or other) tax
consequences to stockholders of NLCI. STOCKHOLDERS SHOULD CONSULT THEIR OWN
ADVISORS CONCERNING SUCH CONSEQUENCES.
It is intended that the exchange of NLCI common stock and preferred stock in
the merger for a continuing equity interest in NLCI by the continuing rollover
stockholders will constitute a reorganization within the meaning of Section
368(a)(1)(E) of the Code. Subject to the limitations and exceptions discussed
above with respect to certain classes of stockholders, and assuming that the
exchange qualifies as a reorganization within the meaning of Section
368(a)(1)(E) of the Code, the continuing rollover stockholders, who will
receive cash for a portion of their shares pursuant to the merger will
generally recognize gain (but not loss) in the amount of the lesser of (1) the
cash received in the merger, or (2) the total gain realized upon receipt of all
of the cash and capital stock of the surviving corporation received by them in
the merger. Any gain so recognized will be treated as capital gain from the
disposition of the NLCI shares held by them at the time of the merger, unless
the cash received by a particular continuing rollover stockholder has the
"effect of the distribution of a dividend," in which case the recognized gain
will be taxed at ordinary income rates as a dividend. The determination of the
"effect of a distribution of a dividend" is made with respect to the individual
circumstances of each stockholder, and in particular whether the merger
transaction has materially reduced the stockholder's interest in NLCI (taking
into account stock held by certain related persons and entities).
EACH CONTINUING ROLLOVER STOCKHOLDER IS STRONGLY URGED TO CONSULT HIS TAX
ADVISOR WITH RESPECT TO HIS PERSONAL TAX CONSEQUENCES OF THE MERGER TRANSACTION.
Litigation Challenging the Merger
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of NLCI. Named as
defendants in the complaint are NLCI, members of the NLCI board of directors
and one former member of the NLCI board of directors. The plaintiff alleges,
among other things, that the proposed merger is unfair and that the NLCI
directors breached their fiduciary duties by failing to fully disclose material
non-public information related to the value of NLCI and by engaging in
self-dealing. The complaint seeks an injunction, damages and other relief. NLCI
was served with the complaint on August 22, 2002. While no response is yet due,
NLCI believes that the complaint lacks merit.
Appraisal Rights
Under Delaware law, if (1) any holder of voting stock properly makes a
demand for appraisal in writing prior to the vote taken at the special meeting,
and (2) the stockholder's shares are not voted in favor of the merger agreement
or the merger, the stockholder will be entitled to exercise appraisal rights
under Section 262 of the Delaware General Corporation Law, referred to as the
"DGCL".
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Under Section 262 of the DGCL, any holder of voting stock who does not wish
to accept the per share merger consideration in cash for the holder's shares
may exercise appraisal rights under the DGCL and elect to have the fair value
of the holder's shares on the date of the merger (exclusive of any element of
value arising from the accomplishment or expectation of the merger) judicially
determined and paid to the holder in cash, together with a fair rate of
interest, if any, provided that the holder complies with the provisions of
Section 262 of the DGCL.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL, and is qualified in its entirety by
reference to the full text of Section 262, which is provided in its entirety as
Appendix C to this proxy statement. All references in Section 262 and in this
summary to a "stockholder" are to the record holder of the shares of voting
stock as to which appraisal rights are asserted. A PERSON HAVING A BENEFICIAL
INTEREST IN SHARES OF VOTING STOCK HELD OF RECORD IN THE NAME OF ANOTHER
PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD
HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO
PERFECT APPRAISAL RIGHTS.
Under Section 262, where a proposed merger is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the special
meeting, the corporation, not less than 20 days before the meeting, must notify
each of its stockholders entitled to appraisal rights that appraisal rights are
available and include in that notice a copy of Section 262. This proxy
statement constitutes that notice to the holders of voting stock, and the
applicable statutory provisions of the DGCL are attached to this proxy
statement as Appendix C. Any stockholder who wishes to exercise appraisal
rights or who wishes to preserve that right should review carefully the
following discussion and Appendix C to this proxy statement. Moreover, because
of the complexity of the procedures for exercising the right to seek appraisal
of the voting stock, NLCI believes that stockholders who consider exercising
such appraisal rights should seek the advice of counsel, which counsel or other
appraisal services will not be paid for by NLCI. FAILURE TO COMPLY WITH THE
PROCEDURES SPECIFIED IN SECTION 262 IN A TIMELY AND PROPER MANNER WILL RESULT
IN THE LOSS OF APPRAISAL RIGHTS.
Filing Written Objection. Any holder of voting stock wishing to exercise
the right to demand appraisal under Section 262 of the DGCL must satisfy each
of the following conditions:
. as more fully described below, the holder must deliver to NLCI a written
demand for appraisal of the holder's shares before the vote on the merger
agreement and the merger at the special meeting, which demand must
reasonably inform NLCI of the identity of the holder and that the holder
intends to demand the appraisal of the holder's shares;
. the holder must not vote the holder's shares of voting stock in favor of
the merger agreement and the merger at the special meeting nor consent
thereto in writing pursuant to Section 228 of the DGCL; and, as a result,
a stockholder who submits a proxy and wishes to exercise appraisal rights
must vote against the merger agreement and the merger or abstain from
voting on the merger agreement and the merger, because a proxy which does
not contain voting instructions will, unless revoked, be voted in favor
of the merger agreement and the merger; and
. the holder must continuously hold the shares from the date of making the
demand through the effective time of the merger; a stockholder who is the
record holder of shares of voting stock on the date the written demand
for appraisal is made, but who thereafter transfers those shares before
the effective time of the merger, will lose any right to appraisal in
respect of those shares.
The written demand for appraisal must be in addition to and separate from
any proxy or vote. Neither voting (in person or by proxy) against, abstaining
from voting or failing to vote on the proposed merger agreement and the merger
will constitute a written demand for appraisal within the meaning of Section
262.
Only a holder of record of shares of voting stock issued and outstanding
immediately before the effective time of the merger is entitled to assert
appraisal rights for the shares registered in that holder's name. A demand
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for appraisal should be executed by or on behalf of the stockholder of record,
fully and correctly, as the stockholder's name appears on the applicable stock
certificates, should specify the stockholder's name and mailing address, the
number of shares of voting stock owned and that the stockholder intends to
demand appraisal of the stockholder's shares. If the shares are owned of record
in a fiduciary capacity, such as by a trustee, guardian or custodian, execution
of the demand should be made in that capacity. If the shares are owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be executed by or on behalf of all owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on
behalf of a stockholder; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, the agent
is acting as agent for such owner or owners. A record holder such as a broker
who holds shares as nominee for several beneficial owners may exercise
appraisal rights with respect to the shares held for one or more other
beneficial owners while not exercising appraisal rights with respect to the
shares held for one or more beneficial owners; in such case, the written demand
should set forth the number of shares as to which appraisal is sought, and
where no number of shares is expressly mentioned, the demand will be presumed
to cover all shares held in the name of the record owner. STOCKHOLDERS WHO HOLD
THEIR SHARES IN BROKERAGE ACCOUNTS OR OTHER NOMINEE FORMS AND WHO WISH TO
EXERCISE APPRAISAL RIGHTS ARE URGED TO CONSULT WITH THEIR BROKERS TO DETERMINE
APPROPRIATE PROCEDURES FOR THE MAKING OF A DEMAND FOR APPRAISAL BY THE NOMINEE.
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time of the merger, be entitled to
vote the shares subject to that demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends
or other distributions payable to holders of record of shares as of a record
date before the effective time of the merger).
Any stockholder may withdraw its demand for appraisal and accept the per
share merger consideration by delivering to NLCI a written withdrawal of the
stockholder's demand for appraisal. However, any such attempt to withdraw made
more than 60 days after the effective time of the merger will require written
approval of the surviving corporation. No appraisal proceeding in the Delaware
Court of Chancery will be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just. If the surviving corporation does not approve a stockholder's
request to withdraw a demand for appraisal when that approval is required, or
if the Delaware Court of Chancery does not approve the dismissal of an
appraisal proceeding, the stockholder will be entitled to receive only the
appraised value determined in any such appraisal proceeding, which value could
be more than, the same as or less than $7.75 per share.
A stockholder who elects to exercise appraisal rights under Section 262
should mail or deliver a written demand to Nobel Learning Communities, Inc.,
1615 West Chester Pike, West Chester, Pennsylvania, 19382, Attn.: General
Counsel.
Notice by NLCI. Within 10 days after the effective time of the merger, the
surviving corporation must send notice of the effectiveness of the merger to
each former stockholder of NLCI who (1) has made a written demand for appraisal
in accordance with Section 262, and (2) has not voted to approve and adopt, nor
consented to, the merger agreement and the merger.
Under the merger agreement, NLCI has agreed to give Socrates prompt notice
of any demands for appraisal received by NLCI. Socrates has the right to
participate in all negotiations and proceedings with respect to demands for
appraisal under the DGCL. NLCI will not, except with the prior written consent
of Socrates, make any payment with respect to any demands for appraisal, or
offer to settle, or settle, any such demands.
Within 120 days after the effective time of the merger, any former
stockholder of NLCI who has complied with the provisions of Section 262 to that
point in time will be entitled to receive from the surviving corporation, upon
written request, a statement setting forth the aggregate number of shares not
voted in favor of the merger agreement and the merger and with respect to which
demands for appraisal have been received and the aggregate
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number of holders of such shares. The surviving corporation must mail that
statement to the stockholder within 10 days of receipt of the request or within
10 days after expiration of the period for delivery of demands for appraisals
under Section 262, whichever is later.
Filing a Petition for Appraisal. Within 120 days after the effective time
of the merger, either the surviving corporation or any stockholder who has
complied with the requirements of Section 262 may file a petition in the
Delaware Court of Chancery demanding a determination of the value of the shares
of voting stock held by all such stockholders. NLCI is under no obligation, and
has no present intent, to file a petition for appraisal, and stockholders
seeking to exercise appraisal rights should not assume that the surviving
corporation will file such a petition or that it will initiate any negotiations
with respect to the fair value of the shares. Accordingly, stockholders who
desire to have their shares appraised should initiate any petitions necessary
for the perfection of their appraisal rights within the time and the manner
prescribed in Section 262. Inasmuch as NLCI has no obligation to file such a
petition, the failure of a stockholder to do so within the time specified could
nullify the stockholder's previous written demand for appraisal.
A stockholder timely filing a petition for appraisal with the Delaware Court
of Chancery must deliver a copy to the surviving corporation, which will then
be obligated within 20 days to provide the Register in Chancery with a duly
verified list containing the names and addresses of all stockholders who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the surviving corporation. After notice
to those stockholders, the Delaware Court of Chancery may conduct a hearing on
the petition to determine which stockholders have become entitled to appraisal
rights. The Delaware Court of Chancery may require stockholders who have
demanded an appraisal of their shares and who hold stock represented by
certificates to submit their certificates to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings. If any
stockholder fails to comply with the requirement, the Delaware Court of
Chancery may dismiss the proceedings as to that stockholder.
Determination of Fair Value. After determining the stockholders entitled to
an appraisal, the Delaware Court of Chancery will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
STOCKHOLDERS CONSIDERING SEEKING APPRAISAL SHOULD BE AWARE THAT THE FAIR
VALUE OF THEIR SHARES AS DETERMINED UNDER SECTION 262 COULD BE MORE THAN, THE
SAME AS OR LESS THAN THE $7.75 PER SHARE THEY WOULD RECEIVE UNDER THE MERGER
AGREEMENT IF THEY DID NOT SEEK APPRAISAL OF THEIR SHARES. STOCKHOLDERS SHOULD
ALSO BE AWARE THAT INVESTMENT BANKING OPINIONS ARE NOT OPINIONS AS TO FAIR
VALUE UNDER SECTION 262.
In determining fair value and, if applicable, a fair rate of interest, the
Delaware Court of Chancery is to take into account all relevant factors. In
Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that, in making this determination of fair value,
the court must consider "market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts which were known or
which could be ascertained as of the date of the merger and which throw any
light on future prospects of the merged corporation." Furthermore, the court
may consider "elements of future value, including the nature of the enterprise,
which are known or susceptible of proof as of the date of the merger and not
the product of speculation."
The costs of the action may be determined by the Delaware Court of Chancery
and taxed upon the parties as the Delaware Court of Chancery deems equitable.
Upon application of a dissenting stockholder, the Delaware
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Court of Chancery may also order that all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all of the shares entitled to
appraisal.
ANY STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS IS URGED TO CONSULT
LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE APPRAISAL RIGHTS. FAILURE TO COMPLY
STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN SECTION 262 OF THE DGCL MAY
RESULT IN THE LOSS OF A STOCKHOLDER'S STATUTORY APPRAISAL RIGHTS.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement and is qualified in its entirety by the merger agreement. The full
text of the merger agreement is included in this proxy statement as Appendix A
and is incorporated herein by reference. Stockholders are urged to read the
entire merger agreement.
The Merger
The merger agreement provides that, at the effective time of the merger,
Socrates, will merge with and into NLCI. Upon completion of the merger,
Socrates will cease to exist and NLCI will continue as the surviving
corporation.
Effective Time of the Merger
The merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware or at such later time as
is specified in the certificate of merger, which time is referred to as the
effective time. NLCI and Socrates have agreed to file the certificate of merger
as soon as practicable, but in any event within three days after the
satisfaction or waiver of the conditions to closing of the merger set forth in
the merger agreement.
Certificate of Incorporation, By-laws and Directors and Officers of NLCI as the
Surviving Corporation
When the merger is completed:
. the certificate of incorporation of NLCI as in effect immediately prior
to the effective time of the merger will be amended to be identical to
the certificate of incorporation of Socrates (except that the name of
Socrates will be changed to Nobel Learning Communities, Inc.) and will
become the certificate of incorporation of the surviving corporation;
. the by-laws of Socrates in effect immediately prior to the effective time
of the merger will become the by-laws of the surviving corporation;
. the directors of the surviving corporation will be Jeff Ott, David
Andrews, Will Lynn, Bruce Krysiak, Pericles Navab, A.J. Clegg and John
Frock; and
. the officers of NLCI immediately prior to the effective time of the
merger will remain the officers of the surviving corporation.
Conversion of Common Stock and Preferred Stock
At the effective time of the merger, each share of NLCI common stock
outstanding immediately before the effective time of the merger will be
converted automatically into the right to receive $7.75 in cash, without
interest, and each share of NLCI preferred stock outstanding immediately before
the effective time of the merger will be converted automatically into the right
to receive $7.75 in cash, without interest, for each whole share of common
stock into which the share of preferred stock is then convertible under NLCI's
certificate of incorporation plus the amount determined by multiplying $7.75 by
the fraction (rounded to the nearest one-hundredth of a share) representing any
fractional share of common stock into which any share of preferred stock is
then convertible under NLCI's certificate of incorporation, in each case
subject to adjustment for any stock split, stock dividend or combination of
stock that may occur from the date of the merger agreement until the effective
time of the merger, and referred to as the merger consideration, except for:
. 382,382 shares of voting stock held by the continuing rollover
stockholders that will be converted into equity interests in the
surviving corporation;
. treasury shares of NLCI, all of which will be canceled without any
payment; and
. shares of voting stock held by stockholders who properly exercise and
perfect appraisal rights that will be subject to appraisal in accordance
with Delaware law.
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At the effective time of the merger, each share of capital stock of Socrates
outstanding immediately before the effective time of the merger will be
converted into and exchanged for one fully paid and non-assessable share of the
same class and series of capital stock of the surviving corporation.
Treatment of Options and Warrants
At the effective time of the merger, each outstanding option granted under
the NLCI option plans and other options listed in the merger agreement will be
canceled in exchange for an amount in cash, if any, determined by multiplying
(1) the excess, if any, of $7.75 over the per share exercise price of the
option, and (2) the number of shares of common stock subject to the option
exercisable as of the effective time of the merger, net of any applicable
withholding taxes. Prior to the effective time of the merger, NLCI and
Socrates, as the case may be, will use all commercially reasonable efforts to
take all actions necessary to provide that the cancellation and cash-out of the
options will qualify for exemption under Rule 16b-3(d) or (e), as applicable,
under the Exchange Act.
At the effective time of the merger, each outstanding warrant will be
canceled in exchange for an amount in cash, if any, determined by multiplying
(1) the excess, if any, of $7.75 over the per share exercise price of the
warrant, and (2) the number of shares of common stock subject to the warrant
exercisable as of the effective time of the merger, net of any applicable
withholding taxes.
NLCI will use all commercially reasonable efforts to obtain all necessary
consents, waivers or releases from holders of the options and warrants relating
to the exchange of the options and warrants, except that NLCI will not be
required to pay any additional consideration to the holders to obtain any
consents, waivers or releases.
Payment for Shares, Options and Warrants
Prior to the effective time of the merger, Socrates will select a bank or
trust company in the United States, reasonably acceptable to NLCI, to act as
paying agent for the payment of the consideration upon surrender of
certificates representing the common stock and preferred stock and, at the
option of the surviving corporation, upon surrender of the options and
warrants. Socrates will take all steps necessary to provide to the paying agent
at the effective time of the merger cash necessary to pay for the shares of
common stock and preferred stock, and, if the surviving corporation elects to
use the paying agent for such payments, for the options and warrants converted
into the right to receive cash. If for any reason (including losses) there are
inadequate funds to pay the requisite consideration for shares of common stock
and preferred stock surrendered, and, if the surviving corporation elects to
use the paying agent for such payments, for the options and warrants, the
surviving corporation must promptly, but in any event within five business
days, deposit with the paying agent additional cash sufficient to pay the
requisite consideration, and the surviving corporation will in any event be
liable for payment of the consideration.
Promptly after the effective time of the merger, the surviving corporation
will cause to be mailed to each record holder of NLCI common stock or preferred
stock (other than the continuing rollover stockholders) immediately prior to
the effective time of the merger whose shares were converted into the right to
receive the merger consideration a letter of transmittal and instructions to
effect the surrender of their share certificate(s) in exchange for payment of
the merger consideration. The holder will be entitled to receive the merger
consideration only upon surrender to the paying agent of a share certificate,
together with the letter of transmittal and other required documentation, duly
completed in accordance with the instructions. If payment of the merger
consideration is to be made to a person whose name is other than that of the
person in whose name the share certificate is registered, it will be a
condition of payment that (1) the share certificate so surrendered be properly
endorsed or otherwise in proper form for transfer, and (2) the person
requesting the payment pay any transfer or other taxes that may be required or
establish to the satisfaction of Socrates that the tax has been paid or is not
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applicable. Until properly surrendered, each share certificate will be deemed
to represent only the right to receive the merger consideration, without
interest. If any share certificate is lost, mutilated or destroyed, the holder
may deliver an affidavit in lieu of the certificate, and if required by the
paying agent, an indemnity bond in form and substance and with surety
reasonably satisfactory to the surviving corporation. No interest will be paid
or accrued on the cash payable upon the surrender of the share certificate.
Promptly after the effective time of the merger, the surviving corporation
will mail to each holder of options granted under the option plans and the
warrants that were converted into the right to receive cash consideration,
materials and instructions necessary to surrender the underlying option
agreement or warrant. A holder will be entitled to receive the cash
consideration only upon surrender to the surviving corporation of the
underlying option agreement or warrant, together with any other required
documentation. Until properly surrendered, each option agreement and warrant
will be deemed to represent only the right to receive the amount of cash,
without interest, into which the option or warrant was converted. If any option
agreement or warrant is lost, mutilated or destroyed, the holder may deliver an
affidavit and indemnity bond in form and substance and with surety reasonably
satisfactory to the surviving corporation. No interest will be paid or accrue
on the cash payable upon surrender of any option agreement or warrant.
Nine months following the effective time of the merger, the surviving
corporation will be entitled to require the paying agent to deliver to it any
funds, including any interest received on the funds, which have been deposited
with the paying agent and which have not been disbursed to holders of share
certificates. Thereafter, holders of certificates representing shares, options
or warrants outstanding before the effective time of the merger will be
entitled to look only to the surviving corporation for payment of any
consideration to which they may be entitled, without interest or dividends.
None of Socrates, NLCI, the surviving corporation or the paying agent nor any
of their respective officers, directors, agents or counsel will be liable to
any person in respect of any cash from the payment fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any certificate, option agreement or warrant has not been surrendered prior
to five years after the effective time of the merger (or immediately prior to
such earlier date on which the consideration payable would otherwise escheat to
or become the property of any governmental authority), any such shares, cash,
dividends or distributions in respect of such share certificate, option
agreement or warrant will, to the extent permitted by applicable law, become
the property of the surviving corporation, free and clear of all claims or
interest of any person previously entitled thereto.
Transfer of Shares, Options and Warrants
After the effective time of the merger there will be no further registration
on the stock transfer books of the surviving corporation (1) of transfers of
shares of common stock or preferred stock, or (2) of the exercise of stock
options or warrants, in any case that were outstanding immediately prior to the
effective time of the merger.
If, after the effective time of the merger, any certificates formerly
representing shares of common stock or preferred stock, any option agreements
formerly representing stock options granted under the option plans or any
warrants are presented to the surviving corporation or the paying agent for any
reason, they will be canceled and exchanged. All consideration paid upon
surrender for exchange of those shares, options and warrants in accordance with
the terms of the merger agreement will be deemed to have been paid in full
satisfaction of all rights pertaining to the shares, options or warrants.
Representations and Warranties
The merger agreement contains various representations and warranties made by
NLCI to Socrates, subject to identified exceptions, including representations
and warranties relating to:
. the due organization, valid existence and good standing of NLCI and its
subsidiaries;
. the validity of, and NLCI's compliance with, its certificate of
incorporation and by-laws;
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. the capitalization of NLCI and its subsidiaries;
. the authorization, execution, delivery and enforceability of the merger
agreement;
. the requisite corporate power and corporate authority of NLCI to execute
and deliver the merger agreement;
. the fairness of the merger to the NLCI stockholders;
. the absence of any conflicts between the merger agreement and NLCI's
certificate of incorporation, by-laws and material agreements or any
judgments and laws applicable to NLCI or its subsidiaries;
. required consents or approvals to the merger;
. the adequacy and valid issuance of, and compliance with, NLCI's and its
subsidiaries', licenses and permits;
. the completeness and accuracy in all material respects of filings made by
NLCI with the Commission since June 30, 2000 and that all filings
required to be made since that time were made;
. the preparation and fair presentation in accordance with generally
accepted accounting principles of consolidated financial statements of
NLCI contained in NLCI's filings with the Commission since June 30, 2000;
. the absence of certain changes in NLCI's business, capitalization or
accounting practices since June 30, 2001;
. the absence of any litigation, suit, claim, action, proceeding,
investigation, order, injunction, judgment or decree against NLCI or its
subsidiaries;
. NLCI's employee benefit plans and the Employee Retirement Income Security
Act of 1974;
. a listing of, and the validity, binding nature and absence of defaults
with respect to, material contracts of NLCI and its subsidiaries;
. environmental matters;
. NLCI's and its subsidiaries' title to all owned properties and NLCI's and
its subsidiaries' leasehold interest in all leased properties;
. the right to use, absence of infringement of, and maintenance of
confidentiality of, the intellectual property of NLCI and its
subsidiaries;
. tax matters;
. the listing and effectiveness of insurance policies;
. the inapplicability of state takeover statutes;
. the NLCI rights agreement and other matters relating to "stockholder
rights" plans and other anti-takeover plans and devices;
. the compliance by NLCI and its subsidiaries with applicable laws;
. the maintenance of, and compliance with, school licenses by NLCI and its
subsidiaries;
. the receipt of a fairness opinion from Legg Mason;
. the absence of certain brokerage fees and commissions;
. estimated fees and expenses incurred in connection with the merger
agreement and the transactions contemplated thereby;
. the absence of labor disputes and other labor matters; and
. the absence of affiliate transactions.
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Some of the representations and warranties listed above will not be
considered breached unless the breach of the representation or warranty has a
material adverse effect on NLCI or would be reasonably likely to prevent or
delay the consummation of the merger. For purposes of the merger agreement,
material adverse effect refers to any circumstances, event, occurrence, change
or effect that materially and adversely affects the business, operations,
condition (financial or otherwise), assets or results of operations of NLCI or
its subsidiaries.
The merger agreement also contains various representations and warranties by
Socrates to NLCI, subject to identified exceptions, including representations
and warranties relating to:
. the due organization, valid existence, good standing and requisite
corporate power and authority of Socrates;
. the purpose for which Socrates was formed;
. ownership of NLCI common stock by Socrates;
. the capitalization of Socrates;
. the authorization, execution, delivery and enforceability of the merger
agreement;
. the absence of any conflicts between the merger agreement and Socrates'
certificate of incorporation, by-laws and agreements, judgments and laws
applicable to Socrates;
. required consents or approvals to the merger;
. the effectiveness of the financing commitments obtained by Socrates for
the merger;
. the absence of brokerage fees and commissions;
. the absence of any litigation, suit, claim, action, proceeding or
investigation against Socrates; and
. the absence of agreements to sell NLCI after the merger.
Some of the representations and warranties listed above will not be
considered breached unless the breach of the representation or warranty would
be reasonably likely to prevent or materially delay the ability of Socrates to
consummate the merger.
None of the representations and warranties in the merger agreement will
survive after the completion of the merger.
Accuracy and Completeness of Information
Each of NLCI and Socrates agreed that information supplied by them for
inclusion in this proxy statement or the Statement on Schedule 13E-3 would be
complete and accurate to the extent provided in the merger agreement.
Conduct of Business Pending the Merger
Before the effective time of the merger, unless otherwise provided in the
merger agreement or consented to by Socrates (which consent may not be
unreasonably withheld), NLCI and its subsidiaries must conduct their respective
business only in the ordinary course and consistent with past practice and NLCI
must use all commercially reasonable efforts to preserve substantially intact
its business organization, to keep available the services of the current
officers, employees and consultants of NLCI and its subsidiaries and to
preserve the current relationships of NLCI and its subsidiaries with customers,
students, suppliers, licensors, licensees and other persons with which NLCI or
any subsidiary has significant business relations. NLCI has agreed, with
limited exceptions, that neither it nor any of its subsidiaries will do any of
the following, except as expressly
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contemplated by the merger agreement or otherwise consented to in writing by
Socrates (which consent may not be unreasonably withheld):
. amend or change its certificate of incorporation, by-laws or equivalent
organizational documents;
. sell, issue, grant, authorize or otherwise transfer or encumber any
shares of capital stock of NLCI or its subsidiaries;
. except with respect to trademarks in the ordinary course and consistent
with past practice, grant any licenses, develop intellectual property or
disclose any confidential intellectual property unless such disclosure is
made subject to a confidentiality agreement;
. authorize, declare or set aside any dividend payment or other
distributions;
. redeem or otherwise acquire any outstanding shares of capital stock or
other equity interests of NLCI or its subsidiaries;
. split, combine or reclassify any shares of NLCI capital stock;
. acquire or agree to acquire any business or any assets of any other
person for a purchase price in excess of $250,000;
. incur any additional indebtedness for borrowed money, except pursuant to
its outstanding credit line or with a maturity of not more than one year
in a principal amount not in excess of $150,000, or make any loans,
except as provided in the merger agreement;
. make any capital expenditures, except as provided in the merger agreement;
. waive any stock repurchase or acceleration rights or amend any
outstanding options, warrants or restricted stock;
. increase compensation, grant or amend any severance package or forgive
indebtedness of certain officers, directors and employees of NLCI;
. pay, settle or otherwise satisfy or cancel any claims, liabilities or
obligations in excess of $300,000 in the aggregate outside the ordinary
course of business, or cancel any indebtedness in excess of $50,000 in
the aggregate;
. make or revoke any tax election, adopt or change any tax accounting
method, settle any tax liabilities or take any action with respect to the
computation of taxes or preparation of a tax return;
. effect any change in any accounting method;
. adopt or amend any employee benefit plan or collective bargaining
agreement; or
. agree to take any of the foregoing actions.
Notification
Socrates has agreed to give prompt notice to NLCI, and NLCI has agreed to
give prompt notice to Socrates, of (1) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause (A) any
representation or warranty in the merger agreement made by it to be untrue or
inaccurate, or (B) any covenant, condition or agreement in the merger agreement
applicable to it not to be complied with or satisfied, and (2) any failure to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it in the merger agreement. The merger agreement provides that
no notification will limit or otherwise affect the remedies available to the
party so notified.
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Preparation of Proxy Statement; Stockholders Meeting
The merger agreement provides that NLCI will duly call, give notice of,
convene and hold a special meeting of NLCI's stockholders as promptly as
practicable, which is the special meeting to which this proxy statement
relates, to consider and adopt the merger agreement and the merger. The merger
agreement also provides that, as soon as practicable after execution of the
merger agreement, NLCI will prepare and file with the Commission this proxy
statement in preliminary form. Except as provided in the merger agreement, this
proxy statement will include the recommendation of the board of directors that
the stockholders approve the merger agreement and the merger. Socrates has
agreed to vote all of the shares of NLCI owned by it in favor of the approval
of the merger agreement and the merger. As of , Socrates did not
own of record any shares of voting stock.
Access to Information; Confidentiality
Prior to the effective time of the merger, NLCI and its subsidiaries will
(1) provide to Socrates and its representatives reasonable access to all of
their properties, books, contracts, commitments, personnel and records, and (2)
promptly make available to Socrates information concerning its business,
properties, assets, customers, consultants and personnel reasonably requested
by Socrates. In addition, NLCI consented, and agreed to cause its subsidiaries
to consent, to Socrates and its representatives contacting, in a reasonable
fashion, real estate developers and landlords of NLCI and its subsidiaries and
will, upon reasonable notice from Socrates, request the real estate developers
and landlords to cooperate during normal business hours prior to the effective
time of the merger with any reasonable requests made by or on behalf of
Socrates. The merger agreement provides that all information so obtained by
Socrates and its representatives will be subject to the confidentiality
agreement between NLCI and the buying group dated November, 2001.
Limitation on Soliciting Transactions
NLCI has agreed that, except as described below, until the effective time of
the merger or the termination of the merger agreement, it will not, and will
not permit any of its subsidiaries, to directly or indirectly initiate,
solicit, negotiate, encourage or provide nonpublic or confidential information
to facilitate, an acquisition transaction. NLCI has also agreed that it will,
and will use its reasonable best efforts to cause any officer, director or
employee of NLCI, or any attorney, accountant, investment banker, financial
advisor or other agent retained by it or any of its subsidiaries, not to
directly or indirectly initiate, solicit, negotiate, encourage or provide
nonpublic or confidential information to facilitate, any acquisition
transaction. In addition, NLCI agreed to immediately cease and cause to be
terminated all activities, discussions or negotiations with respect to any
acquisition proposal.
Under the merger agreement, an acquisition transaction is defined as a
proposal or offer to acquire any part of the business or properties of NLCI
constituting 30% or more of the net revenues, net income or the assets of NLCI
or more than 30% of the capital stock of NLCI (including any capital stock then
owned by the person or group making the offer or proposal), whether by merger,
consolidation, recapitalization, purchase of assets, tender offer or otherwise
and whether for cash, securities or any other consideration or combination
thereof and an acquisition proposal is defined as an unsolicited written bona
fide offer or proposal with respect to an acquisition transaction.
The board of directors of NLCI or the special committee may furnish
information to any person in response to an acquisition proposal if:
. the board of directors or special committee determines in good faith,
after consultation with its independent financial advisor and legal
counsel, that the proposal is, or could reasonably be expected to lead
to, a superior proposal, as discussed below;
. NLCI provides written notice in the manner summarized below; and
. the person, prior to the disclosure of any non-public information, enters
into a confidentiality agreement with NLCI on terms set forth in the
merger agreement.
67
Under the merger agreement, a superior proposal is defined as a bona fide
acquisition proposal that is made by a third party:
. that the board of directors or special committee determines in its good
faith judgment, after consultation with its financial advisor, to be more
favorable to NLCI's stockholders other than the rollover stockholders
from a financial point of view than the merger, after taking into account
any adjustment to the terms of the merger agreement and the transactions
contemplated by the merger agreement proposed by Socrates in response to
the acquisition proposal;
. that is expected to result in the acquiring person or group and any of
its or their respective affiliates owning more than eighty-five percent
of the outstanding shares of NLCI common stock and preferred stock
(including any capital stock of NLCI then owned by the person or group)
or substantially all of the assets of NLCI; and
. that the board of directors or the special committee determines in its
good faith judgment is reasonably likely to be consummated, taking into
account all legal and regulatory aspects and all contingencies
(including, without limitation, any financing contingencies) of the
proposal.
The board of directors or the special committee may engage in discussions or
negotiations with any person in response to an acquisition proposal if, and
only to the extent that:
. the board of directors or special committee determines in good faith,
after consultation with its independent financial advisor and legal
counsel that the acquisition proposal is, or could reasonably be expected
to lead to, a superior proposal;
. the board of directors or special committee determines in good faith,
after consultation with its legal counsel, that failure to do so could
reasonably be expected to constitute a breach of its fiduciary duties to
NLCI stockholders under applicable law;
. NLCI complies with the notice requirements summarized below (and includes
in the notice provided to Socrates the material terms of the acquisition
proposal); and
. if not previously obtained, the board of directors or special committee
obtains a confidentiality agreement on terms set forth in the merger
agreement.
The board of directors or the special committee may (1) approve, recommend
or propose to approve or recommend an acquisition proposal, (2) cause NLCI to
accept an acquisition proposal, or (3) enter into any letter of intent,
acquisition agreement or other similar agreement or arrangement to consummate
an acquisition proposal if, and only to the extent that:
. the board of directors or special committee determines in good faith and
after consultation with its independent financial advisor and legal
counsel that the acquisition proposal would constitute a superior
proposal;
. the board of directors or special committee determines in good faith,
after consultation with its legal counsel, that failure to do so would
reasonably be expected to constitute a breach of its fiduciary duties to
NLCI stockholders under applicable law;
. NLCI complies with the notice requirements summarized below and in
addition, notifies Socrates in writing at least three business days prior
to taking such action, which notice must identify and detail the proposed
terms of the superior proposal;
. the proposal continues to be a superior proposal in light of any improved
transaction proposed by Socrates prior to the expiration of the three
business day period referred to above; and
. if the merger agreement is terminated by NLCI, NLCI pays a termination
fee, reimburses Socrates for its expenses, and complies with its other
obligations under the termination provisions of the merger agreement. See
"The Merger Agreement"--"Termination" and --"Termination Fee and Expense
Reimbursement."
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NLCI must notify Socrates orally within one business day and in writing
within two business days after its receipt of an acquisition proposal,
indication of interest, request for non-public information relating to NLCI or
any subsidiary in connection with an acquisition proposal or request for access
to the properties, books or records of NLCI or any subsidiary by any person or
group that informs the board of directors of NLCI or the subsidiary or the
special committee that it is considering making, or has made, an acquisition
proposal. The notice to Socrates must indicate in reasonable detail the
identity of the person making the acquisition proposal, inquiry or request and
the material terms of the proposal. NLCI must use its reasonable best efforts
to keep Socrates informed of the status and details of any acquisition proposal.
The board of directors of NLCI may take and disclose to the stockholders of
NLCI a position required by Rule 14e-2 under the Exchange Act, without
violating any limitations on soliciting transactions in the merger agreement.
Directors' and Officers' Indemnification and Insurance
The merger agreement provides that, from and after the effective time of the
merger, and to the fullest extent permitted by law, Socrates will cause the
surviving corporation to honor all of NLCI's obligations to indemnify, defend
and hold harmless (including advancing funds for expenses) the current and
former directors and officers of NLCI and its subsidiaries against all losses,
claims, damages or liabilities arising out of their acts or omissions occurring
prior to the effective time of the merger to the maximum extent that the
obligations exist on the date of the merger agreement, whether under NLCI's
certificate of incorporation, by-laws or contractsor the DGCL. The
indemnification obligation will survive the merger and will continue in full
force and effect in accordance with the terms of NLCI's certificate of
incorporation, by-laws or contractsor the DGCL until the expiration of the
applicable statute of limitations. If the enforcement of the indemnification
obligation is required, the surviving corporation is required to reimburse the
director or officer for reasonable attorney's fees and expenses, including
advance payment of fees and expenses upon receipt of an undertaking to repay
the payment except upon adjudication that the director or officer was entitled
to payment.
NLCI will maintain, through the effective time of the merger, NLCI's
existing directors' and officers' insurance in full force and effect without
reduction of coverage. For six years after the effective time of the merger,
Socrates will cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by NLCI (or substitute
policies with reputable and financially sound carriers of at least the same
coverage and amounts containing terms and conditions which are no less
advantageous to the insured) covering claims arising from or related to facts
or events which occurred at or before the effective time of the merger;
provided, however, that Socrates is not obligated to make annual premium
payments for the insurance to the extent premiums exceed 200% of the current
annual premiums paid. If insurance coverage cannot be obtained at all, or can
only be obtained with an annual premium in excess of 200% of the current
premium, Socrates must maintain the most advantageous policies of directors'
and officers' insurance obtainable for an annual premium equal to 200% of the
current annual premium.
The certificate of incorporation or by-laws of the surviving corporation
will contain the indemnification provisions contained in NLCI's current
by-laws, which provisions will not be amended, repealed or otherwise modified
for a period of six years from the effective time of the merger in any manner
that would affect adversely the rights of individuals who at or at any time
prior to the effective time of the merger were directors, officers, employees
or other agents of NLCI (and during this period the certificate of
incorporation of the surviving corporation will not be amended, repealed or
otherwise modified in any manner that would have the effect of so amending,
repealing or otherwise modifying any such provisions of the by-laws).
If the surviving corporation or any of its successors or assigns (1)
consolidates with or merges into any other person and is not the continuing or
surviving corporation or entity and the continuing or surviving entity does not
assume the indemnification obligations of the surviving corporation, or (2)
transfers all or substantially all of its properties and assets to any person,
then, proper provision must be made so that the successors and assigns of the
surviving corporation assume the indemnification obligations.
69
Further Action
Each of NLCI and Socrates has agreed, subject to the terms and conditions in
the merger agreement, to use all reasonable efforts to take, or cause to be
taken, all reasonable actions, and to do, or cause to be done, and to assist
and cooperate with each other in doing, all things reasonably necessary, proper
or advisable to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated by the merger agreement. These
things include: (1) obtaining all necessary actions or nonactions, waivers,
consents and approvals from governmental entities and the making of all
necessary registrations and filings (including filings with governmental
entities, if any) and taking all reasonable steps as may be necessary to obtain
an approval or waiver from, or to avoid an action or proceeding by, any
governmental entity, (2) obtaining all necessary consents, approvals or waivers
from third parties, (3) defending any lawsuits or other legal proceedings,
whether judicial or administrative, challenging the merger agreement or the
consummation of the transactions contemplated by the merger agreement,
including, when reasonable, seeking to have any stay or temporary restraining
order entered by any court or other governmental entity vacated or reversed,
and (4) executing and delivering any additional instruments necessary to
consummate the transactions contemplated by the merger agreement and to carry
out fully the purposes of the merger agreement. Without limiting the foregoing,
NLCI and the board of directors will, at the request of Socrates: (1) take all
action within its power reasonably requested by Socrates as necessary to ensure
that no state takeover statute or similar statute or regulation is or becomes
applicable to the merger agreement or the transactions contemplated by the
merger agreement, and (2) if any state takeover statute or similar statute or
regulation becomes applicable to the merger agreement or the transactions
contemplated by the merger agreement, take all action within its power (unless
the taking of such action would reasonably be expected to be a breach of its
fiduciary obligations to NLCI's stockholders), reasonably requested by Socrates
as necessary to ensure that the transactions contemplated by the merger
agreement may be consummated as promptly as practicable on the terms
contemplated by the merger agreement and otherwise to minimize the effect of
such statute or regulation on the transactions contemplated by the merger
agreement. The merger agreement provides that none of its provisions may be
deemed to require any party to waive any substantial rights or agree to any
substantial limitation on its operations or to dispose of any significant asset
or collection of assets.
Consents and Filings
Socrates and NLCI have agreed to file as soon as practicable after the date
of the merger agreement any required notifications under the HSR Act and to
respond as promptly as practicable to all inquiries or requests for additional
information or documentation under the HSR Act or otherwise received from any
State Attorney General or other governmental entity in connection with
antitrust matters. Socrates and NLCI will cooperate with each other in making
of all such filings or responses, including providing copies of filings and
responses to the other party and its advisors prior to filing or responding.
Public Announcements
Socrates, on the one hand, and NLCI, on the other hand, have agreed to
consult with each other before issuing, and provide each other the opportunity
to review and comment upon, any press release or other public statements
(including any filings with any federal or state governmental or regulatory
agency or with the NASDAQ National Market) with respect to the transactions
contemplated by the merger agreement and have agreed not to issue any such
press release or make any such public statement prior to consultation, except
as may be required by applicable law (including foreign regulations relating to
competition), court process or by obligations pursuant to any listing agreement
with any national securities exchange.
Employee Benefits Matters
For one year following the effective time of the merger and effective upon
the merger, Socrates will, or will cause the surviving corporation to, provide
medical, 401(k), life and disability benefits and cash compensation to
employees of the surviving corporation (except to the extent that any such
employee is party to a contract with
70
NLCI that governs compensation and benefits) that, in the aggregate, are
comparable to the medical, 401(k), life and disability benefits and cash
compensation (other than employee benefit plans, programs, contracts or
arrangements providing for stock options, stock purchase rights, restricted
stock, phantom stock or other stock-based compensation) customarily provided to
the similarly situated employees of comparable companies engaged in for-profit
businesses substantially similar to that of NLCI and its subsidiaries.
Rights Agreement
The board of directors of NLCI has taken all action to render the rights
issued with respect to shares of common stock and preferred stock of NLCI under
the Rights Agreement dated as of May 16, 2000 between NLCI and Stocktrans,
Inc., referred to as the rights agreement, inapplicable to the transactions
contemplated by the merger agreement. Unless otherwise approved in writing by
Socrates, the board of directors may not (1) authorize, approve or effectuate
any amendment to the rights agreement, (2) authorize, approve or effectuate any
redemption of the rights granted under the rights agreement, or (3) take any
action with respect to, or make any determination under, the rights agreement,
in each case to permit or facilitate the consummation of any acquisition
proposal unless the merger agreement has been terminated as provided in the
merger agreement.
Stockholder Litigation
NLCI is required to give Socrates the opportunity to participate in the
defense or settlement of any stockholder litigation against NLCI and/or its
directors relating to the merger agreement or the transactions contemplated by
the merger agreement. In addition, Socrates may prevent NLCI from entering into
any such settlement without the consent of Socrates, which consent may not be
unreasonably withheld or delayed.
Conditions to Completing the Merger
Conditions to each party's obligation. The obligations of NLCI and Socrates
to complete the merger are subject to the satisfaction or waiver of certain
conditions, including the following:
. the merger agreement must have been approved by the affirmative vote of
the holders of at least a majority of NLCI's outstanding voting stock,
voting together as a single class;
. no law, rule, regulation, judgment, decree, injunction, executive order
or award of any court or governmental entity shall be in effect which
would make the merger illegal or otherwise prohibit consummation of the
merger;
. the applicable waiting period (including any extension) under the HSR Act
and any applicable foreign regulations must have expired or been
terminated or obtained;
. all consents, approvals and authorizations legally required to be
obtained to consummate the merger shall have been obtained from all
governmental entities; and
. no litigation, suit, claim, action, proceeding or investigation shall
have been brought by any governmental entity and remain pending that
seeks to prevent the consummation of the transactions contemplated by the
merger agreement.
Conditions to Socrates' obligation. The obligation of Socrates to complete
the merger is subject to the satisfaction or waiver of the following conditions:
. NLCI's representations and warranties in Sections 3.03 (capitalization),
3.04 (authority), 3.17 (state takeover statutes and the rights agreement)
and 3.21 (brokers) of the merger agreement (1) that do not have
materiality or material adverse effect qualifications must be true and
correct in all material respects as of the closing date, unless they
address matters as of a particular date, in which case they must be true
and correct in all material respects as of such date, and (2) that have
materiality or material adverse effect qualifications must be true and
correct in all respects as of the closing date, as though made at and
71
as of the closing date, except that those representations and warranties
that address matters as of a particular date must remain true and correct
in all respects as of such date, and Socrates shall have received a
certificate of the chief executive officer or chief financial officer of
NLCI to that effect;
. NLCI's other representations and warranties in the merger agreement must
be true and correct as of the closing date, as though made at and as of
the closing date (except that those representations and warranties that
address matters only as of a particular date must remain true and correct
as of such date) except for any inaccuracies that would not and would not
reasonably be expected to have a material adverse effect and would not
and would not be reasonably likely to prevent or delay consummation of
the merger (provided, that materiality and material adverse effect
qualifications shall be disregarded), and Socrates shall have received a
certificate of the chief executive officer or chief financial officer of
NLCI to that effect;
. NLCI must have performed or complied in all material respects with the
agreements and covenants required to be complied with by it under the
merger agreement at or prior to the effective time of the merger, and
Socrates shall have received a certificate of NLCI's chief executive
officer or chief financial officer to that effect;
. NLCI must have obtained third-party consents required in connection with
the merger as listed in the merger agreement;
. there must not have occurred any event, change or circumstance that,
individually or in the aggregate, has had, or would reasonably be
expected to have, a material adverse effect on NLCI;
. no litigation, suit, claim, action, proceeding or investigation shall
have been brought and remain pending by any governmental entity or other
person that would reasonably be expected to have, individually or in the
aggregate, a material adverse effect on NLCI;
. the committed financing shall have been consummated on the terms set
forth in the related commitment letters, provided, however, that if the
financing is not consummated pursuant to such terms, Socrates must have
used commercially reasonable efforts to obtain financing with no greater
cost of capital to Socrates and other terms no less favorable in the
aggregate to Socrates than those contained in the commitment letters; and
. NLCI shall have delivered certified copies of resolutions of the board of
directors and the special committee in connection with the merger
agreement and the merger, the NLCI certificate of incorporation and
by-laws and tabulation of the stockholder vote taken at the stockholders'
meeting.
Under the merger agreement, a material adverse effect on NLCI is defined as
any circumstance, event, occurrence, change or effect that materially and
adversely affects the business, operations, condition (financial or otherwise),
assets (tangible or intangible) or results of operations of NLCI and its
subsidiaries taken as a whole other than any circumstance, event, occurrence,
change or effect resulting from the public announcement of the transactions
contemplated by the merger agreement.
Conditions to NLCI's obligation. The obligation of NLCI to complete the
merger is subject to the satisfaction or waiver of the following conditions:
. Socrates' representations and warranties in the merger agreement must be
true and correct as of the closing date, as though made at and as of the
closing date (except that those representations and warranties that
address matters only as of a particular date must remain true and correct
as of such date) except for any inaccuracies that would not and would not
reasonably be expected to have a material adverse effect and would not
and would not be reasonably likely to prevent or delay consummation of
the merger (provided, that materiality and material adverse effect
qualifications shall be disregarded), and NLCI shall have received a
certificate of the chief executive officer or chief financial officer of
Socrates to that effect;
72
. Socrates must have performed and complied in all material respects with
the agreements and covenants required to be performed and complied with
by it under the merger agreement at or prior to the effective time of the
merger and NLCI shall have received a certificate of the chief executive
officer or chief financial officer of Socrates to that effect;
. Socrates shall have delivered certified copies of the resolutions of
Socrates' board of directors and stockholders authorizing the merger
agreement and the certificate of incorporation and the by-laws of
Socrates; and
. NLCI shall have received a certificate of Socrates addressing the matters
regarding its solvency specified in the merger agreement.
Termination
Socrates and NLCI may agree by mutual written consent duly authorized by
their respective boards of directors to terminate the merger agreement at any
time before the effective time of the merger. In addition, either company may
terminate the merger agreement if:
. the merger is not completed on or before January 31, 2003, unless the
failure to consummate the merger is attributable to improper action or a
failure on the part of the party seeking to terminate the merger
agreement to perform any obligation;
. a court or other governmental entity issues a law or order which is final
and nonappealable preventing consummation of the merger;
. the NLCI stockholders do not approve and adopt the merger agreement and
the merger by the requisite vote; or
. prior to consummation of the merger, upon breach by the non-terminating
party of any of its representations, warranties, covenants or agreements
in the merger agreement (subject to any materiality thresholds), or if
any of the non-terminating party's representations or warranties in the
merger agreement shall have become untrue, in either case such that the
non-terminating party is unable to satisfy the closing condition with
respect to such representations and warranties, covenants and agreements,
and the breach is not cured within 15 days of notification by the
terminating party or the breach is not otherwise waived by the
terminating party.
Socrates may terminate the merger agreement if any of the following occurs,
which are each referred to as a Socrates termination event:
. the NLCI board of directors or the special committee withdraws or
modifies, or publicly resolves to withdraw or modify, its recommendation
of the merger agreement and the merger in a manner adverse to Socrates;
. the NLCI board of directors or the special committee fails to recommend
to the NLCI stockholders that they approve the merger;
. the NLCI board of directors or the special committee publicly approves or
recommends, or resolves to approve or recommend an acquisition proposal
other than the merger;
. the NLCI board of directors or the special committee enters into any
letter of intent or similar document or any agreement, contract or
commitment accepting any superior proposal;
. if requested to do so by Socrates if an alternative acquisition proposal
is publicly announced at any time prior to the special meeting, the NLCI
board of directors or special committee fails within a reasonable time
(but in any event within ten business days after the request) to publicly
reconfirm its recommendation that the stockholders approve the merger or
fails to publicly announce that the board of directors is not
recommending the alternative acquisition proposal (provided that the
right to terminate only exists for 30 days after the expiration of the
ten day period);
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. NLCI materially or intentionally breaches its agreement not to initiate,
solicit, negotiate or encourage or provide nonpublic or confidential
information to facilitate any acquisition proposals, or to engage in
discussions or negotiations with respect to acquisition proposals other
than as permitted under the merger agreement; or
. a tender offer or exchange offer for 30% or more of the outstanding
shares of the common stock of NLCI (assuming conversion of preferred
stock and including shares of common stock and/or preferred stock already
held by the person or group commencing the tender or exchange offer) is
commenced, and the board of directors or the special committee of NLCI
fails to recommend against acceptance by its stockholders within ten
business days of its commencement; provided that Socrates' right to
terminate expires if not exercised within 30 days of such failure.
NLCI may also terminate the merger agreement, in the event, referred to as
the NLCI termination event, that prior to the approval by the stockholders of
the merger:
. the board of directors of NLCI authorizes NLCI, subject to complying with
the terms of the merger agreement, to enter into a definitive agreement
for a superior proposal;
. NLCI notifies Socrates in writing within two business days after
receiving the superior proposal that it intends to enter into the
agreement;
. the superior proposal continues to be a superior proposal after taking
into account any adjustment of the terms and conditions proposed in
writing by Socrates within three business days of its receipt of the
notice from NLCI; and
. NLCI delivers the termination fee and expenses as described in
"--Termination Fee and Expense Reimbursement".
Subject to limited exceptions, including the survival of any obligations to
pay the termination fee and expenses, if the merger agreement is terminated,
then it will be of no further force or effect. Except as otherwise provided,
there will be no liability on the part of Socrates or NLCI or their respective
officers or directors and all rights and obligations of the parties will cease.
However, no party will be relieved from its obligations with respect to any
willful breach of any of its representations, warranties, covenants or
agreements set forth in the merger agreement.
Termination Fee and Expense Reimbursement
If the merger agreement is terminated, all fees and expenses will be paid by
the party incurring them, except as described below.
If Socrates terminates the merger agreement due to NLCI's breach of its
representations, warranties, covenants or agreements, NLCI will pay all
reasonable out of pocket expenses incurred by Socrates not to exceed $1,500,000
within two business days of termination. NLCI will pay to Socrates a
non-refundable fee equal to $1,500,000 plus all reasonable out of pocket
expenses incurred by Socrates not to exceed $1,500,000 if:
. Socrates terminates the merger agreement in connection with a Socrates
termination event, in which case payments are due within two business
days of termination;
. (1) Socrates or NLCI terminates the merger agreement because the
requisite stockholder approval is not obtained, (2) prior to the
termination an acquisition proposal was made known to NLCI's stockholders
generally or any person publicly announced its intention (whether or not
conditional) to make an acquisition proposal; and (3) on or prior to the
12-month anniversary of the termination, NLCI enters into an agreement or
letter of intent (or the board of directors resolves or announces an
intention to do so) with respect to, or consummates, any business
combination with any person, entity or group, in which case the payments
are due prior to consummation of the business combination;
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. NLCI terminates the merger agreement in connection with a NLCI
termination event, in which case payments are due prior to termination; or
. Socrates terminates the merger agreement as provided therein due to
NLCI's breach of its representations, warranties, covenants or agreements
and within 12 months of such termination, NLCI enters into an agreement
or letter of intent (or the board of directors resolves or announces an
intention to do so) with respect to, or consummates, any business
combination with any person, entity or group, in which case the payments
are due prior to the consummation of the business combination.
As used in the merger agreement, "business combination" means (1) a merger,
consolidation, share exchange, business combination or similar transaction
involving NLCI as a result of which the NLCI stockholders prior to the
transaction cease to own at least 50% of the voting securities of the entity
surviving or resulting from the transaction (or the ultimate parent entity) in
the proportion they owned the shares prior to the transaction, (2) a sale,
lease, exchange, transfer, public offering in respect of, or other disposition
of more than 50% of the assets of NLCI and its subsidiaries, taken as a whole,
in either case, in a single transaction or a series of related transactions, or
(3) the acquisition, by a person (other than Socrates or its affiliates) or
group of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act)
of more than 50% of NLCI's common stock (assuming conversion of NLCI's
preferred stock and taking into consideration any shares of common stock and/or
preferred stock already held by the person or group), in either case, whether
by tender or exchange offer or otherwise.
Amendment
The merger agreement may be amended by the parties by action taken by or on
behalf of their respective boards of directors and by the special committee at
any time prior to the effective time of the merger. After the merger agreement
is adopted by the NLCI stockholders, no amendment that reduces the amount or
changes the type of merger consideration can be made without the further
approval of NLCI's stockholders. All amendments must be in writing.
On October 2, 2002, NLCI and Socrates entered into an amendment to the
merger agreement. The amendment reflected the amount of shares Mr. A.J. Clegg
committed to convert into equity interests of the surviving corporation in his
amended commitment letter. In addition, the amendment extended from December 5,
2002 to January 31, 2003 the date after which either party may terminate the
merger agreement, so long as the terminating party's improper action or failure
to act did not cause the failure of the merger to occur on or before that date.
The amendment also corrected the disclosure schedule relating to NLCI options.
Waiver
At any time prior to the effective time of the merger, any party to the
merger agreement may (a) extend the time for the performance of any obligation
or other act of any other party, (b) waive any inaccuracy in the
representations and warranties contained in the merger agreement or in any
document delivered pursuant to the merger agreement, and (c) waive compliance
with any agreement or condition contained in the merger agreement. Any
extension or waiver must be in writing, and any waiver by NLCI must be
authorized or approved by the special committee. The failure of any party to
assert any of its rights under the merger agreement will not constitute a
waiver of those rights.
Assignment
Before assignment by one party to the merger agreement of the merger
agreement or any of its rights, interests or obligations under the merger
agreement, the assigning party must obtain the prior written consent of the
non-assigning party, except that Socrates may assign the merger agreement and
any rights, interests or obligations under the merger agreement to any
affiliate without NLCI's consent, provided that the assignment will not relieve
Socrates of its obligations under the merger agreement.
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MARKETS AND MARKET PRICE
Shares of NLCI common stock are listed and principally quoted on the Nasdaq
National Market System under the symbol "NLCI." The following table shows, for
the periods indicated, the reported high and low sale prices per share on the
Nasdaq National Market for NLCI common stock.
HIGH LOW
------ -----
FISCAL YEAR 2003
First Quarter (through September 26, 2002). $ 7.40 $5.01
FISCAL YEAR 2002
First Quarter.............................. $ 9.00 $6.26
Second Quarter............................. $ 8.25 $4.80
Third Quarter.............................. $ 7.48 $5.05
Fourth Quarter............................. $ 7.23 $5.15
FISCAL YEAR 2001
First Quarter.............................. $10.00 $7.75
Second Quarter............................. $ 8.88 $4.69
Third Quarter.............................. $10.25 $5.52
Fourth Quarter............................. $10.00 $7.55
FISCAL YEAR 2000
First Quarter.............................. $ 6.13 $4.25
Second Quarter............................. $ 9.00 $5.13
Third Quarter.............................. $ 9.31 $6.50
Fourth Quarter............................. $ 8.19 $5.94
On August 5, 2002, the last full trading day before the public announcement
of the merger agreement, there were no shares of NLCI common stock traded on
the Nasdaq National Market. On August 2, 2002, the high and low sale prices for
NLCI common stock as quoted on the Nasdaq National Market were $5.99 and $5.40
per share, respectively, and the closing sale price on that date was $5.85 per
share. On , the last practicable trading day for which
information was available prior to the date of the first mailing of this proxy
statement, the closing price per share of NLCI common stock as quoted on the
Nasdaq National Market was $ . Stockholders should obtain a current market
quotation for NLCI common stock before making any decision with respect to the
merger. On September 20, 2002, there were approximately 343 holders of record
of NLCI common stock.
NLCI has never declared or paid cash dividends on its common stock and does
not plan to pay any cash dividends in the foreseeable future. NLCI's current
credit facility and financing documents with private placement lenders limit
NLCI's ability to pay dividends on its common stock. In addition, under the
merger agreement, NLCI has agreed not to pay any cash dividends on its common
stock before the closing of the merger.
76
COMMON STOCK AND PREFERRED STOCK PURCHASE INFORMATION
Purchases By NLCI
Since September 30, 2000, NLCI has not purchased any of its voting stock.
Purchases By NLCI Executive Officers and Directors
The table below sets forth the information regarding purchases by each of
the NLCI executive officers and directors of NLCI common stock or preferred
stock since September 30, 2000, including the number of shares purchased, the
range of prices paid and the average purchase price:
Name Date No. of Shares Price Range Average Purchase Price
---- ------- ------------- ----------- ----------------------
A.J. Clegg(1)........ 8/17/01 20,161 $4.00 $4.00
Edward H. Chambers(2) 9/09/02 6,750 $3.75 $3.75
Peter H. Havens(2)... 9/10/02 6,750 $3.75 $3.75
- --------
(1) These shares were purchased through the exercise of a warrant issued by
NLCI and held by Mr. A.J. Clegg to purchase 20,161 shares of NLCI common
stock.
(2) These shares were purchased through the exercise of stock options.
Recent Transactions
Except as disclosed herein, neither NLCI nor any of the rollover
stockholders has engaged in any transaction with respect to NLCI common stock
or preferred stock within 60 days of the date of this proxy statement.
Purchases By Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan
None of Socrates, Gryphon, Gryphon Partners II-A, L.P. or Cadigan or any of
their respective officers, directors or affiliates listed in Appendix F of this
proxy statement, has engaged in any transaction with respect to NLCI common
stock or preferred stock since September 30, 2000.
77
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table sets forth certain information regarding the beneficial
ownership of NLCI common stock as of September 20, 2002 by (1) all those known
by NLCI to be beneficial owners of more than 5% of its common stock (including
preferred stock convertible into common stock); (2) each director; (3) each
executive officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the Commission and the information is not necessarily
indicative of beneficial ownership for any other purpose. Unless otherwise
indicated, the address for each of the stockholders listed below is c/o Nobel
Learning Communities, Inc., 1615 West Chester Pike, West Chester, Pennsylvania,
19382.
Beneficial Ownership
Number of Percent of
Beneficial Owner Shares Total (1)(2)
- ---------------- ---------- ------------
KU Learning, L.L.C.(3)......................................... 1,903,500 30.1%
Edison Venture Fund II, L.P.(4)................................ 654,018 9.5
Allied Capital Corporation(5).................................. 1,106,256 14.9
Dimensional Fund Advisors Inc.(6).............................. 354,900 5.6
Socrates Acquisition Corporation(7)............................ 890,168 12.8
Cadigan Investment Partners, Inc.(7)........................... 890,168 12.8
Gryphon Partners II, L.P.(7)................................... 890,168 12.8
Gryphon Partners II-A, L.P.(7)................................. 890,168 12.8
A.J. Clegg(8).................................................. 750,021 11.0
Robert E. Zobel(9)............................................. 15,265 *
John R. Frock(10).............................................. 124,882 1.9
Daniel L. Russell(11).......................................... 0 *
Peter H. Havens(12)............................................ 20,109 *
Edward H. Chambers(13)......................................... 27,730 *
Eugene G. Monaco(14)........................................... 10,500 *
D. Scott Clegg(15)............................................. 0 *
Daryl A. Dixon(16)............................................. 0 *
Lynn A. Fontana(17)............................................ 5,000 *
All executive officers and directors as a group (9 persons)(18) 953,507 13.6%
- --------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the Commission. On that basis, NLCI believes that each of the stockholders
named in this table has sole voting and dispositive power with respect to
the shares indicated as beneficially owned except (a) for shares indicated
as beneficially owned by any of the rollover stockholders, which are
subject to voting agreements with Socrates under which each agreed to vote
shares of voting stock owned by him in favor of the merger and granted to
Socrates an irrevocable proxy to vote shares of voting stock owned by him
for the adoption and approval of the merger agreement and the merger, and
(b) as otherwise indicated in the footnotes to this table.
(2) Applicable percentages are based on 6,327,952 shares of common stock
outstanding on September 20, 2002, adjusted as required by rules
promulgated by the Commission.
(3) Based on Schedule 13D/A filed with the Commission on November 10, 1999. KU
Learning, L.L.C. ("KU Learning") may be deemed to share voting and
dispositive power with its sole member, Knowledge Universe Learning, Inc.,
and Knowledge Universe, Inc., the sole stockholder of Knowledge Universe
Learning, Inc. Includes 20,000 shares over which KU Learning and its
affiliates do not have dispositive power and as to which KU Learning and
its affiliates disclaim beneficial ownership. The address of the
78
principal business office of KU Learning, Knowledge Universe Learning, Inc.
and Knowledge Universe, Inc. is 844 Moraga Drive, Los Angeles, California,
90049.
(4) Based on information provided to NLCI in connection with its 2001 annual
meeting. Edison Venture Fund II, L.P. may be deemed to share voting and
dispositive power with Edison Partners II, L.P., its sole general partner.
Includes 524,179 shares issuable upon conversion of 2,096,714 shares of
Series C preferred stock. Edison Venture Fund II, L.P. is a private limited
partnership engaged primarily in making private placement investments. The
address of the principal business office of Edison Venture Fund II, L.P. is
997 Lenox Drive #3, Lawrenceville, New Jersey, 08648.
(5) Includes warrants to purchase 840,298 shares and 265,958 shares issuable
upon conversion of 1,063,830 shares of Series D preferred stock owned by
Allied Capital Corporation and its affiliates, all of which are closed-end
management investment companies registered under the Investment Company Act
of 1940, as amended. The address of the principal business office of Allied
Capital Corporation is 1919 Pennsylvania Avenue, N.W., Suite 300,
Washington, D.C., 20006.
(6) Based on Schedule 13G/A filed with the Commission on February 12, 2002.
Dimensional Fund Advisors Inc. is an investment advisor registered under
Section 203 of the Investment Company Act of 1940, as amended and serves as
investment manager to certain other commingled group trusts and separate
accounts that own the shares. In its role as investment advisor or manager,
Dimensional Fund Advisors Inc. possesses voting and/or investment power
over the shares owned by the funds it manages or advises. Dimensional Fund
Advisors Inc. disclaims beneficial ownership of these shares. The address
of the principal business office of Dimensional Fund Advisors Inc. is 1299
Ocean Avenue, 11/th/ Floor, Santa Monica, California, 90401.
(7) As a result of the voting agreements between Socrates and each of A.J.
Clegg, John Frock, Robert Zobel and D. Scott Clegg, Socrates and each
member of the buying group may be deemed to have acquired beneficial
ownership of 890,168 shares of NLCI's common stock (determined on an
as-converted basis), which includes options to acquire 374,243 shares
exercisable within 60 days of September 20, 2002, 159,789 shares issuable
upon the conversion of 543,500 shares of Series A preferred stock and
100,806 shares issuable upon conversion of 403,226 shares of Series C
preferred stock, representing approximately 12.3% of the outstanding NLCI
common stock. Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan
each disclaim any beneficial ownership of the shares of NLCI capital stock
that are covered by the voting agreements. The address of the principal
business office of Socrates, Gryphon and Gryphon Partners II-A, L.P. is One
Embarcadero Center, San Francisco, California, 94111. The address of the
principal business office of Cadigan is 712 Fifth Avenue, 45/th/ Floor, New
York, New York, 10019.
(8) Includes options to acquire 275,000 shares exercisable within 60 days of
September 20, 2002, 140,385 shares issuable upon conversion of 477,500
shares of Series A preferred stock and 100,806 shares issuable upon
conversion of 403,226 shares of Series C preferred stock. Also includes
24,854 shares held by Mr. A.J. Clegg's children, over which Mr. A.J. Clegg
has sole voting authority, 6,000 shares held by Mr. A.J. Clegg's
grandchildren, over which Mr. A.J. Clegg has sole voting and dispositive
power, and 170,815 shares held jointly by Mr. A.J. Clegg and his spouse,
over which Mr. A.J. Clegg and his spouse have joint voting and dispositive
authority. Does not include 8,500 shares of common stock owned by Mr. A.J.
Clegg's wife, as to which Mr. A.J. Clegg disclaims beneficial ownership.
Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(9) Includes options to acquire 6,561 shares exercisable within 60 days of
September 20, 2002. Also includes 4,000 shares held of record by a
closely-held Florida corporation over which Mr. Zobel has sole voting
power. Also includes 4,704 shares issuable upon conversion of 16,000 shares
of Series A preferred stock held by a family partnership of which Mr. Zobel
is a general partner and over which he has sole voting power, and as to
which Mr. Zobel disclaims beneficial ownership. Does not include 1,000
shares held in a custodian account for Mr. Zobel's children, of which Mr.
Zobel's wife is custodian, as to which Mr. Zobel disclaims beneficial
ownership. Mr. Zobel has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
79
(10) Includes options to acquire 92,682 shares exercisable within 60 days of
September 20, 2002 and 14,700 shares issuable upon conversion of 50,000
shares of Series A preferred stock. Mr. Frock has agreed to vote all of
his shares in favor of the merger agreement and the merger and has granted
Socrates an irrevocable proxy to vote his shares in favor of the merger
agreement and the merger.
(11) Does not include 265,958 shares issuable upon conversion of 1,063,830
shares of Series D preferred stock owned by Allied Capital Corporation and
840,298 shares of common stock issued upon the exercise of warrants held
by Allied Capital Corporation that may be deemed to be beneficially owned
by Mr. Russell. Mr. Russell disclaims beneficial ownership of any shares
held by Allied Capital Corporation. Mr. Russell's address is c/o Allied
Capital Corporation, 1919 Pennsylvania Avenue, N.W., Suite 300,
Washington, D.C., 20006.
(12) Includes options to acquire 8,000 shares exercisable within 60 days of
September 20, 2002 and 3,234 shares issuable upon conversion of 11,000
shares of Series A preferred stock. Does not include 375 shares held by
J.P. Havens TFBO his son and 500 shares held by J.P. Havens TFBO his
daughter over which Mr. Havens has sole voting and dispositive authority
and as to which Mr. Havens disclaims beneficial ownership. Also does not
include 6,250 shares held by his spouse over which Mr. Havens has sole
voting and dispositive authority and as to which Mr. Havens disclaims
beneficial ownership.
(13) Includes options to acquire 8,000 shares exercisable within 60 days of
September 20, 2002 and 1,470 shares issuable upon conversion of 5,000
shares of Series A preferred stock.
(14) Includes options to acquire 7,500 shares exercisable within 60 days of
September 20, 2002 and 3,000 shares held in joint tenancy with his wife.
(15) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(16) Mr. Dixon's address is c/o Reflectx Staffing Services, 3317 Oakmonst
Terrace, Longwood, Florida, 32779.
(17) Includes options to acquire 5,000 shares exercisable within 60 days of
September 20, 2002.
(18) Includes information contained in the notes above, as applicable.
80
Series A Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of NLCI Series A preferred stock as of September 20, 2002 by (1) all
those known by NLCI to be beneficial owners of more than 5% of its Series A
preferred stock; (2) each director; (3) each executive officer; and (4) all
executive officers and directors of NLCI as a group. The number of shares
beneficially owned by each person is determined under the rules of the
Commission and the information is not necessarily indicative of beneficial
ownership for any other purpose. Unless otherwise indicated, the address for
each of the stockholders listed below is c/o Nobel Learning Communities, Inc.,
1615 West Chester Pike, West Chester, Pennsylvania, 19382.
Beneficial Ownership
Number of Percent of
Beneficial Owner Shares Total(1)(2)
- ---------------- ---------- -----------
Socrates Acquisition Corporation(3)............................. 543,500 53.1%
Cadigan Investment Partners, Inc.(3)............................ 543,500 53.1
Gryphon Partners II, L.P.(3).................................... 543,500 53.1
Gryphon Partners II-A, L.P.(3).................................. 543,500 53.1
A.J. Clegg(4)................................................... 477,500 46.6
Robert E. Zobel(5).............................................. 16,000 1.6
John R. Frock(6)................................................ 50,000 4.9
Daniel L. Russell............................................... 0 *
Peter H. Havens(7).............................................. 11,000 1.1
Edward H. Chambers.............................................. 5,000 *
Eugene G. Monaco................................................ 0 *
D. Scott Clegg(8)............................................... 0 *
Daryl A. Dixon.................................................. 0 *
Lynn A. Fontana................................................. 0 *
Emanuel Shemin(9)............................................... 101,487 9.9
All executive officers and directors as a group (9 persons) (10) 559,500 54.7%
- --------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the Commission. On that basis, NLCI believes that each of the stockholders
named in this table has sole voting and dispositive power with respect to
the shares indicated as beneficially owned except (a) for shares indicated
as beneficially owned by any of the rollover stockholders, which are
subject to voting agreements with Socrates under which each agreed to vote
shares of voting stock owned by him in favor of the merger and granted to
Socrates an irrevocable proxy to vote shares of voting stock owned by him
for the adoption and approval of the merger agreement and the merger, and
(b) as otherwise indicated in the footnotes to this table.
(2) Applicable percentages are based on 1,023,694.11 shares outstanding on
September 20, 2002, adjusted as required by rules promulgated by the
Commission.
(3) As a result of the voting agreements between Socrates and each of A.J.
Clegg, John Frock, Robert Zobel and D. Scott Clegg, Socrates and each
member of the buying group may be deemed to have acquired beneficial
ownership of 543,500 shares of Series A preferred stock. Socrates, Gryphon,
Gryphon Partners II-A, L.P. and Cadigan each disclaim any beneficial
ownership of the shares of NLCI capital stock that are covered by the
voting agreements. The address of the principal business office of
Socrates, Gryphon and Gryphon Partners II-A, L.P. is One Embarcadero
Center, San Francisco, California, 94111. The address of the principal
business office of Cadigan is 712 Fifth Avenue, 45/th/ Floor, New York, New
York, 10019.
(4) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(5) Consists of 16,000 shares of Series A preferred stock held by a family
partnership of which Mr. Zobel is a general partner and over which he has
sole voting power. Mr. Zobel disclaims beneficial ownership of these
shares. Mr. Zobel has agreed to vote all of his shares in favor of the
merger agreement and the merger and
81
has granted Socrates an irrevocable proxy to vote his shares in favor of the
merger agreement and the merger.
(6) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Does not include 4,000 shares of Series A preferred stock held by J.P.
Havens TFBO his son and 5,000 shares of Series A preferred stock held by
J.P. Havens TFBO his daughter over which Mr. Havens has sole voting and
dispositive authority and as to which Mr. Havens disclaims beneficial
ownership.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) As reflected on the records of NLCI's stock transfer agent, Mr. Shemin's
address is 800 South Ocean Blvd. LPH4, Boca Raton, Florida, 33432.
(10) Includes information contained in the notes above, as applicable.
Series C Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of NLCI Series C preferred stock as of September 20, 2002 by (1) all
those known by NLCI to be beneficial owners of more than 5% of its Series C
preferred stock; (2) each director; (3) each executive officer; and (4) all
executive officers and directors of NLCI as a group. The number of shares
beneficially owned by each person is determined under the rules of the
Commission and the information is not necessarily indicative of beneficial
ownership for any other purpose. Unless otherwise indicated, the address for
each of the stockholders listed below is c/o Nobel Learning Communities, Inc.,
1615 West Chester Pike, West Chester, Pennsylvania, 19382.
Beneficial Ownership
Number of Percent of
Beneficial Owner Shares Total(1)(2)
- ---------------- ---------- -----------
Socrates Acquisition Corporation(3)........................... 403,226 16.1%
Cadigan Investment Partners, Inc.(3).......................... 403,226 16.1
Gryphon Partners II, L.P.(3).................................. 403,226 16.1
Gryphon Partners II-A, L.P.(3)................................ 403,226 16.1
Edison Venture Fund II, L.P.(4)............................... 2,096,714 83.9
A.J. Clegg(5)................................................. 403,226 16.1
Robert E. Zobel(6)............................................ 0 *
John R. Frock(7).............................................. 0 *
Daniel L. Russell............................................. 0 *
Peter H. Havens............................................... 0 *
Edward H. Chambers............................................ 0 *
Eugene G. Monaco.............................................. 0 *
D. Scott Clegg(8)............................................. 0 *
Daryl A. Dixon................................................ 0 *
Lynn A. Fontana............................................... 0 *
All executive officers and directors as a group (9 persons)(9) 403,226 16.1%
- --------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the Commission. On that basis, NLCI believes that each of the stockholders
named in this table has sole voting and dispositive power with respect to
the shares indicated as beneficially owned except (a) for shares indicated
as beneficially owned by any of the rollover stockholders, which are
subject to voting agreements with Socrates under which each agreed to vote
shares of voting stock owned by him in favor of the merger and granted to
Socrates an irrevocable proxy to vote shares of voting stock owned by him
for the adoption and approval of the merger agreement and the merger, and
(b) as otherwise indicated in the footnotes to this table.
82
(2) Applicable percentages are based on 2,499,940 shares outstanding on
September 20, 2002, adjusted as required by rules promulgated by the
Commission.
(3) As a result of the voting agreements between Socrates and each of A.J.
Clegg, John Frock, Robert Zobel and D. Scott Clegg, Socrates and each
member of the buying group may be deemed to have acquired beneficial
ownership of 403,226 shares of Series C preferred stock. Socrates, Gryphon,
Gryphon Partners II-A, L.P. and Cadigan each disclaim any beneficial
ownership of the shares of NLCI capital stock that are covered by the
voting agreements. The address of the principal business office of
Socrates, Gryphon and Gryphon Partners II-A, L.P. is One Embarcadero
Center, San Francisco, California, 94111. The address of the principal
business office of Cadigan is 712 Fifth Avenue, 45/th/ Floor, New York, New
York, 10019.
(4) Based on information provided to NLCI in connection with its 2001 annual
meeting. Edison Venture Fund II, L.P. may be deemed to share voting and
dispositive power with Edison Partners II, L.P., its sole general partner.
Edison Venture Fund II, L.P. is a private limited partnership engaged
primarily in making private placement investments. The address of the
principal business office of Edison Venture Fund II, L.P. is 997 Lenox
Drive #3, Lawrenceville, New Jersey, 08648.
(5) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(6) Mr. Zobel has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes information contained in the notes above, as applicable.
83
Series D Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of NLCI Series D preferred stock as of September 20, 2002 by (1) all
those known by NLCI to be beneficial owners of more than 5% of its series D
preferred stock; (2) each director; (3) each executive officer; and (4) all
executive officers and directors of NLCI as a group. The number of shares
beneficially owned by each person is determined under the rules of the
Commission and the information is not necessarily indicative of beneficial
ownership for any other purpose. Unless otherwise indicated, the address for
each of the stockholders listed below is c/o Nobel Learning Communities, Inc.,
1615 West Chester Pike, West Chester, Pennsylvania, 19382.
Beneficial Ownership
Number of Percent of
Beneficial Owner Shares Total(1)(2)
- ---------------- ---------- -----------
Allied Capital Corporation(3)................................. 1,063,830 100%
A.J. Clegg(4)................................................. 0 *
Robert E. Zobel(5)............................................ 0 *
John R. Frock(6).............................................. 0 *
Daniel L. Russell(7).......................................... 0 *
Peter H. Havens............................................... 0 *
Edward H. Chambers............................................ 0 *
Eugene G. Monaco.............................................. 0 *
D. Scott Clegg(8)............................................. 0 *
Daryl A. Dixon................................................ 0 *
Lynn A. Fontana............................................... 0 *
All executive officers and directors as a group (9 persons)(9) 0 *
- --------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the Commission. On that basis, NLCI believes that each of the stockholders
named in this table has sole voting and dispositive power with respect to
the shares indicated as beneficially owned except as otherwise indicated in
the footnotes to this table.
(2) Applicable percentages are based on 1,063,830 shares outstanding on
September 20, 2002, adjusted as required by rules promulgated by the
Commission.
(3) Consists of 1,063,830 shares of Series D preferred stock owned by Allied
Capital Corporation and its affiliates, all of which are closed-end
management investment companies registered under the Investment Company Act
of 1940, as amended. The address of the principal business office of Allied
Capital Corporation is 1919 Pennsylvania Avenue, N.W., Suite 300,
Washington, D.C., 20006.
(4) Mr. A.J. Clegg has agree to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(5) Mr. Zobel has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(6) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Does not include 1,063,830 shares of Series D preferred stock owned by
Allied Capital Corporation that may be deemed to be beneficially owned by
Mr. Russell. Mr. Russell disclaims beneficial ownership of any shares owned
by Allied Capital Corporation. Mr. Russell's address is c/o Allied Capital
Corporation, 1919 Pennsylvania Avenue, N.W., Suite 300, Washington, D.C.,
20006.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates and irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes information contained in the notes above, as applicable.
84
INDEPENDENT AUDITORS
NLCI's financial statements as of June 30, 2001 and June 30, 2000, and for
each of the years in the three-year period ended June 30, 2002, included in
this proxy statement as part of Appendix D, have been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in their report
included in NLCI's Annual Report on Form 10-K for the year ended June 30, 2002,
which is included in this proxy statement as Appendix D. Representatives of
PricewaterhouseCoopers LLP are expected to be available at the special meeting
to respond to appropriate questions of stockholders and to make a statement if
they desire to do so.
FUTURE STOCKHOLDER PROPOSALS
If the merger is completed, there will be no public participation in any
future meetings of stockholders of NLCI. However, if the merger is not
completed, NLCI stockholders will continue to be entitled to attend and
participate in NLCI stockholders' meetings. If the merger is not completed,
NLCI will inform its stockholders, by press release or other means determined
reasonable by NLCI, of the date by which stockholder proposals must be received
by NLCI for inclusion in the proxy materials relating to the annual meeting,
which proposals must comply with the rules and regulations of the Commission
then in effect.
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION
NLCI files annual, quarterly and special reports, proxy statements and other
information with the Commission. In addition, because the merger is a "going
private" transaction, NLCI has filed a Rule 13e-3 Transaction Statement on
Schedule 13E-3 with respect to the merger. The Schedule 13E-3, the exhibits to
the Schedule 13E-3 and such reports, proxy statements and other information
contain additional information about NLCI. Exhibits (c)(1) through (c)(6) and
(d)(1) through (d)(3) of the Schedule 13E-3 will be made available for
inspection and copying at NLCI's executive offices during regular business
hours by any NLCI stockholder or a representative of a stockholder as so
designated in writing.
NLCI stockholders may read and copy the Schedule 13E-3 and any reports,
statements or other information filed by NLCI at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Office of the Commission: The Woolworth Building, 233
Broadway, New York, New York, 10279. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. NLCI's filings with the Commission are also available to the public from
commercial document retrieval services and at the website maintained by the
Commission located at: "http://www.sec.gov."
NLCI has included in this proxy statement the following document filed with
the Commission under the Exchange Act:
. Appendix D--NLCI's Annual Report on Form 10-K for the year ended June 30,
2002.
The following documents are incorporated by reference in this proxy
statement and are deemed to be a part hereof:
. NLCI's Annual Report on Form 10-K for the year ended June 30, 2002;
. NLCI's Current Report on Form 8-K filed on August 8, 2002; and
. NLCI's Current Report on Form 8-K filed on September 24, 2002.
However, any references in these documents to the Private Securities
Litigation Reform Act and "safe harbor" protection for forward-looking
statements are specifically not included in this proxy statement.
This proxy statement does not constitute an offer to sell or to buy, or a
solicitation of an offer to sell or to buy, any securities, or the solicitation
of a proxy, in any jurisdiction to or from any person to whom it is not lawful
to make any offer or solicitation in such jurisdiction.
85
Appendix A
Execution Draft
---------------
AGREEMENT AND PLAN OF MERGER
by and between
SOCRATES ACQUISITION CORPORATION
and
NOBEL LEARNING COMMUNITIES, INC.
Dated as of August 5, 2002
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER ..................................................................... 2
SECTION 1.01 The Merger .................................................. 2
SECTION 1.02 Closing; Effective Time .................................... 2
SECTION 1.03 Effect of the Merger ........................................ 2
SECTION 1.04 Subsequent Actions .......................................... 3
SECTION 1.05 Certificate of Incorporation; By-Laws ...................... 3
SECTION 1.06 Directors and Officers ...................................... 3
ARTICLE II
EFFECT ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; PAYMENT FOR
SHARES ......................................................................... 3
SECTION 2.01 Effect on Capital Stock ..................................... 3
SECTION 2.02 Payment for Company Common Stock, Company Preferred Stock
Company Stock Options and Company Warrants in the Merger ... 7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY .................................. 11
SECTION 3.01 Organization and Qualification; Subsidiaries ............... 12
SECTION 3.02 Certificate of Incorporation and By-Laws .................... 12
SECTION 3.03 Capitalization ............................................. 12
SECTION 3.04 Authority Relative to This Agreement ....................... 14
SECTION 3.05 No Conflict; Required Filings and Consents ................. 15
SECTION 3.06 Permits; Compliance ........................................ 16
SECTION 3.07 SEC Filings; Financial Statements .......................... 16
SECTION 3.08 Absence of Certain Changes or Events ........................ 17
SECTION 3.09 Absence of Litigation ....................................... 18
SECTION 3.10 Employee Benefit Matters .................................... 19
SECTION 3.11 Material Contracts .......................................... 21
SECTION 3.12 Environmental Matters ....................................... 22
SECTION 3.13 Title to Properties; Absence of Liens and Encumbrances ...... 23
SECTION 3.14 Intellectual Property ...................................... 23
SECTION 3.15 Taxes ....................................................... 23
SECTION 3.16 Insurance ................................................... 26
SECTION 3.17 State Takeover Statutes; Company Rights Agreement .......... 26
SECTION 3.18 Compliance with Applicable Laws ............................. 27
SECTION 3.19 School Licenses ............................................. 27
SECTION 3.20 Opinion of Financial Advisor ................................ 27
SECTION 3.21 Brokers ..................................................... 27
SECTION 3.22 Fee and Expense Estimate .................................... 28
SECTION 3.23 Employees ................................................... 28
SECTION 3.24 Transactions with Affiliates ................................ 28
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER ........................................ 28
i
SECTION 4.01 Organization and Qualification; Subsidiaries ................. 28
SECTION 4.02 Ownership of Buyer; No Prior Activities ...................... 28
SECTION 4.03 Authority Relative to this Agreement ......................... 29
SECTION 4.04 No Conflict; Required Filings and Consents. .................. 29
SECTION 4.05 Brokers ...................................................... 29
SECTION 4.06 Financing .................................................... 30
SECTION 4.07 Absence of Litigation ........................................ 30
SECTION 4.08 No Agreements or Understandings to Sell Assets or Stock ...... 30
ARTICLE V
CONDUCT OF BUSINESSES PENDING THE MERGER ........................................ 30
SECTION 5.01 Conduct of Business by the Company Pending the Merger ........ 30
SECTION 5.02 Notification of Certain Matters .............................. 33
ARTICLE VI
ADDITIONAL AGREEMENTS ........................................................... 33
SECTION 6.01 Preparation of Proxy Statement; Stockholders Meeting. ........ 33
SECTION 6.02 Access to Information; Confidentiality ....................... 35
SECTION 6.03 No Solicitation of Transactions ............................. 36
SECTION 6.04 Directors' and Officers' Indemnification and Insurance ...... 38
SECTION 6.05 Further Action; Consents; Filings ........................... 39
SECTION 6.06 Public Announcements ......................................... 40
SECTION 6.07 Certain Employee Benefits Matters ............................ 40
SECTION 6.08 Rights Agreement ............................................. 41
SECTION 6.09 Stockholder Litigation ....................................... 41
SECTION 6.10 Solvency ..................................................... 41
ARTICLE VII
CONDITIONS TO THE MERGER ........................................................ 41
SECTION 7.01 Conditions to the Obligations of Each Party .................. 41
SECTION 7.02 Conditions to the Obligations of Buyer ....................... 42
SECTION 7.03 Conditions to the Obligations of the Company ................. 43
ARTICLE VIII
TERMINATION, AMENDMENT, WAIVER AND EXPENSES ..................................... 44
SECTION 8.01 Termination .................................................. 44
SECTION 8.02 Effect of Termination ........................................ 46
SECTION 8.03 Expenses .................................................... 46
ARTICLE IX
GENERAL PROVISIONS .............................................................. 47
SECTION 9.01 Non Survival of Representations, Warranties and Agreements ... 47
SECTION 9.02 Notices ...................................................... 48
SECTION 9.03 Certain Definitions .......................................... 49
SECTION 9.04 Amendment .................................................... 50
SECTION 9.05 Waiver ....................................................... 50
SECTION 9.06 Severability ................................................. 50
SECTION 9.07 Assignment; Binding Effect; Benefit .......................... 51
SECTION 9.08 Specific Performance ......................................... 51
SECTION 9.09 Governing Law; Forum ......................................... 51
SECTION 9.10 Headings ..................................................... 51
ii
SECTION 9.11 Counterparts ............................................ 51
SECTION 9.12 Entire Agreement ........................................ 51
EXHIBIT 1 Form of Voting Agreement
EXHIBIT 2 Directors of the Surviving Corporation
EXHIBIT 3 "knowledge" Individuals
SCHEDULE I Rollover Shares
iii
GLOSSARY OF DEFINED TERMS
Location of
Defined Term Definition
- ------------ -----------
Acquisition Proposal ..................................... Section 6.03(b)
Acquisition Transaction .................................. Section 6.03(a)
Action ................................................... Section 3.09
Affiliate or affiliate ................................... Section 9.03(a)
Affiliated Group ......................................... Section 3.15(j)
Agreement ................................................ Preamble
Appraisal Shares ......................................... Section 2.01(e)
Business Combination ..................................... Section 8.03(e)
business day ............................................. Section 9.03(b)
Buyer .................................................... Preamble
Buyer Class C Common Stock ............................... Section 2.01(d)
Buyer Class P Common Stock ............................... Section 2.01(d)
Buyer Confidentiality Agreement .......................... Section 6.03(b)(i)
Buyer Material Adverse Effect ............................ Section 4.01
Buyer Shares ............................................. Section 2.01(d)
Buyer Stockholder ........................................ Section 2.02(c)
Certificate of Merger .................................... Section 1.02(b)
Certificates ............................................. Section 2.02(b)
Closing .................................................. Section 1.02(a)
Closing Date ............................................. Section 1.02(a)
Code ..................................................... Section 2.02(j)
Commitment Letter ........................................ Section 4.06
Company .................................................. Preamble
Company Balance Sheet .................................... Section 3.07(b)
Company Board ............................................ Recitals
Company By-Laws .......................................... Section 3.02
Company Capital Stock .................................... Section 3.03(a)
Company Charter .......................................... Section 2.01(b)
Company Common Stock ..................................... Recitals
Company Disclosure Schedule .............................. Article III
Company Intellectual Property ............................ Section 3.14(b)
Company Material Contracts ............................... Section 3.11(a)
Company Option Plans ..................................... Section 2.01(f)
Company Permits .......................................... Section 3.06(a)
Company Preferred Stock .................................. Section 3.03(a)
Company Rights ........................................... Section 2.01
Company Rights Agreement ................................. Section 2.01
Company SEC Reports ...................................... Section 3.07(a)
Company Series A Junior Preferred Stock .................. Section 3.03(a)
Company Series A Preferred Stock ......................... Section 3.03(a)
iv
Company Series C Preferred Stock .......................... Section 3.03(a)
Company Series D Preferred Stock .......................... Section 3.03(a)
Company Stock Options ..................................... Section 2.01(f)
Company Stockholder Approval .............................. Section 3.04(c)
Company Stockholders Meeting .............................. Section 6.01(b)
Company Subsidiary ........................................ Section 9.03(c)
Company Warrants .......................................... Section 2.01(g)
Confidentiality Agreement ................................. Section 6.03(b)(i)
Consent ................................................... Section 3.05(b)
Contract .................................................. Section 3.15(f)
control ................................................... Section 9.03(d)
Controlled Group of Corporations .......................... Section 3.10(h)
DGCL ...................................................... Section 1.01
Effective Time ............................................ Section 1.02(b)
Employee Benefit Plan ..................................... Section 3.10(h)
Employee Pension Benefit Plan ............................. Section 3.10(h)
Employee Welfare Benefit Plan ............................. Section 3.10(g)
Environmental Laws ........................................ Section 9.03(e)
Environmental Permits ..................................... Section 3.13
ERISA ..................................................... Section 3.10(a)
Exchange Act .............................................. Section 3.07(a)
Expenses .................................................. Section 8.03(a)
Fiduciary ................................................. Section 3.10(g)
Filed Company SEC Documents ............................... Section 3.08
Financing ................................................. Section 4.06
Governmental Entity ....................................... Section 2.02(h)
Hazardous Substances ...................................... Section 9.03(f)
HSR Act ................................................... Section 3.05(b)
Intellectual Property ..................................... Section 9.03(g)
Judgment .................................................. Section 3.05(a)
knowledge ................................................. Section 9.03(h)
Law ....................................................... Section 1.02(b)
Liability ................................................. Section 3.10(h)
Licensed Intellectual Property ............................ Section 3.14(c)
Liens ..................................................... Section 3.01(b)
Material Adverse Effect ................................... Section 9.03(i)
Maximum Premium ........................................... Section 6.04(b)
Merger .................................................... Recitals
Merger Consideration ...................................... Section 2.01(b)
Multiemployer Plan ........................................ Section 3.10(h)
Option Agreement .......................................... Section 2.02(d)
Option Consideration ...................................... Section 2.01(f)
Order ..................................................... Section 7.01(b)
Paying Agent Section 2.02(a)
Payment Fund .............................................. Section 2.02(a)
PBGC ...................................................... Section 3.10(h)
v
Person or person .......................................... Section 9.03(j)
Prohibited Transaction .................................... Section 3.10(h)
Proxy Statement ........................................... Section 3.05(b)
Rollover Shares ........................................... Section 2.01(c)
Rollover Options .......................................... Section 2.01(f)
Rollover Stockholder ...................................... Recitals
Schedule 13E-3 ............................................ Section 6.01(e)
Scheduled Options ......................................... Section 2.01(f)
SEC ....................................................... Section 3.05(b)
Securities Act ............................................ Section 3.07(a)
Special Committee ......................................... Recitals
subsidiary ................................................ Section 9.03(k)
Superior Proposal ......................................... Section 6.03(b)
Surviving Corporation ..................................... Section 1.01
Surviving Corporation Class C Common Stock ................ Section 2.01(c)
Surviving Corporation Class P Common Stock ................ Section 2.01(c)
Tax Return ................................................ Section 3.15(j)
Tax or Taxes .............................................. Section 3.15(j)
Transactions .............................................. Recitals
Trademarks ................................................ Section 9.03(l)
U.S. GAAP ................................................. Section 3.07(b)
Voting Company Debt ....................................... Section 3.03(c)
Warrant Consideration ..................................... Section 2.01(g)(i)
vi
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of August 5, 2002 (this
"Agreement") is by and between SOCRATES ACQUISITION CORPORATION, a Delaware
corporation ("Buyer"), and Nobel Learning Communities, Inc., a Delaware
corporation (the "Company"). All terms not otherwise defined herein shall have
the meanings ascribed to them in Section 9.03 hereof.
WHEREAS, a special committee of the Board of Directors of the Company
(the "Company Board") consisting solely of disinterested directors (the "Special
Committee"), subject to the terms and conditions set forth herein, has
unanimously (i) determined that (A) the merger (the "Merger") of Buyer with and
into the Company is advisable and in the best interests of the Company and its
public stockholders (other than those stockholders of the Company identified on
Schedule I hereto (each, a "Rollover Stockholder" and collectively, the
"Rollover Stockholders")), and (B) the cash consideration to be received for
outstanding shares of common stock, par value $0.001 per share, of the Company
(the "Company Common Stock") and outstanding shares of Company Preferred Stock
(as defined in Section 3.03 hereof) in the Merger is fair to the stockholders of
the Company who will be entitled to receive such cash consideration (other than
the Rollover Stockholders), (ii) recommended that the Company Board approve and
adopt this Agreement, the Merger and the other transactions contemplated hereby
(collectively, the "Transactions") and (iii) recommended approval and adoption
by the stockholders of the Company of this Agreement and the Transactions;
WHEREAS, the Company Board, subject to the terms and conditions set
forth herein and after the unanimous recommendation of the Special Committee,
has (i) determined that (A) the Merger is advisable and in the best interests of
the Company and its public stockholders (other than the Rollover Stockholders),
and (B) the cash consideration to be received for outstanding shares of Company
Common Stock and Company Preferred Stock in the Merger is fair to the
stockholders of the Company who will be entitled to receive such cash
consideration (other than the Rollover Stockholders), (ii) approved and adopted
this Agreement and the Transactions and (iii) recommended approval and adoption
by the stockholders of the Company of this Agreement and the Transactions;
WHEREAS, the Board of Directors of Buyer has unanimously approved this
Agreement and the Transactions;
WHEREAS, the Rollover Stockholders shall retain all or a portion of
their equity interest in the Company in connection with the Merger, as more
fully described herein;
WHEREAS, Buyer and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and the
Transactions and also to prescribe various conditions to the Merger; and
WHEREAS, certain stockholders of the Company have, concurrently with
the execution of this Agreement, executed voting agreements, dated as of the
date hereof, pursuant to which such stockholders have agreed to vote any shares
of Company Common Stock and Company
1
Preferred Stock owned by such stockholders in favor of the approval and
adoption of this Agreement and the Transactions.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions herein
contained, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 The Merger. Upon the terms of this Agreement and subject
to the conditions set forth in Article VII, and in accordance with the Delaware
General Corporation Law (the "DGCL"), at the Effective Time (as defined in
Section 1.02(b) hereof), Buyer shall be merged with and into the Company. As a
result of the Merger, the separate corporate existence of Buyer shall cease and
the Company shall continue as the surviving corporation of the Merger (the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Delaware.
SECTION 1.02 Closing; Effective Time.
(a) The closing of the Merger (the "Closing") shall take place
(i) at 10:00 a.m. (Eastern Daylight Savings Time) at the offices of Ropes &
Gray, 885 Third Avenue, Suite 3200, New York, New York as soon as practicable,
but in any event within three (3) business days after the day on which the last
to be fulfilled or waived of the conditions set forth in Article VII (other than
those conditions that by their nature are to be fulfilled at the Closing, but
subject to the fulfillment or waiver of such conditions) shall be fulfilled or
waived in accordance with this Agreement or (ii) at such other place and time or
on such other date as Buyer and the Company may agree in writing (the "Closing
Date").
(b) At the Closing, the Company and Buyer shall cause a
certificate of merger (the "Certificate of Merger") to be executed and filed
with the Secretary of State of the State of Delaware as provided in Section 251
of the DGCL and make all other filings or recordings required by applicable
statute, law (including principles of common law), legislation, legally binding
interpretation, ordinance, rule or regulation of any Governmental Entity,
domestic or foreign (collectively, "Laws") in connection with the Merger. The
Merger shall become effective at such time as the Certificate of Merger is duly
filed with the Secretary of State of the State of Delaware or at such later time
as is specified in the Certificate of Merger in accordance with the DGCL (the
"Effective Time").
SECTION 1.03 Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the Certificate of Merger and
the applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of the Company and Buyer shall vest in the
Surviving Corporation, and all obligations, debts, liabilities and duties of the
Company and Buyer shall become the obligations, debts, liabilities and duties of
the Surviving Corporation.
2
SECTION 1.04 Subsequent Actions. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Company or Buyer or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of the Company and Buyer, all such deeds, bills of sale,
assignments and assurances and to take and do, in the name and on behalf of each
of the Company and Buyer or otherwise, all such other actions and things as may
be necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the Surviving
Corporation or otherwise to carry out this Agreement.
SECTION 1.05 Certificate of Incorporation; By-Laws.
(a) At the Effective Time, the Certificate of Incorporation of
the Company shall be amended to be identical to that of Buyer, as in effect
immediately prior to the Effective Time, except that Article I shall state that
the name of the Company is Nobel Learning Communities, Inc. Such Certificate of
Incorporation, as so amended, shall be the Certificate of Incorporation of the
Surviving Corporation, until thereafter amended, subject to the requirements of
Section 6.04 hereof, in accordance with the terms thereof and of the DGCL.
(b) At the Effective Time, the By-Laws of Buyer, as in effect
immediately prior to the Effective Time, shall be the By-Laws of the Surviving
Corporation until thereafter amended, subject to Section 6.04 hereof, in
accordance with the terms thereof, and of the Certificate of Incorporation of
the Surviving Corporation and of the DGCL.
SECTION 1.06 Directors and Officers. The individuals set forth on
Exhibit 2 hereto shall be the directors of the Surviving Corporation, each to
hold office in accordance with the Certificate of Incorporation and By-Laws of
the Surviving Corporation, and the officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, in each
case until their respective successors are duly elected or appointed and
qualified.
ARTICLE II
EFFECT ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
PAYMENT FOR SHARES
SECTION 2.01 Effect on Capital Stock. For purposes of this Section
2.01, references to Company Common Stock, Company Preferred Stock and Rollover
Shares (as defined in Section 2.01(c) hereof) include the rights (the "Company
Rights") issued pursuant to the Rights Agreement dated as of May 16, 2000 (as
amended and in effect as of the date hereof, the "Company Rights Agreement")
between the Company and Stocktrans, Inc., a Pennsylvania corporation, as Rights
Agent, that are associated with such Company Common Stock, Company Preferred
Stock and Rollover Shares. At the Effective Time, by virtue of the Merger and
without
3
any action on the part of the holder of any shares of Company Common Stock,
Company Preferred Stock or any shares of capital stock of Buyer:
(a) Cancellation of Treasury Stock and Buyer-Owned Stock. Each share
of Company Common Stock or Company Preferred Stock that, immediately prior to
the Effective Time, is owned directly by the Company or Buyer shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and no other consideration shall be delivered or deliverable in exchange
therefor.
(b) Conversion of Company Common Stock and Company Preferred Stock.
Except as otherwise set forth in Sections 2.01(a), 2.01(c) and 2.01(e) hereof,
by virtue of the Merger and without any action on the part of holder thereof:
(i) each issued share of Company Common Stock shall be converted into the right
to receive $7.75 in cash and (ii) each issued share of Company Preferred Stock
shall be converted into the right to receive $7.75 in cash for each whole share
of Company Common Stock into which such share of Company Preferred Stock is then
convertible pursuant to the Company's Certificate of Incorporation, as amended
to date (the "Company Charter") plus the amount determined by multiplying $7.75
by the fraction (rounded to the nearest one-hundredth of a share) representing
any fractional share of Company Common Stock in which any share of Company
Preferred Stock is then convertible pursuant to the Company Charter, in each
case subject to adjustment for any stock split, stock dividend or combination of
stock that may occur from the date hereof and prior to the Effective Time. The
cash payable upon the conversion of each share of Company Common Stock or
Company Preferred Stock, as the case may be, pursuant to this Section 2.01(b) is
referred to as the "Merger Consideration". As of the Effective Time, all such
shares of Company Common Stock and Company Preferred Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of Company
Common Stock or Company Preferred Stock shall cease to have any rights with
respect thereto, except the right to receive Merger Consideration upon surrender
of such certificate in accordance with this Section 2.01(b), without interest.
(c) Rollover Shares. Each issued share of Company Common Stock or
Company Preferred Stock held by a Rollover Stockholder and designated on
Schedule I under the column designated "Rollover Shares" (each a "Rollover
Share" and together the "Rollover Shares") shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive (i) the aggregate number of shares of Class C Common Stock, par
value $.01 per share, of the Surviving Corporation (the "Surviving Corporation
Class C Common Stock") and (ii) the aggregate number of shares of Class P Common
Stock, par value $.01 per share, of the Surviving Corporation ("Surviving
Corporation Class P Common Stock") set forth on Schedule I next to the name of
each such Rollover Stockholder in the columns designated "Surviving Corporation
Class C Common Stock" and "Surviving Corporation Class P Common Stock,"
respectively. All such Rollover Shares, by virtue of the Merger and without any
action on the part of the holders thereof, shall no longer be outstanding and
shall be canceled and retired and shall cease to exist, and each holder of a
certificate representing any such Rollover Shares shall thereafter cease to have
any rights with respect to such Rollover Shares, except the right to receive the
Surviving Corporation Class C Common Stock and the Surviving Corporation Class P
Common Stock for such Rollover Shares as set forth in Schedule I upon the
surrender of such certificate in accordance with this Section 2.01(c).
4
(d) Capital Stock of Buyer. Each issued and outstanding share of
Class C Common Stock, par value $.01 per share, of Buyer (the "Buyer Class C
Common Stock") shall be converted into and become one fully paid and
non-assessable shares of Surviving Corporation Class C Common Stock, and each
issued and outstanding share of Class P Common Stock, par value $.01 per share,
of Buyer (the "Buyer Class P Common Stock") shall be converted into and become
one fully paid and non-assessable shares of Surviving Corporation Class P Common
Stock. All such shares of Buyer Class C Common Stock and Buyer Class P Common
Stock (collectively "Buyer Shares"), by virtue of the Merger and without any
action on the part of the holders thereof, shall no longer be outstanding and
shall be cancelled and retired and shall cease to exist, and each holder of a
certificate representing any such Buyer Shares shall thereafter cease to have
any rights with respect to such Buyer Shares, except the right to receive
Surviving Corporation Class C Common Stock or Surviving Corporation Class P
Common Stock as set forth above.
(e) Appraisal Rights. Notwithstanding any provisions of this
Agreement to the contrary, shares of Company Common Stock and Company Preferred
Stock which are issued and outstanding immediately prior to the Effective Time
and which are held by any Person who has not voted such shares of Company Common
Stock or Company Preferred Stock in favor of the Merger, who shall have
delivered a written demand for appraisal of such shares of Company Common Stock
or Company Preferred Stock in the manner provided by the DGCL and who, as of the
Effective Time, shall not have effectively withdrawn or lost such right to
appraisal (the "Appraisal Shares") shall not be converted into a right to
receive the Merger Consideration. The holders thereof shall be entitled only to
such rights as are granted by Section 262 of the DGCL. Each holder of Appraisal
Shares who becomes entitled to payment for such shares of Company Common Stock
or Company Preferred Stock pursuant to Section 262 of the DGCL shall receive
payment therefor from the Surviving Corporation in accordance with the DGCL;
provided, however, that (i) if any such holder of Appraisal Shares shall have
failed to establish its entitlement to appraisal rights as provided in Section
262 of the DGCL, (ii) if any such holder of Appraisal Shares shall have
effectively withdrawn its demand for appraisal of such shares of Company Common
Stock or Company Preferred Stock or lost its right to appraisal and payment for
its shares of Company Common Stock or Company Preferred Stock under Section 262
of the DGCL, or (iii) if neither any holder of Appraisal Shares nor the
Surviving Corporation shall have filed a petition demanding a determination of
the value of all Appraisal Shares within the time provided in Section 262 of the
DGCL, such holder shall forfeit the right to appraisal of such shares of Company
Common Stock or Company Preferred Stock and each such share of Company Common
Stock and Company Preferred Stock shall be treated as if such share of Company
Common Stock or Company Preferred Stock had been converted, as of the Effective
Time, into a right to receive the Merger Consideration, without interest
thereon, from the Surviving Corporation as provided in Section 2.01(b) hereof.
The Company shall give Buyer prompt notice of any demands received by the
Company for appraisal of Company Common Stock or Company Preferred Stock, and,
until the Effective Time, Buyer shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Buyer, make any payment with
respect to, or settle or offer to settle, any such demands.
(f) Company Stock Options. As part of the Transactions, the Company
and the Surviving Corporation shall cause any outstanding options to purchase
Company Common
5
Stock ("Company Stock Options") granted pursuant to the Company's 1986 Stock
Option and Stock Grant Plan, 1988 Stock Option and Stock Grant Plan, 1995 Stock
Incentive Plan and 2000 Stock Option Plan for Consultants (collectively the
"Company Option Plans") and the other Company Stock Options disclosed in Section
3.03(d) of the Company Disclosure Schedule (the "Scheduled Options") to be
treated as follows:
(i) Except as set forth in clause (ii) below, at the Effective Time,
all then outstanding Company Stock Options shall be canceled and in lieu
thereof, each holder of a Company Stock Option shall receive from the
Surviving Corporation, an amount in cash (if any) equal to the product of
(i) the excess, if any, of the per share Merger Consideration over the per
share exercise price of such Company Stock Option and (ii) the number of
shares of Company Common Stock subject to such Company Stock Option
exercisable as of the Effective Time, net of any applicable withholding
taxes (the "Option Consideration").
(ii) Each Company Stock Option held by a Rollover Stockholder and
designated on Schedule I under the column designated "Rollover Options"
(each a "Rollover Option" and together the "Rollover Options") shall, by
virtue of the Merger and without any action on the part of the holder
thereof, be converted into the right to receive the aggregate number of
options for Surviving Corporation Class C Common Stock and the aggregate
number of options for Surviving Corporation Class P Common Stock set forth
on Schedule I next to the name of each such Rollover Stockholder in the
columns designated "Surviving Corporation Class C Options" and "Surviving
Corporation Class P Options", respectively. All such Rollover Options, by
virtue of the Merger and without any action on the part of the holders
thereof, shall no longer be outstanding and shall be canceled and retired
and shall cease to exist, and each holder of a certificate or agreement
representing any such Rollover Options shall thereafter cease to have any
rights with respect to such Rollover Options, except the right to receive
options for the Surviving Corporation Class C Common Stock and options for
the Surviving Corporation Class P Common Stock for such Rollover Options as
set forth in Schedule I upon the surrender of such certificate or agreement
in accordance with this Section 2.01(f).
(iii) Each of the Company and the Surviving Corporation, as the case
may be, covenants that prior to the Effective Time it will use all
commercially reasonable efforts to take all actions necessary to provide
that the cancellation and cash-out and/or rollover of Company Stock Options
pursuant to this Section 2.01(f) will qualify for exemption under Rule
16b-3(d) or (e), as applicable, under the Exchange Act (as defined in
Section 3.07(a) hereof).
(iv) The Company shall use all commercially reasonable efforts to
obtain all necessary consents, waivers or releases from holders of Company
Stock Options and shall take such action as may be reasonably necessary to
give effect to, and accomplish, the transactions contemplated by this
Section 2.01(f); provided, however, that in no event shall this Section
2.01(f)(iv) require the Company to pay any consideration to the holders of
the Company Stock Options to obtain such consents, waivers or releases.
6
(v) Except as otherwise provided herein or agreed to by the parties,
the Company Option Plans shall terminate effective as of the Effective Time
and the Company shall use all commercially reasonable efforts to cause the
provisions in any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of
the Company or any Company Subsidiary to be canceled as of the Effective
Time.
(g) Company Warrants. As part of the Transactions, the Company and
theSurviving Corporation shall cause any outstanding warrants to purchase
Company Common Stock ("Company Warrants") granted pursuant to the Common Stock
Purchase Warrant dated August 30, 1995 held by Allied Capital Corporation and
the Common Stock Purchase Warrant dated June 30, 1998 held by Allied Capital
Corporation to be treated as follows:
(i) At the Effective Time, all then outstanding Company Warrants
shall be canceled and in lieu thereof, each holder of Company Warrants
shall receive from the Surviving Corporation, an amount in cash (if any)
equal to the product of (i) the excess, if any, of the per share Merger
Consideration over the per share exercise price of such Company Warrant and
(ii) the number of shares of Company Common Stock subject to such Company
Warrant exercisable as of the Effective Time, net of any applicable
withholding taxes (the "Warrant Consideration").
(ii) The Company shall use all commercially reasonable efforts to
obtain all necessary consents, waivers or releases from holders of Company
Warrants and shall take such action as may be reasonably necessary to give
effect to, and accomplish, the transactions contemplated by this Section
2.01(g); provided, however, that in no event shall this Section 2.01(g)(ii)
require the Company to pay any consideration to the holders of the Company
Warrants to obtain such consents, waivers or releases.
(iii) Except as otherwise provided herein or agreed to by the parties,
the Company Warrants shall terminate effective as of the Effective Time.
SECTION 2.02 Payment for Company Common Stock, Company Preferred Stock
Company Stock Options and Company Warrants in the Merger.
(a) Paying Agent. Prior to the Effective Time, Buyer shall select a
bank or trust company in the United States, reasonably acceptable to the
Company, to act as paying agent (the "Paying Agent") for the payment of the
Merger Consideration upon surrender of certificates representing Company Common
Stock and Company Preferred Stock and, at the option of the Surviving
Corporation, of the Option Consideration and the Warrant Consideration. Buyer
shall take all steps necessary to provide to the Paying Agent at the Effective
Time cash necessary to pay for the shares of Company Common Stock and Company
Preferred Stock, and, if the Surviving Corporation elects to use the Paying
Agent for such payments, for the Company Stock Options and the Company Warrants
converted into the right to receive cash pursuant to Section 2.01 hereof (such
cash being hereinafter referred to as the "Payment Fund"). If for any reason
(including losses) the Payment Fund is inadequate to pay the amounts to which
holders of shares of Company Common Stock and Company Preferred Stock, and, if
the Surviving Corporation elects to use the Paying Agent for such payments, for
the Company Stock Options and the
7
Company Warrants shall be entitled under Section 2.01 hereof, the Surviving
Corporation shall promptly, but in any event within five (5) business days,
deposit in trust additional cash with the Paying Agent sufficient to make all
payments required under Section 2.01 hereof, and the Surviving Corporation shall
in any event be liable for payment thereof. The Payment Fund shall not be used
for any purpose except as expressly provided in this Agreement.
(b) Payment Procedures for Company Common Stock and Company Preferred
Stock. Promptly after the Effective Time, the Surviving Corporation shall cause
the Paying Agent to mail to each holder of record of a certificate or
certificates (the "Certificates") that immediately prior to the Effective Time
represented outstanding shares of Company Common Stock or Company Preferred
Stock (other than holders of Rollover Shares), whose shares were converted into
the right to receive Merger Consideration pursuant to Section 2.01 hereof, (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent and shall be in such form and have such other
provisions as Buyer may reasonably specify), and (ii) instructions for use in
effecting the surrender of the Certificates, other than Rollover Shares, in
exchange for Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the Paying
Agent, the holder of such Certificate shall be entitled to receive in exchange
therefor the amount of cash into which the shares of Company Common Stock or
Company Preferred Stock theretofore represented by such Certificate shall have
been converted pursuant to Section 2.01 hereof, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of Company Common Stock or Company Preferred Stock that is not registered in the
transfer records of the Company, payment may be made to a Person other than the
Person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the Person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a Person other than the registered
holder of such Certificate or establish to the satisfaction of Buyer that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.02, each Certificate, other than those with respect to Rollover
Shares, shall be deemed at any time after the Effective Time to represent only
the right to receive upon such surrender the amount of cash, without interest,
into which the shares of Company Common Stock or Company Preferred Stock
theretofore represented by such Certificate have been converted pursuant to
Section 2.01(b) hereof. If any holder of shares of Company Common Stock or
Company Preferred Stock shall be unable to surrender such holder's Certificates
because such Certificates have been lost, mutilated or destroyed, such holder
may deliver in lieu thereof an affidavit and, if required by the Paying Agent,
an indemnity bond in form and substance and with surety reasonably satisfactory
to the Surviving Corporation. No interest shall be paid or accrue on the cash
payable upon surrender of any Certificate.
(c) Buyer and Rollover Procedures. At the Closing, each holder of
Buyer Shares (each, a "Buyer Stockholder" and collectively, the "Buyer
Stockholders") and each Rollover Stockholder shall surrender the certificate(s)
representing the Buyer Shares or the Rollover Shares held by such Buyer
Stockholder or Rollover Stockholder and the Surviving Corporation shall issue to
each such Buyer Stockholder and Rollover Stockholder a certificate or
certificates representing the number of shares of Surviving Corporation Class C
Common Stock
8
and Surviving Corporation Class P Common Stock to which such Buyer Stockholder
and Rollover Stockholder is entitled pursuant to Sections 2.01(c) and 2.01(d)
hereof and Schedule I hereto.
(d) Procedures for Company Stock Options and Company Warrants.
Promptly after the Effective Time, the Surviving Corporation shall or shall
cause the Paying Agent to mail to each holder of an option agreement (each, an
"Option Agreement") that immediately prior to the Effective Time represented
Company Stock Options, whose Company Stock Options were converted into the right
to receive Option Consideration pursuant to Section 2.01(f) hereof, such
materials and instructions for use in effecting the surrender of such Option
Agreement in exchange for Option Consideration. Promptly after the Effective
Time, the Surviving Corporation shall or shall cause the Paying Agent to mail to
each holder of a Company Warrant that was converted into the right to receive
Warrant Consideration pursuant to Section 2.01(g) hereof, such materials and
instructions for use in effecting the surrender of such Company Warrant in
exchange for Warrant Consideration. Upon surrender of an Option Agreement to the
Paying Agent or the Surviving Corporation, as the case may be, together with
such other documents as may reasonably be required by the Paying Agent or the
Surviving Corporation, the holder of such Option Agreement shall be entitled to
receive in exchange therefor the amount of cash into which the Company Stock
Options theretofore represented by such Option Agreement shall have been
converted pursuant to Section 2.01(f). Upon surrender of a Company Warrant to
the Paying Agent or the Surviving Corporation, as the case may be, together with
such other documents as may reasonably be required by the Paying Agent or the
Surviving Corporation, the holder of such Company Warrant shall be entitled to
receive in exchange therefor the amount of cash into which the Company Warrant
shall have been converted pursuant to Section 2.01(g) hereof. Until surrendered
as contemplated by this Section 2.02(d), each Option Agreement and Company
Warrant shall be deemed at any time after the Effective Time to represent only
the right to receive upon such surrender the amount of cash, without interest,
into which the Company Options theretofore represented by such Option Agreement
shall have been converted pursuant to Section 2.01(f) hereof or into which the
Company Warrant shall have been converted pursuant to Section 2.01(g) hereof. If
any holder of Company Stock Options or Company Warrants shall be unable to
surrender such holder's Option Agreement or Company Warrant because such Option
Agreement or Company Warrant has been lost, mutilated or destroyed, such holder
may deliver in lieu thereof an affidavit and indemnity bond in form and
substance and with surety reasonably satisfactory to the Surviving Corporation.
No interest shall be paid or accrue on the cash payable upon surrender of any
Option Agreement or Company Warrant.
(e) No Further Ownership Rights in Company Common Stock, Company
Preferred Stock, Rollover Shares, Company Stock Options or Company Warrants. The
Merger Consideration, Option Consideration and Warrant Consideration paid in
accordance with the terms of this Article II and the exchange of Rollover Shares
for shares of the Surviving Corporation in accordance with the terms of this
Article II shall be deemed to have been paid in full satisfaction of all rights
pertaining to such shares of Company Common Stock, Company Preferred Stock,
Rollover Shares, Company Stock Options or Company Warrants, and after the
Effective Time there shall be no further registration on the stock transfer
books of the Surviving Corporation (i) of transfers of shares of Company Common
Stock, Company Preferred Stock or Rollover Shares or (ii) of the exercise of
Company Stock Options or Company Warrants, in any
9
case that were outstanding immediately prior to the Effective Time. If, after
the Effective Time, any certificates formerly representing shares of Company
Common Stock or Company Preferred Stock, any Option Agreements formerly
representing Company Stock Options or any Company Warrants are presented to the
Surviving Corporation or the Paying Agent for any reason, they shall be canceled
and exchanged as provided in this Article II.
(f) Payment Fund for Appraisal Shares. Any portion of the Payment Fund
made available to the Paying Agent pursuant to Section 2.02(a) hereof to pay for
shares of Company Common Stock or Company Preferred Stock that become Appraisal
Shares shall be returned to the Surviving Corporation upon written demand.
(g) Termination of Payment Fund. Any portion of the Payment Fund that
remains undistributed to the holders of Company Common Stock, Company Preferred
Stock, Company Stock Options or Company Warrants for nine months after the
Effective Time shall be delivered to Buyer or the Surviving Corporation, upon
demand, and any holder of Company Common Stock, Company Preferred Stock, Company
Stock Options or Company Warrants who has not theretofore complied with this
Article II shall thereafter look only to Surviving Corporation for payment of
its claim for Merger Consideration, Option Consideration or Warrant
Consideration as the case may be, without interest or dividends thereon.
(h) No Liability. None of Buyer, the Company, the Surviving
Corporation or the Paying Agent, nor any of their respective officers,
directors, employees, agents or counsel, shall be liable to any Person in
respect of any cash from the Payment Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar Law. If any
Certificate, Option Agreement or Company Warrant has not been surrendered prior
to five years after the Effective Time (or immediately prior to such earlier
date on which Merger Consideration, Option Consideration or Warrant
Consideration in respect of such Certificate, Option Agreement or Company
Warrant, as the case may be, would otherwise escheat to or become the property
of any federal, state, local or foreign government or any court of competent
jurisdiction, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (each, a "Governmental
Entity")), any such shares, cash, dividends or distributions in respect of such
Certificate shall, to the extent permitted by applicable Law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any Person previously entitled thereto.
(i) Investment of Payment Fund. The Paying Agent shall invest any cash
included in the Payment Fund, as directed by the Surviving Corporation, on a
daily basis. Any interest and other income resulting from such investments shall
be paid to the Surviving Corporation.
(j) Withholdings. Buyer or the Surviving Corporation, as the case may
be, shall be entitled to deduct and withhold from the consideration otherwise
payable to any holder of Company Common Stock, Company Preferred Stock, Company
Stock Options or Company Warrants pursuant to this Agreement such amounts as may
be required to be deducted and withheld with respect to the making of such
payment under the Internal Revenue Code of 1986, as amended (the "Code"), or
under any provision of state, local or foreign tax Law. To the extent that
amounts are so withheld by the Surviving Corporation or Buyer, as the case may
be,
10
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of Company Common Stock, Company
Preferred Stock, Company Stock Options or Company Warrants in respect of which
such deduction and withholding was made by the Surviving Corporation or Buyer,
as the case may be.
(k) Adjustments Regarding Dilution.
(i) In the event that prior to the Effective Time, solely as a result
of a reclassification, stock split (including a reverse split), or stock
dividend or stock distribution, made on a pro rata basis to all holders of
such class of stock of the entity making such a stock dividend or stock
distribution, there is a change in the number of shares of Company Common
Stock, Company Preferred Stock, Buyer Class C Common Stock or Buyer Class P
Common Stock outstanding or issuable upon the conversion, exchange or
exercise of securities or rights convertible or exchangeable into or
exercisable for shares of Company Common Stock, Company Preferred Stock,
Buyer Class C Common Stock or Buyer Class P Common Stock, then the Merger
Consideration, Option Consideration, Warrant Consideration, and the number
of shares of Surviving Corporation Class C Common Stock and Surviving
Corporation Class P Common Stock into which the Rollover Shares and Buyer
Shares are entitled to be converted pursuant to Sections 2.01(c) and
2.01(d) hereof and Schedule I hereto shall all be equitably adjusted to
eliminate the effects of such event.
(ii) In the event that prior to the Effective Time there occurs a
"Distribution Date" (as defined in the Company Rights Agreement), (X) the
Merger Consideration, Option Consideration and Warrant Consideration shall
be equitably adjusted such that the aggregate amounts to be paid in respect
of the shares of Company Common Stock and Company Preferred Stock pursuant
to Section 2.01(b) hereof and the aggregate amounts to be paid to the
holders of Company Stock Options or Company Warrants pursuant to Sections
2.01(f) and (g) shall be equal to the aggregate amounts that would have
been payable to all such holders of Company Common Stock, Company Preferred
Stock, Company Stock Options and Company Warrants had such Distribution
Date not occurred and (Y) the number of shares of Surviving Corporation
Class C Common Stock and Surviving Corporation Class P Common Stock into
which the Rollover Shares are entitled to be converted pursuant to Sections
2.01(c) and 2.01(d) hereof and Schedule I hereto shall be equitably
adjusted to eliminate the effects of such event. In the event there shall
be any rights that have separated from the Common Stock or shares of Series
A Preferred Stock outstanding as a result of a Distribution Date, the
provisions of Section 2 shall be deemed to be amended to provide for the
pro rata payment to rights or the Series A Preferred Stock holders taking
into account this clause (i).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer that, except as
specified in the applicable section of the Disclosure Schedule furnished by the
Company to Buyer prior to the execution of this Agreement (the "Company
Disclosure Schedule") corresponding to the Sections and subsections set forth
below:
11
SECTION 3.01 Organization and Qualification; Subsidiaries.
(a) Except as set forth in Section 3.01(a) of the Company
Disclosure Schedule, the Company and each Company Subsidiary is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or formation and has all
requisite corporate power and corporate authority to own, lease and operate its
properties and to carry on its business as it is now being conducted, except
where the failure to be organized, existing, in good standing or to have such
power or authority has not had or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect or would not, or
would not reasonably be likely to, prevent or delay the consummation of the
Merger. Except as set forth in Section 3.01(a) of the Company Disclosure
Schedule, each of the Company and the Company Subsidiaries is duly qualified or
licensed as a foreign corporation or organization to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that have not had or would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect or would not,
or would not reasonably be likely to, prevent or delay the consummation of the
Merger.
(b) Section 3.01(b) of the Company Disclosure Schedule lists each
Company Subsidiary and its jurisdiction of organization. All of the outstanding
shares of capital stock of each Company Subsidiary have been validly issued and
are fully paid and nonassessable and, except as set forth in Section 3.01(b) of
the Company Disclosure Schedule, are owned by the Company, free and clear of all
pledges, liens, charges, mortgages, encumbrances and security interests of any
kind or nature whatsoever (collectively, "Liens"). Except for its interests in
the Company Subsidiaries and except for the ownership of interests set forth in
Section 3.01(b) of the Company Disclosure Schedule, the Company does not own,
directly or indirectly, or have any outstanding contractual obligation to
acquire, any capital stock, membership interest, partnership interest, joint
venture interest or other equity interest in any corporation, partnership, joint
venture or other business association or entity.
SECTION 3.02 Certificate of Incorporation and By-Laws. The Company has
heretofore provided or made available to Buyer a complete and correct copy of
the Company Charter and the Company's By-Laws, as amended to date ("Company
By-Laws"). The Company Charter and Company By-Laws are in full force and effect.
The Company is not in violation of any of the provisions of the Company Charter
or Company By-Laws. The Company has provided or made available to Buyer complete
copies of the charter, By-Laws or organizational documents of each Company
Subsidiary and, except as set forth in Section 3.02 of the Company Disclosure
Schedule, no Company Subsidiary is in violation of such documents, except for
such violations that have not had or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect or would not, or
would not be reasonably likely to, prevent or delay the consummation of the
Merger.
SECTION 3.03 Capitalization.
(a) The authorized capital stock of the Company consists of (i)
20,000,000 shares of Company Common Stock and (ii) 10,000,000 shares of
preferred stock, consisting of
12
(A) 2,484,320 shares of Series A preferred stock, par value $0.001 per share
("Company Series A Preferred Stock"), (B) 2,500,000 shares of Series C preferred
stock, par value $0.001 per share ("Company Series C Preferred Stock"), (C)
1,063,830 shares of Series D preferred stock, par value $0.001 per share
("Company Series D Preferred Stock" and collectively with the Company Series A
Preferred Stock and the Company Series C Preferred Stock, the "Company Preferred
Stock") and (D) 120,000 shares of Series A junior preferred stock, par value
$0.001 per share ("Company Series A Junior Preferred Stock" and collectively
with the Company Common Stock and the Company Preferred Stock, the "Company
Capital Stock"). At the close of business on August 2, 2002 (i) 6,544,953 shares
of Company Common Stock were issued and outstanding, (ii) 1,023,694.11 shares of
Series A Preferred Stock were issued and outstanding, which shares were
convertible into 300,966 shares of Company Common Stock in accordance with the
terms of the Company Charter, (iii) 2,499,940 shares of Series C Preferred Stock
were issued and outstanding, which shares were convertible into 624,985 shares
of Company Common Stock in accordance with the terms of the Company Charter,
(iv) 1,063,830 shares of Series D Preferred Stock were issued and outstanding,
which shares were convertible into 265,957.5 shares of Company Common Stock in
accordance with the terms of the Company Charter, (v) 230,510 shares of Company
Common Stock were held in the Company's treasury, (vi) no shares of Company
Preferred Stock were held in the Company's treasury, (vii) 597,737 shares of
Company Common Stock were subject to Company Stock Options granted pursuant to
the Company Option Plans, (viii) 243,250 shares of Company Common Stock were
subject to Scheduled Options, (ix) 840,298 shares of Company Common Stock were
subject to outstanding Company Warrants, and (x) 120,000 shares of Company
Series A Junior Preferred Stock were reserved for issuance (but not issued and
outstanding) in connection with the Company Rights. The Company has made
available to Buyer a complete and correct copy of the Company Rights Agreement,
as amended to the date of this Agreement.
(b) Except as set forth above, at the close of business on August 2,
2002 no shares of the Company's capital stock or other voting securities of the
Company were issued, reserved for issuance or outstanding. All outstanding
shares of Company Capital Stock are, and all such shares that may be issued
prior to the Effective Time will be when issued upon the terms and conditions
specified in the instruments pursuant to which they are issuable, duly
authorized, validly issued, fully paid and nonassessable and not subject to or
issued in violation of any purchase option, call option, right of first refusal,
preemptive right, subscription right or any similar right under any provision of
the DGCL, the Company Charter, the Company By-Laws or any Company Material
Contract (as defined in Section 3.11 hereof) to which the Company is a party or
otherwise bound.
(c) There are not any bonds, debentures, notes or other indebtedness
of the Company having the right to vote (or convertible into, or exchangeable
for, securities having the right to vote) on any matters on which holders of
Company capital stock may vote ("Voting Company Debt").
(d) Except as set forth above or as set forth in Section 3.03(d) of
the Company Disclosure Schedule, as of the date of this Agreement, there are not
any options, warrants, rights, convertible or exchangeable securities, "phantom"
stock rights, stock appreciation rights, stock-based performance units,
commitments, Contracts, arrangements or undertakings of any kind to which the
Company or any Company Subsidiary currently is a party or by which any of them
13
currently is bound (i) obligating the Company or any Company Subsidiary to issue
or sell, or cause to be issued or sold, additional shares of capital stock or
other equity interests in, or any security convertible or exercisable for or
exchangeable into any capital stock of or other equity interest in, the Company
or of any Company Subsidiary or any Voting Company Debt; (ii) obligating the
Company or any Company Subsidiary to issue, grant, extend or enter into any such
option, warrant, right, security, stock appreciation right, stock-based
performance unit, commitment, Contract, arrangement or undertaking; or (iii)
that give any Person the right to receive any economic benefit or right similar
to or derived from the economic benefits and rights occurring to holders of
Company Capital Stock. Section 3.03(d) of the Company Disclosure Schedule sets
forth the total number of outstanding Company Stock Options and the exercise
prices thereof, and lists all Company Warrants and the exercise prices thereof.
The Company has provided Buyer with a Schedule of all of the Company Stock
Options, including the relevant vesting times, exercise prices and exercise
periods, and copies of all Company Option Plans and forms of Option Certificates
granted thereunder, and copies of all Company Warrants and documents related to
the Scheduled Options.
(e) Except as set forth in Section 3.03(e) of the Company Disclosure
Schedule, there are no outstanding contractual obligations of the Company or of
any Company Subsidiary, contingent or otherwise, to repurchase, redeem or
otherwise acquire any shares of capital stock of the Company or any Company
Subsidiary other than as provided in the Company Charter. Except as set forth in
the Company Charter, the Company Rights Agreement and in Section 3.03(e) of the
Company Disclosure Schedule, there are no issued and outstanding shares of
Company Capital Stock that are subject to a repurchase or redemption right in
favor of the Company.
SECTION 3.04 Authority Relative to This Agreement.
(a) The Company has all requisite corporate power and corporate
authority to execute and deliver this Agreement and, subject to the Company
Stockholder Approval (as defined in Section 3.04(c)) with respect to the Merger,
to consummate the transactions contemplated hereby. The execution and delivery
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject, in the case of the Merger,
to receipt of the Company Stockholder Approval. The Company has duly executed
and delivered assuming the due authorization, execution and delivery by Buyer,
this Agreement, and this Agreement constitutes its legal, valid and binding
obligation (subject to the Company Stockholder Approval with respect to the
Merger), enforceable against it in accordance with its terms.
(b) The Company Board, on August 5, 2002, and the Special Committee,
on August 5, 2002, in each case at a meeting duly called and held, duly adopted
resolutions (i) approving this Agreement and the Merger, (ii) determining that
the terms of the Merger are fair to and in the best interests of the Company and
its stockholders (other than the Rollover Stockholders), (iii) determining that
the Merger Agreement is fair to the stockholders of the Company (other than the
Rollover Stockholders) and (iv) recommending that the Company's stockholders
approve this Agreement and directing that this Agreement and the Merger be
14
submitted for consideration by the Company's stockholders at the Company
Stockholders' Meeting.
(c) The only vote of holders of any class or series of Company Capital
Stock necessary to approve and adopt this Agreement and the Merger is the
approval of this Agreement by the holders of not less than a majority of the
outstanding shares of Company Common Stock and Company Preferred Stock (voting
on an as-converted basis pursuant to the Company Charter), voting together as a
single class (the "Company Stockholder Approval").
SECTION 3.05 No Conflict; Required Filings and Consents.
(a) Except as set forth in Section 3.05(a) of the Company Disclosure
Schedule, the execution and delivery by the Company of this Agreement do not,
and the consummation of the transactions contemplated hereby and compliance with
the terms hereof will not, result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any Person under, or result in the creation of any
Lien upon any of the properties or assets of the Company or any Company
Subsidiary under, any provision of (i) the Company Charter, the Company By-Laws
or the comparable charter or organizational documents of any Company Subsidiary,
(ii) Company Material Contract (as defined in Section 3.11 hereof) or (iii)
subject to the filings and other matters referred to in Section 3.05(b) hereof,
any judgment, order, injunction or decree, domestic or foreign, of any
Governmental Entity (each a "Judgment"), or Law, applicable to the Company or
any Company Subsidiary or their respective properties or assets, other than, in
the case of clauses (ii) and (iii) above, any such items that, individually or
in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect or would not, or would not reasonably be likely to,
prevent or delay the consummation of the Merger.
(b) Except as set forth in Section 3.05(b) of the Company Disclosure
Schedule, no consent, approval, license, permit, order or authorization (each, a
"Consent") of, or registration, declaration or filing with, any Governmental
Entity is required to be obtained or made by the Company or any Company
Subsidiary in connection with the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby, other
than (i) if required, compliance with and filing of a pre-merger notification
report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) the filing with the U.S. Securities and Exchange
Commission (the "SEC") of a proxy statement relating to the approval of this
Agreement by the Company's stockholders (the "Proxy Statement"), (iii) the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware and appropriate documents with the relevant authorities of the other
jurisdictions in which the Company is qualified to do business, (iv) compliance
with and filings under the Laws of any foreign jurisdictions, if and to the
extent required, and (v) such other items that, individually and in the
aggregate, would not and would not reasonably be expected to have a Material
Adverse Effect or would not, or would not reasonably be likely to, prevent or
delay the consummation of the Merger.
15
SECTION 3.06 Permits; Compliance.
(a) Except (i) as disclosed in Section 3.06(a) of the Company
Disclosure Schedule; or (ii) to the extent that the lack of possession of any
such Company Permits (as defined below), individually or in the aggregate, would
not and would not reasonably be expected to have a Material Adverse Effect or
would not, or would not reasonably be likely to, prevent or delay the
consummation of the Merger; (A) each of the Company and the Company Subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Entity necessary for the Company or any Company Subsidiary
to own, lease and operate its properties or to carry on its business as it is
now being conducted (the "Company Permits"), and (B) no suspension or
cancellation of any of the Company Permits is pending or, to the knowledge of
the Company, overtly threatened.
(b) Except (i) as disclosed in Section 3.06(b) of the Company
Disclosure Schedule; or (ii) to the extent such conflicts, defaults or
violations, individually or in the aggregate, would not, and would not
reasonably be expected to have a Material Adverse Effect or would not, or would
not be reasonably likely to, prevent or delay the consummation of the Merger,
neither the Company nor any Company Subsidiary is in conflict with, or in
default or violation of, any Company Permits.
SECTION 3.07 SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to
be filed by it with the SEC since June 30, 2000, including (i) all Annual
Reports on Form 10-K, (ii) all Quarterly Reports on Form 10-Q, (iii) all proxy
statements relating to meetings of stockholders (whether annual or special) and
(iv) all Reports on Form 8-K, (v) all other reports or registration statements
(collectively, the "Company SEC Reports"). The Company SEC Reports, as well as
all forms, reports and documents to be filed by the Company with the SEC after
the date hereof and prior to the Effective Time, (i) were, at the time filed,
and, in the case of Company SEC Reports filed after the date hereof, will at the
time they are filed be prepared in all material respects in accordance with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in each
case the published rules and regulations of the SEC thereunder, each as
applicable to such Company SEC Reports and (ii) did not as of the time they were
filed, and in the case of such forms, reports and documents filed by the Company
with the SEC after the date of this Agreement, will not as of the time they are
filed, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were and
will be made, not misleading. No Company Subsidiary is subject to the periodic
reporting requirements of the Exchange Act. To the knowledge of the Company,
there is no material unresolved violation of the Exchange Act or the published
rules and regulations of the SEC asserted by the SEC with respect to the Company
SEC Reports.
(b) Each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the Company SEC Reports was prepared in
accordance with the published rules and regulations of the SEC and United States
generally accepted accounting
16
principles ("U.S. GAAP") applied on a consistent basis throughout the periods
indicated (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q under the Exchange Act) and each
presented at the time they were filed or, in the case of Company SEC Reports
filed after the date hereof, will present fairly at the time they are filed, in
all material respects, the consolidated financial position, results of
operations and cash flows of the Company and the consolidated Company
Subsidiaries as at the respective dates thereof and for the respective periods
indicated therein, except as otherwise noted therein (subject, in the case of
unaudited statements, to normal and recurring year-end adjustments which are not
expected to be material, individually or in the aggregate). The balance sheet of
the Company contained in the Company SEC Reports as of June 30, 2001 is
hereinafter referred to as the "Company Balance Sheet".
(c) The Company has heretofore furnished to Buyer a complete and
correct copy of any effective amendments or modifications (which have not yet
been filed with the SEC but which are required to be filed) to agreements,
documents or other instruments which previously had been filed by the Company
with the SEC pursuant to the Securities Act or the Exchange Act.
SECTION 3.08 Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports filed and publicly available prior to the date of this
Agreement (the "Filed Company SEC Documents") or in Section 3.08 of the Company
Disclosure Schedule, or actions expressly contemplated by this Agreement, from
the date of the Company Balance Sheet, the Company has conducted its business
only in the ordinary course consistent with past practice, and during such
period there has not been:
(i) any event, change, effect or development that, individually or
in the aggregate, has had or would reasonably be expected to have a
Material Adverse Effect or that would, or would reasonably be likely to,
prevent or delay the consummation of the Merger;
(ii) any authorization, declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any Company Capital Stock or any repurchase or redemption for
value by the Company of any Company Capital Stock;
(iii) any split, combination or reclassification of any Company
Capital Stock or any issuance or the authorization of any issuance of any
other securities in respect of, in lieu of or in substitution for shares of
Company Capital Stock;
(iv) any issuance by the Company or any Company Subsidiary of any
notes, bonds or other debt securities or any capital stock or other equity
securities or any securities convertible, exchangeable or exercisable into
any capital stock or other equity securities, except for the issuance of
any shares of Company Common Stock pursuant to the exercise of any stock
options pursuant to the Company Option Plans, the exercise of any Scheduled
Options or the exercise of Company Warrants;
17
(v) (A) any granting by the Company or any Company Subsidiary to
any current or former director, officer or employee of the Company or any
Company Subsidiary of any increase in their compensation, except to the
extent required under employment agreements in effect as of the date of the
Company Balance Sheet, or with respect to employees (other than directors,
officers or regional vice presidents) in the ordinary course of business
consistent with prior practice and except for Company Stock Options that
are reflected as outstanding in clause (vii) of Section 3.03(a) hereof, (B)
any granting by the Company or any Company Subsidiary to any current or
former director, officer or regional vice president of any increase in
severance or termination pay, except as was required under any employment,
severance or termination policy, practice or agreements in effect as of the
date of the Company Balance Sheet or (C) any entry by the Company or any
Company Subsidiary into, or any amendment of, any employment, severance or
termination agreement with any such director, officer or employee, except
for such agreements or amendments with employees (other than directors,
officers or regional vice presidents) that were entered into in the
ordinary course of business consistent with prior practice;
(vi) any termination of employment or departure of any officer or
regional vice president of the Company or any Company Subsidiary;
(vii) any entry by the Company or any Company Subsidiary into any
commitment or transaction material to the Company and the Company
Subsidiaries taken as a whole;
(viii) any material revaluation by the Company of any material asset
(including any writing down of the value of inventory or writing off of
notes or accounts receivable);
(ix) any change in accounting methods, principles or practices by
the Company or any Company Subsidiary materially affecting the consolidated
assets, liabilities or results of operations of the Company, except insofar
as may have been required by a change in U.S. GAAP;
(x) any elections with respect to Taxes (as defined in Section 3.15
hereof) by the Company or any Company Subsidiary or settlement or
compromise by the Company or any Company Subsidiary of any material Tax
liability or refund;
(xi) any occurrence of any action or event described in Section
5.01(b)(i) - (iii), (vi)-(x), (xii), (xiv)-(xv); or
(xii) any agreement by the Company or any Company Subsidiary to take
any of the actions described in this Section 3.08 except as expressly
contemplated by this Agreement.
SECTION 3.09 Absence of Litigation. Except as specifically disclosed in the
Filed Company SEC Documents or in Section 3.09 of the Company Disclosure
Schedule, (i) there is no litigation, suit, claim, action, proceeding or
investigation (an "Action") pending or, to the knowledge of the Company, overtly
threatened against the Company or any Company
18
Subsidiary, or any property or asset of the Company or any Company Subsidiary,
before any court, arbitrator or Governmental Entity, domestic or foreign, that,
individually or in the aggregate, would have or would reasonably be expected to
have a Material Adverse Effect, or would, or would be reasonably likely to,
prevent or delay the consummation of the Merger (and the Company is not aware of
any basis for any such Action); nor (ii) is there any Judgment outstanding
against the Company or any Company Subsidiary that, individually or in the
aggregate, has had or would reasonably be expected to have a Material Adverse
Effect or that would, or would reasonably be likely to, prevent or delay the
consummation of the Merger.
SECTION 3.10 Employee Benefit Matters.
(a) Section 3.10(a) of the Company Disclosure Schedule lists each
Employee Benefit Plan other than those Employee Benefit Plans set forth in the
Company SEC Documents. The Company has delivered or made available to Buyer
correct and complete copies of the plan documents and of any summary plan
descriptions, the most recent determination letter received from the Internal
Revenue Service, the most recent Form 5500 Annual Report (for which annual
reports are required), and all related trust agreements, insurance contracts,
and other funding agreements which implement each such Employee Benefit Plan.
(i) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) conforms in all material respects to, and is
being administered and operated in material compliance with, the applicable
requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), the Code, and other applicable Laws.
(ii) Except as set forth in Section 3.10(a)(ii) of the Company
Disclosure Schedule, all required reports and descriptions (including Form
5500 Annual Reports and PBGC-l's) have been filed or distributed
appropriately with respect to each such Employee Benefit Plan. The
requirements of Part 6 of Subtitle B of Title I of ERISA and of Code
Section 4980B have been met with respect to each such Employee Benefit Plan
which is an Employee Welfare Benefit Plan subject to such Part.
(iii) Except as set forth in Section 3.10(a)(iii) of the Company
Disclosure Schedule, the Company and each Company Subsidiary has made all
contributions which are due under each Employee Benefit Plan and all
contributions for any period ending on or before the Closing Date which are
not yet due have been paid to each such Employee Pension Benefit Plan or
accrued in accordance with the past custom and practice of the Company. All
premiums or other payments for all periods ending on or before the Closing
Date have been paid with respect to each such Employee Benefit Plan which
is an Employee Welfare Benefit Plan.
(iv) Except as set forth in Section 3.10(a)(iv) of the Company
Disclosure Schedule, any Employee Benefit Plan that is intended to be
qualified under Code Section 401(a) and exempt from tax under Code Section
501(a) has been determined by the Internal Revenue Service to be so
qualified or exempt and, to the knowledge of the Company, no reason
currently exists for such determination to be revoked.
19
(b) No Employee Pension Benefit Plan is, or since July 1, 1996 has
been, subject to Title IV of ERISA and none of the Company, the Company
Subsidiaries or any member of the Controlled Group of Corporations that
includes the Company and the Company Subsidiaries since July 1, 1996 has
incurred or has any reason to expect that any of the Company and the
Company Subsidiaries will incur, any liability (contingent or otherwise)
(or to the knowledge of the Company and the Company Subsidiaries on or
prior to July 1, 1996 has incurred any liability (contingent or otherwise)
but only to the extent any such liability (contingent or otherwise)
continues past June 30, 1996) to the PBGC (other than PBGC premium
payments) or otherwise under Title IV of ERISA (including any withdrawal
liability, contingent or otherwise) or under the Code with respect to any
such Employee Benefit Plan which is an Employee Pension Benefit Plan.
(c) There have been no Prohibited Transactions involving any such
Employee Benefit Plan that could subject the Company or any Company
Subsidiary to any material penalty or material tax imposed under the Code
or ERISA. There are no pending or, to the knowledge of the Company,
threatened claims by or on behalf of any Employee Benefit Plan, or by or on
behalf of any individual participants or beneficiaries of any Employee
Benefit Plan, alleging any breach of fiduciary duty on the part of the
Company or any Company Subsidiary under ERISA or any other applicable
regulations, or claiming benefits payments other than those made in the
ordinary operation of such plans.
(d) Except as set forth in Section 3.10(d) of the Company Disclosure
Schedule, neither the Company nor any Company Subsidiary has or since
January 1, 1996 has had an obligation to contribute to any Multiemployer
Plan, and to the knowledge of the Company and the Company Subsidiaries,
prior to January 2, 1996, neither the Company nor any Company Subsidiary
has become subject to an obligation to contribute to any Multiemployer Plan
other than such obligations satisfied prior to July 1, 1996.
(e) Except as set forth in Section 3.10(e) of the Company Disclosure
Schedule, none of the Company and the Company Subsidiaries maintains or
since January 1, 1996 has maintained or been required to contribute to any
Employee Welfare Benefit Plan (and, to the knowledge of the Company and the
Company Subsidiaries, none of the Company and Company Subsidiaries, prior
to July 1, 1996 maintained or have been required to contribute to any
Employee Welfare Benefit Plan, other than any such plans where the Company
and Company Subsidiaries did not have any liability in respect of after
June 30, 1996) providing medical, health, or life insurance or other
welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance
with Code Section 4980B).
(f) No binding promise or commitment to amend or improve any Employee
Benefit Plan for the benefit of current or former directors, officers, or
employees of the Company or any Company Subsidiary which is not reflected
in the documentation provided or made available to Buyer has been made.
(g) Except as set forth in Section 3.10(g) of the Company Disclosure
Schedule, the transactions contemplated by this Agreement shall not alone
or upon the occurrence of any additional or subsequent event, result in any
payment, of severance or
20
otherwise, or acceleration, vesting or increase in benefits under any Employee
Benefit Plan for the benefit of any current or former director, officer, or
employee of the Company or any of the Company Subsidiaries.
(h) For purposes of this Agreement:
(i) "Controlled Group of Corporations" has the meaning set forth in
Code Section 1563.
(ii) "Employee Benefit Plan" means any material "employee benefit
plan" as defined in Section 3(3) of ERISA and any profit sharing, stock
option, stock purchase, equity, stock appreciation, incentive deferred
compensation, severance plan, material fringe benefit, material bonus or
other material benefit plan (other than any agreements referred to in
Section 3.11(a)(i) hereof), sponsored or maintained by the Company or any
Company Subsidiary or for which the Company or any Company Subsidiary may
have any liability.
(i) "Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
(ii) "Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(l).
(iii) "Multiemployer Plan" has the meaning set forth in ERISA Section
3(37).
(iv) "PBGC" means the Pension Benefit Guaranty Corporation.
(v) "Prohibited Transaction" has the meaning set forth in ERISA
Section 406 and Code Section 4975.
SECTION 3.11 Material Contracts.
(a) Subsections (i) through (viii) of Section 3.11(a) of the Company
Disclosure Schedule contain a list of the following types of contracts and
agreements (including all amendments thereto) to which the Company or a Company
Subsidiary is currently a party, other than those contracts and agreements
listed as exhibits in the Company's Form 10-K for the fiscal year ended June 30,
2001 (such contracts, agreements and arrangements as are required to be set
forth in Section 3.11(a) of the Company Disclosure Schedule, together with all
contracts, agreements and arrangements of the Company or any Company Subsidiary
required to be set forth in Section 3.10(a) of the Company Disclosure Schedule
or listed or required to be listed as exhibits in the Company's Form 10-K for
the fiscal year ended June 30, 2001, being the "Company Material Contracts"):
(i) all employment, consulting, severance, termination or
indemnification agreements between the Company or any Company Subsidiary
and any director, officer or regional vice president of the Company or any
Company Subsidiary;
21
(ii) all contracts, credit agreements, indentures and other similar
agreements evidencing outstanding or currently available indebtedness,
including guaranties, of more than $500,000 individually to unaffiliated
third parties;
(iii) all agreements under which the Company or any Company Subsidiary
has advanced or loaned any funds in excess of $100,000 individually other
than to the Company or to any wholly-owned Subsidiary of the Company;
(iv) all joint venture or other similar material agreements;
(v) all real property lease agreements with annual lease payments in
excess of $200,000 (exclusive of common area maintenance fees and Taxes)
individually and all other lease agreements with annual lease payments in
excess of $200,000 individually;
(vi) agreements that are currently in effect under which the Company
has granted any Person registration rights (including demand and piggy-back
registration rights), preemptive rights, redemption rights, subscription
rights, rights of first refusal, purchase options or call options with
respect to the capital stock of the Company or any Company Subsidiary;
(vii) all written or material oral contracts and agreements with
Affiliates of the Company or any Company Subsidiary.
(b) Except as set forth in Section 3.11(b) of the Company Disclosure
Schedule, or as would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect or would not, or would not
reasonably be likely to prevent or delay the consummation of the Merger, (i)
each Company Material Contract is a legal, valid and binding agreement
enforceable against the Company or Company Subsidiary that is a party thereto
and, to the Company's knowledge, the other parties thereto, in accordance with
its terms and (ii) neither the Company nor any Company Subsidiary is in
violation or default, or has received notice that it is in violation or default,
under any Company Material Contract and (iii) to the Company's knowledge no
other party is in default under any Company Material Contract. The Company has
provided the Buyer with, or made available to the Buyer, copies of all Company
Material Contracts.
SECTION 3.12 Environmental Matters. To the knowledge of the Company, except
as described in Section 3.12 of the Company Disclosure Schedule: (a) the Company
and the Company Subsidiaries are not in violation of any Environmental Law
applicable to any of them; (b) neither the Company nor any of the Company
Subsidiaries are liable for any off-site contamination by Hazardous Substances;
(c) the Company and the Company Subsidiaries have all permits, licenses and
other authorizations required under any Environmental Law ("Environmental
Permits"); (d) the Company and the Company Subsidiaries are in compliance in all
material respects with their Environmental Permits; and (e) neither the
execution of this Agreement nor the consummation of the transactions
contemplated herein will require any investigation, remediation or other action
with respect to Hazardous Substances, or any notice to or consent of
Governmental Entities or third parties, pursuant to any applicable Environmental
Law or Environmental Permit, except in each such case for Section 3.12(a)
through (e), for such
22
matters that, individually or in the aggregate, have not had and would not
reasonably be expected to have a Material Adverse Effect or that would not, or
would not reasonably be likely to, prevent or delay the consummation of the
Merger. To the knowledge of the Company, none of the properties currently or
formerly owned, leased or operated by the Company or the Company Subsidiaries
are contaminated with any Hazardous Substance except for such contamination that
has not had and would not reasonably be expected to have a Material Adverse
Effect. None of the Company or the Company Subsidiaries has received written
notice of a violation of, or any liability under, any Environmental Law (whether
with respect to properties presently or previously owned or used). The Company
and the Company Subsidiaries have made available to Buyer all material
environmental audits, reports and other environmental documents relating to
their properties, facilities or operations which are in their possession or
control. Neither the Company nor any of the Company Subsidiaries has treated,
stored, disposed of, arranged for or permitted the disposal of, handled, or
released any substance, or owned or operated its business or any property or
facility in a manner that has given or would reasonably be expected to give rise
to any Material Adverse Effect. Neither the Company nor any of the Company
Subsidiaries has arranged for the disposal or treatment or for the
transportation for disposal or treatment, of any substance at any off-site
location where such arrangement has had or would reasonably be expected to have
a Material Adverse Effect.
SECTION 3.13 Title to Properties; Absence of Liens and Encumbrances.
Except as described in Section 3.13(a) of the Company Disclosure Schedule, each
of the Company and the Company Subsidiaries has good and valid title to, or, in
the case of leased properties and assets, valid leasehold interests in, all of
its respective properties and assets, real, personal and mixed, owned, used or
held for use in its business, free and clear of any Liens except (i) statutory
liens, security interests, mortgages, charges or encumbrances arising out of
operation of law with respect to a liability incurred in the ordinary course of
business and which is not delinquent or is not material, (ii) such liens,
security interests, mortgages, charges or encumbrances and other imperfections
of title as do not materially detract from the value or impair the use of the
property subject thereto, provided that there are adequate reserves for any such
liens, security interests, mortgages, charges or encumbrances set forth on the
face of the Company Balance Sheet to the extent such liens, security interests,
mortgages, charges or encumbrances are required to be reserved for in accordance
with GAAP, (iii) liens for Taxes not yet subject to penalties for nonpayment of
which are being actively contested in good faith by appropriate proceedings,
provided that there are adequate reserves for any such liens set forth on the
face of the Company Balance Sheet, (iv) mechanics', materialmen's, workmen's,
warehousemen's, carrier's repairmen's, landlords' or other like liens and
security obligations that are not delinquent or that are not material and (v) as
reflected in the financial statements contained in the Filed Company SEC
Documents. Except as described in Section 3.13(b) of the Company Disclosure
Schedule, the Company neither owns nor leases any real property. The real
property listed in Sections 3.13(a) and 3.13(b) of the Company Disclosure
Schedule constitutes all of the real property used, leased or occupied by the
Company or any Company Subsidiary as of the date hereof.
SECTION 3.14 Intellectual Property.
(a) To the knowledge of the Company, (i) except as set forth in
Section 3.14(a) of the Company Disclosure Schedule, the Company and the Company
Subsidiaries own or otherwise have the right to use all Intellectual Property
necessary for the operation of the
23
Company's business as presently conducted and (ii) each item of Intellectual
Property owned or used by the Company or any Company Subsidiary will be owned or
available for use by the Surviving Corporation on identical terms and conditions
immediately subsequent to the Closing, in either case except where the inability
to own or use such Intellectual Property would not have or would not reasonably
be expected to have a Material Adverse Effect and in either case with the
exception that no representations or warranties are made with respect to
commercial licensed computer software, databases, or systems or to software or
databases which were developed solely for the Company and are not material to
the Company's operations. Except as set forth in Section 3.14(a) of the Company
Disclosure Schedule, the Company is not in receipt of any pending written claims
that its use or the use by any Company Subsidiary of the Intellectual Property
currently used in operating its properties or carrying on its business as
presently conducted infringes any Intellectual Property rights of a third party,
and has not made any pending written claims that any third party has infringed
the Intellectual Property rights of the Company, except where such claim of
infringement would not have or would not reasonably be expected to have a
Material Adverse Effect. Section 3.14(a) of the Company Disclosure Schedule sets
forth an accurate list of each material patent, registered trademark and service
mark, and registered copyright owned by the Company.
(b) The Company and the Company Subsidiaries have taken reasonable
steps in accordance with normal industry practice to maintain the
confidentiality of their material trade secrets and other confidential
Intellectual Property. To the knowledge of the Company, since August 1, 2001 (i)
there has been no misappropriation or improper disclosure of any material trade
secrets or other confidential Intellectual Property of the Company or any
Company Subsidiary by any Person, (ii) no employee of the Company or any Company
Subsidiary has misappropriated any material trade secrets of any other Person in
the course of such performance as an employee, and (iii) no employee of the
Company or any Company Subsidiary is in material default or material breach of
any term of any provision relating to trade secrets or confidential Intellectual
Property in the employment agreements, non-disclosure agreements, or assignment
of invention agreements listed in Section 3.11(a)(i) 3-11 of the Company
Disclosure Schedule.
SECTION 3.15 Taxes.
(a) Each of the Company and the Company Subsidiaries has filed on a
timely basis all Tax Returns required to be filed by it. All such Tax Returns
were correct and complete in all material respects. All Taxes owed by any of the
Company and the Company Subsidiaries (whether or not shown on any Tax Return)
have been timely paid in full, except for any Taxes being contested in good
faith as described in Section 3.15(a) of the Company Disclosure Schedule, to the
extent they are reflected as a reserve for current tax liability on the Company
Balance Sheet. The Company and the Company Subsidiaries have complied with all
requirements for timely extensions to file Tax Returns. No claim has been made
in writing by an authority in a jurisdiction where any of the Company and the
Company Subsidiaries does not file Tax Returns that they may be subject to
taxation by that jurisdiction. There are no material liens or other encumbrances
on any of the assets of any of the Company and the Company Subsidiaries that
arose in connection with any failure (or alleged failure) to pay any Tax.
(b) Each of the Company and the Company Subsidiaries has complied in
all material respects with all reporting requirements and has withheld and paid
all Taxes required to
24
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third party.
(c) There is no ongoing dispute, audit, investigation, proceeding or
claim concerning any Liability with respect to Taxes of the Company or the
Company Subsidiaries either (i) claimed or raised by any authority in writing or
(ii) as to which the Company has knowledge based upon contact with any such
authority. Except as set forth in Section 3.15(c) of the Company Disclosure
Schedule, (i) none of the federal, state, local, and foreign income Tax Returns
filed with respect to the Company and the Company Subsidiaries have been the
subject of an audit for any taxable year beginning after December 31, 1998 and
(ii) none are currently the subject of audit or notice of intention to audit.
The Company has delivered or made available to Buyer correct and complete copies
of all federal, state, local and foreign income Tax Returns, examination reports
and statements of deficiencies assessed against or agreed to by any of the
Company and the Company Subsidiaries for the last three taxable years.
(d) None of the Company or any of the Company Subsidiaries has
waived any statute of limitations in respect of Taxes or agreed to any extension
of time with respect to a Tax assessment or deficiency, which waiver or
extension remains outstanding.
(e) Since December 31, 1998, none of the Company or any of the
Company Subsidiaries is or has been a party to any Tax allocation or sharing
agreement or a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than the Affiliated Group the common parent of which is
the Company). The Company does not have any Liability for the Taxes of any
Person other than the Company and the Company Subsidiaries under Treas. Reg.
Section 1.1502-6 (or any similar provision of state, local or foreign Law), as a
transferee or successor, by contract, or otherwise.
(f) None of the Company or any of the Company Subsidiaries has filed
a consent under Code Section 341(f) concerning collapsible corporations. None of
the Company and the Company Subsidiaries has made any payments, is obligated to
make any payments, or is a party to any contract, lease, license, indenture,
note, bond, agreement, permit, concession, franchise or other instrument (each a
"Contract") that as a result of either prior transactions or the Merger could
obligate it to make any payments that will not be deductible under Code Sections
162(m) or 280G or that will be subject to an excise tax under Code Section 4999.
(g) None of the Company or any of the Company Subsidiaries has been
a "distributing corporation" or a "controlled corporation" in connection with a
distribution that the parties involved treated as described in Section 355 of
the Code within the past two years.
(h) No closing agreements, private letter rulings, technical advice
memoranda or similar agreements or rulings that have continuing effect have been
entered into or issued by any taxing authority with or in respect of the Company
or any Company Subsidiary.
(i) To the Company's knowledge, the unpaid Taxes of the Company and
the Company Subsidiaries (1) did not, as of June 30, 2001, exceed the reserve
for Tax liability (excluding any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on the face of
the Company Balance Sheet (rather than in any
25
notes thereto) and (2) will not exceed that reserve as adjusted for operations
and transactions through the Closing Date in accordance with the past custom and
practice of the Company and the Company Subsidiaries in filing their Tax
Returns.
(j) For the purposes of this Agreement:
(i) "Affiliated Group" means any affiliated group within the meaning
of Code Section 1504(a) or any similar group defined under a similar
provision of state, local, or foreign Law.
(ii) "Tax" or "Taxes" means any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental, customs
duties, capital stock, franchise, profits, withholding, social security (or
similar, including FICA), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever, including
any interest, penalty, or addition thereto, whether disputed or not.
(iii) "Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
SECTION 3.16 Insurance. Section 3.16 of the Company Disclosure Schedule
sets forth a complete and accurate list of all material insurance policies in
force naming the Company, or, to the Company's knowledge, any Company Subsidiary
or directors or executive officers thereof as a loss payee, for which the
Company or, to the Company's knowledge, any Company Subsidiary has paid or is
obligated to pay all or part of the premiums. Except as set forth on Section
3.16 of the Company Disclosure Schedule neither the Company nor any Company
Subsidiary has received written notice of any pending or overtly threatened
cancellation or premium increase (retroactive or otherwise) with respect
thereto, and to the Company's knowledge, each of the Company and the Company
Subsidiaries is in compliance with all material conditions contained therein.
SECTION 3.17 State Takeover Statutes; Company Rights Agreement.
(a) The Company has taken such actions, if any, as it reasonably
determined necessary for the consummation of the Transactions under Section 203
of the DGCL and to permit Buyer, Gryphon Partners II, L.P., Cadigan Investment
Partners, Inc., the Rollover Stockholders and their respective spouses,
associates, affiliates and subsidiaries, or any combination thereof, to become
"interested stockholders" (within the meaning of Section 203 of the DGCL), in
connection with developing agreements, arrangements or understandings among
themselves relating to the participation of all or any of them in the
Transactions and by taking any and all actions relating to the consummation of,
and by consummating, the Transactions.
(b) Except for the Company Rights Agreement, neither the Company nor
any of the Company Subsidiaries is a party to any "stockholder rights" plan or
any similar anti-takeover plan or device. The Company and the Company Board have
taken all action
26
necessary to (i) render the Company Rights inapplicable to this Agreement and
the transactions contemplated hereby and (ii) ensure that (A) neither Buyer nor
any of its stockholders, Affiliates or associates, or any Rollover Stockholders
is or will become an "Acquiring Person" (as defined in the Company Rights
Agreement) by reason of this Agreement or the Merger, (B) a "Distribution Date"
(as defined in the Company Rights Agreement) shall not occur by reason of this
Agreement or the Merger and (C) the Company Rights shall expire immediately
prior to the Effective Time.
SECTION 3.18 Compliance with Applicable Laws. Except as disclosed in the
Filed Company SEC Documents or in Section 3.18 of the Company Disclosure
Schedule, to the Company's knowledge the Company and the Company Subsidiaries
are in compliance with all Laws applicable to the Company or the Company
Subsidiaries or by which any property or asset of the Company or any Company
Subsidiary is bound or affected, including those relating to labor and
employment, occupational health and safety and the environment, except where
such noncompliance would not and would not reasonably be expected to have a
Material Adverse Effect or would not, or would not reasonably be likely to,
delay the consummation of the Merger. Except as set forth in the Filed Company
SEC Documents or in Section 3.20 of the Company Disclosure Schedule, to the
Company's knowledge neither the Company nor any Company Subsidiary has received
any written communication during the past two years from a Governmental Entity
that alleges that the Company or a Company Subsidiary is not in compliance in
any material respect with any applicable Law, which failure to be in compliance
remains uncured.
SECTION 3.19 School Licenses. Except as set forth in Section 3.19 of the
Company Disclosure Schedule, to the Company's knowledge, the Company and each of
the Company Subsidiaries possess and are in compliance with all school licenses
necessary to operate its facilities and conduct its business and have not
received any written notices from any Governmental Entity of violations with
respect to any such school licenses that remain uncured, except where the
failure to possess or be in compliance with any such school licenses,
individually or in the aggregate, has not had, or would not reasonably be
expected to have a Material Adverse Effect or would not, or would not be
reasonably likely to, prevent or delay the consummation of the Merger.
SECTION 3.20 Opinion of Financial Advisor. The Company has received the
written opinion of Legg Mason dated the date of this Agreement to the effect
that, as of the date of this Agreement, the consideration to be received in the
Merger by the holders of Company Common Stock and Company Preferred Stock, other
than holders of Rollover Shares, is fair to such holders from a financial point
of view, and a copy of the signed opinion has been provided to Buyer.
SECTION 3.21 Brokers. No broker, investment banker, financial advisor or
other Person, other than Legg Mason, financial advisor to the Special Committee,
the fees and expenses of which will be paid by the Company, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated hereby based upon arrangements
made by or on behalf of the Company. The Company has delivered to Buyer a
complete and accurate copy of all agreements pursuant to which Legg
27
Mason is entitled to any fees and expenses payable directly or indirectly by the
Company in connection with any of the transactions contemplated by this
Agreement.
SECTION 3.22 Fee and Expense Estimate. Section 3.22 of the Company
Disclosure Schedule sets forth a list of the fees and expenses, estimated in
good faith as of the date of this Agreement, incurred and to be incurred by the
Company and any of the Company Subsidiaries in connection with the transactions
contemplated hereby (including without limitation the fees and expenses of Legg
Mason and of the Company's legal counsel and accountants) and noting which fees
and expenses, if any, have been paid as of the date hereof or accrued as of the
date hereof.
SECTION 3.23 Employees. To the knowledge of the Company, no officer or
regional vice president has any plans to terminate employment with the Company
or any Company Subsidiaries. The Company and the Company Subsidiaries have not
experienced any labor disputes or work stoppages due to labor disagreements. The
Company and the Company Subsidiaries are not, nor have any of them ever been, a
party to any collective bargaining agreements and to the knowledge of the
Company none of the Company or any of the Company Subsidiaries has been the
subject of any organizational activity.
SECTION 3.24 Transactions with Affiliates. Except as set forth in the
Filed Company SEC Documents, since the date of the Company's last proxy
statement filed with the SEC, no event has occurred that would be required to be
reported by the Company pursuant to Item 404 of Regulation S-K promulgated by
the SEC. Section 3.24 of the Company Disclosure Schedule identifies each Person
who is (or who may be deemed to be) an "affiliate" (as the term is used in Rule
144 under the Securities Act), of the Company as of the date of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrant to the Company that:
SECTION 4.01 Organization and Qualification; Subsidiaries. Buyer is a
corporation duly organized, validly existing and in good standing under the Laws
of the jurisdiction of its incorporation and has all requisite power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as it is now being conducted, except
where the failure to be organized, existing, in good standing or to have such
power, authority or governmental approvals would not reasonably be expected to
prevent or materially delay the ability of Buyer to consummate the transactions
contemplated hereby (a "Buyer Material Adverse Effect"). Buyer is duly qualified
or licensed as a foreign corporation or organization to do business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that would not reasonably be likely to have a Buyer
Material Adverse Effect.
SECTION 4.02 Ownership of Buyer; No Prior Activities. Buyer was formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement. Buyer (i) has not conducted, and will not prior to the Effective Time
conduct, any business and (ii) has no, and prior to the Effective Time will have
no, assets or liabilities, except, in either case, in connection
28
with the Transactions. No shares of Company Common Stock or Company Preferred
Stock are held by Buyer or any subsidiary or Affiliates of Buyer. As of the date
hereof, the authorized capital stock of Buyer, consists of 3,000 shares of
common stock, par value $0.01 per share, 1,000 of which have been validly
issued, are fully paid and nonassessable. All of the issued and outstanding
capital stock of Buyer is owned by Gryphon Partners II, L.P.
SECTION 4.03 Authority Relative to this Agreement. Buyer has all
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Buyer and the consummation by Buyer of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Buyer. Buyer has duly executed and delivered
this Agreement, and this Agreement constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms.
SECTION 4.04 No Conflict; Required Filings and Consents.
(a) The execution and delivery by Buyer of this Agreement does not,
and the consummation of the transactions contemplated hereby and compliance with
the terms hereof will not, result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to a loss of a
material benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any Person under, or result in the creation of any
Lien upon any of the properties or assets of Buyer under, any provision of (i)
its charter, by-laws or other organizational documents, (ii) any Contract to
which Buyer is a party or by which any of its respective properties or assets is
bound or (iii) subject to the filings and other matters referred to in Section
4.04(b), any Judgment or Law applicable to Buyer or any of its subsidiaries or
respective properties or assets, other than, in the case of clauses (ii) and
(iii) above, any such items that, individually and in the aggregate, have not
had and would not reasonably be expected to have a Buyer Material Adverse
Effect.
(b) No Consent of, or registration, declaration or filing with, any
Governmental Entity is required to be obtained or made by or with respect to
Buyer in connection with the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby, other
than (i) if required, compliance with and filing of a pre-merger notification
report under the HSR Act, (ii) the filing with the SEC of such reports under
Section 13 of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby, (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of the other jurisdictions
in which Buyer is qualified to do business, (iv) compliance with and filings
under the Laws of any foreign jurisdictions, if and to the extent required, and
(v) such other items that, individually and in the aggregate, have not had and
would not reasonably be expected to have a Buyer Material Adverse Effect.
SECTION 4.05 Brokers. No broker, investment banker, financial advisor or
other Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Buyer.
29
SECTION 4.06 Financing. Buyer has provided the Company with a commitment
letter from (i) BNP Paribas, dated as of the date hereof, (ii) Gryphon Partners
II, L.P., dated as of the date hereof and (iii) Cadigan Investment Partners,
Inc., dated as of the date hereof (the "Commitment Letters" and the financing to
be provided thereunder, the "Financing"). The obligations to fund the
commitments under the Commitment Letters are not subject to any condition other
than as set forth in the Commitment Letters. Buyer is not aware of any fact or
occurrence existing on the date of this Agreement that makes any of the
assumptions or statements set forth in the Commitment Letters inaccurate or that
causes the Commitment Letters to be ineffective or that precludes the
satisfaction of the conditions set forth in the Commitment Letters. The
Commitment Letters have been duly executed by Buyer and, to the knowledge of
Buyer, all other parties thereto, and are in full force and effect as of the
date hereof. All commitment and other fees required to be paid under the
Commitment Letters on or prior to the date hereof have been paid.
SECTION 4.07 Absence of Litigation. There is no Action pending or, to the
knowledge of Parent or Buyer, overtly threatened against Parent or Buyer, before
any court, arbitrator or Governmental Entity, domestic or foreign, that would,
or would reasonably be likely to, prevent or delay the consummation of the
Merger (and neither Parent nor Buyer is aware of any basis for any such Action),
nor (ii) is there any Judgment outstanding against either Parent or Buyer that
would, or would reasonably be likely to, prevent or delay the consummation of
the Merger.
SECTION 4.08 No Agreements or Understandings to Sell Assets or Stock. As
of the date of this Agreement, neither Parent nor Buyer is a party to any
agreement, arrangement or understanding to sell all or substantially all of the
assets of the Surviving Corporation after the Closing or to sell more than 20%
of the stock of the Surviving Corporation to be owned by Parent and the Rollover
Stockholders.
ARTICLE V
CONDUCT OF BUSINESSES PENDING THE MERGER
SECTION 5.01 Conduct of Business by the Company Pending the Merger. The
Company agrees that, between the date of this Agreement and the Effective Time,
except as set forth in Section 5.01 of the Company Disclosure Schedule or as
specifically contemplated by any other provision of this Agreement, unless Buyer
shall otherwise consent in writing, which consent shall not be unreasonably
withheld (provided, that for purposes of this Section 5.01 only, any assessment
as to the unreasonableness of any decision of Buyer to withhold consent shall be
made with reference to the perspective of a similarly-situated buyer):
(a) the businesses of the Company and the Company Subsidiaries shall
be conducted only in, and the Company and the Company Subsidiaries shall not
take any action except in, the ordinary course of business and in a manner
consistent with past practice; and
(b) the Company shall use all commercially reasonable efforts to
preserve substantially intact its business organization, to keep available the
services of the current officers, employees and consultants of the Company and
the Company Subsidiaries and to preserve the current relationships of the
Company and the Company Subsidiaries with
30
customers, students, suppliers, licensors, licensees and other Persons with
which the Company or any Company Subsidiary has significant business relations.
By way of amplification and not limitation, except (x) as contemplated by this
Agreement, (y) for transfers of cash among the Company and the Company
Subsidiaries pursuant to the Company's existing cash management policies or (z)
as set forth in Section 5.01 of the Company Disclosure Schedule, neither the
Company nor any Company Subsidiary shall, between the date of this Agreement and
the Effective Time, directly or indirectly, do, or propose to do, any of the
following without the prior written consent of Buyer which consent shall not be
unreasonably withheld (provided, that for purposes of this Section 5.01 only,
any assessment as to the unreasonableness of any decision of Buyer to withhold
consent shall be made with reference to the perspective of a similarly-situated
buyer):
(i) amend or change its Certificate of Incorporation or By-Laws or
equivalent organizational documents;
(ii) transfer, issue, sell, pledge, lease, license, dispose, grant,
encumber, or authorize for transfer, issuance, sale, pledge, lease,
license, disposition, grant or encumbrance (whether to a third party or any
Affiliate) any shares of its stock of any class, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
such stock, or any other ownership interest (including, without limitation,
any phantom interest), of the Company or any Company Subsidiary (except (a)
for the issuance of shares of Company Common Stock pursuant to the Company
Stock Options or Company Warrants outstanding on the date of this
Agreement, or (b) the conversion of shares of Company Preferred Stock into
Company Common Stock in accordance with the terms of the Company Charter);
(iii) except with respect to trademarks in the ordinary course of
business and consistent with past practice, (a) grant any license in
respect of any Intellectual Property of the Company or any Company
Subsidiary, (b) develop any Intellectual Property jointly with any third
party, or (c) disclose any confidential Intellectual Property of the
Company or any Company Subsidiary other than in the ordinary course of
business and consistent with past practice unless such Intellectual
Property is subject to a confidentiality agreement protecting against any
further disclosure;
(iv) authorize, declare or set aside any dividend payment or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its stock other than the payment of dividends required to be paid
to holders of Company Preferred Stock;
(v) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its stock or issue or
authorize the issuance of any other securities in respect of, or in lieu of
or in substitution for shares of its capital stock;
(vi) acquire or agree to acquire (including, without limitation, by
merger, consolidation, or acquisition of stock or assets) any interest in
any corporation, partnership, other business organization or any division
thereof or any assets thereof for a purchase price in excess of $250,000;
31
(vii) incur any additional indebtedness for borrowed money or issue
any debt securities or assume, guarantee or endorse the obligations of any
Person (other than its subsidiaries consistent with past practice), or make
any loans or advances to any Person (other than its subsidiaries and
employees consistent with past practice (provided that such loans or
advances to employees do not exceed $50,000 in the aggregate)), except for
indebtedness under the Company's existing Loan and Security Agreement dated
as of March 9, 1999 between the Company, the Company Subsidiaries, Fleet
National Bank (in its capacity as Agent) and the other financial
institutions signatory thereto, as amended and in effect, incurred in the
ordinary course of business and consistent with past practice and for other
indebtedness with a maturity of not more than one year in a principal
amount not, in the aggregate, in excess of $150,000;
(viii) enter into any contract or agreement requiring the payment, or
receipt of payment, of consideration in excess of $100,000 individually or
$500,000 in the aggregate, or modify, amend, renew, waive any material
provision of, or terminate any existing Company Material Contract, other
than in the ordinary course of business consistent with past practice;
(ix) make or authorize any capital expenditures, other than as set
forth in Section 5.01(ix) of the Company Disclosure Schedule;
(x) waive any stock repurchase or acceleration rights, amend or
change the terms of any options, warrants, or restricted stock, or reprice
options granted under any Company Option Plan or warrants or, except
pursuant to the terms of Company Options or Company Warrants outstanding as
of the date hereof with respect to fractional shares, authorize cash
payments in exchange for any options granted under any Company Option
Plans, any Scheduled Options, or Company Warrants;
(xi) (a) increase the compensation payable or to become payable to
the Company's or any Company Subsidiary's officers or employees, except for
increases in salaries or wages accordance with past practices and
consistent with current budgets, as disclosed in Section 5.01(xi) of the
Company Disclosure Schedule, (b) grant or amend any rights to severance or
termination pay to, or enter into or amend any employment or severance
agreement with, any director, officer or other employee of the Company or
any Company Subsidiary (other than the entering into of employment
agreements with new employees of the Company (other than new officers or
directors) in accordance with the Company's past practice and existing
policies) or (c) forgive any indebtedness of any employee of the Company or
any Company Subsidiary;
(xii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) in excess of $300,000 in the aggregate (not including any
amounts covered by insurance not resulting in an increase in the premium
under such insurance), other than the payment, discharge or satisfaction,
in the ordinary course of business consistent with past practice, or cancel
any indebtedness in excess of $50,000 in the aggregate or waive any claims
or rights of substantial value, or waive the benefits of, or agree to
modify in any manner, any confidentiality, standstill or similar agreement
to which the Company or any Company Subsidiary is a party;
32
(xiii) make or revoke any Tax elections, adopt or change any method of
Tax accounting, request any ruling or similar determination, enter into any
closing agreement or settle any Tax liabilities or take any action
(including communications with a Governmental Entity) with respect to the
computation of Taxes or the preparation of a Tax Return that is
inconsistent with past practice;
(xiv) take any action, other than as required by U.S. GAAP or by the
SEC, with respect to accounting principles or procedures, including,
without limitation, any revaluation of assets;
(xv) establish, adopt, enter into or amend any collective bargaining
agreement or Employee Benefit Plan other than in the ordinary course of
business consistent with prior practice and except as would not result in
any material increase in the amounts payable by the Company or any Company
Subsidiary thereunder, or make any material determinations not in the
ordinary course of business consistent with prior practice, under any
collective bargaining agreement or Employee Benefit Plan; or
(xvi) agree in writing or otherwise to take any of the actions
described in clauses (i) through (xv) above.
SECTION 5.02 Notification of Certain Matters. Buyer shall give prompt
notice to the Company, and the Company shall give prompt notice to Buyer, of (i)
the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of
which would be likely to cause (A) any representation or warranty contained in
this Agreement made by such Person to be untrue or inaccurate or (B) any
covenant, condition or agreement contained in this Agreement applicable to such
Person not to be complied with or satisfied and (ii) any failure of Buyer or the
Company, as the case may be, to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this Section 5.02 shall not
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01 Preparation of Proxy Statement; Stockholders Meeting.
(a) The Company shall, as soon as practicable following the date of
execution of this Agreement, prepare and file with the SEC the Proxy Statement
in preliminary form (provided that Buyer, and its counsel shall be given
reasonable opportunity to review and comment on the Proxy Statement and any
amendments thereto prior to its filing with the SEC), and each of the Company
and Buyer shall use all commercially reasonable efforts to respond as promptly
as practicable to any comments of the SEC with respect thereto. The Company
shall notify Buyer promptly of the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff for amendments or supplements
to the Proxy Statement or for additional information and shall supply Buyer with
copies of all correspondence between the Company or any of its representatives,
on the one hand, and the SEC or its staff, on the other hand, with respect to
the Proxy Statement. If at any time prior to receipt of the Company
33
Stockholder Approval there shall occur any event that should be set forth in an
amendment or supplement to the Proxy Statement, the Company shall promptly
prepare and mail to its stockholders such an amendment or supplement. The
Company shall use all commercially reasonable efforts to cause the Proxy
Statement to be mailed to the Company's stockholders as promptly as practicable
after filing with the SEC. Subject to Section 6.01(d) hereof, unless the Company
shall have terminated this Agreement pursuant to Section 8.01(h) the Proxy
Statement shall contain the recommendation of the Company Board that the
stockholders of the Company vote to adopt and approve this Agreement and the
Merger. If requested to do so by Buyer at any time prior to the Company
Stockholders Meeting (as defined in Section 6.01(b)) and subject to compliance
with applicable Laws, if there shall have been publicly announced an alternative
Acquisition Proposal, the Company Board shall within a reasonable period of time
following such request, but in no event more than ten business days after such
request (and, in any event, prior to the Company Stockholders Meeting) publicly
reaffirm such recommendation and/or shall publicly announce that it is not
recommending that the stockholders of the Company accept an alternative
Acquisition Proposal; provided, however, that if the Company shall fail to
reaffirm such recommendation and/or fail to publicly announce that it is not
recommending that the stockholders of the Company accept an alternative
Acquisition Proposal within such ten business day period following such request,
Buyer shall have no more than 30 days to elect to exercise its rights pursuant
to Section 8.01(d)(v); provided, further, that the failure of Buyer to exercise
its rights pursuant to Section 8.01(d)(v) in one instance shall not be deemed to
constitute a waiver of such rights in any other instance.
(b) The Company shall, as soon as reasonably practicable following
the date of execution of this Agreement, duly call, give notice of, convene and
hold a meeting of its stockholders (the "Company Stockholders Meeting") for the
purpose of seeking the Company Stockholder Approval. Subject to Section 6.01(d)
hereof, unless the Company shall have terminated this Agreement pursuant to
Section 8.01(h), the Company shall, through the Company Board, recommend to its
stockholders that they give the Company Stockholder Approval. Without limiting
the generality of the foregoing, the Company agrees that its obligations
pursuant to the first sentence of this Section 6.01(b) shall not be affected by
the commencement, public proposal, public disclosure or communication to the
Company of any Acquisition Proposal.
(c) Buyer shall cause any and all shares of Company Common Stock or
Company Preferred Stock owned by Buyer, to be voted in favor of the approval of
this Agreement.
(d) Nothing in this Agreement shall prevent the Company Board from
withholding, withdrawing, amending or modifying its recommendation that the
stockholders of the Company vote to adopt and approve this Agreement and the
Merger if the Company Board determines in good faith (after consultation with
legal counsel) that the failure to take such action would reasonably be expected
to constitute a breach by the Company Board of its fiduciary duties to the
Company's stockholders under applicable Law. Unless this Agreement shall have
been terminated in accordance with its terms, nothing contained in this Section
6.01(d) shall limit the Company's obligation to convene and hold the Company
Stockholders Meeting (regardless of whether the Company Board's recommendation
shall have been withheld, withdrawn, amended or modified).
34
(e) None of the information supplied by Buyer for inclusion or
incorporation by reference in the Proxy Statement or a Statement on Schedule
13E-3 ("Schedule 13E-3") shall, at (i) the time filed with the SEC, in the case
of the Schedule 13E-3, (ii) the time the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the stockholders of the
Company, in the case of the Proxy Statement, (iii) the time of Company's
Stockholders' Meetings, in the case of each of the Schedule 13E-3 and the Proxy
Statement, in each case as then amended or supplemented, and (iv) the Effective
Time, in the case of each of the Schedule 13E-3 and the Proxy Statement, in each
case as then amended or supplemented, contain any untrue statement of a material
fact or fail to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. If, at any time prior to the
Effective Time, any event or circumstance relating to Buyer, or their respective
officers or directors, that should be set forth in an amendment or a supplement
to the Proxy Statement or Schedule 13E-3 should be discovered by Buyer, Buyer
shall promptly inform the Company thereof. All documents that Buyer is
responsible for filing with the SEC in connection with the transactions
contemplated by this Agreement will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and the
rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(f) None of the information supplied by the Company for inclusion
or incorporation by reference in the Proxy Statement or a Schedule 13E-3 shall,
at (i) the time filed with the SEC, in the case of the Schedule 13E-3, (ii) the
time the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to the stockholders of the Company, in the case of the Proxy
Statement, (iii) the time of Company's Stockholders' Meetings, in the case of
each of the Schedule 13E-3 and the Proxy Statement, in each case as then amended
or supplemented, and (iv) the Effective Time, in the case of each of the
Schedule 13E-3 and the Proxy Statement, in each case as then amended or
supplemented, contain any untrue statement of a material fact or fail to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. If, at any time prior to the Effective Time, any event or
circumstance relating to the Company or any Company Subsidiary, or their
respective officers or directors, that should be set forth in an amendment or a
supplement to the Proxy Statement or Schedule 13E-3 should be discovered by the
Company, the Company shall promptly inform Buyer. All documents that the Company
is responsible for filing with the SEC in connection with the Merger or the
other transactions contemplated by this Agreement will comply as to form and
substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange Act and
the rules and regulations thereunder.
SECTION 6.02 Access to Information; Confidentiality. The Company shall,
and shall cause each Company Subsidiary to afford to Buyer, and to Buyer's
officers, employees, accountants, counsel, financial advisors, financing sources
and other representatives, upon reasonable notice, reasonable access during
normal business hours during the period prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records and,
during such period, the Company shall, and shall cause each Company Subsidiary
to, promptly make available to Buyer such information concerning its business,
properties, assets, customers, consultants and personnel as Buyer may reasonably
request. The Company hereby consents, and shall cause each Company Subsidiary to
consent, to Buyer and Buyer's
35
officers, employees, accountants, counsel, financial advisors, financing sources
and other representatives contacting, in a reasonable fashion, real estate
developers and landlords of the Company and such Company Subsidiary and will,
upon reasonable notice from Buyer, request such real estate developers and
landlords to cooperate during normal business hours during the period prior to
the Effective Time with any reasonable requests made by or on behalf of Buyer.
Subject to the requirements of Law, Buyer shall, and shall cause its officers,
employees, agents, consultants and affiliates to, hold all information obtained
pursuant to this Agreement in confidence under the Buyer Confidentiality
Agreement, and in the event of termination of this Agreement for any reason,
Buyer shall promptly comply with its obligations under the Buyer Confidentiality
Agreement.
SECTION 6.03 No Solicitation of Transactions.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement in accordance with Section 8.01 hereof, except as
provided in clause (b) below, the Company shall not, and shall not permit any of
the Company Subsidiaries to directly or indirectly, initiate, solicit,
negotiate, encourage or provide nonpublic confidential information to
facilitate, and the Company shall, and shall use its reasonable best efforts to
cause any officer, director or employee of the Company, or any attorney,
accountant, investment banker, financial advisor or other agent retained by it
or any of the Company Subsidiaries, not to directly or indirectly initiate,
solicit, negotiate, encourage or provide nonpublic or confidential information
to facilitate, any proposal or offer to acquire any part of the business or
properties of the Company constituting 30% or more of the net revenues, net
income or the assets of the Company or more than 30% of the capital stock of the
Company (including any capital stock then owned by the Person or group making
such offer or proposal), whether by merger, consolidation, recapitalization,
purchase of assets, tender offer or otherwise and whether for cash, securities
or any other consideration or combination thereof (any such transaction being
referred to herein as an "Acquisition Transaction"). The Company immediately
shall cease and cause to be terminated all activities, discussions or
negotiations with any parties with respect to any Acquisition Proposal as
defined below.
(b) Notwithstanding the provisions of clause (a) above, the Company
Board or the Special Committee may:
(i) furnish information to any Person in response to an unsolicited
written bona fide offer or proposal with respect to an Acquisition
Transaction (an "Acquisition Proposal") if, and only to the extent that
(I) the Company Board or the Special Committee determines, in good faith
and after consultation with its independent financial advisor and legal
counsel, that such Acquisition Proposal is, or could reasonably be
expected to lead to, a Superior Proposal (as hereinafter defined); (II)
prior to furnishing such information to such Person, the Company provides
written notice to Buyer to the effect that it is furnishing such
information to such Person (which notice shall be in compliance with
clause (c) of this Section 6.03); and (III) the Company Board or the
Special Committee receives, prior to furnishing any such information to
such Person, an executed confidentiality agreement (a "Confidentiality
Agreement") which does not contain exclusivity provisions which would
prevent the Company from complying with its obligations hereunder and
which is substantially similar to the confidentiality
36
agreement between the Company and Cadigan Investment Partners dated
November, 2001 (the "Buyer Confidentiality Agreement").
(ii) engage in discussions or negotiations with any Person in
response to an Acquisition Proposal if, and only to the extent that (I)
the Company Board or the Special Committee determines, in good faith and
after consultation with its independent financial advisor and legal
counsel, that such Acquisition Proposal is, or could reasonably be
expected to lead to, a Superior Proposal (as hereinafter defined); (II)
the Company Board or the Special Committee determines in good faith (after
consultation with legal counsel) that the failure to engage in discussions
or negotiations with such person could reasonably be expected to
constitute a breach by the Company Board or the Special Committee of its
fiduciary duties to the Company's stockholders under applicable Law; (III)
prior to engaging in discussions or negotiations with such Person, the
Company provides written notice to Buyer to the effect that it is engaging
in discussions or negotiations with such Person (which notice shall be in
compliance with clause (c) of this Section 6.03 and shall identify the
material terms of the proposal (if different from any notice previously
provided)); and (IV) if not previously obtained, the Company Board or the
Special Committee receives, prior to engaging in discussions or
negotiations with such Person, a Confidentiality Agreement.
(iii) (A) approve, recommend, or propose to approve or recommend any
Acquisition Proposal, (B) cause the Company to accept any Acquisition
Proposal and/or (C) enter into any letter of intent, acquisition agreement
or other similar agreement or arrangement to consummate an Acquisition
Proposal, if and only to the extent that (I) the Company Board or the
Special Committee determines, in good faith and after consultation with
its independent financial advisor and legal counsel, that such Acquisition
Proposal would constitute a Superior Proposal (as hereinafter defined);
(II) the Company Board or the Special Committee determines in good faith
(after consultation with legal counsel) that the failure to take such
action would reasonably be expected to constitute a breach by the Company
Board or the Special Committee of its fiduciary duties to the Company's
stockholders under applicable Law; and (III) prior to taking such action,
the Company complies with the requirements contained in clause (c) of this
Section 6.03.
For purposes of this Agreement, "Superior Proposal" shall mean a bona fide
Acquisition Proposal made by a third party (A) that the Company Board or the
Special Committee determines in its good faith judgment (after consultation with
its financial advisor) to be more favorable to the Company's stockholders (other
than the Rollover Stockholders) from a financial point of view than the Merger
(after taking into account any adjustment to the terms of this Agreement and the
transactions contemplated hereby proposed by Buyer in response to such
Acquisition Proposal), (B) that is expected to result in the acquiring person or
group and any of its or their respective Affiliates owning more than eighty-five
percent of the outstanding shares of Company Common Stock and Company Preferred
Stock (including any capital stock of the Company then owned by such person or
group) or substantially all of the assets of the Company, and (C) that the
Company Board or the Special Committee determines in its good faith judgment is
reasonably likely to be consummated, taking into account all legal and
regulatory aspects of the proposal and all contingencies (including, without
limitation, any financing contingencies) of
37
the proposal. The Company's Board of Directors may take and disclose to the
Company's stockholders a position required by Rule 14e-2 under the Exchange Act.
It is understood and agreed that negotiations and other activities conducted in
accordance with this paragraph (b) shall not constitute a violation of paragraph
(a) of this Section 6.03.
(c) The Company shall notify Buyer orally within one business day and
in writing within two business days after receipt of any Acquisition Proposal,
indication of interest or request for nonpublic information relating to the
Company or a Company Subsidiary in connection with an Acquisition Proposal or
for access to the properties, books or records of the Company or any Company
Subsidiary by any Person or group that informs the Board of Directors of the
Company or such Company Subsidiary or the Special Committee that it is
considering making, or has made, an Acquisition Proposal. Such notice to Buyer
shall indicate in reasonable detail the identity of the offeror and the terms
and conditions of such proposal, inquiry or contact. The Company shall use its
reasonable efforts to keep Buyer informed of the status and details (including
any change to the terms thereof) of any such Acquisition Proposal. In addition,
in the event the Company intends to take any actions set forth in clause
(b)(iii) of this Section 6.03 in connection with a Superior Proposal, the
Company will notify Buyer in writing at least three business days prior to
taking such action, which notice will identify and detail the proposed terms of
such Superior Proposal. The Company may only take any action set forth in clause
(b)(iii) of this Section 6.03 with respect to such Superior Proposal if (a) the
proposal continues to be a Superior Proposal in light of any improved
transaction proposed by Buyer prior to the expiration of the three business day
period and (b) the Company terminates the agreement in accordance with Section
8.01(h) of this Agreement and complies with Section 8.03(b) of this Agreement.
SECTION 6.04 Directors' and Officers' Indemnification and Insurance.
(a) Buyer shall, to the fullest extent permitted by Law, cause the
Surviving Corporation (from and after the Effective Time) to honor all of the
Company's obligations to indemnify, defend and hold harmless (including any
obligations to advance funds for expenses) the current and former directors and
officers of the Company and the Company Subsidiaries against all losses, claims,
damages or liabilities arising out of acts or omissions by any such directors
and officers occurring prior to the Effective Time to the maximum extent that
such obligations of the Company exist on the date of this Agreement, whether
pursuant to the Company Charter, the Company By-Laws, the contractual
obligations set forth on Schedule 6.04 or the DGCL and such obligations shall
survive the Merger and shall continue in full force and effect in accordance
with the terms of the Company Charter, the Company By-Laws, any such contractual
obligations and the DGCL from the Effective Time until the expiration of the
applicable statute of limitations with respect to any claims against such
directors or officers arising out of such acts or omissions. In the event a
current or former director or officer of the Company or any of its subsidiaries
is entitled to indemnification under this Section 6.04(a), such director or
officer shall be entitled to reimbursement from the Surviving Corporation for
reasonable attorney's fees and expenses incurred by such director or officer in
pursuing such indemnification, including payment of such fees and expenses by
the Surviving Corporation in advance of the final disposition of such action
upon receipt of an undertaking by such current or former director or officer to
repay such payment unless it shall be adjudicated that such current or former
director or officer was entitled to such payment.
38
(b) The Company shall maintain, through the Effective Time, the
Company's existing directors' and officers' insurance in full force and effect
without reduction of coverage. From and after the Effective Time and for a
period of six years after the Effective Time, Buyer shall cause to be maintained
in effect the current policies of directors' and officers' liability insurance
maintained by the Company (provided that Buyer may substitute therefore policies
with reputable and financially sound carriers of at least the same coverage and
amounts containing terms and conditions which are no less advantageous to the
insureds) with respect to claims arising from or related to facts or events
which occurred at or before the Effective Time; provided, however, that Buyer
shall not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 200% of the annual premiums paid as of the date
hereof by the Company for such insurance (such 200% amount, the "Maximum
Premium"). If such insurance coverage cannot be obtained at all, or can only be
obtained at an annual premium in excess of the Maximum Premium, Buyer shall
maintain the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Premium. The Company
represents to Buyer that the last annual premium paid prior to the date of this
Agreement was $66,183.
(c) The Certificate of Incorporation or By-Laws of the Surviving
Corporation shall contain the provisions that are set forth, as of the date of
this Agreement, in Article 4 of the By-Laws of the Company, which provisions
shall not be amended, repealed or otherwise modified for a period of six years
from the Effective Time in any manner that would affect adversely the rights
thereunder of individuals who at or at any time prior to the Effective Time were
directors, officers, employees or other agents of the Company (and during such
period the Certificate of Incorporation of the Surviving Corporation shall not
be amended, repealed or otherwise modified in any manner that would have the
effect of so amending, repealing or otherwise modifying any such provisions of
the By-Laws).
(d) If the Surviving Corporation or any of its successors or assigns
(i) consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
and the continuing or surviving entity does not assume the obligations of the
Surviving Corporation set forth in this Section 6.04, or (ii) transfers all or
substantially all of its properties and assets to any Person, then, and in each
such case, proper provision shall be made so that the successors and assigns of
the Surviving Corporation assume, as a matter of Law or otherwise, the
obligations set forth in this Section 6.04.
SECTION 6.05 Further Action; Consents; Filings.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties shall use all reasonable efforts to take, or
cause to be taken, all reasonable actions, and to do, or cause to be done, and
to assist and cooperate with the other parties in doing, all things reasonably
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated hereby, including
without limitation (i) the obtaining of all necessary actions or nonactions,
waivers, consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all reasonable steps as may be necessary to
obtain an approval or waiver from, or to avoid an action or proceeding by,
39
any Governmental Entity, (ii) the obtaining of all necessary consents, approvals
or waivers from third parties, (iii) the defending of any lawsuits or other
legal proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby,
including, when reasonable, seeking to have any stay or temporary restraining
order entered by any court or other Governmental Entity vacated or reversed and
(iv) the execution and delivery of any additional instruments necessary to
consummate the transactions contemplated hereby and to carry out fully the
purposes of this Agreement. In connection with and without limiting the
foregoing, the Company and the Company Board shall, at the request of Buyer: (i)
take all action within its power reasonably requested by Buyer as necessary to
ensure that no state takeover statute or similar statute or regulation is or
becomes applicable to this Agreement or the transactions contemplated hereby,
and (ii) if any state takeover statute or similar statute or regulation becomes
applicable to this Agreement or the transactions contemplated hereby, take all
action within its power (unless the taking of such action would reasonably be
expected to be a breach of its fiduciary obligations to the Company's
stockholders), reasonably requested by Buyer as necessary to ensure that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated by this Agreement and otherwise to minimize the effect
of such statute or regulation on the transactions contemplated hereby. Nothing
in this Agreement shall be deemed to require any party to waive any substantial
rights or agree to any substantial limitation on its operations or to dispose of
any significant asset or collection of assets.
(b) Buyer and the Company shall file as soon as practicable after the
date of this Agreement any required notifications under the HSR Act and shall
respond as promptly as practicable to all inquiries or requests that may be made
pursuant to the HSR Act for additional information or documentation and shall
respond as promptly as practicable to all inquiries and requests received from
any State Attorney General or other Governmental Entity in connection with
antitrust matters. The parties shall cooperate with each other in connection
with the making of all such filings or responses, including providing copies of
all such documents to the other party and its advisors prior to filing or
responding.
SECTION 6.06 Public Announcements. Buyer, on the one hand, and the
Company, on the other hand, shall consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements (including any filings with any federal or state
governmental or regulatory agency or with the NASDAQ National Market) with
respect to the transactions contemplated hereby and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by applicable Law (including foreign regulations
relating to competition), court process or by obligations pursuant to any
listing agreement with any national securities exchange.
SECTION 6.07 Certain Employee Benefits Matters. For a period of one year
following the Effective Time and effective upon the Merger, Buyer shall, or
shall cause the Surviving Company to, provide medical, 401(k), life and
disability benefits and cash compensation to Surviving Company employees (except
to the extent that any such employee is party to a contract covered by Section
3.11(a)(i) that governs such compensation and benefits) that, in the aggregate,
are comparable to the medical, 401(k), life and disability benefits and cash
compensation (other than employee benefit plans, programs, contracts or
arrangements providing
40
for stock options, stock purchase rights, restricted stock, phantom stock or
other stock-based compensation) customarily provided to the similarly situated
employees of comparable companies engaged in for-profit businesses substantially
similar to that of the Company and the Company Subsidiaries.
SECTION 6.08 Rights Agreement. The Company Board has taken all action in
order to render the Company Rights inapplicable to the transactions contemplated
hereby (including, without limitation, the execution and delivery of the Voting
Agreements set forth in Exhibit 1 hereto). Except as approved in writing by
Buyer, the Company Board shall not (i) authorize, approve or effectuate any
amendment to the Company Rights Agreement, (ii) authorize, approve or effectuate
any redemption of the Company Rights or (iii) take any action with respect to,
or make any determination under, the Company Rights Agreement, in each case to
permit or facilitate the consummation of any Acquisition Proposal unless this
Agreement has been terminated in accordance with the terms and conditions set
forth herein.
SECTION 6.09 Stockholder Litigation. The Company shall give Buyer the
opportunity to participate in the defense or settlement of any stockholder
litigation against the Company and/or its directors relating to this Agreement
or the transactions contemplated hereby; provided, however, that Buyer shall
have the right to prevent the Company from entering into any such settlement
without Buyer's consent, which consent shall not be unreasonably withheld or
delayed.
SECTION 6.10 Solvency. Buyer shall deliver to the Company a certificate
from the Chief Financial Officer of the Surviving Corporation, dated as of the
Closing Date, to the effect that, immediately after the Effective Time and after
giving effect to the Merger, the Financing and the other transactions
contemplated in connection therewith (and any changes in the Surviving
Corporation's assets and liabilities as a result thereof) the Surviving
Corporation: (i) will be solvent (i.e., in that both the fair value of its
assets will not be less than the sum of its debts and that the present fair
saleable value of its assets will not be less than the amount required to pay
its probable liability on its debts as they become absolute and matured); (ii)
will not have unreasonably small capital with which to engage in its business;
and (iii) will not have incurred and does not plan to incur debts beyond its
ability to pay as they become absolute and matured.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01 Conditions to the Obligations of Each Party. The obligations
of the Company and Buyer to consummate the Merger are subject to the
satisfaction or waiver (where permissible) at or prior to the Effective Time of
the following conditions:
(a) Company Stockholder Approval. The Company Stockholder Approval
shall have been obtained.
(b) No Order. No Governmental Entity or court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
Law, rule, regulation, judgment, decree, injunction, executive order or award
(an "Order") that is then in effect or
41
pending and has, or would have, the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
(c) Antitrust Waiting Periods. Any waiting period (and any extension
thereof) applicable to the consummation of the Merger under the HSR Act and any
foreign regulations, if any, shall have expired or been terminated or obtained.
(d) Consents and Authorizations from Governmental Entities. All
consents, approvals and authorizations legally required to be obtained to
consummate the Merger shall have been obtained and made with all Governmental
Entities.
(e) Actions. No Action shall have been brought and remain pending by
any Governmental Entity that seeks to prevent the consummation of the
transactions contemplated by this Agreement.
SECTION 7.02 Conditions to the Obligations of Buyer . The obligations of
Buyer to consummate the Merger are subject to the satisfaction or waiver (where
permissible) at or prior to the Effective Time of the following additional
conditions:
(a) Representations and Warranties.
(i) Each of the representations and warranties of the Company
contained in Sections 3.03, 3.04, 3.17 and 3.21 of this Agreement (A) that
do not have materiality or Material Adverse Effect qualifications shall be
true and correct in all material respects as of the Closing Date, as though
made at and as of the Closing Date, except that those representations and
warranties that address matters only as of a particular date shall remain
true and correct in all material respects as of such date and (B) that have
materiality or Material Adverse Effect qualifications shall be true and
correct in all respects as of the Closing Date, as though made at and as of
the Closing Date, except that those representations and warranties that
address matters as of a particular date shall remain true and correct in
all respects as of such date; and
(ii) each of the representations and warranties of the Company
contained in this Agreement and not listed in clause (i) above shall be
true and correct as of the Closing Date, as though made at and as of the
Closing Date, except that those representations and warranties that address
matters only as of a particular date shall remain true and correct as of
such date except where the failure of any of the representations and
warranties either at the Closing Date or as of such particular date would
not and would not reasonably be expected to have a Material Adverse Effect
and would not and would not be reasonably likely to prevent or delay
consummation of the Merger, (provided, that for purposes of this Section
7.02(a)(ii) only, any materiality or Material Adverse Effect qualifications
to the representations and warranties shall be disregarded).
Buyer shall have received a certificate of the Chief Executive Officer or Chief
Financial Officer of the Company as to the satisfaction of the conditions set
forth in this Section 7.02(a).
42
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time and Buyer shall have received a certificate of the Chief
Executive Officer or Chief Financial Officer of the Company to that effect.
(c) Consents. The consents, approvals and authorizations from third
parties listed on Schedule 7.02(c) required as a result of the transactions
contemplated by this Agreement or the Merger shall have been obtained or Buyer
shall be reasonably satisfied that such consents, approvals and authorizations
are not required.
(d) Material Adverse Effect. There shall have been no circumstance,
event, occurrence, change or effect that, individually or in the aggregate, has
had or would reasonably be expected to have a Material Adverse Effect since the
date of this Agreement.
(e) Actions. No Action shall have been brought and remain pending by
any Governmental Entity or other Person that would reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(f) Financing. The Financing contemplated in the Commitment Letters
shall have been consummated on the terms set forth therein; provided, however,
that in the event the Financing contemplated in the Commitment Letters shall not
have been consummated on the terms set forth therein, the Buyer shall have used
commercially reasonable efforts to obtain financing with no greater cost of
capital to the Buyer and other terms no less favorable in the aggregate to the
Buyer than the terms contained in the Commitment Letters, in order to consummate
the Merger and the transactions contemplated hereby.
(g) Certified Copies. At the Closing, the Company shall deliver
certified copies of (i) the resolutions duly adopted by the Company Board on
August 5, 2002 and the Special Committee on August 5, 2002 authorizing the
execution, delivery and performance of this Agreement and the other agreements
contemplated hereby applicable to it and the Transactions, (ii) Company Charter
and Company By-Laws and (iii) the tabulation of the stockholder vote taken at
the Stockholders Meeting.
SECTION 7.03 Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are subject to the satisfaction or
waiver (where permissible) at or prior to the Effective Time of the following
additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects as of the Closing Date, as though made on and as of the
Closing Date, except that those representations and warranties that address
matters only as of a particular date shall remain true and correct as of such
date except where the failure of any of the representations and warranties
either at the Closing Date or as of such particular date would not and would not
reasonably be expected to have a Buyer Material Adverse Effect, (provided, that
for purposes of this Section 7.03(a) only, any materiality or Buyer Material
Adverse Effect qualifications to the
43
representations and warranties shall be disregarded), and the Company shall have
received a certificate of the Chief Executive Officer or Chief Financial Officer
of Buyer to that effect.
(b) Agreements and Covenants. Buyer shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time and the Company shall have received a certificate of the Chief Executive
Officer or Chief Financial Officer of Buyer to that effect.
(c) Certified Copies. At the Closing, Buyer shall deliver certified
copies of (i) the resolutions duly adopted by Buyer's board of directors
authorizing the execution, delivery and performance of this Agreement and the
other agreements contemplated hereby applicable to it and the Transactions, (ii)
the resolutions duly adopted by Buyer's stockholders approving this Agreement
and the Transactions, and (iii) the certificate of incorporation and the by-laws
of Buyer.
(d) Solvency Certificate. The Company shall have received a
certificate in form and substance satisfactory to the Company, to the effects
set forth in Section 6.10 hereof.
ARTICLE VIII
TERMINATION, AMENDMENT, WAIVER AND EXPENSES
SECTION 8.01 Termination. This Agreement may be terminated and the Merger
and the other transactions contemplated by this Agreement may be abandoned at
any time prior to the Effective Time, notwithstanding any requisite approval and
adoption of this Agreement and the transactions contemplated by this Agreement,
as follows:
(a) by mutual written consent duly authorized by the Boards of
Directors of each of Buyer and the Company;
(b) by either Buyer or the Company, if the Effective Time shall not
have occurred on or before December 5, 2002; provided, however, that the right
to terminate this Agreement under this Section 8.01(b) shall not be available to
any party whose improper action or failure to act has caused the failure of the
Merger to occur on or before such date;
(c) by either Buyer or the Company, if there shall be any Law or
Order of a Governmental Authority which is final and nonappealable preventing
the consummation of the Merger;
(d) by Buyer if (X) the Company Board or the Special Committee (i)
withdraws or modifies in a manner adverse to Buyer, or publicly resolves to
withdraw or modify in a manner adverse to Buyer, its approval or recommendation
of this Agreement or the Merger, (ii) fails to recommend to the Company's
stockholders that they approve the Merger and give the Company Stockholder
Approval, (iii) publicly approves or recommends, or resolves to approve or
recommend, any alternative Acquisition Proposal, (iv) enters into any letter of
intent or similar document or any agreement, contract or commitment accepting
any Superior Proposal, or (v) fails to reconfirm the recommendation referred to
in clause (ii) above if requested in accordance with the applicable provisions
of Section 6.01(a), or fails to publicly announce (in accordance
44
with the applicable provisions of Section 6.01(a)) that the Company Board is not
recommending any alternative Acquisition Proposal, (Y) the Company shall have
materially or Intentionally breached its obligations under Section 6.03, or (Z)
a tender offer or exchange offer for 30% or more of the outstanding shares of
the Company Common Stock (assuming conversion of the Company Preferred Stock and
taking into consideration any shares of Company Common Stock and/or Company
Preferred Stock already held by the Person or group commencing such tender or
exchange offer) is commenced, and the Board of Directors or the Special
Committee of the Company fails to recommend against acceptance of such tender
offer or exchange offer by its stockholders (including by taking no position
with respect to the acceptance of such tender offer or exchange offer by its
stockholders) within ten business days from the commencement thereof; provided
that Buyer's right to terminate pursuant to this clause (Z) shall expire if not
exercised within 30 days of such failure;
(e) by either Buyer or the Company if this Agreement shall fail to
receive the requisite vote for approval at the Company Stockholders' Meeting
duly called and held in accordance with Section 6.01(b) hereof;
(f) prior to the Effective Time, by Buyer upon a breach of any
representation, warranty, covenant or agreement (subject to the materiality
threshold, if any, expressed in such representation, warranty, covenant or
agreement) on the part of the Company set forth in this Agreement, or if any
representation or warranty of the Company shall have become untrue, in either
case such that the conditions set forth either in Section 7.02(a) or 7.02(b)
hereof would not be satisfied; provided, that the termination right pursuant to
this clause (f) shall not be available if such breach shall have been cured
within 15 days of notification by Buyer to the Company of such breach or such
breach is otherwise waived by Buyer;
(g) prior to the Effective Time, by the Company upon a breach of any
representation, warranty, covenant or agreement (subject to the materiality
threshold, if any, expressed in such representation, warranty, covenant or
agreement) on the part of Buyer set forth in this Agreement, or if any
representation or warranty of Buyer shall have become untrue, in either case
such that the conditions set forth either in Section 7.03(a) or Section 7.03(b)
hereof would not be satisfied; provided, that the termination right pursuant to
this clause (g) shall not be available if such breach shall have been cured
within 15 days of notification by the Company to Buyer of such breach or such
breach is otherwise waived by the Company;
(h) prior to the Stockholder Approval, by the Company (A) if the
Board of Directors of the Company shall have authorized the Company, subject to
complying with the terms of this Agreement (including without limitation,
Section 6.03), to enter into a definitive agreement with respect to a Superior
Proposal and the Company shall have notified Buyer in writing pursuant to
Section 6.03(c) that it intends to enter into such an agreement, and (B) the
Superior Proposal on which the agreement is based continues to be a Superior
Proposal after taking into account any adjustment to the terms and conditions
hereof proposed in writing by Buyer within three business days of receipt of the
Company's written notification of its intention to enter into such definitive
agreement with respect to the Superior Proposal; provided, however, that such
termination pursuant to this clause (h) shall not be effective unless and until
the Company shall have paid to Buyer the fee described in Section 8.03(b)
hereof.
45
SECTION 8.02 Effect of Termination. Except as provided in Section 9.01
hereof, in the event of termination of this Agreement pursuant to Section 8.01
hereof, this Agreement shall forthwith become void, there shall be no liability
under this Agreement on the part of Buyer or the Company or any of their
respective officers or directors, and all rights and obligations of each party
hereto shall cease, subject to the obligations set forth in Section 8.03 hereof;
provided, however, that nothing herein shall relieve any party from liability
for the willful breach of any of its representations, warranties, covenants or
agreements set forth in this Agreement.
SECTION 8.03 Expenses.
(a) Except as set forth below, all Expenses (as defined below)
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses. "Expenses" as
used in this Agreement shall include all reasonable out of pocket expenses
(including, without limitation, all fees and expenses of counsel, accountants,
investment bankers, experts and consultants to a party hereto and its
affiliates) incurred by a party or on its behalf in connection with or related
to the authorization, preparation, negotiation, execution and performance of
this Agreement, the preparation, printing, filing and mailing of the Schedule
13E-3 and the Proxy Statement, the solicitation of stockholder approval, the
filing of any required notices under the HSR Act or other similar regulations
and all other matters related to the closing of the Merger and the other
transactions contemplated by this Agreement.
(b) The Company agrees to pay to Buyer a non-refundable fee equal
to $1,500,000 plus all Expenses not to exceed $1,500,000 incurred by Buyer if:
(i) Buyer terminates this Agreement pursuant to Section 8.01(d);
(ii) (A) Buyer or the Company terminates this Agreement pursuant to
Section 8.01(e), (B) prior to the time of such termination an Acquisition
Proposal had been made known to the Company's stockholders generally or
any Person shall have publicly announced its intention (whether or not
conditional) to make an Acquisition Proposal; and (C) on or prior to the
12-month anniversary of the termination of this Agreement, the Company or
any of the Company Subsidiaries or affiliates (x) enters into an agreement
or letter of intent (or if the Company Board resolves or announces an
intention to do so) with respect to any Business Combination with any
Person, entity or group or (y) consummates any Business Combination with
any Person, entity or group;
(iii) The Company terminates this Agreement pursuant to Section
8.01(h); or
(iv) Buyer terminates this agreement pursuant to Section 8.01(f) and
within 12 months of such termination, the Company (x) enters into an
agreement or letter of intent (or if the Company Board resolves or
announces an intention to do so) with respect to any Business Combination
with any Person, entity or group or (y) consummates any Business
Combination with any Person, entity or group.
(c) Any payment required to be paid pursuant to Section 8.03(a)
shall be made by wire transfer of same day funds:
46
(i) prior to the occurrence of (a) any event described in Section
8.03(b)(iii), (b) any event described in subclause (x) or (y) of Section
8.03(b)(ii) in the case of termination by the Company or Buyer pursuant to
such Section 8.03(b)(ii) or (c) any event described in subclause (x) or
(y) of Section 8.03(b)(iv) in the case of termination by Buyer pursuant to
such Section 8.03(b)(iv); or
(ii) within two business days of a termination by Buyer pursuant to
Section 8.03(b)(i).
(d) Without duplication of any payment required by Section 8.03(b),
if Buyer terminates this Agreement pursuant to Section 8.01(f), the Company
agrees to reimburse Buyer for all Expenses not to exceed $1,500,000 incurred by
Buyer, such payment to be made by wire transfer of same day funds within two
business days of such termination.
(e) For purposes of this Section 8.03, "Business Combination" means
(i) a merger, consolidation, share exchange, business combination or similar
transaction involving the Company as a result of which the Company stockholders
prior to such transaction cease to own at least 50% of the voting securities of
the entity surviving or resulting from such transaction (or the ultimate parent
entity thereof) in the proportion they owned such shares prior to such
transaction, (ii) a sale, lease, exchange, transfer, public offering in respect
of, or other disposition of more than 50% of the assets of the Company and the
Company Subsidiaries, taken as a whole, in either case, in a single transaction
or a series of related transactions, or (iii) the acquisition, by a Person
(other than Buyer or any affiliate thereof) or group of beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the Company
Common Stock (assuming conversion of the Company Preferred Stock and taking into
consideration any shares of Company Common Stock and/or Company Preferred Stock
already held by such Person or group), in either case, whether by tender or
exchange offer or otherwise.
(f) The Company acknowledges that the agreements contained in this
Section 8.03 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Buyer would not enter into this
Agreement; accordingly, if the Company fails to pay the amounts due pursuant to
this Section 8.03, and, in order to obtain any such payment, Buyer commences a
legal proceeding which results in a judgment against the Company for the amounts
set forth in this Section 8.03, the Company shall pay to Buyer its costs and
expenses (including attorneys' fees) in connection with such proceeding,
together with interest on the amounts set forth in this Section 8.03 at the
prime rate of Citibank N.A. in effect on the date any such payment was required
to be made.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01 Non Survival of Representations, Warranties and Agreements.
The representations and warranties in this Agreement and in any certificate
delivered pursuant hereto shall terminate at the Effective Time or upon
termination of this Agreement pursuant to Article VIII hereof. The covenants and
agreements in this Agreement shall survive the Effective Time in accordance with
their terms.
47
SECTION 9.02 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed given (i) five
days after mailing by certified mail (postage prepaid, return receipt
requested), (ii) when delivered by hand, (iii) upon confirmation of receipt by
facsimile, delivered during normal business hours, or (iv) one business day
after sending by overnight delivery service to the respective parties at the
following addresses (or at such other address for a party as shall be specified
in a notice given in accordance with this Section 9.02):
if to Buyer:
Socrates Acquisition Corporation
One Embarcadero Center, Suite 2750
San Francisco, CA 94111
Facsimile No.: (415) 217-7400
Attention: Jeff Ott
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Facsimile No.: (617) 951-7050
Attention: David C. Chapin, Esq.
if to the Company:
Nobel Learning Communities, Inc.
1615 West Chester Pike
West Chester, PA 19382
Facsimile No.: (484) 947-2003
Attention: Chief Executive Officer
with a copy to:
Nobel Learning Communities, Inc.
1615 West Chester Pike
West Chester, PA 19382
Facsimile No.: (484) 947-2003
Attention: General Counsel
with a copy to:
Dechert
1717 Arch Street
4000 Bell Atlantic Tower
Philadelphia, PA 19103
48
Facsimile No.: 215-994-2222
Attention: Geraldine A. Sinatra, Esq.
SECTION 9.03 Certain Definitions. For purposes of this Agreement, the term:
(a) "Affiliate" of a specified Person means a Person who directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under common control with such specified Person;
(b) "business day" means any day on which both the principal offices
of the SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day (other than a Saturday or a
Sunday) on which banks are not required or authorized to close in The City of
New York;
(c) "Company Subsidiary" means any subsidiary of the Company.
(d) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "Environmental Laws" means any federal, state, local or foreign
Laws relating to (A) releases or overtly threatened releases of Hazardous
Substances or materials containing Hazardous Substances; (B) the manufacture,
handling, transport, use, treatment, storage or disposal of Hazardous Substances
or materials containing Hazardous Substances; or (C) otherwise relating to
pollution or protection of the environment, health, safety or natural resources;
(f) "Hazardous Substances" means (i) those substances defined in or
regulated under the following federal statutes and their state counterparts and
all regulations thereunder: the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking
Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide, and
Rodenticide Act and the Clean Air Act; (ii) petroleum and petroleum products,
including crude oil and any fractions thereof; (iii) natural gas, synthetic gas,
and any mixtures thereof; (iv) polychlorinated biphenyls, asbestos and radon;
(v) any other contaminant; and (vi) any substance, material or waste regulated
by any federal, state, local or foreign Governmental Entity pursuant to any
Environmental Law;
(g) "Intellectual Property" means patents, patent applications,
copyrights, trade secrets, inventions, know-how, confidential information and
data, trademarks, service marks, trade names, domain names, rights of privacy
and publicity and moral rights.
(h) "Intentionally" means deliberately acting or failing to act with
the purpose of causing a result, whether such result is achieved or not.
49
(i) "knowledge" means, with respect to the Company, the actual
knowledge, after reasonable inquiry, of any of the persons set forth on Section
(A) of Exhibit 3 hereto and with respect to Buyer, the actual knowledge, after
reasonable inquiry, of any of the persons set forth on Section (B) of Exhibit 3
hereto.
(j) "Material Adverse Effect" means any circumstance, event,
occurrence, change or effect that materially and adversely affects the business,
operations, condition (financial or otherwise), assets (tangible or intangible)
or results of operations of the Company and the Company Subsidiaries taken as a
whole other than any circumstance, event, occurrence, change or effect resulting
from the public announcement of the transactions contemplated by this Agreement.
(k) "person" or "Person" means an individual, corporation,
partnership, limited partnership, syndicate, Person (including, without
limitation, a "Person" as defined in section 13(d)(3) of the Exchange Act),
trust, association or entity or government, political subdivision, agency or
instrumentality of a government; and
(l) "subsidiary" or "subsidiaries" of any Person means any
corporation, partnership, joint venture or other legal entity of which such
Person (either alone or through or together with any other subsidiary) owns,
directly or indirectly, more than 50% of the stock or other equity interests,
the holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other legal
entity.
SECTION 9.04 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors and by
the Special Committee at any time prior to the Effective Time; provided,
however, that after this Agreement is adopted by the Company's stockholders, no
such amendment shall be made that reduces the amount or changes the type of
consideration into which each share of Company Common Stock or Company Preferred
Stock shall be converted upon consummation of the Merger without the further
approval of the Company's stockholders. This Agreement may not be amended,
except by an instrument in writing signed by the parties hereto.
SECTION 9.05 Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any obligation or other
act of any other party hereto, (b) waive any inaccuracy in the representations
and warranties contained herein or in any document delivered pursuant hereto,
and (c) waive compliance with any agreement or condition contained herein. Any
such extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby; provided, however, that any
such waiver by the Company shall be effective only if authorized or approved by
the Special Committee. The failure of any party to this Agreement to assert any
of its rights under this Agreement shall not constitute a waiver of such rights.
SECTION 9.06 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of Law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect as long as the economic or legal substance of
the transactions contemplated by this Agreement is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
50
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner in order that the transactions contemplated by this Agreement be
consummated as originally contemplated to the fullest extent possible.
SECTION 9.07 Assignment; Binding Effect; Benefit. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of Law or otherwise) without the
prior written consent of the other parties, provided, however, that Buyer shall
be entitled to assign this Agreement and any rights, interests or obligations
hereunder to any of its Affiliates without the consent of the Company, provided
that any such assignment shall not relieve Buyer of its obligations hereunder.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, other than the Company's current and former directors and officers in
the case of Section 6.04, nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 9.08 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at Law or in equity.
SECTION 9.09 Governing Law; Forum. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that state and without regard to
any applicable conflicts of law principles.
SECTION 9.10 Headings. The descriptive headings contained in this Agreement
are included for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 9.11 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
SECTION 9.12 Entire Agreement. This Agreement (including the Exhibits the
Company Disclosure Schedule) and the Buyer Confidentiality Agreement constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
[The rest of this page has intentionally been left blank]
51
IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
SOCRATES ACQUISITION CORPORATION
By: /s/ Jeffrey Ott
-------------------------------
Name: Jeffrey Ott
Title: Co-President
By: /s/ David Luttway
-------------------------------
Name: David Luttway
Title: Co-President
NOBEL LEARNING COMMUNITIES, INC.
By: /s/ Peter Havens
-------------------------------
Name: Peter Havens
Title: Director
Exhibit 3
List of "knowledge" Individuals
Section A
Jack Clegg
John Frock
Robert Zobel
William Bailey
Kathy Herman
Section B
Jeff Ott
Josh Donfeld
Pericles Navab
David Luttway
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT, dated as of October 2, 2002 (the "Amendment"),
is by and between Socrates Acquisition Corporation, a Delaware corporation (the
"Buyer") and Nobel Learning Communities, Inc., a Delaware corporation (the
"Company") and amends the Agreement and Plan of Merger, dated as of August 5,
2002, by and between the Buyer and the Company (the "Merger Agreement").
Capitalized terms used but not otherwise defined herein have the meaning
assigned to those terms in the Merger Agreement.
WHEREAS, pursuant to Section 9.04 of the Merger Agreement, on
September 30, 2002, the Special Committee of the Board of Directors of the
Company and the Board of Directors of the Company approved an amendment of
certain provisions of the Merger Agreement as set forth below; and
WHEREAS, pursuant to Section 9.04 of the Merger Agreement, on
September 30, 2002, the Board of Directors of the Buyer approved an amendment of
certain provisions of the Merger Agreement as set forth below.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto hereby agree as follows:
1. Amendments to Merger Agreement
1.1. Amendment to Section 3.03(a)(v). Section 3.03(a)(v) of the Merger
Agreement is hereby amended by deleting the number "230,510" and
replacing it with the number "230,501".
1.2. Amendment to to Section 8.01(b). Section 8.01(b) of the Merger
Agreement is hereby amended by deleting the date "December 5, 2002"
and replacing it with the date "January 31, 2003".
1.3. Amendment to Section 4.06. Section 4.06 of the Merger Agreement is
hereby amended by deleting the first sentence thereof and replacing it
with the following sentence: "Buyer has provided the Company with a
commitment letter from (i) BNP Paribas, dated as of August 5, 2002 and
amended as of October 2, 2002, (ii) Gryphon Partners II, L.P., dated
as of August 5, 2002 and amended as of October 2, 2002, and (iii)
Cadigan Investment Partners, Inc., dated as of August 5, 2002, (the
"Commitment Letters" and the financing to be provided thereunder, the
"Financing")."
1.4. Schedule I to the Merger Agreement shall be superseded and replaced in
its entirety by Schedule I attached hereto as Exhibit 1.4.
1.5. The list of "Outstanding Options and Warrants" contained in Section
3.03(d) of the Company Disclosure Schedule to the Merger Agreement
shall be superseded and replaced in its entirety by the list of
"Outstanding Options and Warrants" attached hereto as Exhibit 1.5.
2. Miscellaneous.
2.1. Counterparts. This Amendment may be executed and delivered (including
by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
2.2. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that state and without
regard to any applicable conflicts of law principles.
2.3. Headings. The descriptive headings contained in this Amendment are
included for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Amendment.
2.4. Effectiveness of Merger Agreement. Except as expressly set forth
herein, the Merger Agreement is not modified, amended, released or
otherwise affected by this Amendment. The parties hereby agree that
all references to the Merger Agreement contained in any documents
delivered in connection with or at the closing under the Merger
Agreement be deemed to refer to the Merger Agreement as amended
hereby.
2.5. Entire Agreement. This Amendment constitutes the entire agreement
among the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings among the parties
with respect to the subject matter contained herein.
[The rest of this page has intentionally been left blank]
IN WITNESS WHEREOF, Buyer and the Company have caused this Amendment to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
SOCRATES ACQUISITION CORPORATION
By: /s/ Jeffrey Ott
--------------------------------
Name: Jeffrey Ott
Title: Co-President
By: /s/ David Luttway
--------------------------------
Name: David Luttway
Title: Co-President
NOBEL LEARNING COMMUNITIES, INC.
By: /s/ Peter Havens
--------------------------------
Name: Peter Havens
Title: Director
Exhibit 1.4
Schedule I
Rollover Shares/Options
-----------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Rollover Shares Surviving Surviving Rollover Surviving Surviving
Corporation Corporation Options Corporation Class Corporation Class
Class C Common Class P Common C Options P Options
Stock Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Common Preferred
- ------------------------------------------------------------------------------------------------------------------------------------
Jack Clegg 108,991 880,726/1/ 0
- ------------------------------------------------------------------------------------------------------------------------------------
John Frock 17,500 50,000 0
- ------------------------------------------------------------------------------------------------------------------------------------
Scott Clegg 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Zobel 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------
/1/ Consists of 477,500 shares of Series A Preferred Stock and 403,226 shares of
Series C Preferred Stock
Appendix B
[LEGG MASON] Investment
Banking
Legg Mason Wood Walker, Incorporated
Suite 1100, 1735 Market Street, Philadelphia, PA 19103
215.496.8300 Fax: 215.568.2031
Member New York Stock Exchange, Inc. / Member SIPC
August 5, 2002
The Board of Directors and
The Special Committee of the Board of Directors
Nobel Learning Communities, Inc.
C/o Peter Havens, Chairman
Baldwin Investment Management, LLC
Four Falls Corporate Center, Suite 202
West Conshohocken, PA 19428
Members of the Special Committee and the Board of Directors:
Cadigan Investment Partners, Inc. and Gryphon Partners II L.P. (the
"Investor Group") have proposed the purchase of 94.24% of the common stock of
Nobel Learning Communities, Inc. ("Nobel" or the "Company") for $7.75 per share
in cash in a merger transaction (the "Transaction") in which Socrates
Acquisition Corporation (the "Buyer") will be merged with and into the Company.
The remaining 5.76% of the Company's outstanding common stock (the "Rollover
Shares") is owned by certain members of the Company's management and will be
converted to capital stock of the newly merged company in the Transaction. You
have requested our opinion (the "Opinion"), as investment bankers, as to the
fairness, from a financial point of view, of the amount of consideration to be
received in the Transaction to the Company's common stockholders, other than
holders of Rollover Shares.
In connection with our Opinion set forth below, we have, among other
things:
(i) reviewed the material terms of the Transaction, including a draft
dated July 12, 2002, of the agreement and plan of merger for the
Transaction and the commitment letter of the lender;
(ii) reviewed certain publicly available audited and unaudited financial
statements of Nobel and certain other publicly available information
concerning Nobel;
(iii) reviewed certain internal information, primarily financial in nature,
concerning Nobel prepared by its management;
(iv) reviewed forecast financial statements of Nobel prepared and furnished
to us by the senior management of Nobel;
Page 2 August 5, 2002
(v) held discussions with certain officers and employees of Nobel
concerning the operations, financial condition and future prospects of
Nobel;
(vi) reviewed certain publicly available financial and stock market data
relating to selected public companies that we considered relevant to
our inquiry;
(vii) reviewed certain publicly available data regarding transactions that
we considered relevant to our inquiry; and
(viii) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed necessary or
appropriate.
In connection with our review, we have assumed and relied upon the
accuracy and completeness of all financial and other information supplied to us
by Nobel, and all publicly available information, and we have not independently
verified such information. We have further relied on the assurances of the
Company's management that they are unaware of any facts that would make the
information provided to us incomplete or misleading. We also have relied upon
the management of Nobel as to the reasonableness and achievability of the
financial projections (and the assumptions and bases therein) provided to us by
Nobel and we have assumed that such projections have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of
management as to the future operating performance of Nobel. Nobel does not
publicly disclose internal management projections of the type provided to Legg
Mason in connection with Legg Mason's review of the Transaction. Such
projections were not prepared with the expectation of public disclosure. The
projections were based on numerous variables and assumptions that are inherently
uncertain, including without limitation, factors related to general economic and
competitive conditions. Accordingly, actual results could vary significantly
from those set forth in such projections. We have relied on these forecasts and
do not in any respect assume any responsibility for the accuracy or completeness
thereof.
We have not been requested to make, and we have not made, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities of
Nobel and we have not been furnished with any such appraisals or evaluations.
Estimates of values of Nobel and its assets do not purport to be appraisals or
necessarily reflect the prices at which Nobel or its assets may actually be
sold. Because such estimates are inherently subject to uncertainty, Legg Mason
assumes no responsibility for their accuracy.
Our Opinion is necessarily based on share prices and economic and other
conditions and circumstances as in effect on, and the information made available
to us as of, July 31, 2002. We have assumed that the Transaction will be
consummated on the terms and conditions as presented to us by management,
without any waiver of material terms or conditions by Nobel. Subsequent
developments may affect our Opinion and we have no obligation to update, reissue
or reaffirm our Opinion.
Page 3 August 5, 2002
This letter is directed to the Special Committee of Nobel's Board of
Directors (the "Special Committee") and Nobel's Board of Directors (the "Board")
and the Opinion expressed herein is provided for the use of the Special
Committee and the Board in their evaluation of the proposed Transaction. This
letter does not constitute a recommendation of the Transaction over any other
alternative transaction (including the alternative to not effect the
Transaction) that may be available to Nobel and does not address the underlying
business decision of the Special Committee or the Board to proceed with or to
effect the Transaction. Also Legg Mason is not making any recommendation to
Nobel's stockholders as to whether or not they should vote for or against the
Transaction or seek their statutory dissenters' rights in respect of the
Transaction. This letter is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, nor shall
this letter be used for any other purposes, without the prior written consent of
Legg Mason Wood Walker, Incorporated, provided that this Opinion may be included
in its entirety in any filing made by Nobel with the Securities and Exchange
Commission with respect to the Transaction.
Legg Mason has acted as the financial advisor to the Special Committee in
connection with the Special Committee's analyses and evaluation of the Company's
strategic alternatives, including the proposed Transaction. We were not engaged
to, and we have not attempted to locate other potential acquirers of Nobel or
its assets or conducted an auction thereof. Legg Mason has received a retainer
as an initial payment. Legg Mason will also receive a fee upon delivery of this
fairness opinion and a fee upon the closing of the Transaction. In addition,
Legg Mason has represented the Company in the past as an investment banker for
which it has received customary fees.
Based upon and subject to the foregoing, we are of the opinion that, as
of August 5, 2002, the amount of consideration to be paid to Nobel's common
stockholders (other than holders of Rollover Shares) in the Transaction is fair
to such stockholders, from a financial point of view.
Very truly yours,
LEGG MASON WOOD WALKER,
INCORPORATED
Appendix C
DELAWARE CODE
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
(S) 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)251(g)
of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264 of this
title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or d. Any combination of the shares of stock, depository
receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving or resulting
corporation within 10 days thereafter shall notify each of the holders of
any class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include in
such notice a copy of this section. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constitutent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
Appendix D
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, 2002
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1615 West Chester Pike 19382
West Chester, PA
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (484) 947-2000
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. [_]
As of September 3, 2002, 6,544,953 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 3, 2002 was approximately $30,256,000 (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.
-ii-
TABLE OF CONTENTS
Item
No. Page
PART I
1. Business ....................................................................... 1
Executive Officers of the Company .............................................. 8
2. Properties ..................................................................... 10
3. Legal Proceedings .............................................................. 10
4. Submission of Matters to a Vote of Security Holders ............................ 10
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters ................................................ 11
6. Selected Financial Data ........................................................ 13
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............................... 14
7A. Quantitative and Qualitative Disclosures About Market Risk ..................... 22
8. Financial Statements and Supplementary Data .................................... 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ......................................... 22
PART III
10. Directors and Executive Officers of the Registrant ............................. 23
11. Executive Compensation ......................................................... 26
12. Security Ownership of Certain Owners and Management ............................ 37
13. Certain Relationships and Related Transactions ................................. 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............... 44
iii
PART I
ITEM 1. BUSINESS.
Recent Developments
Nobel Learning Communities, Inc. ("NLCI" or "the Company") has entered
into an Agreement and Plan of Merger, dated as of August 5, 2002, with Socrates
Acquisition Corporation ("Socrates"), a corporation newly formed by Gryphon
Partners II, L.P. and Cadigan Investment Partners, Inc. (the "Buying Group"),
both of which are engaged principally in the business of investing in companies.
Under the merger agreement, Socrates will be merged into NLCI, with NLCI as the
surviving corporation (the "Merger"). If the Merger is completed, each issued
and outstanding share of NLCI common stock and preferred stock (calculated on an
as-converted basis to the nearest one-hundredth of a share) will be converted
into the right to receive $7.75 in cash, without interest, except for certain
shares and options held by the NLCI directors and executive officers identified
in the merger agreement as a rollover stockholder, which will continue as, or be
converted into, equity interests of the surviving corporation. In addition, if
the Merger is completed, each outstanding option and warrant that is exercisable
as of the effective time of the Merger will be canceled in exchange for (1) the
excess, if any, of $7.75 over the per share exercise price of the option or
warrant multiplied by (2) the number of shares of common stock subject to the
option or warrant exercisable as of the effective time of the merger, net of any
applicable withholding taxes. Following the Merger, NLCI will continue its
operations as a privately held company. The Merger is contingent upon
satisfaction of a number of conditions, including approval of NLCI's
stockholders, the receipt of regulatory and other approvals and consents, the
absence of any pending or threatened actions that would prevent the consummation
of the transactions contemplated by the merger agreement and receipt of
financing. There can be no assurance that these or other conditions to the
Merger will be satisfied or that the Merger will be completed. If the Merger is
not completed for any reason, it is expected that the current management of
NLCI, under the direction of the NLCI Board of Directors, will continue to
manage NLCI as an ongoing business.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
Certain statements set forth in or incorporated by reference in this
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, whether and when the Merger will be consummated, our outlook for
Fiscal 2003, other statements in this report other than historical facts
relating to the financial conditions, results of operations, plans, objectives,
future performance and business of the Company. In addition, words such as
"believes," "anticipates," "expects," "intends," "estimates," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Such statements are based on our
currently available 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. Readers are cautioned that the forward-looking statements reflect
management's analysis only as of the date hereof, and the Company assumes no
obligation to update these statements. Actual future results, events and trends
may differ materially from those expressed in or implied by such statements
depending on a variety of factors set forth throughout this 10-K. With respect
to any forward-looking statements regarding the Merger, these factors include,
but are not limited to, the risks that stockholder approval, financing and
regulatory and other governmental and third-party clearances and consents may
not be obtained in a timely manner or at all and that other conditions to the
Merger may not be satisfied.
General
The Company is a for-profit provider of education for the pre-elementary
through 12th grade market and school management services. Our programs are
offered through a network of private schools, charter schools, schools for
learning challenged students, and special purpose 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 Arizona, California, Florida, Georgia, Illinois,
Maryland, Nevada, New Jersey, North Carolina, Oregon, Pennsylvania, South
Carolina, Texas, Virginia and Washington. The schools operate under
1
various names, including Chesterbrook Academy (East, South and Midwest),
Merryhill School (West), Evergreen Academy (Northwest), Paladin Academy
(learning challenged) and Houston Learning Academy and Saber Academy (special
purpose high schools). As of September 3, 2002, we operated 179 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; and
. development of new businesses.
Our pre-elementary and elementary strategy is based on meeting the
educational needs of children, beginning with infancy. We encourage our children
to stay with our 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-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 a more
individualized approach to learning through our small schools with small
classes, with curricula that integrates community-based learning and that is
supported by technology. Further, in certain locations, we serve those with
special needs through our schools for learning challenged and special purpose
high schools. We believe that the empirical results support the quality of our
programs. Standardized test results have shown that, on average, our students
perform one and one-half to three grade levels above national norms in reading
and mathematics.
Many of our pre-elementary and elementary 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 one
of our schools knowing the children will receive both a quality education and
engage in well-supervised activities.
Most of our pre-elementary and elementary 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 1985, The Rocking Horse Childcare Centers of America, Inc.
merged into a publicly-traded entity that had been incorporated in 1983. 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 1615 West Chester Pike, West Chester, PA
19382. Our telephone number is (484) 947-2000.
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. Each child's individual educational needs and
2
skills are considered upon entrance into one of our schools. 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 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 our framework and philosophy as well as other
resources that support our educational mission.
We maintain that small schools, small classes, qualified teachers, clearly
articulated curricula 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. 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 the child's physical, social, emotional and intellectual growth,
schools are encouraged to provide fee-based experiences specifically tailored to
particular families' interests 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 licensing and accrediting agencies through an internal quality
assurance program. Many of our 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) and its
regional affiliates.
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 curricula, within the standards of Nobel
Learning Communities, to meet local needs. Members of our management visit 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
3
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 report
to regional Vice Presidents of Operations. School principals and Executive
Directors work closely with regional and corporate management, particularly in
the regular assessment of program quality.
Principals and Executive Directors are also responsible to raise additional
revenues through ancillary programs, such as sales of school uniforms,
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
Executive 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 a more individualized approach to learning, comprehensive
curricula, small class sizes, accreditation, credentialed teachers, before and
after school programs and summer camps. We promote early age introduction of
foreign language and technology use. We evaluate student progress regularly,
including the administration of standardized tests, which show that, on average,
our school age children perform one and one-half to three grade levels above
national norms.
Corporate Development - Nobel Learning Communities 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 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.
New School Development
Since June 2001 through June 2002, we opened four pre-elementary schools
and two Paladin Academy schools. From July 1, 2002 through September 3, 2002, we
have opened four pre-elementary schools, two elementary schools and one Saber
Academy special purpose high school. Throughout the remainder of the twelve
months ended June 30, 2003 ("Fiscal 2003") we plan to open approximately, six
Paladin Academy schools.
Proposed development sites are presented to us through a network of
developers and land realtors across the United States. After site selection, we
engage a developer or contractor to build a facility to our specifications. We
currently work with several developers who purchase the land, build the facility
and lease the premises to us under a long-term lease. Alternatively, we purchase
land, construct the building with our own or borrowed funds and then seek to
enter into a sale and lease-back transaction with an investor. Our development
plans are dependent on the continued availability of developer and financing
arrangements.
4
Acquisitions
Since 1994, we have acquired 74 schools: 47 pre-elementary schools, 21
elementary schools and six special purpose high schools. We strive to make only
acquisitions that 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, or become the foundation for new, Nobel
Learning Communities and quality of personnel.
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 special purpose 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.
Paladin Academy
Our Paladin Academy schools serve the needs of children with learning
challenges. 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 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 students in our general education
program, as well as to students from other schools who require a clinical
educational approach.
As of September 3, 2002, we operated 14 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 nine schools located
within our 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, Nevada, New Jersey, North Carolina, Virginia and Washington.
We plan to expand Paladin Academy schools within our school clusters across
the United States. Further, as Paladin Academy develops broader market
recognition independent of our private elementary schools, we plan to roll out
the program independently across the United States. Our ultimate goal is to be a
recognized national operator of special education schools.
Expanding our initiatives in special education, since May 2000, under terms
of a credit agreement, we have advanced funds to 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, Pennsylvania, which serves
624 students in kindergarten through eighth 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 services such as, 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
5
from the School District of Philadelphia. In some cases, as part of the
arrangements with the charter schools, we lease the charter school premises from
a third party and sublease 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 contracts, 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.
We also plan to pursue moderate 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, we would lose the right to operate a school if the
charter authority were to revoke the charter. Typically, the charter holder is a
community group that 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 / Saber Academy
In September 1999, we acquired all the capital stock of Houston Learning
Academy ("HLA"), an operator of five special purpose high schools in the Houston
metropolitan marketplace. HLA schools offer a half-day high school program, as
well as summer school, tutorials and special education classes to residential
hospitals that are fully accredited by the Southern Association of Colleges and
Schools. HLA schools' programs feature 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) under the
name Saber Academy, followed by introduction into existing and future Nobel
Learning Community markets. We believe HLA / Saber Academy and Paladin Academy
schools will have significant marketing and other synergies. For example, since
HLA / Saber Academy programs run primarily in the morning, we can use the same
facilities to conduct Paladin Academy programs in the afternoons.
Industry and Competition
Education reform movements in the United States are posing alternatives to
the public schools. Among others, these reforms include charter schools, private
management of public schools, home schooling, private schools and, on a limited
basis, voucher programs. Our strategy is to provide parents a quality
alternative through our 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 material for-profit competitor
that integrates elementary and pre-elementary schools of which we are aware
which currently competes beyond a regional level is Children's World, a
subsidiary of Aramark Corporation.
We offer a national curriculum based program with excellent 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 children 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.
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,
6
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.
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 benefits in the least restrictive environment. The
charter school's obligation to provide these potentially extensive services and
the attendant financial exposure, varies depending on state law. Other laws
applicable to our charter schools include the Family Educational Rights and
Privacy Act (which protects the privacy of a student's educational record), the
Gun-Free Schools Act (which requires us to effect certain policies, assurances
and reports at our charter schools regarding the discipline of students who
bring weapons to our schools) and various civil rights laws.
Insurance
We currently maintain comprehensive general liability, workers'
compensation, automobile liability, property, excess umbrella liability and
student accident insurance. The policies provide for a variety of coverage and
are subject to various limits. Companies involved in the education and care of
children, however, may not be able to obtain insurance for the total risks
inherent in their operations. In particular, general liability coverage can have
sublimits per claim for child abuse. We believe we have adequate insurance
coverage at this time. There can be no assurance that in future years we will
not become subject to lower limits or substantial increase in insurance
premiums.
Service Marks
We have registered various service marks in the United States Patent and
Trademark Office, including, among others, Chesterbrook Academy(R), Merryhill
Country School(R), Camp Zone (R) and The Activities Club (R). 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 somewhat more stable. We continue to seek
to improve summer results through camps and other programs.
Employees
On September 3, 2002, we employed approximately 3,900 persons,
approximately 1,170 of whom were employed on a part-time or seasonal basis. We
believe that our relationship with our employees is satisfactory.
7
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
Name Age Position
- ---- --- --------
A. J. Clegg 63 Chairman of the Board of Directors and Chief Executive
Officer; Director
John R. Frock 59 Vice Chairman - Corporate Development; Assistant
Secretary; Director
Robert E. Zobel 54 Vice Chairman - Corporate Affairs and Chief Financial
Officer; Director
D. Scott Clegg 39 Vice Chairman - Operations, President and Chief
Operating Officer
Dr. Lynn A. Fontana 54 Executive Vice President - Education and Chief
Education Officer
Gary V. Lea 48 Vice President - Southern Operations
Kimberly D. Pablo 39 Vice President - Western Operations
Kathleen L. Willard 53 Vice President - Northern Operations
The following description contains certain information concerning the
foregoing persons:
A. J. Clegg. Mr. A. J. Clegg was named Chairman of the Board of Directors
and Chief Executive Officer of NLCI in May, 1992. Since 1996, Mr. A. J. 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. A. J. Clegg also served as the Chairman and CEO of JBS
Investment Banking, Ltd., a provider of investment management and consulting
services to businesses, including NLCI. 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. A. J. 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. A. J.
Clegg 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. A. J. Clegg was recognized as "Education Entrepreneur of the
Year" by the Association of Education Practitioners and Providers. Mr. A. J.
Clegg is the father of D. Scott Clegg, NLCI's Vice Chairman - Operations,
President and Chief Operating Officer.
John R. Frock. Mr. Frock was appointed Vice Chairman - Corporate
Development of NLCI in April 2002. Prior to such appointment, Mr. Frock had been
Executive Vice President - Corporate Development since August 1, 1994. Mr. Frock
was elected to the Board of Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief Operating Officer of JBS Investment
Banking, Ltd., a provider of investment management and consulting services to
businesses, including NLCI.
Robert E. Zobel. Mr. Zobel was appointed Vice Chairman - Corporate Affairs
and Chief Financial Officer of NLCI in April 2002. Between February 2001 and
April 2002, Mr. Zobel served as Vice President, Chief Administrative Officer and
Secretary of MARS, Inc., a start up retail organization. Mr. Zobel was Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of MARS,
Inc. from February 1996 until February 2001. From 1974 through February 1996,
Mr. Zobel was associated with Deloitte & Touche LLP (formerly Touche Ross & Co.)
as an employee and since September 1981 as a partner. Mr. Zobel earned a B.A.
degree from Claremont
8
McKenna College, a J.D. degree from Willamette University College of Law and a
LLM degree in tax from Boston University. Mr. Zobel has been a director of NLCI
since 1998.
D. Scott Clegg. Mr. D. Scott Clegg rejoined NLCI as Vice Chairman -
Operations, President and Chief Operating Officer in February 2002. Previously,
Mr. D. Scott Clegg had been with NLCI from 1993 until 1997, commencing with his
appointment as Vice President - Operations for the Merryhill Country Schools
division in June 1993, and culminating with his appointment in early 1996 as
Vice President - Operations, with responsibility for nationwide operations. Mr.
D. Scott Clegg left NLCI in 1997, to become a principal and founder of Pathways
Education Group, L.L.C., a management consulting firm serving the public and
private sectors in education. He was formerly Vice President of New Business
development at JBS Investment Banking, Ltd. Mr. D. Scott Clegg also served as
General Manager and Chief Operating Officer of Dynasil Corporation of America, a
public company, and also served as a member of Dynasil's board of directors. Mr.
D. Scott Clegg is the son of A. J. Clegg, our Chairman and Chief Executive
Officer.
Dr. Lynn A. Fontana. Dr. Fontana joined NLCI August of 1999 as Executive
Vice President - Education and Chief Education Officer. She is responsible for
the educational programs, professional development, technology integration and
quality assurance in NLCI's network of schools. Dr. Fontana has been actively
involved in educational research and development for more than twenty-five
years. As a research associate professor at George Mason University she directed
educational projects funded by public and private foundations including the
National Science Foundation, Bell Atlantic Foundation, Corporation for Public
Broadcasting, the Defense Advanced Research Projects Agency, and the Department
of Defense Education Activity. Prior to joining the research faculty at George
Mason University, Dr. Fontana was Vice President for Educational Activities at
WETA. Dr. Fontana has a B.A. in history and political science from Juniata
College and a Ph.D. in social studies education from Indiana University. She
taught high school history for eight years in public schools in Pennsylvania and
New Jersey. Dr. Fontana has served on the Board of Trustees of National History
Day for 10 years and on the editorial board for World Book Publishing for six of
the last eight years.
Gary V. Lea. Mr. Lea was appointed Vice President - Southern Operations in
June of 2001. Mr. Lea joined NLCI in January of 2000 as Executive Director. Mr.
Lea was formerly with KinderCare Learning Centers, Inc. from July 1988 through
August of 1996, as a Regional Vice President covering 11 states and 150 schools.
He has also had extensive experience in the restaurant and service industry. He
was formerly the Director of Operations with Boston Market for a large southwest
territory. Mr. Lea attended Southwest Missouri State University where he earned
a B.S in Business and Psychology.
Kimberly D. Pablo. Ms. Pablo has been with NLCI since it acquired Merryhill
Schools in 1989. She ran one of NLCI's three largest schools for approximately
four years as a principal, during which time enrollment grew at that school from
150 students to 250 students. In 1997 Ms. Pablo was promoted to one of two
District Managers, and ran a successful district of 13 elementary, middle and
preschools. In 1999, she was promoted to Vice President - Western Operations.
Ms. Pablo graduated with a BA from Humboldt State University in CA and received
her Masters Degree in Organizational Management in 1999.
Kathleen L. Willard. Ms. Willard was named Vice President - Northern
Operations in December of 1999. Between January 1997 and December of 1999, Ms.
Willard was the Executive Director for the Florida district schools of NLCI.
From 1985 to 1997, prior to the acquisition of the schools in Florida by NLCI,
Ms. Willard served as a school administrator with Another Generation Preschools
(a privately held preschool company in the Ft. Lauderdale area).
9
Item 2. Properties.
At September 3, 2002, we operated 179 schools on 10 owned and 169 leased
properties in 15 states. Our schools are geographically distributed as follows:
four in Arizona, 29 in California, 17 in Florida, one in Georgia, 13 in
Illinois, one in Maryland, seven in Nevada, 15 in New Jersey, 24 in North
Carolina, three in Oregon, 23 in Pennsylvania, two in South Carolina, ten in
Texas, 22 in Virginia and eight in Washington. 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, 2002, 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 22,500 square feet of space for our corporate offices in West
Chester, Pennsylvania.
Item 3. Legal Proceedings.
We are a party in various suits and claims that arise in the ordinary
course of our business. Our management currently believes that the ultimate
disposition 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.
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of NLCI. Named as
defendants in the complaint are NLCI, members of the NLCI Board of Directors and
one former member of the NLCI Board of Directors. The plaintiff alleges, among
other things, that the proposed merger is unfair and that the current and former
NLCI directors breached their fiduciary duties by failing to disclose fully
material non-public information related to the value of NLCI and by engaging in
self-dealing. The complaint seeks an injunction, damages and other relief. NLCI
was served with the complaint on August 22, 2002.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
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, 2000 through June 30, 2002 and for the first quarter to date in Fiscal 2003.
High Low
Fiscal 2001 (July 1, 2000 to June 30, 2001)
First Quarter ........................................ 10.000 7.750
Second Quarter ....................................... 8.875 4.688
Third Quarter ........................................ 10.250 5.516
Fourth Quarter ....................................... 10.000 7.550
Fiscal 2002 (July 1, 2001 to June 30, 2002)
First Quarter ........................................ 9.000 6.250
Second Quarter ....................................... 8.250 4.800
Third Quarter ........................................ 7.480 5.050
Fourth Quarter ....................................... 7.230 5.150
Fiscal 2003
First Quarter (through September 3, 2002 ............. 7.600 5.010
Holders
At September 3, 2002, there were approximately 342 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 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.
11
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of June 30,
2002:
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity compensation plans
issued upon exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column (a))
Plan category warrants and rights warrants and rights
-------------
(a) (b) (c)
Equity compensation plans
approved by security holders 728,237 7.228 662,273
Equity compensation plans not
approved by security holders 100,000 8.363 --
------- ----- --
Total: 828,237 7.365 662,273
======= ===== =======
Options issued outside of the stockholder-approved plans have been issued with
features substantially similar to those of the stockholder-approved plans.
Item 6. Selected Financial Data.
Six Months
For the years ending June 30, Ended Year Ended
------------------------------------------- ------------- -------------
Operating Data 2002 2001 2000 1999 June 30, 1998 December 1997
--------- --------- ---------- --------- ------------- -------------
Revenue $ 156,279 $ 147,952 $ 127,407 $ 109,762 $ 48,995 $ 80,980
School operating expenses 136,190 129,786 110,078 96,475 42,643 70,258
--------- --------- ---------- --------- ------------- -------------
School operating profit 20,089 18,166 17,329 13,287 6,352 10,722
General and administrative expenses 11,776 11,004 9,742 7,717 3,391 5,973
Restructuring expense - - - - - 2,960
--------- --------- ---------- --------- ------------- -------------
Operating income 8,313 7,162 7,587 5,570 2,961 1,789
Interest expense 3,637 4,171 3,373 2,998 1,044 2,047
Other income (160) (424) (145) (248) (102) (158)
Minority interest 34 23 88 74 35 86
--------- --------- ---------- --------- ------------- -------------
Income (loss) before income taxes 4,802 3,392 4,271 2,746 1,984 (186)
Income tax expense 1,968 1,596 1,793 1,153 833 250
--------- --------- ---------- --------- ------------- -------------
Net (loss) income before Cumulative effect
of change in accounting principal and
extraordinary item 2,834 1,796 2,478 1,593 1,151 (436)
Cumulative effect of accounting change - 295 - - -
Extraordinary item - - - - - 449
--------- --------- ---------- --------- ------------- -------------
Net income (loss) 2,834 1,501 2,478 1,593 1,151 (885)
Preferred dividends 82 81 82 83 51 102
--------- --------- ---------- --------- ------------- -------------
Net income available to common stockholders' $ 2,752 1,420 2,396 1,510 1,100 (987)
========= ========= ========== ========= ============= =============
Basic earnings per share:
Net income (loss) before Cumulative effect
of change in accounting principle and
extraordinary item $ 0.44 $ 0.29 $ 0.40 $ 0.25 $ 0.18 $ (0.09)
Cumulative effect of accounting change - (0.05) - - - -
Extraordinary item - - - - - (0.07)
--------- --------- ---------- --------- ------------- -------------
Net income (loss) $ 0.44 $ 0.24 $ 0.40 $ 0.25 $ 0.18 $ (0.16)
========= ========= ========== ========= ============= =============
Dilutive earnings per share:
Net income (loss) before Cumulative effect
of change in accounting principle and
extraordinary item $ 0.38 $ 0.24 $ 0.33 $ 0.22 $ 0.15 $ (0.09)
Cumulative effect of accounting change (a) - (0.04) - - - -
Extraordinary item - - - - - (0.07)
--------- --------- ---------- --------- ------------- -------------
Net income (loss) $ 0.38 $ 0.20 $ 0.33 $ 0.22 $ 0.15 $ (0.16)
========= ========= ========== ========= ============= =============
EBITDA (b)
(earnings before interest, taxes,
depreciation and amortization expense) $ 14,514 $ 14,624 $ 13,943 $ 11,123 $ 5,243 $ 4,803
--------- --------- ---------- --------- ------------- -------------
Balance Sheet Data:
Working capital deficit $ (13,325) $ (15,453) $ (16,946) $ (12,087) $ (10,221) $ (7,946)
Goodwill and intangibles, net 49,521 50,012 51,447 47,319 43,754 37,923
Total assets 102,980 101,784 98,618 81,025 75,020 74,398
Short-term debt and
Current portion of long-term debt 4,488 6,414 6,293 2,209 2,031 2,793
Long-term debt 35,729 36,941 36,509 29,147 26,477 28,470
Stockholders' equity 42,487 38,601 36,558 34,145 32,736 31,636
(a) Cumulative effect of accounting change represents the effect of the
adoption of Staff Accounting Bulletin 101, Revenue Recognition.
(b) EBITDA is defined by the Company as its net income before interest expense,
income taxes, depreciation, amortization and cumulative effect of a change
in accounting principle. EBITDA is not intended to indicate that cash flow
is sufficient to fund all of the Company's cash needs or represent cash
flow from operations as defined by accounting principals generally
accepted in the United States of America. EBITDA should not be used as a
tool for comparison as the computation may not be similar for all
companies.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company has entered into an Agreement and Plan of Merger, dated as
of August 5, 2002, with Socrates Acquisition Corporation ("Socrates"), a
corporation newly formed by Gryphon Partners II, L.P. and Cadigan Investment
Partners, Inc. (collectively with Gryphon Partners II-A, L.P., the "Buying
Group"), both of which are engaged principally in the business of investing in
companies. Under the merger agreement, Socrates will be merged into NLCI, with
NLCI as the surviving corporation (the "Merger"). If the Merger is completed,
each issued and outstanding share of NLCI common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
will be converted into the right to receive $7.75 in cash, without interest,
except for certain shares and options held by the NLCI directors and executive
officers identified in the merger agreement as a rollover stockholder, which
will continue as, or be converted into, equity interests of the surviving
corporation. In addition, if the Merger is completed, each outstanding option
and warrant that is exercisable as of the effective time of the Merger will be
canceled in exchange for (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant multiplied by (2) the number of shares
of common stock subject to the option or warrant exercisable as of the effective
time of the merger, net of any applicable withholding taxes. Following the
Merger, NLCI will continue its operations as a privately held company. The
Merger is contingent upon satisfaction of a number of conditions, including
approval of NLCI's stockholders, the receipt of regulatory and other approvals
and consents, the absence of any pending or threatened actions that would
prevent the consummation of the transactions contemplated by the merger
agreement and receipt of financing. There can be no assurance that these or
other conditions to the Merger will be satisfied or that the Merger will be
completed. If the Merger is not completed for any reason, it is expected that
the current management of NLCI, under the direction of the NLCI Board of
Directors, will continue to manage NLCI as an ongoing business.
It is currently anticipated that the total amount of funds necessary to
complete the Merger and the related transactions is approximately $108,900,000
(assuming that no NLCI stockholders exercise and perfect their appraisal
rights). The Buying Group has received commitments, subject to various
conditions, from financial institutions in an aggregate amount sufficient,
taking into account the amounts to be contributed as equity financing, to fund
these requirements. The receipt of third-party financing is a condition to
completion of the Merger. Of this amount, $47,500,000 is expected to be funded
from a equity investment in the Company by Socrates and stockholders who are
converting their shares into equity interests in the surviving corporation and
an additional $50,000,000 is expected to be funded through new credit
facilities. These funds are expected to be used to pay NLCI's stockholders and
certain option holders and warrant holders, other than stockholders who are
converting their shares into equity interest in the surviving corporation, to
refinance debt, and to pay fees and expenses related to the Merger. Following
completion of the Merger, the senior secured credit facility and the senior
subordinated notes are expected to be repaid through cash flow generated from
operations in the ordinary course of business and/or through refinancing.
The Company anticipates that it will expense in the first and second
quarter of Fiscal 2003 approximately $800,000 of legal, professional and other
registration fees incurred in connection with the Merger.
Results of Operations
Fiscal Year ended June 30, 2002 ("Fiscal 2002") compared to Fiscal Year ended
June 30, 2001("Fiscal 2001")
At June 30, 2002, the Company operated 174 schools. Since June 30, 2001,
the Company has opened six new schools: four preschools and two schools for
learning challenged (the Paladin Academy schools). The Company has also closed
three schools.
Revenues for Fiscal 2002 increased $8,327,000 or 5.6% to $156,279,000 from
$147,952,000 for Fiscal 2001. The increase in revenues is primarily attributable
to tuition increases, the maturing of schools opened in Fiscal 2001 and the
opening of nine new schools.
Same school revenue (schools that were opened in both periods) increased
$6,908,000 or 4.7% in Fiscal 2002 compared to Fiscal 2001. This increase is
related to tuition increases of approximately 5% and the maturing of schools
opened in Fiscal 2001 offset by a decrease in enrollment in many of the
Company's preschools due
14
primarily as a result of the 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 new schools opened totaled $1,766,000. Revenues related
to The Activities Club increased $257,000. These increases were offset by a
decrease in revenues of $604,000 related to school closings.
School operating profit in Fiscal 2002 increased $1,923,000 or 10.6% to
$20,089,000 from $18,166,000 for Fiscal 2001. Total school operating profit
margin increased from 12.3% for Fiscal 2001 to 12.9% for Fiscal 2002. The
results for Fiscal 2002 include the effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
which resulted in a $1,677,000 reduction in goodwill amortization expense. (See
Note 7 to the financial statements.)
Same school operating profit increased $3,324,000 or 17.6% in Fiscal 2002
compared to Fiscal 2001. Same school operating profit margin improved from 12.9%
in Fiscal 2001 to 14.4% in Fiscal 2002. Excluding the effect of the adoption of
SFAS 142, same school operating profit increased $1,695,000 or 9.0%. The
increase in same school operating profit is due to the effect of the adoption of
SFAS 142, the maturing of schools opened in Fiscal 2001 and lower school level
expenses as a percentage of revenue. New schools opened in Fiscal 2002 incurred
a loss of $1,126,000. Pre-opening expense (start-up cost) for schools to open in
Fiscal 2003 was $516,000. The Activities Club ("TAC"), a business purchased in
December 1999, reduced its operating loss for Fiscal 2002 by $294,000 from
$474,000 in Fiscal 2001 to $180,000 in Fiscal 2002. School closings negatively
affected the change in school operating profit by $53,000.
General and administrative expenses increased $772,000 or 7.0% from
$11,004,000 in Fiscal 2001 to $11,776,000 in Fiscal 2002. As a percentage of
revenue, general and administrative expense was 7.5% for Fiscal 2002 and 7.4%
for Fiscal 2001. This increase in general and administrative expenses was
primarily related to additional corporate staffing, increased rent related to
new corporate office location and increased fees for professional and legal
services.
As a result of the factors mentioned above, operating income increased
$1,151,000 from $7,162,000 in Fiscal 2001 to $8,313,000 in Fiscal 2002.
Operating income as a percentage of revenue increased from 4.8% in Fiscal 2001
to 5.3% in Fiscal 2002.
Other income decreased $264,000 during Fiscal 2002 as compared to the
comparable period in the prior year. This decrease was primarily due to a
decrease in interest income from investments and notes receivable. Other income
for Fiscal 2002 also includes the gain recognized on the settlement of a
promissory note of $383,000 and the write-off of expenses related to
unsuccessful transactions of $344,000.
For Fiscal 2002, EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization) totaled $14,514,000. This represents a decrease
of $110,000 over the comparable period. EBITDA is not intended to indicate that
cash flow is sufficient to fund all of the Company's cash needs or represent
cash flow from operations as defined by accounting principles generally accepted
in the United States of America. In addition, EBITDA should not be used as a
tool for comparison as the computation may not be similar for all companies.
Interest expense decreased $534,000 or 12.8% from $4,171,000 for Fiscal
2001 to $3,637,000 for Fiscal 2002. The decrease is due to decreased interest
rates on the Company's senior credit facility and a decrease in interest
associated with subordinated notes due to repayments. The decreases were offset
by an increase in the Company's senior subordinated debt which increased from
10.0% to 12.0% in October 2001.
Income tax expense totaled $1,968,000 for Fiscal 2002, which reflects a 41%
effective tax rate. The reduction in the tax rate from Fiscal 2001 is
principally caused by the implementation of FAS 142, as the Company is no longer
amortizing non-deductible goodwill.
15
Fiscal 2001 compared to the twelve months ended June 30, 2000 ("Fiscal 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.
At June 30, 2001, the Company operated 171 schools. Since June 2000 through
June 2001, the Company 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 (HLA) and three charter
schools (including the two Arizona charter schools purchased in 2000). The
Company also closed three underperforming schools.
Revenues in Fiscal 2001 increased $20,545,000 or 16.1% to $147,952,000 in
Fiscal 2001 from $127,407,000 for Fiscal 2000. After adjusting Fiscal 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 Fiscal 2000 to $132,900,000 in Fiscal 2001 or
6.4%. This increase was related to tuition and enrollment increases and the
maturing of schools opened in Fiscal 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 TAC decreased $238,000 from
$640,000 in Fiscal 2000 to $402,000 in Fiscal 2001. These increases were offset
by a decrease in revenues of $1,656,000 related to closed schools.
School operating profit for Fiscal 2001 increased $837,000 or 4.8% to
$18,166,000 from $17,329,000 in Fiscal 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
Fiscal 2000 to $19,295,000 in Fiscal 2001 or 10.9%. Same school operating profit
margin improved from 13.9% in Fiscal 2000 to 14.5% in Fiscal 2001. The increase
in same school operating profit was due to the revenue increases and the
maturing of the schools opened in Fiscal 1999. For Fiscal 2001, new schools
incurred losses of $711,000. Included in these losses was $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 Fiscal 2001, operating
results from TAC were a loss of $474,000 or a decrease of $550,000 as compared
to Fiscal 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 Fiscal 2001. As a percentage of revenue, general and
administrative expenses decreased from 7.6% of revenues in Fiscal 2000 to 7.4%
of revenues in Fiscal 2001. The increase in general and administrative expense
related primarily 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
canceled.
As a result of the factors mentioned above, operating income decreased
$425,000 to $7,162,000 for Fiscal 2001 as compared to that for Fiscal 2000.
Operating income as a percentage of revenue increased from 5.9% in Fiscal 2000
to 4.8% in Fiscal 2001.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization) before the cumulative effect of a change in accounting principles,
totaled $14,624,000 for Fiscal 2001 which was $681,000 above Fiscal 2000. As a
percentage of revenue, EBITDA for Fiscal 2001 equaled 9.9% versus 10.9% in
Fiscal 2000. EBITDA is not intended to indicate that cash flow is sufficient to
fund all of the Company's cash needs or represent cash flow from operations as
defined by accounting principles generally accepted in the United States of
America. In addition, EBITDA should not be used as a tool for comparison as the
computation may not be similar for all companies.
16
Interest expense increased by $798,000 or 23.7% for Fiscal 2001 as compared
to Fiscal 2000. The increase in interest expense was 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 Fiscal 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 Revenue Recognition
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.
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
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 that was recognized during 2001. SAB
101 modifies the recognition of fee income but has no impact on cash flow or the
operations of the Company.
Liquidity and Capital Resources
Fiscal 2002 Cash Flows
Total cash and cash equivalents increased $466,000 from $1,321,000 at June
30, 2001 to $1,787,000 at June 30, 2002. The net increase was primarily related
to cash provided from operations totaling $10,548,000, repayments on notes
receivable of $1,680,000, proceeds from the exercise of stock options and
warrants of $1,510,000 and an increase in borrowings under the Senior Credit
Facility of $819,000. These sources of cash were offset by $8,673,000 in capital
expenditures, a decrease in cash overdraft liability of $1,864,000 and
repayments of subordinated debt of $3,865,000.
The working capital deficit decreased $2,128,000 from $15,453,000 at June
30, 2001 to $13,325,000 at June 30, 2002. The decrease is primarily the result
of a decrease of $1,864,000 in cash overdraft liability and a decrease of
$1,926,000 in current maturities of long-term debt. This decrease was offset by
an increase in unearned income totaling $370,000 and a decrease of $1,585,000 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 2003, but acquisitions will be limited in number.
In addition, the Company is committed to a plan and is actively marketing
approximately $6,000,000 in real estate for a potential sale leaseback
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
17
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 2004. At that time, the outstanding principal
under the Acquisition Credit Facility will be converted into a term loan that
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 NLCI must meet or exceed defined interest
coverage ratios and must not exceed leverage ratios.
At June 30, 2002, the Company was not in compliance with two credit
facility financial covenant ratios. The Company, however, received a waiver for
the breach of the interest coverage ratio and adjusted leverage ratio at June
30, 2002. In addition, the breached ratios were amended and restated to lower
ratio requirements for Fiscal 2003. The Company's interest coverage ratio
increased from a ratio of EBITDA of 3.5 times interest expense or higher to 4.0
times interest expense or higher at June 30, 2002. The Company's ratio was 3.99
times EBITDA at June 30, 2002. The Company's adjusted leverage ratio decreased
from 4.5 times EBITDA or plus rent expenses to 4.25 times EBITDA plus rent
expense at June 30, 2002. The Company's ratio was 4.37 times EBITDA plus rent
expense at June 30, 2002. The Company is in compliance with all other bank
covenant requirements.
At June 30, 2002, a total of $28,217,000 was outstanding and $9,353,000 was
available under the Amended and Restated Loan Agreement. There was $2,084,000
outstanding under the Working Capital Credit Facility, $13,276,000 was
outstanding under the Acquisition Credit Facility, $12,857,000 was outstanding
under the Term Loan and $287,000 in outstanding letters of credit. In addition,
the Company has $12,000,000 outstanding under subordinated debt agreements as
well as significant commitments under operating lease agreements. The following
is a summary of these obligations (dollars in thousands):
Contractual Obligations Less than 2-4 Year 5 and
Total 1 year years after
---------------------------------------------------------
Long-term obligations $40,217 4,488 26,781 8,948
Interest rate swap 376 63 313
Operating leases 228,682 25,127 69,890 133,665
---------------------------------------------------------
Total $269,275 $29,678 $96,984 $142,613
=========================================================
The Company announced on August 6, 2002 that it had entered into a merger
agreement with Socrates under which the Company would be the surviving
corporation. The Company has incurred, and will continue to incur, substantial
fees for services in connection with this transaction that heretofore have been
capitalized. If the transaction is consummated, these fees will be allocated to
the equity and debt financing of the transaction and thereafter treated in
accordance with generally accepted accounting principles. In the event the
transaction is not consummated, these fees will be expensed at that time. The
resulting write off may be material and may be sufficiently large that the
Company will find itself out of compliance with the covenants associated with
its existing senior debt. We cannot determine at this time whether any such
write off would be material or would cause the Company to be in default under
the credit facility with its senior lender.
The Company also has significant commitments with certain of its executives
that would be triggered upon a change in control and certain termination events.
Capital Expenditures
The Company is continuously maintaining and, where necessary, upgrading the
property and equipment of each school. During Fiscal 2002, the Company spent
approximately $8,673,000 on capital expenditures, which included $2,259,000 for
new school development, $5,758,000 on upgrading existing facilities and $656,000
related to new corporate offices. During Fiscal 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 Fiscal 2002, the Company received $390,000 from the sale of 2 closed
schools. During Fiscal 2001, the Company received $8,268,000 from sale and
leaseback transactions of new schools.
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 become
subject to lower limits or substantial increases in insurance premiums.
Recently Issued Accounting Standards
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
18
SFAS No. 121 with respect to cash flow estimations. SFAS No. 144 becomes
effective for the Company in Fiscal 2003. The Company is evaluating SFAS No. 144
and has not yet determined the full impact of adoption on its financial position
but will reclass property and equipment held for sale as part of total property
and equipment as the assets are still in use.
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 Fiscal 2002.
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
settled for $1,025,000 on February 14, 2002 resulting in a gain of $383,000. As
a result of the adoption of FASB 145, the Company recorded the gain as other
income during the quarter ended March 31, 2002. The impact on diluted earnings
per share for the quarter and year to date March 31, 2002 was $0.03 per share
(net of tax).
On July 30, 2002, FASB issued Statement 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
FASB 146 is to be applied prospectively to exit or disposal activities initiated
after December 21, 2002.
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. 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.
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.
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 also has investments in other entities. The collectibility 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.
19
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 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. As a result, the Company ceased amortization of goodwill, the effect of
which was a reduction of $1,677,000 of amortization expense for the year ended
June 30, 2002.
The net carrying value of goodwill was $48,376,000 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 13% to 20%). 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 $7,806,000 and $4,676,000. Accordingly, the Company updated its analysis
at June 30, 2002 and concluded that no impairment was required for these two
reporting units. 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 require judgments and estimates and could require us to write
down the carrying value of our goodwill and other intangible assets in future
periods.
Long Term Note Receivable
The Company has a $2,600,000 note receivable pursuant to a Credit Agreement
with Total Education Solutions ("TES") due May 2005, of which $2,250,000 is
convertible into 30.0% ownership 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). The proceeds received by TES have been
used for the expansion of its product throughout California and plans to enter
other states. Although TES's revenues have grown since the origination of the
credit agreement, TES has also incurred losses as a result of building the
infrastructure to service 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 to continue to hold this investment.
In evaluating the investment in TES, a discounted cash flow analyses was
prepared for TES based on a recent financing discussion memorandum. The cash
flow analyses indicated that the investment in TES has a value greater than our
current carrying value. In addition, we reviewed other objective evidence
including recent comparable
20
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 as income in the period of enactment. A
valuation allowance is recorded based on the uncertainty regarding the ultimate
realizability of deferred tax assets.
The Company files a U.S. federal income tax return and various state income
tax returns, which are subject to examination by tax authorities. This process
involves estimating the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The Company's 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 the local attribution of income.
21
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 12.0%, $10,000,000 senior subordinated debt at June 30, 2002 and
June 30, 2001. The Company also has no cash flow exposure on certain mortgages,
notes payable and subordinate debt agreements aggregating $2,386,000 and
$6,471,000 at June 30, 2002 and June 30, 2001, 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 1.0% change in the LIBOR rate and the prime rate would
have resulted in interest expense changing by approximately $143,000 and
$206,000 in Fiscal 2002 and Fiscal 2001, 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, 2002 the Company's interest rate
swap contract outstanding had a total notional amount of $12,857,000. Under the
interest rate swap contract, the Company agrees to pay a fixed rate of 5.48% and
the counterparty agrees to make payments based on 3-month LIBOR. The market
value of the interest rate swap agreement at June 30, 2002 was a liability of
$376,000, net of taxes and is included as a component of Accumulated Other
Comprehensive Loss, of which a portion is expected to be reclassified to the
consolidated statement of income within one year.
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-26 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
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 listed below. 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.
The names of the directors and certain information about them, are set
forth below:
Director
Name of Director Age Principal Occupation Since
- --------------------------------------------------------------------------------------------
Continuing Director with a term expiring in 2004 (Class II Directors):
Daniel L. Russell 37 Principal Private Finance Group, Allied 2001
Capital Corporation
Continuing Director with a term expiring in 2002 (Class III Directors):
Edward Chambers 65 Executive Vice President - Finance and 1988
Administration of Wawa, Inc.
A.J. Clegg 63 Chairman of Board of Directors and Chief 1992
Executive Officer of the Company
Peter H. Havens 48 Chairman of Baldwin Management, LLC 1991
Continuing Director with a term expiring in 2003 (Class I Directors):
John R. Frock 59 Vice Chairman - Corporate Development of 1992
the Company
Eugene G. Monaco 74 Judge, Delaware County District Court 1995
(retired)
Robert E. Zobel 54 Vice Chairman - Corporate Affairs and Chief 1998
Financial Officer of the Company
The following description contains certain information concerning the
directors, including current positions and principal occupations during the past
five years.
Edward H. Chambers. Mr. Chambers has served as Executive Vice President
- - Finance and Administration of Wawa, Inc. since March 1988. During the period
April 1984 through March 1988, he served as President and Chief Executive
Officer and as a director, of Northern Lites, Ltd., an owner and operator of
quick-service restaurants operating pursuant to a franchise from D'Lites of
America, Inc. From 1982 to July 1984, Mr. Chambers was President - Retail
Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service
restaurants. He is also a director of Riddle Memorial Hospital.
A. J. Clegg. Mr. A. J. Clegg was named Chairman of the Board and Chief
Executive Officer of NLCI in May 1992. Since 1996, Mr. A. J. 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. A. J. Clegg served as the Chairman and CEO of JBS Investment Banking,
Ltd., a provider of investment management and consulting services to businesses,
including NLCI. 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. A.
J. 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
23
senswitches. Mr. A. J. Clegg 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. A. J. Clegg was recognized as
"Education Entrepreneur of the Year" by the Association of Education
Practitioners and Providers. Mr. A. J. Clegg is the father of Mr. D. Scott
Clegg, NLCI's Vice Chairman - Operations, President and Chief Operating Officer.
John R. Frock. Mr. Frock was appointed Vice Chairman - Corporate
Development of NLCI in April 2002. Prior to such appointment, Mr. Frock had been
Executive Vice President - Corporate Development since August 1, 1994. Mr. Frock
was elected to the Board of Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief Operating Officer of JBS Investment
Banking, Ltd., a provider of investment management and consulting services to
businesses, including NLCI.
Peter H. Havens. Mr. Havens is Chairman of Baldwin Management, LLC, an
investment management concern. Previously, he was the Executive Vice President
of Bryn Mawr Bank Corporation overseeing the Investment Management and Trust
Division. From 1982 through May 1995, Mr. Havens served as manager of Kewanee
Enterprises, a private investment firm located in Bryn Mawr, Pennsylvania. He is
also chairman of the board of directors of Petroferm, Inc., a director of
Independence Seaport Museum and Lankenau Hospital Foundation and a Trustee
Emeritus of Ursinus College.
Eugene G. Monaco. Mr. Monaco has both a J.D. from Temple Law School and
M.S. in Mechanical Engineering from the University of Delaware and, from January
1, 1990 until his retirement in late 1995, served as a Judge for the Delaware
County District Court. He also served as an Instructor in Kinematics and
Dynamics at Drexel University, a Lecturer in child abuse at Penn State
University and was the Chief Negotiator for the Rose Tree Media School Board. He
also served as Assistant District Attorney in Media, Pennsylvania and
Engineering Negotiator for Westinghouse Electric for 32 years.
Daniel L. Russell. Mr. Russell is a Principal in the Private Finance
Group at Allied Capital Corporation. Prior to joining Allied Capital in 1998,
Mr. Russell served in the financial services practice of KPMG Peat Marwick LLP
from 1991 to 1998, including serving as a Senior Manager from 1996 to 1998. Mr.
Russell is a director of The Hillman Group, SunSource Technology Services, Inc.
and HealthASPex. Mr. Russell is a Certified Public Accountant.
Robert E. Zobel. Mr. Zobel was appointed Vice Chairman - Corporate
Affairs and Chief Financial Officer of NLCI in April 2002. Between February 2001
and April 2002, Mr. Zobel served as Vice President, Chief Administrative Officer
and Secretary of MARS, Inc., a start up retail organization. Mr. Zobel was Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of MARS,
Inc. from February 1996 until February 2001. From 1974 through February 1996,
Mr. Zobel was associated with Deloitte & Touche LLP (formerly Touche Ross & Co.)
as an employee and since September 1981 as a partner. Mr. Zobel earned a B.A.
degree from Claremont McKenna College, a J.D. degree from Willamette University
College of Law and a LLM degree in tax from Boston University. Mr. Zobel has
served as a director of NLCI since 1998.
During the last five years, no director or executive officer of the Company
has:
(i) filed a petition for bankruptcy;
(ii) been convicted in a criminal proceeding; or
(iii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result
of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or
mandating activities subject to, federal or state securities
laws or finding any violation with respect to such laws.
On March 11, 2002, Pamela Lewis resigned from the NLCI Board of
Directors for personal reasons unrelated to the Company. On April 30, 2002, the
Company's Board of Directors reduced the number of directors on the Company's
Board, from eight to seven.
24
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
Common Stock, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common
Stock. Executive officers, directors and ten percent stockholders are required
by SEC regulations to furnish the Company with a copy of all Section 16(a) forms
("Forms 3, 4, and 5") that they file. To the Company's knowledge, based solely
on a review of copies of the Forms 3, 4 and 5 furnished to the Company and
written representations with respect to all transactions in the Company's
securities effected during the period from July 1, 2001 through June 30, 2002,
all officers, directors and beneficial owners complied with the applicable
Section 16(a) filing requirements except that (i) Mr. A.J. Clegg inadvertently
failed to file a report on Form 4 in connection with the exercise of a warrant
to purchase 20,161 shares of the Company's Common Stock, (ii) Mr. Robert E.
Zobel inadvertently failed to report timely on Form 4 dispositions of Common
Stock beneficially owned by him, and (iii) Messrs. D. Scott Clegg and Robert E.
Zobel each inadvertently failed to report timely a grant of options (made both
under the 1995 Stock Incentive Plan and outside of NLCI's option plans) to
purchase Common Stock in Fiscal 2002. We have been advised by Messrs. A.J.
Clegg, D. Scott Clegg and Robert E. Zobel that they are in the process of
completing their filings.
25
Item 11. Executive Compensation.
The information required by this Item is listed below.
Compensation Tables
The following tables contain compensation data for the Chief Executive
Officer and certain other of the Company's four other most highly compensated
executive officers (based on total annual salary and bonus for Fiscal 2002) (the
"Named Executive Officers").
Summary Compensation Table
-----------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------------------------
Other Securities All
Name and Fiscal Annual Underlying Other
Principal Position Year Salary Bonus Compensation(1) Options/SARs Compensation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
A.J. Clegg 2002 $ 329,648 $ 80,644(3) - - $ 6,752
Chairman, President and 2001 316,154 144,639(4) - - 7,383
Chief Executive Officer 2000 314,007 141,477 - 110,000 6,391
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Frock 2002 $ 180,869 $ - - - $ 2,164
Vice Chairman - 2001 145,846 - $ 14,626 - 2,073
Corporate Development 2000 141,846 66,636 - - 2,676
- -----------------------------------------------------------------------------------------------------------------------------------
Robert E. Zobel(5)
Vice Chairman - 2002 $ 35,385 $ - $ 3,792 65,000 $ -
Corporate Affairs and 2001 - - - - -
Chief Financial Officer 2000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
D. Scott Clegg(5)
Vice Chairman - 2002 $ 126,923 (6)$ - $ 3,000 65,000 $ -
Operations, President and 2001 - - - - -
Chief Operating Officer 2000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Dr. Lynn A. Fontana
Executive Vice President - 2002 $ 126,040 $ - $ 21,389 - $ 1,561
Education and Chief 2001 113,960 - 22,468 - 368
Education Officer 2000 98,526 20,360 0 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Daryl A. Dixon (7) 2002 $ 174,540 (8)$ - $ 97,777 - $ 1,159
Former President and 2001 265,000 - 49,326 - 312
Chief Operating Officer 2000 260,615 117,205 49,858 - 302
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The amounts reported for Mr. Frock consist of $7,800 for automobile
expenses in Fiscal 2001 and $6,826 for health insurance in Fiscal
2001. The amounts reported for Mr. Zobel in Fiscal 2002 consist of
$1,200 for automobile expense and $2,592 for health insurance. The
amounts reported for Mr. D. Scott Clegg in Fiscal 2002 consist of
$3,000 for automobile expense. The amounts reported for Dr. Fontana
consist of $9,362 and $9,362 for loan forgiveness for relocation or
moving expenses in Fiscal 2002 and 2001, respectively, $6,000and
$6,000 for automobile expenses for Fiscal 2002 and 2001 , respectively
and $6,026 and $7,106 for health insurance in Fiscal 2002 and 2001 ,
respectively. The amounts reported for Mr. Dixon consist of $36,750,
$34,100 and $35,303 in respect of loan forgiveness in Fiscal 2002,
2001 and 2000, respectively, $4,200, $8,400 and $8,400 for automobile
expenses in Fiscal 2002, 2001 and 2000, respectively, $6,027, $6,826
and $6,155 for health insurance in Fiscal 2002, 2001 and 2000,
respectively, $7,644 in Fiscal 2002 for unused vacation and $43,156 in
Fiscal 2002 for options exercised. Perquisites and other personal
benefits for Messrs. A. J. Clegg for all years; Mr. Frock in Fiscal
2002 and 2000 and Dr. Fontana in fiscal 2000 did not exceed 10% of
such executive officer's salary and bonus and accordingly have been
omitted from the table as permitted by the rules of the SEC.
26
(2) Other compensation in Fiscal 2002 for Messrs. A. J. Clegg, Frock and Dixon
and Dr. Fontana consisted of payments of (i) $5,848, $2,164, $216, and
$260, respectively, in respect of life insurance, and (ii) $905, $0, $943,
and $1,301, respectively; in respect of Company matching 401(k) plan
contributions.
(3) Payment date for $80,644 of bonus payable under Mr. A. J. Clegg's Special
Incentive Agreement was accelerated by NLCI's compensation committee from
November 20, 2001 to August 19, 2001 in connection with his exercise of
warrants to purchase shares of NLCI's Common Stock. Mr. A. J. Clegg has
voluntarily deferred payment to him of the remaining $56,689 of this bonus.
(4) Includes $7,306 of interest accrued from November 20, 2000, the date bonus
payment was due, until June 22, 2001, the date bonus payment was actually
made.
(5) Mr. Zobel joined the Company in April 2002 and Mr. D. Scott Clegg joined
the Company in February 2002.
(6) Includes $50,000 Mr. D. Scott Clegg received during Fiscal 2002 as a
consultant immediately preceding his employment with the Company.
(7) Mr. Dixon resigned form the Company effective November 30, 2001 and
continued to serve as a consultant through February 18, 2002.
(8) Includes $71,598 Mr. Dixon received during Fiscal 2002 as a consultant
immediately following his resignation.
27
Options/Stock Appreciation Rights Granted in Fiscal 2002
---------------------------------------------------------------------------------------
Potential Realized Value
Individual Grants at Assumed Annual Rates
of Stock Price
------------------------------------------------------------ Appreciation for Option
Term (10 yrs) (3)
---------------------------
% of Total
Number of Options/
Securities SARs
Underlying Granted Exercise At 5% At 10%
Option/ to all or Annual Annual
Name of SARs Employees in Base Price Expiration Growth Growth
Executive Granted (1) Fiscal 2002 (2) per Share Date Rate Rate
- -------------------------------------------------------------------------------------------------------------------------
A.J. Clegg 0 0.00% n/a n/a $ 0 $ 0
John R. Frock 0 0.00% n/a n/a $ 0 $ 0
Robert E. Zobel 65,000 48.15% $5.85 02/21/2012 $239,137 $299,531
D. Scott Clegg 65,000 48.15% $5.85 02/21/2012 $239,137 $299,531
Dr. Lynn A. Fontana 0 0.00% n/a n/a $ 0 $ 0
(1) Options granted vest in increments of one-third of the total number of
options granted on the first, second and third anniversary dates of
the date of grant.
(2) During Fiscal 2002, the Company granted to employees options to
purchase an aggregate of 135,000 shares of Common Stock.
(3) The potential realizable values are based on an assumption that the
stock price of the shares of Common Stock of the Company appreciate at
the annual rate shown (compounded annually) from the date of grant
until the end of the option term. These values do not take into
account contractual provisions of the options which provide for
termination of an option following termination of employment,
nontransferability, or vesting. These amounts are calculated based on
the requirements promulgated by the SEC and do not reflect the
Company's estimate of future stock price growth of the shares of the
Company's Common Stock.
Aggregated Option/Stock Appreciation Rights Exercised in Fiscal 2002
and Value of Options at June 30, 2002
Exercised in Number of Unexercised Value of Unexercised
Fiscal 2002 Options at June 30, 2002 In-the-Money Options at
June 30, 2002
-------------------------------------------------------------------------------------
Shares
Acquired
Name of on Value Un- Un-
Executive Exercise Realized Exercisable exercisable Exercisable exercisable
- -----------------------------------------------------------------------------------------------------------------------
A.J. Clegg 0 0 238,333 36,667 $120,030 $ 0
John R. Frock 0 0 92,682 0 $107,220 $ 0
Robert E. Zobel 0 0 6,561 65,000 $ 0 $62,595
D. Scott Clegg 0 0 65,000 $ 0 $62,595
Dr. Lynn A. Fontana 0 0 3,333 1,667 $ 3,126 $ 1,564
None of the above named executive officers held any stock appreciation
rights at June 30, 2002.
Compensation of Directors
The Company pays directors an annual retainer of $10,000 (except directors
who are also employees of the Company, who receive $6,000), which is paid
quarterly, and pays members of committees of the Board of Directors $750 per
meeting for each committee meeting attended. In addition, members of the
Company's special committee of the Board of Directors will be paid a retainer in
the amount of $15,000, and the Chair of the special committee of the Board of
Directors will be paid a retainer in the amount of $25,000 (plus, in each such
case, such other amounts as may be deemed to be appropriate by the Board of
Directors following the date on which such retainers are paid), such retainers
to be in lieu of the normal policy of the Company for the attendance of meetings
of the special
28
committee. (Executive officers' compensation reported in the Summary
Compensation Table does not include these fees.)
The Company's 1995 Stock Incentive Plan, as amended, provides that as of
the date 90 days following the closing of each fiscal year that the Plan is in
effect, each individual serving as a director of the Company who is not an
officer or employee of the Company will be granted a nonqualified stock option
to purchase 5,000 shares of Common Stock if the Company's pre-tax income for
such fiscal year increased at least 20% from the prior fiscal year and if the
individual served as a director for the entire fiscal year then ended (or a
proportionate lesser number of shares if the individual served as a director for
less than the entire fiscal year). In Fiscal 2002, no shares were subject to
annual grant, and, pursuant to the Plan, no director received an option to
purchase any shares of Common Stock.
Executive Severance Plan
In March 1997, the Company adopted an Executive Severance Pay Plan (the
"Severance Pay Plan"). The Severance Pay Plan covered certain officers and key
executives of the Company and such other additional employees or positions as
determined by written resolution of the Board from time to time (collectively,
the "Eligible Executives"). Under the Severance Pay Plan, if the employment of
an Eligible Executive with the Company terminates following a Change in Control
(as defined in the Severance Pay Plan) of the Company, under specified
circumstances, the Eligible Executive will be entitled to receive the severance
benefit specified in the Severance Pay Plan. The amount payable to an Eligible
Executive would equal (a) the Eligible Executive's salary for a period of months
equal to six plus the number of years of service of the Eligible Executive as of
the date of termination (or two times the number of years of service, if he or
she has completed at least three years of service as of the termination date),
subject to a maximum of 18 months' pay, plus (b) the bonus which would have been
payable to the Eligible Executive for the year in which employment was
terminated pro rated based on the number of months of employment in the year of
termination. In December 2001, the Severance Pay Plan was amended to remove a
provision which would have given Eligible Executives the right to receive
benefits under the Severance Pay Plan by terminating their employment
voluntarily, for any reason, within one month following the date of a Change of
Control.
Senior Executive Severance Plan
In February 2000, the Company adopted an amended Senior Executive Severance
Pay Plan (the "Executive Severance Pay Plan"), which replaced the Executive
Severance Pay Plan adopted in March 1997, for five of the Company's executive
officers. Under the Senior Executive Severance Pay Plan, if the employment of an
Executive Officer covered by the Executive Severance Pay Plan (collectively, the
"Eligible Senior Executives") terminates following a Change in Control (as
defined therein) of the Company, under specified circumstances, the Eligible
Senior Executive will be entitled to receive the severance benefit specified in
the Executive Severance Pay Plan. The amount payable to an Eligible Senior
Executive would equal (a) the Eligible Executive's salary for a period of months
equal to (i) twelve plus the number of years of service of the Eligible
Executive as of the date of termination if he has completed less than three
years of services, (ii) twelve plus two times the number of years of service, if
he has completed three or four years of service as of the termination date, or
(iii) twelve plus 2.99 times the number of years of service, if he has completed
at least five years of service as of the termination date; but in no event more
35.99 months, plus (b) the bonus which would have been payable to the Eligible
Executive for the year in which employment was terminated pro rated based on the
number of months of employment in the year of termination. In December 2001, the
Executive Severance Pay Plan was amended to remove a provision that would have
given Eligible Senior Executives the right to receive benefits under the
Executive Severance Pay Plan by terminating their employment voluntarily, for
any reason, within one month following the date of a Change in Control.
Employment Agreements with Executive Officers
Daryl A. Dixon - President and Chief Operating Officer
The Company entered into a three-year employment agreement with Daryl Dixon
upon his commencement of employment in February 1999. Mr. Dixon's annual base
salary was $265,000 and beginning in the Fiscal 2000, Mr. Dixon became eligible
to receive an annual bonus of up to 50% of his base salary for achieving the
Company's business plan and up to an additional 50% of his base salary for
achieving above business plan targets. Pursuant to his employment agreement, on
his first day of employment, the Company granted Mr. Dixon options to purchase
29
150,000 shares of Common Stock, vesting over a three-year period. The Company
also agreed to provide Mr. Dixon with a $8,400 per year car allowance, term life
insurance in the amount of $260,000 for his benefit and other benefits provided
to the Company's senior executives. Further, upon commencement of his
employment, the Company loaned Mr. Dixon the sum of $90,000 (to repay a loan
with his prior employer) (the "Dixon Loan"), accruing interest at a rate of 8%
per annum. Each month during Mr. Dixon's employment, the Company forgave 1/36 of
the principal amount and associated interest of the Dixon Loan. Mr. Dixon agreed
not to compete against the Company during the term of his employment and for two
years thereafter.
The Company entered into a certain Separation Agreement and Mutual Release
with Mr. Dixon dated November 30, 2001. Pursuant to that agreement, Mr. Dixon's
employment with the Company terminated on that date, and he agreed to continue
to serve the Company as a consultant through February 18, 2002 (the "Transition
Period"). During the Transition Period, Mr. Dixon was compensated at a pro rated
amount equivalent to $265,000 per year. In addition, Mr. Dixon received a lump
sum payment equal to the number of days of vacation which had accrued but were
unused, multiplied by his prorated daily compensation. The Company also agreed
to permit Mr. Dixon, during the Transition Period, to continue to participate in
any health and insurance plans maintained by the Company for its employees
generally, and permitted the stock options granted to Mr. Dixon under his
employment agreement to continue to vest through the Transition Period. The
Company also agreed that, during the Transition Period, it would continue to
forgive 1/36 of the principal amount and associated interest of the Dixon Loan.
Finally, Mr. Dixon agreed that, until the ninetieth day following the end of the
Transition Period, he would not publicly sell more than 1,200 shares of NLCI
common stock in any one day, in a public sale (provided, that Mr. Dixon would be
permitted to sell any amount of shares as a private trade (i.e., any trade not
reflected on any securities exchange, quotation system or SRO) to any beneficial
owner of less than 5% of the Company's Common Stock).
Dr. Lynn Fontana - Executive Vice President - Education and Chief Education
Officer
The Company entered into a three-year employment agreement with Dr. Lynn
Fontana upon her commencement of employment in August 1999. Dr. Fontana's annual
base salary was $110,000 and she was eligible for an annual bonus according to a
bonus plan established by the Company annually. The Company also agreed to
provide Dr. Fontana with a $6,000 per year car allowance and loaned to Dr.
Fontana the sum of $25,000 for relocation expenses, accruing interest at a rate
of 8% per annum. On each anniversary date during Dr. Fontana's employment, the
Company forgave 1/3 of the principal amount and associated interest of this
loan. In connection with her employment agreement, on her first day of
employment, the Company granted Dr. Fontana options to purchase 5,000 shares of
Common Stock, vesting over a three-year period.
On February 3, 2000, the Company and Dr. Fontana amended her employment
agreement to provide that the loan to Dr. Fontana for moving expenses would be
forgiven if her employment with the Company was terminated due to a Change in
Control (as defined in her employment agreement). Dr. Fontana is currently paid
$131,000 under the terms of her employment agreement.
D. Scott Clegg - Vice Chairman - Operations, President and Chief Operating
Officer
On March 18, 2002, we named D. Scott Clegg our Vice Chairman - Operations,
President and Chief Operating Officer. It is expected that Mr. D. Scott Clegg
will execute a three-year employment agreement that will provide for, among
other things, an annual base salary of $200,000, and an annual bonus of up to
100% of his base salary for achieving business plan targets. In connection with
this anticipated employment agreement, on his first day of employment, the
Company granted Mr. D. Scott Clegg options to purchase 65,000 shares of Common
Stock, vesting over a three-year period. The Company also agreed to provide Mr.
D. Scott Clegg with a $7,200 per year car allowance, term life insurance in the
amount of $200,000 for his benefit and other benefits provided to the Company's
senior executives. Further, upon commencement of his employment, the Company
advanced to Mr. D. Scott Clegg the sum of $35,000 for relocation expenses (the
"D. Scott Clegg Relocation Allowance"). Each month during Mr. D. Scott Clegg's
employment, the Company will forgive 1/36 of the principal amount and associated
interest of the D. Scott Clegg Relocation Allowance. It is also anticipated that
Mr. D. Scott Clegg will agree not to compete against the Company during the term
of his employment and for two years thereafter.
30
Robert E. Zobel - Vice Chairman - Corporate Affairs and Chief Financial Officer
On April 29, 2002, we named Robert E. Zobel our Vice Chairman - Corporate
Affairs and Chief Financial Officer. It is expected that Mr. Zobel will execute
a three-year employment agreement that will provide for, among other things, an
annual base salary of $230,000, and an annual bonus of up to 100% of his base
salary for achieving business plan targets. In connection with this anticipated
employment agreement, on his first day of employment, the Company granted Mr.
Zobel options to purchase 65,000 shares of Common Stock, vesting over a
three-year period. The Company also agreed to provide Mr. Zobel with a $7,200
per year car allowance, term life insurance in the amount of $230,000 for his
benefit and other benefits provided to the Company's senior executives. Further,
upon commencement of his employment, the Company advanced to Mr. Zobel the sum
of $50,000 for relocation expenses (the "Zobel Relocation Allowance"). Each
month during Mr. Zobel's employment, the Company will forgive 1/36 of the
principal amount and associated interest of the Zobel Relocation Allowance. It
is also anticipated that Mr. Zobel will agree not to compete against the Company
during the term of his employment and for two years thereafter.
Other Agreements with Executive Officers
The Company and Mr. A. J. Clegg are parties to a Special Incentive
Agreement entered into November 20, 1999 which provides that on each of the
first, second and third anniversaries of the date of such agreement, if Mr. A.
J. Clegg is employed by the Company on such anniversary date, the Company will
pay him an incentive payment in the amount of $137,333. Such agreement also
provides that if there is a Change in Control (as defined in the agreement) of
the Company, within 30 days of the occurrence of such Change in Control, the
Company will pay to Mr. A. J. Clegg any such incentive payments which have not
yet been paid (in lieu of making payment on the applicable anniversary date).
The Company and Mr. Frock are parties to a Noncompete Agreement which
provides that the Company will make a payment to Mr. Frock of $255,000 following
his termination for any reason if, within 30 days of his termination date, Mr.
Frock delivers a letter to the Company agreeing not to engage in specified
activities in competition with the Company for four years. The Company and Mr.
Frock are also parties to a Contingent Severance Agreement which provides that
if Mr. Frock's employment is terminated because (i) the Company terminates Mr.
Frock's employment without Cause (as defined in the agreement), or (ii) Mr.
Frock resigns following a Change in Control (as defined in the agreement),
within 20 days following the date of termination, the Company must make a
severance payment to Mr. Frock in such amount. The Company will not under any
circumstance be required to make a payment to Mr. Frock under both the
Noncompete Agreement and the Contingent Severance Agreement.
On August 29, 2001, the Company entered into Employment and Termination
Agreements with each of Mr. A. J. Clegg and Mr. Frock. These agreements provide,
as to each of these executives, that if the Company terminates the executive's
employment other than for cause or his death or disability, the Company will pay
to that executive, as severance, an amount equal to 2.99 times his average
earnings for the five full calendar years preceding such termination. In
addition, upon such termination, the Company will continue to provide, at its
cost, family health insurance coverage to the executive and his spouse for the
remainder of their lives or, in the event that the Company is unable under its
then-current group health insurance plan to provide such family health insurance
coverage, the Company will reimburse the executive and his spouse up to $24,000
per year for the cost of obtaining similar health insurance coverage. Upon such
termination, the Company will also provide the executive with two full, annual
scholarships per year for life to the Company school of his choice.
In the Employment and Termination Agreements, each executive also agrees
not to compete with the Company for a period of three years following
termination of his employment, in exchange for which the Company would, for each
such year, pay to Mr. A. J. Clegg the sum of $100,000 and to Mr. Frock the sum
of $50,000. In the event that the executive voluntarily terminates his
employment with the Company, the Company will provide the executive with a
five-year consulting contract, for which Mr. A. J. Clegg would be paid not less
than $200,000 per year and Mr. Frock not less than $100,000 per year and which
would provide each executive with the health insurance and scholarships
described above. Finally, the Company agrees to provide Mr. A. J. Clegg with a
life insurance policy with a benefit of $640,000 and Mr. Frock with a life
insurance policy with a benefit of $360,000.
The aggregate amount of payments and benefits provided under each
executive's Employment and Termination Agreement will be offset against the
aggregate amount of any payments or benefits owed to that executive under the
31
Company's Severance Pay Plan, but not, in the case of Mr. Frock, by any payments
or benefits under Mr. Frock's Noncompete Agreement or Contingent Severance
Agreement.
Executive Compensation
Report of the Compensation Committee. At the beginning of Fiscal 2002, the
Company's Compensation Committee was comprised of three outside directors of the
Company, Messrs. Chambers (Chairman), Walton and Zobel. In November 2001,
following Mr. Daniel Russell's election to the Board of Directors to succeed Mr.
Walton, Mr. Russell replaced Mr. Walton on the Company's Compensation Committee,
Ms. Lewis replaced Mr. Chambers, and Mr. Russell became the Chairman of the
Compensation Committee. In April 2002, when Mr. Zobel became the Company's Vice
Chairman - Corporate Affairs and Chief Financial Officer and following Ms.
Lewis' resignation as a director of the Company, Eugene Monaco was named to the
Company's Compensation Committee to replace Mr. Zobel, and Mr. Chambers replaced
Ms. Lewis.
At least annually, the Compensation Committee reviews the compensation
levels of the Company's executive officers and certain other key employees and
makes recommendations to the Board of Directors regarding compensation of such
persons. In general, the Compensation Committee endeavors to base the
compensation of the executive officers on individual performance, performance
against established financial goals based on the Company's strategic plan, and
comparative compensation paid to executives of direct competitors and of
non-financial service companies.
The Compensation Committee's review of compensation, other than that of the
Chairman and Chief Executive Officer, is based on the recommendations of the
Company's internal compensation committee, which consists of Mr. A. J. Clegg
(Chairman and Chief Executive Officer) and Mr. Frock (Vice Chairman -Corporate
Development). Executive officers' compensation generally consists of base salary
(which comprises a significant portion of total compensation), bonus (which is
based on the Company's performance and/or specific goals), fringe benefits and
stock options. All executive officers are reviewed annually for performance.
Salary changes are effective in October. Bonuses are distributed after the
results of the audit of the financial statements have been verified.
The Chairman and Chief Executive Officer's compensation for Fiscal 2002
included an annual base salary of $333,300, a bonus plan based on the Company's
net income as compared to the annual plan submitted to and approved by the Board
of Directors in June 2001, and the Compensation Committee's subjective
evaluation of the Company's and the Chief Executive Officer's performance, and
customary fringe benefits. Mr. A. J. Clegg's salary reflected a 4.2% increase
over the prior period. In November 1999, in order to provide additional
incentive to Mr. A. J. Clegg, the Compensation Committee entered into a Special
Incentive Agreement with Mr. A. J. Clegg which provides that on each of the
first, second and third anniversaries of the date of such agreement, if employed
by the Company on such anniversary date, Mr. A. J. Clegg will receive an
incentive payment (apart from any other compensation) in the amount of $137,333.
In August 2001, in order to provide additional incentive to Messrs. A. J.
Clegg and Frock, the Compensation Committee approved Employment and Termination
Agreements with each of Mr. A. J. Clegg and Mr. Frock. These agreements provide,
as to each of these executives, that if the Company terminates the executive's
employment other than for cause or his death or disability, the Company will pay
to that executive, as severance, an amount equal to 2.99 times his average
earnings for the five full calendar years preceding such termination. In
addition, upon such termination, the Company will continue to provide, at its
cost, family health insurance coverage to the executive and his spouse for the
remainder of their lives or, in the event that the Company is unable under its
then-current group health insurance plan to provide such family health insurance
coverage, the Company will reimburse the executive and his spouse up to $24,000
per year for the cost of obtaining similar health insurance coverage. Upon such
termination, the Company will also provide the executive with two full, annual
scholarships per year for life to the Company school of his choice.
In Fiscal 2002 the bonus plan of each executive officer included a formula
component, providing a bonus of up to 100% of base salary based on the Company's
performance as compared to the Company's Business Plan. Based on such formula,
no executive officer received a bonus. Further, at the discretion of the
Company's internal executive committee and the Compensation Committee together,
bonuses could be awarded based on accomplishments of individual goals, which is
in addition to the bonus percentage awarded under the formula component, up to a
maximum total bonus (together with the formula-based component) of 100% of base
salary. No discretionary bonuses were approved.
32
Compensation Committee
Mr. Edward H. Chambers
Mr. Daniel L. Russell
Mr. Eugene G. Monaco
Report of the Audit Committee
Membership and Role of the Audit Committee
At the beginning of Fiscal 2002, the Audit Committee of the Company's Board
of Directors (the "Audit Committee") was comprised of three outside directors,
Messrs. Chambers, Havens and Zobel, appointed by the Board of Directors. In
April 2002, when Mr. Zobel became the Company's Vice Chairman - Corporate
Affairs and Chief Financial Officer, Daniel Russell was named to the Audit
Committee to replace Mr. Zobel. Each member of the Audit Committee is
independent as defined under the National Association of Securities Dealers'
listing standards, and at least one member has past experience in accounting or
related financial management experience. The Audit Committee is governed by a
written charter adopted and approved by the Board of Directors.
Review of the Company's Audited Financial Statements for Fiscal 2002
The Audit Committee has reviewed and discussed the audited financial
statements of the Company for the fiscal year ended June 30, 2002 with the
Company's management. The Audit Committee has discussed with
PricewaterhouseCoopers LLP, the Company's independent public accountants, the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees).
The Audit Committee has also received the written disclosures and the
letter from PricewaterhouseCoopers LLP relating to their independence as
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and the Audit Committee has discussed with
PricewaterhouseCoopers LLP the independence of that firm.
The Audit Committee has also considered whether the provision of non-audit
services by PricewaterhouseCoopers LLP is compatible with maintaining
PricewaterhouseCoopers LLP's independence.
Based on the Audit Committee's reviews and discussions noted above, the
Audit Committee recommended to the Board of Directors that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002, for filing with the SEC.
Audit Committee
Mr. Edward H. Chambers
Mr. Peter H. Havens
Mr. Daniel L. Russell
33
Audit and Related Fees
Fees to Accountants for Services Rendered During Fiscal 2002
Audit Fees
The aggregate fees billed to the Company by PricewaterhouseCoopers LLP for
professional services for the audit of the Company's annual financial statements
for Fiscal 2002 and the review of the Company's financial statements included in
the Company's quarterly reports on Form 10-Q for Fiscal 2002 totaled $130,000.
Financial Information Systems Design and Implementation Fees
The Company did not engage PricewaterhouseCoopers LLP to provide, during
Fiscal 2002, any services for the Company regarding the design or implementation
of the Company's financial information systems, within the meaning of Rule
2-01(c)(4)(ii) of Regulation S-X.
All Other Fees
Fees billed to the Company by PricewaterhouseCoopers LLP during Fiscal 2002
for all other non-audit services rendered to the Company, including tax related
services, totaled $260,000.
34
Stock Performance
The following line graph compares the cumulative total stockholder return
on the Company's Common Stock with the total return of the Nasdaq Stock Market
(U.S. Companies) and an index of peer group companies for the period June 30,
1997 through June 30, 2002 as calculated by the Center for Research in Security
Prices. The graphs assume that the value of the investment in the Company's
Common Stock and each index was $100 at June 30, 1997 and that all dividends
paid by the companies included in the indexes were reinvested.
[GRAPHIC]
Comparison of Five Year Cumulative Total Return
CRSP Total Returns Index for: 6/97 6/98 6/99 6/00 6/01 6/02
---- ---- ---- ---- ---- ----
- ------- Nobel Learning Communities, Inc. 100.0 105.9 58.8 92.6 89.1 68.1
- -- -- -- Nasdaq Stock Market 100.0 131.6 189.1 279.6 151.6 103.3
- (U.S Companies)
- - - - - Self-Determined Peer Group 100.0 148.0 130.5 109.0 173.9 133.8
The self determined peer group includes: Bright Horizons Family Solutions,
Inc.; Childtime Learning Centers, Inc.; DeVry Inc.; ITT Educational Services,
Inc.; Sylvan Learning Systems, Inc. and Tesseract Group Inc.
Notes:
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization
of the previous trading day.
35
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100 at 6/30/97.
36
Item 12. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth certain information regarding the
beneficial ownership of NLCI common stock as of September 3, 2002 (1) all those
known by NLCI to be beneficial owners of more than 5% of its common stock
(including preferred stock convertible into common stock); (2) each director;
(3) each Named Executive Officer; and (4) all executive officers and directors
of NLCI as a group. The number of shares beneficially owned by each person is
determined under the rules of the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. Unless otherwise
indicated, the address for each of the stockholders listed below is c/o Nobel
Learning Communities, Inc., 1615 West Chester Pike, West Chester, PA 19382.
Beneficial Owner Beneficial Ownership
- ---------------- Number of Percent of
Shares Total (1) (2)
---------- -------------
KU Learning, L.L.C. (3) ............................................... 1,903,500 30.1%
Edison Venture Fund II, L.P. (4) ...................................... 654,018 9.6
Allied Capital Corporation (5) ........................................ 1,106,256 14.9
Dimensional Fund Advisors Inc. (6) .................................... 354,900 5.6
Socrates Acquisition Corporation (7) .................................. 853,501 12.3
Cadigan Investment Partners, Inc. (7) ................................. 853,501 12.3
Gryphon Partners II, L.P. (7) ......................................... 853,501 12.3
Gryphon Partners II-A, L.P. (7) ....................................... 853,501 12.3
A.J. Clegg (8) ........................................................ 713,354 10.5
Robert E. Zobel (9) ................................................... 15,265 *
John R. Frock (10) .................................................... 124,882 1.9
Daniel L. Russell (11) ................................................ 0 *
Peter H. Havens (12) .................................................. 20,109 *
Edward H. Chambers (13) ............................................... 27,730 *
Eugene G. Monaco (14) ................................................. 10,500 *
D. Scott Clegg (15) ................................................... 0 *
Daryl A. Dixon (16) ................................................... 0 *
Lynn A. Fontana (17) .................................................. 5,000 *
All executive officers and directors as a group (9 persons) (18) ...... 916,840 13.2%
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except (a) for shares indicated as
beneficially owned by any of the rollover stockholders, which are subject
to voting agreements with Socrates under which each agreed to vote shares
of common stock and preferred stock owned by him in favor of the merger and
granted to Socrates an irrevocable proxy to vote shares of common stock and
preferred stock owned by him for the adoption and approval of the merger
agreement and the merger and (b) as otherwise indicated in the footnotes to
this table.
(2) Applicable percentages are based on 6,314,452 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) Based on Schedule 13D/A filed with the SEC on November 10, 1999. KU
Learning, L.L.C. ("KU Learning") may be deemed to share voting and
dispositive power with its sole member, Knowledge Universe Learning, Inc.,
and Knowledge Universe, Inc., the sole stockholder of Knowledge Universe
Learning, Inc. Includes 20,000 shares over which KU Learning and its
affiliates do not have dispositive power and as to which KU Learning and
its affiliates disclaim beneficial ownership. The address of the principal
business office of KU Learning, Knowledge Universe Learning, Inc. and
Knowledge Universe, Inc. is 844 Moraga Drive, Los
37
Angeles, CA 90049.
(4) Based on information provided to NLCI in connection with its 2001 annual
meeting. Edison Venture Fund II, L.P. may be deemed to share voting and
dispositive power with Edison Partners II, L.P., its sole general partner.
Includes 524,179 shares issuable upon conversion of 2,096,714 shares of
Series C Convertible Preferred Stock. Edison Venture Fund II, L.P. is a
private limited partnership engaged primarily in making private placement
investments. The address of the principal business office of Edison Venture
Fund II, L.P. is 997 Lenox Drive #3, Lawrenceville, NJ 08648.
(5) Includes warrants to purchase 840,298 shares and 265,958 shares issuable
upon conversion of 1,063,830 shares of Series D Convertible Preferred Stock
owned by Allied Capital Corporation and its affiliates, all of which are
closed-end management investment companies registered under the Investment
Company Act of 1940, as amended. The address of the principal business
office of Allied Capital Corporation is 1919 Pennsylvania Avenue N. W.,
Suite 300, Washington, D.C. 20006.
(6) Based on Schedule 13G/A filed with the SEC on February 12, 2002.
Dimensional Fund Advisors Inc. is an investment advisor registered under
Section 203 of the Investment Company Act of 1940, as amended and serves as
investment manager to certain other commingled group trusts and separate
accounts that own the shares. In its role as investment advisor or manager,
Dimensional Fund Advisors Inc. possesses voting and/or investment power
over the shares owned by the funds it manages or advises. Dimensional Fund
Advisors Inc. disclaims beneficial ownership of these shares. The address
of the principal business office of Dimensional Fund Advisors Inc. is 1299
Ocean Avenue, 11/th/ Floor, Santa Monica, CA 90401.
(7) As a result of the voting agreements between Socrates and each of A.J.
Clegg, D. Scott Clegg, John Frock and Robert Zobel, Socrates and each
member of the buying group may be deemed to have acquired beneficial
ownership of 853,501 shares of NLCI's common stock (determined on an
as-converted basis), which includes options to acquire 337,576 shares
exercisable within 60 days of September 3, 2002, 159,789 shares issuable
upon the conversion of 543,500 shares of Series A preferred stock and
100,806 shares issuable upon conversion of 403,226 shares of Series C
preferred stock, representing approximately 12.3% of the outstanding NLCI
common stock. Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan
each disclaim any beneficial ownership of the shares of NLCI capital stock
that are covered by the voting agreements. The address of the principal
business office of Socrates, Gryphon and Gryphon Partners II-A, L.P. is One
Embarcadero Center, San Francisco, CA 94111. The address of the principal
business of Cadigan is 712 Fifth Avenue, 45th Floor, New York, NY 10019.
(8) Includes options to acquire 238,333 shares exercisable within 60 days of
September 3, 2002, 140,385 shares issuable upon conversion of 477,500
shares of Series A Convertible Preferred Stock and 100,806 shares issuable
upon conversion of 403,226 shares of Series C Convertible Preferred Stock.
Also includes 24,854 shares held by Mr. A.J. Clegg's children, over which
Mr. A.J. Clegg has sole voting authority, 6,000 shares held by Mr. A.J.
Clegg's grandchildren, over which Mr. A.J. Clegg has sole voting and
dispositive power, and 170,815 shares held jointly by Mr. A.J. Clegg and
his spouse, over which Mr. A.J. Clegg and his spouse have joint voting and
dispositive authority. Does not include 8,500 shares of common stock owned
by Mr. A.J. Clegg's wife, as to which Mr. A.J. Clegg disclaims beneficial
ownership. Mr. A.J. Clegg has agreed to vote all of his shares in favor of
the merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes options to acquire 6,561 shares exercisable within 60 days of
September 3, 2002. Also includes 4,000 shares held of record by a
closely-held Florida corporation over which Mr. Zobel has sole voting
power. Also includes 4,704 shares issuable upon conversion of 16,000 shares
of Series A Convertible Preferred Stock held by a family partnership of
which Mr. Zobel is a general partner and over which he has sole voting
power, and as to which Mr. Zobel disclaims beneficial ownership. Does not
include 1,000 shares held in a custodian account for Mr. Zobel's children,
of which Mr. Zobel's wife is custodian, as to which Mr. Zobel disclaims
beneficial ownership. Mr. Zobel has agreed to vote all of his shares in
favor of the merger agreement and the merger and has granted Socrates an
irrevocable proxy to vote his shares in favor of the merger agreement and
the merger.
(10) Includes options to acquire 92,682 shares exercisable within 60 days of
September 3, 2002 and 14,700 shares issuable upon conversion of 50,000
shares of Series A Convertible Preferred Stock. Mr. Frock has agreed to
vote all of his shares in favor of the merger agreement and the merger and
has granted Socrates an irrevocable proxy to vote his shares in favor of
the merger agreement and the merger.
(11) Does not include 265,958 shares issuable upon conversion of 1,063,830
shares of Series D Convertible Preferred Stock owned by Allied Capital
Corporation and 840,298 shares of common stock issued upon the exercise of
warrants held by Allied Capital Corporation that may be deemed to be
beneficially owned by Mr. Russell. Mr. Russell disclaims beneficial
ownership of any shares held by Allied Capital Corporation. Mr.
38
Russell's address is c/o Allied Capital Corporation, 1919 Pennsylvania
Avenue N.W., Suite 300, Washington, D.C. 20006.
(12) Includes options to acquire 14,750 shares exercisable within 60 days of
September 3, 2002 and 3,234 shares issuable upon conversion of 11,000
shares of Series A Convertible Preferred Stock. Does not include 375 shares
held by J.P. Havens TFBO his son and 500 shares held by J.P. Havens TFBO
his daughter over which Mr. Havens has sole voting and dispositive
authority and as to which Mr. Havens disclaims beneficial ownership. Also
does not include 6,250 shares held by his spouse over which Mr. Havens has
sole voting and dispositive authority and as to which Mr. Havens disclaims
beneficial ownership.
(13) Includes options to acquire 14,750 shares exercisable within 60 days of
September 3, 2002 and 1,470 shares issuable upon conversion of 5,000 shares
of Series A Convertible Preferred Stock.
(14) Includes options to acquire 7,500 shares exercisable within 60 days of
September 3, 2002 and 3,000 shares held in joint tenancy with his wife.
(15) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(16) Mr. Dixon's address is c/o Reflectx Staffing Services, 3317 Oakmonst
Terrace, Longwood, FL 32779.
(17) Includes options to acquire 5,000 shares exercisable within 60 days of
September 3, 2002.
(18) Includes information contained in the notes above, as applicable.
Series A Convertible Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of the Company's Series A Convertible Preferred Stock as of September
3, 2002 by (1) all those known by NLCI to be beneficial owners of more than 5%
of its Series A Convertible Preferred Stock; (2) each director; (3) each Named
Executive Officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purpose. Unless otherwise indicated, the
address for each of the stockholders listed below is c/o Nobel Learning
Communities, Inc., 1615 West Chester Pike, West Chester, PA 19382.
Beneficial Owner Beneficial Ownership
- ---------------- Number of Percent of
Shares Total (1) (2)
------ -------------
Socrates Acquisition Corporation (3) ................................ 543,500 53.1%
Cadigan Investment Partners, Inc. (3) ............................... 543,500 53.1
Gryphon Partners II, L.P. (3) ....................................... 543,500 53.1
Gryphon Partners II-A, L.P. (3) ..................................... 543,500 53.1
A.J. Clegg (4) ...................................................... 477,500 46.6
Robert E. Zobel (5) ................................................. 16,000 1.6
John R. Frock (6) ................................................... 50,000 4.9
Daniel L. Russell ................................................... 0 *
Peter H. Havens (7) ................................................. 11,000 1.1
Edward H. Chambers .................................................. 5,000 *
Eugene G. Monaco .................................................... 0 *
D. Scott Clegg (8) .................................................. 0 *
Daryl A. Dixon ...................................................... 0 *
Lynn A. Fontana ..................................................... 0 *
Emanuel Shemin (9) .................................................. 101,487 9.9
All executive officers and directors as a group (9 persons) (10) .... 559,500 54.7%
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except (a) for shares indicated as
beneficially owned by any of the rollover stockholders, which are subject
to
39
voting agreements with Socrates under which each agreed to vote shares of
preferred stock owned by him in favor of the merger and granted to Socrates
an irrevocable proxy to vote shares of common stock and preferred stock
owned by him for the adoption and approval of the merger agreement and the
merger and (b) as otherwise indicated in the footnotes to this table.
(2) Applicable percentages are based on 1,023,694.11 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) As a result of the voting agreements between Socrates and each of A.J.
Clegg, Scott Clegg, John Frock and Robert Zobel, Socrates and each member
of the buying group may be deemed to have acquired beneficial ownership of
543,500 shares of Series A preferred stock. Socrates, Gryphon, Gryphon
Partners II-A, L.P. and Cadigan each disclaim any beneficial ownership of
the shares of NLCI capital stock that are covered by the voting agreements.
The address of the principal business office of Socrates, Gryphon and
Gryphon Partners II-A, L.P. is One Embarcadero Center, San Francisco,
California, 94111. The address of the principal business office of Cadigan
is 712 Fifth Avenue, 45th Floor, New York, New York, 10019.
(4) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(5) Consists of 16,000 shares of Series A Convertible Preferred Stock held by a
family partnership of which Mr. Zobel is a general partner and over which
he has sole voting power. Mr. Zobel disclaims beneficial ownership of these
shares. Mr. Zobel has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(6) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Does not include 4,000 shares of Series A Convertible Preferred Stock held
by J.P. Havens TFBO his son and 5,000 shares of Series A Convertible
Preferred Stock held by J.P. Havens TFBO his daughter over which Mr. Havens
has sole voting and dispositive authority and as to which Mr. Havens
disclaims beneficial ownership.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) As reflected on the records of the Company's transfer agent, Mr. Shemin's
address is 800 South Ocean Blvd. LPH4, Boca Raton, Florida 33432.
(10) Includes information contained in the notes above, as applicable.
40
Series C Convertible Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of the Company's Series C Convertible Preferred Stock as of September
3, 2002 by (1) all those known by NLCI to be beneficial owners of more than 5%
of its Series C Convertible Preferred Stock ; (2) each director; (3) each Named
Executive Officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purposes. Unless otherwise indicated, the
address for each of the stockholders listed below is c/o Nobel Learning
Communities, Inc., 1615 West Chester Pike, West Chester, Pennsylvania 19382.
Beneficial Owner Beneficial Ownership
---------------- Number of Percent of
Shares Total (1) (2)
------ -------------
Socrates Acquisition Corporation (3) .............................. 403,226 16.1%
Cadigan Investment Partners, Inc. (3) ............................. 403,226 16.1
Gryphon Partners II, L.P. (3) ..................................... 403,226 16.1
Gryphon Partners II-A, L.P. (3) ................................... 403,226 16.1
Edison Venture Fund II, L.P. (4) .................................. 2,096,714 83.9
A.J. Clegg (5) .................................................... 403,226 16.1
Robert E. Zobel (6) ............................................... 0 *
John R. Frock (7) ................................................ 0 *
Daniel L. Russell ................................................. 0 *
Peter H. Havens ................................................... 0 *
Edward H. Chambers ................................................ 0 *
Eugene G. Monaco .................................................. 0 *
D. Scott Clegg (8) ................................................ 0 *
Daryl A. Dixon .................................................... 0 *
Lynn A. Fontana ................................................... 0 *
All executive officers and directors as a group
(9 persons) (9) ................................................... 403,226 16.1%
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except (a) for shares indicated as
beneficially owned by any of the rollover stockholders, which are subject
to preferred agreements with Socrates under which each agreed to vote
shares of common stock and preferred stock owned by him in favor of the
merger and granted to Socrates an irrevocable proxy to vote shares of
voting stock owned by him for the adoption and approval of the merger
agreement and the merger and (b) as otherwise indicated in the footnotes to
this table.
(2) Applicable percentages are based on 2,499,940 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) As a result of the voting agreements between Socrates and each of A.J.
Clegg, Scott Clegg, John Frock and Robert Zobel, Socrates and each member
of the buying group may be deemed to have acquired beneficial ownership of
403,226 shares of Series C preferred stock. Socrates, Gryphon and Cadigan
each disclaim any beneficial ownership of the shares of NLCI capital stock
that are covered by the voting agreements. The address of the principal
business office of Socrates and Gryphon is One Embarcadero Center, San
Francisco, California, 94111. The address of the principal business office
of Cadigan is 712 Fifth Avenue, 45th Floor, New York, New York 10019.
(4) Based on information provided to NLCI in connection with its 2001 annual
meeting. Edison Venture Fund II, L.P. may be deemed to share voting and
dispositive power with Edison Partners II, L.P., its sole general partner.
Edison Venture Fund II, L.P. is a private limited partnership engaged
primarily in making private placement investments. The address of the
principal business office of Edison Venture Fund II, L.P. is 997 Lenox
Drive #3, Lawrenceville, NJ 08648.
(5) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
41
(6) Mr. Zobel has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes information contained in the notes above, as applicable.
Series D Convertible Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of the Company's Series D Convertible Preferred Stock as of September
3, 2002 by (1) all those known by NLCI to be beneficial owners of more than 5%
of its Series D Convertible Preferred Stock; (2) each director; (3) each Named
Executive Officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purpose. Unless otherwise indicated, the
address for each of the stockholders listed below is c/o Nobel Learning
Communities, Inc., 1615 West Chester Pike, West Chester, PA 19382.
Beneficial Owner Beneficial Ownership
---------------- Number of Percent of
Shares Total (1) (2)
------ -------------
Allied Capital Corporation (3) ............................ 1,063,830 100%
A.J. Clegg (4) ............................................ 0 *
Robert E. Zobel (5) ....................................... 0 *
John R. Frock (6) ......................................... 0 *
Daniel L. Russell (7) ..................................... 0 *
Peter H. Havens ........................................... 0 *
Edward H. Chambers ........................................ 0 *
Eugene G. Monaco .......................................... 0 *
D. Scott Clegg (8) ........................................ 0 *
Daryl A. Dixon ............................................ 0 *
Lynn A. Fontana ........................................... 0 *
All executive officers and directors as a group (9 persons) (9) .... 0 *
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except as otherwise indicated in the
footnotes to this table.
(2) Applicable percentages are based on 1,063,830 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) Consists of 1,063,830 shares of Series D Convertible Preferred Stock owned
by Allied Capital Corporation and its affiliates, all of which are
closed-end management investment companies registered under the Investment
Company Act of 1940, as amended. The address of the principal business
office of Allied Capital Corporation is 1919 Pennsylvania Avenue N.W.,
Suite 300, Washington, D.C. 20006.
(4) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
42
(5) Mr. Zobel has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(6) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Does not include 1,063,830 shares of Series D Convertible Preferred Stock
owned by Allied Capital Corporation that may be deemed to be beneficially
owned by Mr. Russell. Mr. Russell disclaims beneficial ownership of any
shares held by Allied Capital Corporation. Mr. Russell's address is c/o
Allied Capital Corporation, 1919 Pennsylvania Avenue N. W., Suite 300,
Washington, D.C. 20006.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates and irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes information contained in the notes above, as applicable.
Item 13. Certain Relationships and Related Transactions.
In July 1998, the Company issued a $10,000,000 10% senior subordinated note
(the "Allied Note") to Allied Capital Corporation, of which Daniel L. Russell, a
director of the Company, is a principal. Payments on the Allied 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 Common Stock and granted to Allied Capital Corporation
certain rights to require the Company to register the shares of Common Stock
issuable upon exercise of the warrants under the Securities Act of 1933.
In May 2001, the Company amended the Allied Note. Under the original Allied
Note, interest accrued at the rate of 10% until the Note had been repaid. The
amendments now provide that interest will accrue at the rate of 10% until
October 31, 2001; at the rate of 12% from November 1, 2001 through June 30, 2005
and at the rate of 13% from July 1, 2005 until the Note has been repaid. In
connection with the modification of the Allied Note, the Company paid to Allied
Capital Corporation a fee of $150,000. The entire principal of the Allied Note
is currently outstanding.
The Company loaned to Daryl Dixon, the Company's President and Chief
Operating Officer, the sum of $90,000 upon the commencement of his employment
(to repay a loan with his prior employer). The loan accrued interest at a rate
of 8% per annum. Each month during Mr. Dixon's employment, the Company forgave
1/36 of the principal amount and associated interest of this loan. The loan was
forgiven in full on February 18, 2002.
In June 2001, the Company sold a school property in Manalapan, New Jersey,
to Mr. A. J. Clegg and his wife, Stephanie Clegg, d/b/a Tiffany Leasing, a
Pennsylvania sole proprietorship, in a transaction approved by the Board of
Directors. The purchase price for the property was $3,857,000, based on the
appraised value of the property as determined by an independent third party
appraiser. Simultaneously with the closing of the sale, the Company leased the
property back from Tiffany Leasing under a 20-year lease, with an initial annual
rent of approximately $450,000 per year. The lease is a triple net lease,
pursuant to which the Company is responsible for all costs of the property,
including maintenance, taxes and insurance. The Company also has two 5-year
options to renew the lease at the end of the original lease term. Apart from
increasing the length of the original lease term, the terms and conditions of
the purchase and lease are substantially the same as the final terms and
conditions previously negotiated by the Company with a disinterested third party
which had been interested in buying and leasing the property, but which did not
ultimately consummate the transaction for reasons unrelated to the Company or
the proposed terms.
During Fiscal 2002 but prior to the time he was employed by the Company, D.
Scott Clegg, the son of A. J. Clegg, received $50,000 for payment of services as
a consultant to the Company.
43
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
2.1 Agreement and Plan of Merger by and between Socrates Acquisition
Corporation and Nobel Learning Communities, Inc., dated as of
August 5, 2002. (Filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed on August 8, 2002, and incorporated
herein by reference).
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, 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 A
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 as modified November 15,
2001. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 2001, and
incorporated herein by reference.)
4.1 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.)
44
4.2 Amendment No. 1 to the Rights Agreement of Nobel Learning
Communities, Inc., dated as of August 4, 2002, between Nobel
Learning Communities, Inc. and Stocktrans, Inc., as Rights Agent.
(Filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K,
filed on August 8, 2002, and incorporated herein by reference.)
4.3 Amendment No. 2 to the Rights Agreement of Nobel Learning
Communities, Inc., dated as of August 5, 2002, between Nobel
Learning Communities, Inc. and Stocktrans, Inc., as Rights Agent.
(Filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K,
filed on August 8, 2002, and incorporated herein by reference.)
10.1 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 10.1 have not been filed. The Registrant
will furnish supplementally a copy of any omitted schedules or
attachments to the SEC 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.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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. (Filed as Exhibit 4.5 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
The Registrant has omitted certain instruments defining the rights
of holders of long-term debt in cases where the indebtedness
evidenced by such instruments does not exceed 10% of the
Registrant's total assets. The Registrant agrees to furnish a copy
of each of such instruments to the SEC upon request.
10.6 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. (Filed as Exhibit 4.6 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
10.7 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. (Filed as Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
10.8 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. (Filed
as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001, and incorporated herein by
reference).
10.9 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. (Filed as Exhibit 4.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
45
10.11 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,
and incorporated herein by reference.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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 SEC upon request.) (Filed as Exhibit 4A to the Registrant's
Current Report on Form 8-K, filed on September 11, 1995, and
incorporated herein by reference.)
10.23 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied
Capital Corporation to purchase up to 23,178.25 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, filed on September 11,
1995, and incorporated herein by reference.)
Exhibit 10.23 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:
46
Number of Shares
of Common Stock
Warrant No. Holder (subject to adjustment)
----------- ------ -----------------------
2 Allied Capital Corporation II 142,932.25
3 Allied Investment Corporation 92,713.00
4 Allied Investment Corporation II 50,219.50
10.24 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.)
10.25 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.)
10.26 Nobel Learning Communities, Inc. Senior Executive Severance Pay Plan
Statement and Summary Plan Description as modified February 3, 2000 and
December 21, 2001. (Filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001, and
incorporated herein by reference.)
10.27 Nobel Learning Communities, Inc. Executive Severance Pay Plan Statement
and Summary Plan Description as modified February 3, 2000 and
December 21, 2001. (Filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001, and
incorporated herein by reference.)
10.28 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.)
10.29 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.)
10.30 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.)
10.31 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.)
10.32 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.)
10.33 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.)
10.34 Employment and Termination Agreement dated as of August 2001 between A.
J. Clegg and the Registrant. (Filed as Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2001, and incorporated herein by reference).
10.35 Employment and Termination Agreement dated as of August 2001 between
John R. Frock and the Registrant. (Filed as Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2001, and incorporated herein by reference).
10.36 Separation Agreement and Mutual Release, dated as of November 30, 2001,
between Daryl Dixon and Registrant. (Filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001, and incorporated herein by reference)
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
(d) Financial Statement Schedules.
47
None.
48
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.
49
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 23, 2002 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 23, 2002
- ---------------- Chief Executive Officer and
A. J. Clegg Director (Principal Executive
Officer)
/s/ Robert E. Zobel Vice Chairman-- Corporate Affairs September 23, 2002
- -------------------- and Chief Financial Officer and
Robert E. Zobel Director (Principal Financial
and Accounting Officer)
/s/ Edward H. Chambers Director September 23, 2002
- ----------------------
Edward H. Chambers
/s/ John R. Frock Vice Chairman-- Corporate September 23, 2002
- ----------------- Development and Director
John R. Frock
/s/ Peter H. Havens Director September 23, 2002
- -------------------
Peter H. Havens
/s/ Eugene G. Monaco Director September 23, 2002
- --------------------
Eugene G. Monaco
/s/ Daniel L. Russell Director September 23, 2002
- ---------------------
Daniel L. Russell
50
CERTIFICATIONS
I, A.J. Clegg, certify that:
1. I have reviewed this annual report on Form 10-K of Nobel Learning
Communities, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 23, 2002
/s/ A.J. Clegg
- ---------------
A.J. Clegg
Chief Executive Officer
I, Robert E. Zobel, certify that:
1. I have reviewed this annual report on Form 10-K of Nobel Learning
Communities, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 23, 2002
/s/ Robert E. Zobel
- --------------------
Robert E. Zobel
Chief Financial Officer
51
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, 2002 and 2001, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2002, 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
September 3, 2002
F-1
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
June 30, 2002 June 30, 2001
----------------- ----------------
ASSETS
Cash and cash equivalents $ 1,787 $ 1,321
Accounts receivable, less allowance for doubtful 2,685 2,858
accounts of $468 in 2002 and $351 in 2001
Notes receivable 251 1,836
Prepaid rent 2,408 2,142
Prepaid insurance and other 2,543 1,896
----------------- ----------------
Total Current Assets 9,674 10,053
----------------- ----------------
Property and equipment, at cost 60,287 52,218
Accumulated depreciation (26,303) (20,792)
----------------- ----------------
33,984 31,426
----------------- ----------------
Property and equipment held for sale 5,605 5,995
Goodwill 48,376 48,376
Intangible assets, net 1,145 1,636
Long term note receivable 2,600 2,225
Deposits and other assets 1,596 2,073
----------------- ----------------
Total Assets $ 102,980 $ 101,784
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations $ 4,488 $ 6,414
Current portion of swap contract 63 -
Cash overdraft liability 3,564 5,428
Accounts payable and other current liabilities 7,528 6,678
Unearned income 7,356 6,986
----------------- ----------------
Total Current Liabilities 22,999 25,506
----------------- ----------------
Long-term obligations 25,411 25,526
Long-term subordinated debt 10,318 11,415
Swap contract 313 -
Deferred gain on sale/leaseback 28 15
Deferred taxes 1,192 460
Minority interest in consolidated subsidiary 232 261
----------------- ----------------
Total Liabilities $ 60,493 $ 63,183
----------------- ----------------
Commitments and Contingencies (Notes 14 and 20)
Stockholders' Equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, issued and outstanding 4,587,464 in
both 2002 and 2001. $5,524 aggregate liquidation
preference at June 30, 2002 and 2001 5 5
Common stock, $0.001 par value; 20,000,000 shares
authorized, issued and outstanding 6,544,953 in 2002 and
6,212,561 in 2001. 6 6
Treasury stock, cost; 230,510 shares in 2002 and 2001 (1,375) (1,375)
Additional paid-in capital 41,389 39,879
Retained earnings 2,838 86
Accumulated other comprehensive loss (376) -
----------------- ----------------
Total Stockholders' Equity 42,487 38,601
----------------- ----------------
Total Liabilities and Stockholders' Equitiy $ 102,980 $ 101,784
================= ================
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,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Revenues $ 156,279 $ 147,952 $ 127,407
--------- --------- ---------
Operating expenses:
Personnel costs 74,616 72,057 60,541
School operating costs 23,410 23,183 19,514
Insurance, taxes, rent and other 31,790 27,369 23,493
Depreciation and amortization 5,671 6,586 5,826
New school development 703 591 704
--------- --------- ---------
136,190 129,786 110,078
--------- --------- ---------
School operating profit 20,089 18,166 17,329
--------- --------- ---------
General and administrative expenses 11,776 11,004 9,742
--------- --------- ---------
Operating income 8,313 7,162 7,587
Interest expense 3,637 4,171 3,373
Other income (160) (424) (145)
Minority interest in income of
consolidated subsidiary 34 23 88
--------- --------- ---------
Income before income taxes and change in
accounting principle 4,802 3,392 4,271
Income tax expense 1,968 1,596 1,793
--------- --------- ---------
Net income before change in
accounting principle $ 2,834 $ 1,796 $ 2,478
--------- --------- ---------
Cumulative effect of change in accounting
principle, (net of income tax benefit of
$242) - 295 -
--------- --------- ---------
Net income 2,834 1,501 2,478
Preferred stock dividends 82 81 82
--------- --------- ---------
Net income available to common
stockholders $ 2,752 $ 1,420 $ 2,396
========= ========= =========
Basic earnings per share:
Net income before cumulative effect
of change in accounting principle $ 0.44 $ 0.29 $ 0.40
Cumulative effect of change in accounting principle - (0.05) -
--------- --------- ---------
Net income $ 0.44 $ 0.24 $ 0.40
========= ========= =========
Dilutive earnings per share:
Net income before cumulative effect
of change in accounting principle $ 0.38 $ 0.24 $ 0.33
Cumulative effect of change in accounting principle - (0.04) -
--------- --------- ---------
Net income $ 0.38 $ 0.20 $ 0.33
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2002, 2001 and 2000
(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
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 1999 4,593,542 $ 5 6,121,365 $ 6 $ 39,239 $ (1,375) $ (3,730)
=========== =========== =========== =========== =========== =========== ===========
Net income -- 0 0 0 0 0 2,478
Stock options exercised -- -- 3,333 -- 17 -- --
Conversion of preferred stock (6,078) -- 1,470 -- -- -- --
Preferred dividends -- -- -- -- -- -- (82)
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 2000 4,587,464 $ 5 6,126,168 $ 6 $ 39,256 $ (1,375) $ (1,334)
=========== =========== =========== =========== =========== =========== ===========
Net income -- -- -- -- -- -- 1,501
Stock options exercised -- -- 42,262 -- 217 -- --
Common Stock issued related to
acquisitions -- -- 44,131 -- 406 -- --
Preferred dividends -- -- -- -- -- -- (81)
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 2001 4,587,464 $ 5 6,212,561 $ 6 $ 39,879 $ (1,375) $ 86
=========== =========== =========== =========== =========== =========== ===========
Comprehensive income:
Net income -- -- -- -- -- -- 2,834
Swap contract, net of tax -- -- -- -- -- -- --
Total comprehensive income
Stock options and warrants
exercised -- -- 332,392 -- 1,510 -- --
Preferred dividends -- -- -- -- -- -- (82)
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 2002 4,587,464 $ 5 6,544,953 $ 6 $ 41,389 $ (1,375) $ 2,838
=========== =========== =========== =========== =========== =========== ===========
Accumulated
Other
Comprehensive
Loss Total
------ -----------
June 30, 1999 $ -- $ 34,145
====== ===========
Net income -- $ 2,478
Stock options exercised -- $ 17
Conversion of preferred stock -- $ --
Preferred dividends -- $ (82)
------ -----------
June 30, 2000 $ -- $ 36,558
====== ===========
Net income -- $ 1,501
Stock options exercised -- $ 217
Common Stock issued related to
acquisitions -- $ 406
Preferred dividends -- $ (81)
------ -----------
June 30, 2001 $ -- $ 38,601
====== ===========
Comprehensive income:
Net income -- $ 2,834
Swap contract, net of tax (376) $ (376)
-----------
Total comprehensive income $ 2,458
Stock options and warrants
exercised -- $ 1,510
Preferred dividends -- $ (82)
------ -----------
June 30, 2002 $ (376) $ 42,487
====== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-4
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Dollars in thousands)
For the year ended June 30,
----------------------------------
2002 2001 2000
----------------------------------
Cash Flows from Operating Activities:
Net income $ 2,834 $ 1,501 $ 2,478
-------- -------- --------
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 6,075 7,061 6,299
Amortization of debt discount 129 128 128
Provision for losses on accounts receivable 491 900 372
Provision for deferred taxes 732 451 970
Minority interest in income 34 23 88
Other 50 273 -
Changes in Assets and Liabilities
Net of Acquisitions:
Accounts receivable (363) (1,569) (8)
Prepaid assets (912) (1,669) (384)
Other assets and liabilities 421 204 185
Unearned income 370 725 124
Accounts payable and accrued expenses 687 (1,769) (82)
-------- -------- --------
Total Adjustments 7,714 4,758 7,692
-------- -------- --------
Net Cash Provided by Operating Activities 10,548 6,259 10,170
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (8,673) (15,224) (13,408)
Proceeds from sale of property and equipment 657 8,268 2,449
Payment for acquisitions net of cash acquired - (539) (6,669)
Issuance of notes receivable (425) (2,788) -
Repayment of notes receivable 1,680 - -
-------- -------- --------
Net Cash Used in Investing Activities (6,761) (10,283) (17,628)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from term loan and revolving line of credit 2,962 16,498 12,114
Repayment of long term debt (2,143) (13,864) (2,116)
Repayment of subordinated debt (3,865) (2,319) (2,209)
Debt issuance cost - (490) -
Proceeds from capital lease 311 - -
Repayment of capital lease obligation (150) (74) (84)
Dividends paid to preferred stockholders (82) (81) (82)
Cash overdraft (1,864) 1,660 1,976
Proceeds from exercise of stock options and warrants 1,510 217 17
-------- -------- --------
Net Cash Provided by Financing Activities (3,321) 1,547 9,616
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 466 (2,477) 2,158
Cash and cash equivalents at beginning of year 1,321 3,798 1,640
-------- -------- --------
Cash and cash equivalents at end of year $ 1,787 $ 1,321 $ 3,798
======== ======== ========
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,
-------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Supplemental Disclosures of Cash
Flow Information
Cash paid during year for:
Interest $ 3,351 4,302 3,206
Income taxes $ 1,175 1,431 302
Acquisitions
Fair value of tangible assets acquired $ - 173 5,011
Goodwill and intangibles $ - 809 5,708
Liabilities assumed $ - (38) (931)
Notes issued $ - - (3,119)
Common shares issued $ - (405) -
-------------- -------------- --------------
Total cash paid for acquisitions $ - 539 6,669
============== ============== ==============
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") was organized in 1984 as
The Rocking Horse Childcare Centers of America, Inc. In 1985, The Rocking Horse
Childcare Centers of America, Inc. merged into a publicly-traded entity that had
been incorporated in 1983. The Company operates private schools, schools for the
learning challenged, specialty high schools and charter schools located in
Arizona, California, Florida, Georgia, Illinois, Maryland, Nevada, New Jersey,
North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia and
Washington.
Principles of Consolidation and Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Recognition of Revenues:
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, which represent approximately 1.2% of revenues,
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 the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, including the existence of an arrangement, the rendering
of services, a determinable fee and probable collection.
In December 1999, the Securities and Exchange Commission issued SAB 101,
which provides guidance related to revenue recognition.
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
SAB 101 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.
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.
Accounts Receivable and Credit Risk:
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.
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 also 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.
F-7
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.
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.
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 as income in the period of enactment. A
valuation allowance is recorded based on the uncertainty regarding the ultimate
realizability of deferred tax assets.
The Company files a U.S. federal income tax return and various state income
tax returns, which are subject to examination by tax authorities. This process
involves estimating the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The Company's 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 the local attribution of income.
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 as of 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.
Risk and Uncertainties:
Future results of operations of the Company involve a number of risks and
uncertainties. Factors that could affect future operating results and cause
actual results to vary materially from historical results include, but are not
limited to, consumer acceptance of the Company's business strategy with respect
to expansion into new and existing markets, the Company's debt and related
financial covenants, difficulties in managing the Company's growth including
attracting and retaining qualified personnel, a large portion of the Company's
assets represent goodwill, increased competition, changes in government policy
and regulation, ability to obtain additional capital required to fully implement
the business plan, and the Company's recoverability of the note receivable from
Total Education Solutions, Inc. ("TES")(See footnote 10).
F-8
Negative developments in these areas could have a material effect on the
Company's business, financial condition and results of operations.
Accounting for Derivatives:
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This standard, as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments, Certain Hedging
Activities," an amendment of FASB Standard No. 133, establishes accounting and
reporting standards requiring that every derivative instrument, such as interest
rate swap agreements, be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The company records its derivatives at fair
value within the consolidated balance sheet and the changes in fair value of the
derivatives are either reported in earnings or are reported in other
comprehensive loss in stockholder's equity. The fair value represents the
estimated amount the Company would receive or pay to terminate their interest
rate swap agreements taking into consideration current interest rates (see Note
11). Derivatives are limited in use and are not entered into for speculative
purposes.
New Accounting Pronouncements:
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 full impact of adoption on its financial position but will
reclass property and equipment held for sale as part of total property and
equipment as the assets are still in use.
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 2002.
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
settled for $1,025,000 on February 14, 2002 resulting in a gain of $383,000. As
a result of the adoption of FASB 145, the Company recorded the gain as other
income during the quarter ended March 31, 2002. The impact on diluted earnings
per share for the quarter and year to date March 31, 2002 was $0.03 per share
(net of tax).
On July 30, 2002, the Financial Accounting Standards Board (FASB) issued
Statement 146, Accounting for Costs Associated with Exit or Disposal Activities.
The standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. FASB 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002.
Reclassifications:
Certain prior year amounts for the fiscal year ended June 30, 2001 have
been reclassified to conform to the presentation adopted in fiscal 2002.
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 options, warrants, and 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,
------------- ------------- -------------
2002 2001 2000
------------- ------------- -------------
Basic earnings per share:
- ---------------------------------
Net income $ 2,834 $ 1,501 $ 2,478
Less preferred dividends 82 81 82
Net income available for
------------ ------------ ------------
common stock 2,752 1,420 2,396
------------ ------------ ------------
Average common stock outstanding 6,197,936 5,980,986 5,929,811
------------ ------------ ------------
Basic earnings per share $ 0.44 $ 0.24 $ 0.40
============ ============ ============
Diluted earnings per share:
- ---------------------------------
Net income available for common stock
and dilutive securities $ 2,834 $ 1,501 $ 2,478
Average common stock outstanding 6,197,936 5,980,986 5,929,811
Additional common shares resulting from dilutive securities:
Options, warrants and convertible
preferred stock 1,276,767 1,535,014 1,543,123
Average common stock and dilutive
------------ ------------ ------------
securities outstanding 7,474,703 7,516,000 7,472,934
------------ ------------ ------------
Dilutive earnings per share $ 0.38 $ 0.20 $ 0.33
============ ============ ============
3. Acquisitions and Dispositions:
During the years ended June 30, 2001, and 2000, the Company completed
various acquisitions, all of which are accounted for using the purchase method,
as 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).
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.
F-10
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,
the Company 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 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.
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 2000, 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 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. The
Arizona
F-11
Promissory Notes were settled between the Company and the Seller's for
$1,025,000 during fiscal year 2002 which resulted in a gain of $383,000. 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. (See note 1)
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
Fiscal 2001 and Fiscal 2000 all occurred at the beginning of Fiscal 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 Fiscal 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
4. Cash Equivalents:
The Company has an agreement with its primary bank that allows the bank to
act as the Company's principal in making daily investments with available funds
in excess of a selected minimum account balance. This investment amounted to
$572,000 and $537,000 at June 30, 2002 and 2001, respectively. The Company's
funds were invested in money market accounts, which exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk on
cash and cash equivalents as such deposits are maintained in high quality
financial institutions.
5. Notes Receivable:
At June 30, 2001, the Company had a current note receivable of $1,664,000
due from People for People, Inc. related to construction cost for a proposed
charter school financed by the Company. Interest on the note accrued at 2.5%
over prime from July 11, 2000 to April 16, 2001 and at 14% through August 13,
2001. The principal amount of the note was repaid August 13, 2001. Accrued
interest is being repaid in installments. At June 30, 2002, accrued interest
outstanding was $178,000.
F-12
6. 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, 2002 June 30, 2001
-------------------- ---------------------
Land $ 2,831 $ 2,832
Buildings 6,128 5,741
Assets under capital lease obligations 1,224 913
Leasehold improvements 20,644 17,686
Furniture and equipment 29,452 25,027
Construction in progress 8 19
-------------------- ---------------------
$ 60,287 $ 52,218
Accumulated depreciation (26,303) (20,792)
-------------------- ---------------------
$ 33,984 $ 31,426
==================== =====================
Depreciation expense was $5,584,000, $4,879,000, and $4,354,000 for the years
ended June 30, 2002, 2001 and 2000, respectively. Amortization of capital leases
included in depreciation expense amounted to $183,000, $15,000 for the years
June 30, 2002 and 2001, respectively. Accumulated amortization of capital leases
amounted to $695,000 and $512,000 at June 30, 2002 and June 30, 2001,
respectively.
7. 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. As a result, the Company ceased
amortization of Goodwill, the effect of which was a reduction of $1,677,000 of
amortization expense for the year ended June 30, 2002.
The net carrying value of goodwill was $48,376,000 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 13% to 20%). 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 $7,806,000 and $4,676,000. Accordingly, the Company updated its analysis
at June 30, 2002 and concluded that no impairment was required for these two
reporting units. 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 require judgments and estimates and could require us to write
down the carrying value of our goodwill and other intangible assets in future
periods.
F-13
The impact on prior year financial results, as if FAS 142 had been in effect is
as follows (dollars in thousands):
Year ending June 30, Year ending June 30,
----------------- ------------ ---------------- -------------
2001 2001 2000 2000
As reported Pro forma As reported Pro forma
----------------- ------------ ---------------- -------------
Earnings before taxes and change in
accounting principle $3,392 $3,392 $4,271 $4,271
Goodwill amortization - 1,629 - 1,484
------------------------------ ------------------------------
Adjusted earnings before taxes and
change in accounting principle
3,392 5,021 4,271 5,755
Income tax expense 1,596 2,058 1,793 2,360
------------------------------ ------------------------------
Net income before change in
accounting principle $1,796 $2,963 $2,478 $3,395
============================== ==============================
Basic earnings per share $ 0.29 $ 0.48 $ 0.40 $ 0.56
============================== ==============================
Diluted earnings per share $ 0.24 $ 0.39 $ 0.33 $ 0.45
============================== ==============================
8. Intangible Assets, net:
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.
At June 30, 2002 and 2001 the Company's intangibles assets were as follows
(dollars in thousands):
June 30, 2002 June 30, 2001
Intangible assets
Non-compete $ 2,493 $ 2,493
Other 901 901
------------- ----------------
3,394 3,394
Accumulated amortization (2,249) (1,758)
------------- ----------------
$ 1,145 $ 1,636
============= ================
Amortization expense for intangible assets was $491,000, $454,000 and $496,000
for the years ended June 30, 2002, 2001 and 2000, respectively. Amortization of
intangible assets will be as follows: $309,000 in 2003, $96,000 in 2004, $74,000
in 2005, $48,000 in 2006 and $618,000 in 2007 and thereafter.
F-14
9. 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, 2002 June 30, 2001
------------------ --------------------
Land $ 1,645 $ 1,839
Buildings 3,960 4,315
Leasehold improvements 110 110
Furniture and equipment 45 122
Accumulated depreciation (155) (391)
------------------- --------------------
$ 5,605 $ 5,995
=================== =================---
10. Long Term Note Receivable:
The Company has a $2,600,000 note receivable pursuant to of a Credit
Agreement with TES due May 2005 of which $2,250,000 is convertible into 30%
ownership 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 2000,
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. Although TES's revenues have grown since the origination of the
credit agreement, TES has also incurred losses as a result of building the
infrastructure to service other regions.
As part of the evaluation of the carrying value of TES, a number of positive
and negative factors affecting TES were considered including:
. Operating results and outlook for TES;
. Expected future cash flows
. Current conditions and trends in the industry;
. Other industry comparables; and
. The Company's plans and ability hold this investment.
In evaluating the investment in TES, a discounted cash flow analyses was
prepared for TES based on a recent financing discussion memorandum. The cash
flow analysis indicated that the investment in TES has a value greater than the
current carrying value. In addition, 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 was reviewed.
F-15
11. Debt:
Debt consisted of the following (dollars in thousands):
June 30, 2002 June 30, 2001
---------------- ----------------
Long Term Obligations:
Revolving and term credit facility $ 28,217 $ 27,398
First mortgages and notes payable to sellers due in
varying installments over three to 15 years with
fixed interest rates ranging from 8% to 12% 179 265
Capitalized lease obligation 162 -
Other 93 135
---------------- ----------------
$ 28,651 $ 27,798
---------------- ----------------
Less current portion (3,240) (2,272)
---------------- ----------------
$ 25,411 $ 25,526
================ ================
Long Term Subordinated Debt:
Senior subordinated note due 2005 interest at 12%,
payable quarterly. Net of original issue discount of
$386,000 at June 30, 2002 $ 9,614 $ 9,486
Subordinated debt agreements, due in varying
installments over five to 10 years with fixed interest
rates varying from 7% to 8% 1,952 6,071
---------------- ----------------
Total subordinated debt 11,566 15,557
Less current portion (1,248) (4,142)
---------------- ----------------
$ 10,318 $ 11,415
================ ================
Credit Facility.
Since 1995, the Company amended its credit facility agreement 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, 2004. 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, 2002, a total of $28,217,000 was outstanding and $9,353,000 was
available under the amended and restated loan agreement; $2,084,000 was
outstanding under Working Capital Credit Facility, $13,276,000 was outstanding
under the Acquisition Credit Facility and $12,857,000 was outstanding under the
Term Loan.
The interest rate at June 30, 2002 for the Working Capital Credit Facility
of $2,084,000 outstanding and $3,276,000 for the Acquisition Credit Facility was
at 5.5%, which was prime plus 0.75%. Interest rate on the remaining $10,000,000
outstanding on the Acquisition Credit Facility was 4.38%, which was adjusted
Libor plus 2.5%. The interest rate on the Term Loan was 7.98%, which was fixed
Libor of 5.48% (see interest rate swap agreement below) plus 2.5%.
F-16
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%.
Nobel also pays a commitment fee on the Working Capital and Acquisition
Facility 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
30, 2002, 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
30, 2002, Nobel had $287,000 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.
At June 30, 2002, the Company was not in compliance with two credit
facility financial covenant ratios. As a result, the Company received a waiver
for the breach of the interest coverage ratio and adjusted leverage ratio at
June 30, 2002. In addition, the breached ratios were amended and restated to
lower ratio requirements for fiscal year 2003. The Company's interest coverage
ratio increased from a ratio of EBITDA of 3.5 times interest expense or higher
to 4.0 times interest expense or higher at June 30, 2002. The Company's ratio
was 3.99 times EBITDA at June 30, 2002. The Company's adjusted leverage ratio
decreased from 4.5 times EBITDA or plus rent expenses to 4.25 times EBITDA plus
rent expense at June 30, 2002. The Company's ratio was 4.37 times EBITDA plus
rent expense at June 30, 2002. The Company is in compliance with all other bank
covenant requirements.
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 in 2002 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, 2002 the Company's interest rate swap contract outstanding
had a total notional amount of $12,857,000. Under the interest rate swap
contract, the Company agrees to pay a fixed rate of 5.48% and the counterparty
agrees to make payments based on 3-month LIBOR. The market value of the interest
rate swap agreement at June 30, 2002 was a liability of $376,000, net of taxes
and is included as a component of Accumulated Other Comprehensive Loss, of which
a portion is expected to be reclassified to the consolidated statement of income
within one year.
In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation. In May, 2001, the Company amended its $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
increased 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 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 discount is being amortized to interest expense over the
term of the note.
Maturities of long-term obligations are as follows: $4,488,000 in 2003,
$7,399,000 in 2004, $5,076,000 in 2005, $14,306,000 in 2006, and $8,948,000 in
2007 and thereafter.
F-17
12. Accounts Payable and Other Current Liabilities:
Accounts payable and other current liabilities were as follows
(dollars in thousands):
June 30, 2002 June 30, 2001
----------------- -----------------
Accounts payable $ 2,349 $ 2,105
Accrued payroll and related items 1,805 1,647
Accrued rent 424 345
Accrued taxes 282 186
Other accrued expense 2,668 2,395
----------------- -----------------
$ 7,528 $ 6,678
================= =================
13. 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.
14. 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, 2002 (dollars in thousands):
Operating Leases
2003 $ 25,127
2004 24,520
2005 23,433
2006 21,937
2007 20,138
2008 and thereafter 113,527
--------
Total minimum lease
obligations $228,682
========
Most of the above leases contain annual rental increases based on changes
in consumer price indexes, which are not reflected in the above schedule. Rental
expense for all operating leases was $23,929,000, $21,469,000, and $17,596,000,
for the years ended June 30, 2002, 2001 and 2000, These leases are typically
triple-net leases requiring the Company to pay all applicable real estate taxes,
utility expenses, maintenance and insurance costs.
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):
2003 $ 1,258
2004 $ 1,239
2005 $ 1,187
2006 $ 942
2007 and thereafter $ 2,214
F-18
15. 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, 2002 and 2001, 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. At June 30, 2002 and 2001, 2,500,000 shares were outstanding.
The Series 1 Warrants are exercisable at $4.00 per share, subject to
adjustment, and were to expire on August 19, 2001. On August 19, 2001, the
holders of 125,000 Series 1 Warrants issued in connection with the Series C
Convertible Preferred Stock exercised their warrants at $4.00 per share. The
Series 2 Warrants have terminated pursuant to their terms.
In 1993, the Company issued 2,484,320 shares of Company's Series A
Convertible Preferred Stock for a purchase price of $1.00 per share. The Series
A Preferred Stock is convertible into Common Stock at a conversion rate, subject
to adjustment, of .2940 shares of Common Stock for each share of Series A
Preferred Stock. The Series A Preferred Stock is redeemable by the Company at
any time after the fifth anniversary of its issuance at a redemption price of
$1.00 per share plus cumulative unpaid dividends. The Preferred Stock is not
redeemable at the option of the holders. Upon liquidation, the holders of shares
of Series A Preferred Stock are entitled to receive, before any distribution or
payment is made upon any Common Stock, $1.00 per share plus all accrued and
unpaid dividends. Shares outstanding at June 30, 2002 and 2001 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.
F-19
The Rights are designed to provide the Board of Directors sufficient time to
evaluate proposed change-in-control transactions by encouraging potential
acquirers to negotiate with the Board of Directors before attempting a tender
offer for the Company. The Rights are not intended to prevent transactions on
terms that are fair to the Company's stockholders nor to deter any potential
acquirer who is willing to complete a transaction on such terms.
Common Stock Warrants:
In connection with a $10,000,000 senior subordinated note issued to Allied
Capital Corporation in July 1998, the Company issued warrants to acquire an
aggregate of 531,255 shares of the Company's common stock at $8.5625 per share.
The exercise price was reduced to $7.00 per share on May 31, 2000, based on the
terms of the warrant requiring adjustment to the trailing 30 day average high
and low stock price.
In connection with a debt refinancing in August, 1995, the Company issued
to Allied Capital Corporation warrants to acquire an aggregate of 309,042 shares
of the Company's Common Stock at $7.52 per share.
At June 30, 2002, 2001 and 2000, 840,267, 965,267, and 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, 2002 and 2001, 92,000 options have
been granted under this plan. At June 30, 2002 and 2001, $55,000 and $29,000,
respectively, in compensation expense have 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 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.
F-20
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, 1999 836,804 3.75 to 16.44 6.39
----------- ---------- ------------- ----------
Granted 180,788 5.87 to 8.13 7.53
Exercised (3,333) 5.06 5.06 5.06
Canceled (33,467) 5.06 to 11.62 7.31
----------- ---------- ------------- ----------
Balance June 30, 2000 980,792 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 960,650 3.75 to 16.44 7.16
----------- ---------- ------------- ----------
Granted 140,000 5.85 to 8.00 5.93
Exercised (207,392) 4.69 to 5.75 4.87
Canceled (65,021) 3.75 to 11.63 5.31
----------- ---------- ------------- ----------
Balance June 30, 2002 828,237 3.75 to 16.44 7.36
=========== ========== ============= ==========
Of the 140,000 options granted during 2002 50,000 options were granted
outside of the Company's stock incentive plans. At June 30, 2002 and June 30,
2001, 554,273 and 571,002 shares, respectively, remained available for options
or stock grants under the 1995 Stock Incentive Plan and 662,273 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):
For the Year ended June 30,
---------------------------------------
2002 2001 2000
Net income:
- - as reported $ 2,834 $ 1,501 $ 2,478
- - pro forma $ 2,432 $ 897 $ 2,157
Basic earnings per share
- - as reported $ 0.44 $ 0.24 $ 0.40
- - pro forma $ 0.38 $ 0.15 $ 0.35
Diluted earnings per share
- - as reported $ 0.38 $ 0.20 $ 0.33
- - pro forma $ 0.32 $ 0.12 $ 0.29
F-21
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:
2002 2001
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 36.07% 44.24%
Risk-free interest rate 4.44% 5.77%
Expected life of options 3 years 3 years
16. Other (Income) Expense:
Other (income) expense consists of the following (dollars in thousands):
Year Ending June 30,
----------------------------------------------
2002 2001 2000
-------------- -------------- ----------------
Interest income $ (161) (426) (118)
Rental income (expense) 11 (39) (46)
Depreciation related to rental properties 29 18 17
Gain on settlement of note payable (383) - -
Transaction costs 344 - -
Other - 23 2
-------------- -------------- ----------------
$ (160) (424) (145)
============== ============== ================
17. Income Taxes:
Current tax provision (dollars in thousands):
Year Ending June 30,
--------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Federal $ 1,070 $ 788 $ 902
State 166 115 (79)
--------------- --------------- ---------------
1,236 903 823
Deferred tax provision 732 451 970
--------------- --------------- ---------------
$ 1,968 $ 1,354 $ 1,793
=============== =============== ===============
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,
--------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
U.S. federal statutory rate $ 1,681 $ 984 $ 1,495
State taxes, net of federal tax benefit 83 70 128
Goodwill and other 204 300 170
--------------- --------------- ---------------
$ 1,968 $ 1,354 $ 1,793
=============== =============== ===============
F-22
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows (dollars in
thousands):
Year Ending June 30,
--------------------------------------------------
2002 2001 2000
--------------------------------------------------
tax assets (liabilities)
Goodwill amortization $ (2,242) $ (702) $ (468)
Depreciation 21 (264) (174)
Provision for school closings and
other restructuring - - 60
AMT credit carryforward and state
net operating losses 986 647 732
Other 184 - -
--------------- ---------------- -----------------
(1,051) (319) 150
--------------- ---------------- -----------------
Valuation allowance (141) (141) (141)
--------------- ---------------- -----------------
Net deferred tax (liability) asset $ (1,192) $ (460) $ 9
=============== ================ =================
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 $6,938,000 as of June 30, 2002, which can be carried forward from
seven to twenty years depending on the state and will expire between 2005 and
2020, if not utilized.
18. 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. The Company's
matching contributions under the Plan were $269,000, $238,000, and $169,000 for
the years ended June 30, 2002, 2001 and 2000, respectively.
19. Fair Value of Financial Instruments:
Fair value estimates, methods and assumptions are set forth below for
Nobel's financial instruments at June 30, 2002, and June 30, 2001.
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, 2002 and 2001 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 fair value of the $2,600,000 note receivable from TES exceeds its
carrying value. (see Note 10). 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 12% senior subordinated notes of $9,614,000 at June 30, 2002 and
$9,486,000 at June 30, 2001, approximated market value. The carrying values for
F-23
Nobel's remaining long-term debt of $30,603,000 and $33,869,000 at June 30, 2002
and 2001, 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, 2002, the Company would have had to
pay $637,000 to terminate the interest rate swap.
20. Commitments and Contingencies:
In addition to the legal proceedings described below in Note 22, 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.
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 Part III of report on Form 10-K contained herein.
21. Related Party Transactions:
In June 2001, the Company sold a school property in Manalapan, New Jersey,
to Mr. A. J. Clegg, d/b/a Tiffany Leasing, a Pennsylvania sole proprietorship,
in a transaction approved by the Board of Directors. The purchase price for the
property was $3,857,000, based on the appraised value of the property as
determined by an independent third party appraiser. Simultaneously with the
closing of the sale, the Company leased the property back from Tiffany Leasing
under a 20-year lease, with an initial annual rent of approximately $450,000 per
year. The Company is responsible for all costs of the property, including
maintenance, taxes and insurance. The Company also has two 5-year options to
renew the lease at the end of the original lease term. Apart from increasing the
length of the original lease term, the terms and conditions of the purchase and
lease are substantially the same as the final terms and conditions previously
negotiated by the Company with a disinterested third party which had been
interested in buying and leasing the property, but which did not ultimately
consummate the transaction for reasons unrelated to the Company or the proposed
terms.
22. Segment Information:
The Company manages its schools based on 3 geographical regions within the
United States. In FY 2000 the Company acquired Houston Learning Academy and The
Activities Club and began managing charter schools. These operations have
different characteristics and are managed separately from the school operations.
These operations do not currently meet the quantification criteria and therefore
are not deemed reportable under Statement of Financial Accounting Standards 131,
Disclosures about Segments of an Enterprise and Related Information and are
reflected in the "other" category. The accounting policies of the segments are
the same as those described in the "Summary of Significant Accounting Policies."
F-24
The table below presents information about the reported operating income of the
company for the fiscal years ended June 30, 2002, 2001 and 2000, (dollars in
thousands):
Private
Schools Other Corporate Total
----------- --------- ------------ ------------
June 30, 2002
-----------------
Revenues $ 146,717 9,562 - 156,279
School operating profit $ 19,507 582 - 20,089
Depreciation and
amortization $ 4,819 852 404 6,075
Goodwill $ 46,428 1,948 - 48,376
Segment assets $ 82,505 14,532 5,943 102,980
June 30, 2001
-----------------
Revenues $ 139,726 8,226 - 147,952
School operating profit $ 17,945 221 - 18,166
Depreciation and
amortization $ 5,983 603 475 7,061
Goodwill $ 46,428 1,948 - 48,376
Segment assets $ 80,798 14,257 6,729 101,784
June 30, 2000
-----------------
Revenues $ 125,176 2,231 - 127,407
School operating profit $ 16,910 419 - 17,329
Depreciation and
amortization $ 5,739 87 473 6,299
Goodwill $ 47,196 2,299 - 49,495
Segment assets $ 83,426 8,881 6,311 98,618
23. Subsequent events:
The Stockholder Rights Plan was amended on August 4, 2002, and August 5,
2002, by Amendment No. 1 and Amendment No. 2, respectively, as part of the
negotiation and execution of the Agreement and Plan of Merger, dated as of
August 5, 2002 (the "Merger Agreement"), with Socrates Acquisition Corporation
("Socrates"), a corporation newly formed by Gryphon Partners II, L.P. and
Cadigan Investment Partners, Inc. (collectively, the "Buying Group"), both of
which are engaged principally in the business of investing in companies.
On August 5, 2002, the Company entered into the Merger Agreement. Under the
Merger Agreement, Socrates will be merged into the Company, with the Company as
the surviving corporation (the "Merger"). If the Merger is completed, each
issued and outstanding share of the Company's common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
will be converted into the right to receive $7.75 in cash, without interest,
except for certain shares and options held by the the Company's directors and
executive officers identified in the merger agreement as a rollover stockholder,
which will continue as, or be converted into, equity interests of the surviving
corporation. In addition, if the Merger is completed, each outstanding option
and warrant that is exercisable as of the effective time of the Merger will be
canceled in exchange for (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant multiplied by (2) the number of shares
of common stock subject to the option or warrant exercisable as of the effective
time of the merger, net of any applicable withholding taxes. Following the
Merger, the Company will continue its operations as a privately held company.
The Merger is contingent upon satisfaction of a number of conditions, including
approval of the Company's stockholders, the receipt of regulatory and other
approvals and consents, the absence of any pending or threatened actions that
would prevent the consummation of the transactions contemplated by the merger
agreement and receipt of financing. There can be no assurance that these or
other conditions to the Merger will be satisfied or that the Merger will be
completed. If the Merger is not completed for any reason, it is expected that
the current management of the Company, under the direction of the Company's
Board of Directors, will continue to manage the Company as an ongoing business.
It is currently anticipated that the total amount of funds necessary to
complete the Merger and the related transactions is approximately $108,900,000
(assuming that no NLCI stockholders exercise and perfect their appraisal
rights). The Buying Group has received commitments, subject to various
conditions, from financial institutions in an aggregate amount sufficient,
taking into account the amounts to be contributed as equity financing, to fund
these requirements. The receipt of third-party financing is a condition to
completion of the Merger. Of this amount, $47,500,000 is expected to be funded
from an equity investment in the Company by Socrates and stockholders who are
converting their shares into equity interests in the surviving corporation and
an additional $50,000,000 is expected to be funded through new credit
facilities. These funds are expected to be used to pay NLCI's stockholders and
certain option holders and warrant holders, other than stockholders who are
converting their shares into equity interests in the surviving corporation, to
refinance debt, and to pay fees and expenses related to the Merger. Following
completion of the Merger, the senior secured credit facility and the senior
subordinated notes are expected to be repaid through cash flow generated from
operations in the ordinary course of business and/or through refinancing.
F-25
The Company's Board of Directors, acting upon the unanimous recommendation
of the Special Committee of the Board comprised of three disinterested
directors, approved the transaction. In reaching its decision, the Special
Committee and the Board received a fairness opinion from the Company's financial
advisor, Legg Mason Wood Walker, Incorporated.
The Company anticipates that it will expense in the first and second
quarter of fiscal 2003 approximately $800,000 of legal, professional and other
registration fees incurred in connection with the Merger.
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of the Company. Named as
defendants in the complaint are the Company, members of the Company Board of
Directors and one former member of the Company's Board of Directors. The
plaintiff alleges, among other things, that the Merger is unfair and that the
Company's directors breached their fiduciary duties by failing to fully disclose
material non-public information related to the value of the Company and by
engaging in self-dealing. The complaint seeks an injunction, damages and other
relief. The Company was served with the complaint on August 22, 2002.
24. 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.
Operating Net income Earnings (loss) per share Market price
------------------------- ---------------------
Revenue Profit (loss) Basic Diluted High Low
----------- ------------ ---------- -------------- --------- ---------- --------
Fiscal 2002 (1)
- ----------------
September 30, 2001 $ 34,423 $ (39) $ (540) $ (0.09) $ (0.09) $ 9.000 $ 6.250
December 31, 2001 39,892 2,530 946 0.15 0.13 8.250 4.800
March 31, 2002 40,737 2,633 1,032 0.16 0.14 7.480 5.050
June 30, 2002 41,227 3,189 1,396 0.22 0.18 7.230 5.150
Fiscal 2001 (2)
- ---------------
September 30, 2000 31,530 (495) (1,111) (0.19) (0.19) 10.000 7.750
December 31, 2000 37,673 1,985 595 0.10 0.08 8.875 4.688
March 31, 2001 39,204 2,584 820 0.13 0.11 10.250 5.516
June 30, 2001 39,552 3,094 1,201 0.20 0.16 10.000 7.550
(1) Results for Fiscal 2002 reflect the adoption of FAS 142 which excludes
goodwill amortization
(2) Results for Fiscal 2001 have been restated to reflect the adoption of SAB
101, Revenue Recognition in the first quarter of Fiscal 2001.
F-26
APPENDIX E
INFORMATION RELATING TO THE DIRECTORS AND EXECUTIVE OFFICERS OF NLCI
The name, position and principal occupation or employment, business address
and material occupations, positions, offices or employment for the past five
years, of each director or executive officer of NLCI are set forth below. A.J.
Clegg, John Frock and Robert Zobel, each a director and executive officer of
NLCI, and D. Scott Clegg, an executive officer of NLCI, are the rollover
stockholders. The business address of each director and executive officer of
NLCI is c/o Nobel Learning Communities, Inc., 1615 West Chester Pike, West
Chester, Pennsylvania, 19382. The business telephone number of each director
and executive officer of NLCI is (484) 947-2000. Each director and executive
officer of NLCI is a citizen of the United States.
NAME PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
FIVE-YEAR EMPLOYMENT HISTORY
A.J. Clegg.................. Mr. A.J. Clegg was named Chairman of the Board
and Chief Executive Officer of NLCI in May 1992.
Since 1996, Mr. A.J. 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. A.J. Clegg served as the Chairman
and CEO of JBS Investment Banking, Ltd., a
provider of investment management and consulting
services to businesses, including NLCI. 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. A.J. 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. A.J. Clegg 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. A.J.
Clegg was recognized as "Education Entrepreneur
of the Year" by the Association of Education
Practitioners and Providers. Mr. A.J. Clegg is
the father of D. Scott Clegg, NLCI's Vice
Chairman--Operations, President and Chief
Operating Officer.
D. Scott Clegg.............. Mr. D. Scott Clegg rejoined NLCI as Vice
Chairman--Operations, President and Chief
Operating Officer in February 2002. Previously,
Mr. D. Scott Clegg had been with NLCI from 1993
until 1997, commencing with his appointment as
Vice President--Operations for the Merryhill
Country Schools division in June 1993, and
culminating with his appointment in early 1997 as
Vice President--Operations, with responsibility
for nationwide operations. Mr. D. Scott Clegg
left NLCI to become a principal and founder of
Pathways Education Group, L.L.C., a management
consulting firm serving the public and private
sectors in education. He was formerly Vice
President of New Business development at JBS
Investment Banking, Ltd. Mr. D. Scott Clegg also
served as General Manager and Chief Operating
officer of Dynasil Corporation of America, a
public company, and also served as a member of
Dynasil's Board of Directors. Mr. D. Scott Clegg
is the son of A.J. Clegg, NLCI's Chairman and
Chief Executive Officer.
E-1
NAME PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
FIVE-YEAR EMPLOYMENT HISTORY
Dr. Lynn A. Fontana......... Dr. Fontana joined NLCI in August of 1999 as
Executive Vice President--Education and Chief
Education Officer. She is responsible for the
educational programs, professional development,
technology integration and quality assurance in
NLCI's network of schools. Dr. Fontana has been
actively involved in educational research and
development for more than twenty-five years. As a
research associate professor at George Mason
University, she directed educational projects
funded by public and private foundations
including the National Science Foundation, Bell
Atlantic Foundation, Corporation for Public
Broadcasting, the Defense Advanced Research
Projects Agency and the Department of Defense
Education Activity. Prior to joining the research
faculty at George Mason University, Dr. Fontana
was Vice President for Educational Activities at
WETA. Dr. Fontana has a B.A. in history and
political science from Juniata College and a
Ph.D. in social studies education from Indiana
University. She taught high school history for
eight years in public schools in Pennsylvania and
New Jersey. Dr. Fontana has served on the Board
of Trustees of National History Day for 10 years
and on the editorial board for World Book
Publishing for six of the last eight years.
John R. Frock............... Mr. Frock was appointed Vice Chairman--Corporate
Development of NLCI in April 2002. Prior to such
appointment, Mr. Frock had been Executive Vice
President--Corporate Development since August 1,
1994. Mr. Frock was elected to the Board of
Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief
Operating Officer of JBS Investment Banking,
Ltd., a provider of investment management and
consulting services to businesses, including NLCI.
Robert E. Zobel............. Mr. Zobel was appointed Vice Chairman--Corporate
Affairs and Chief Financial Officer of NLCI in
April 2002. Between February 2001 and April 2002,
Mr. Zobel served as Vice President, Chief
Administrative Officer and Secretary of MARS,
Inc., a start up retail organization. Mr. Zobel
was Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary of MARS, Inc.
from February 1996 until February 2001. From 1974
through February 1996, Mr. Zobel was associated
with Deloitte & Touche LLP (formerly Touche Ross
& Co.) as an employee and since September 1981 as
a partner. Mr. Zobel earned a B.A. degree from
Claremont McKenna College, a J.D. degree from
Willamette University College of Law and a LLM in
tax from Boston University.
Edward H. Chambers.......... Mr. Chambers has served as Executive Vice
President--Finance and Administration of Wawa,
Inc. since March 1988. During the period April
1984 through March 1988, he served as President
and Chief Executive Officer, and as a director,
of Northern Lites, Ltd., an owner and operator of
quick-service restaurants operating pursuant to a
franchise from D'Lites of America, Inc. From 1982
to July 1984, Mr. Chambers was President--Retail
Operations of Kentucky Fried Chicken Corp., a
franchiser of quick-service restaurants. He is
also a director of Riddle Memorial Hospital
System and the Riddle Memorial Hospital
Foundation.
E-2
NAME PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
FIVE-YEAR EMPLOYMENT HISTORY
Peter H. Havens............. Mr. Havens is Chairman of Baldwin Management,
LLC, an investment management concern.
Previously, he was the Executive Vice President
of Bryn Mawr Bank Corporation overseeing the
Investment Management and Trust Division. From
1982 through May 1995, Mr. Havens served as
manager of Kewanee Enterprises, a private
investment firm located in Bryn Mawr,
Pennsylvania. He is also chairman of the board of
directors of Petroferm, Inc., a director of
Independence Seaport Museum and Lankenau Hospital
Foundation, and a Trustee Emeritus of Ursinus
College.
Eugene G. Monaco............ Mr. Monaco is currently a director of NLCI. From
January 1, 1990 until his retirement in late
1995, Mr. Monaco served as a Judge for the
Delaware County District Court of Pennsylvania.
He also served as an Instructor in Kinematics and
Dynamics at Drexel University, a Lecturer in
child abuse at Penn State University, and was the
Chief Negotiator for the Rose Tree Media School
Board. Mr. Monaco has also served as Assistant
District Attorney in Media, Pennsylvania and
Engineering Negotiator for Westinghouse Electric
for 32 years. Mr. Monaco has both a J.D. from
Temple Law School and a M.S. in Mechanical
Engineering from the University of Delaware.
Daniel L. Russell........... Mr. Russell is a Principal in the Private Finance
Group at Allied Capital Corporation. Prior to
joining Allied in 1998, Mr. Russell served in the
financial services practice of KPMG Peat Marwick
LLP from 1992 to 1998, including serving as a
Senior Manager from 1996 to 1998. Mr. Russell is
also a director of The Hillman Group, STS
Operating Inc. (dba: SunSource Technology
Services, Inc.) and HealthASPex. Mr. Russell is a
Certified Public Accountant.
E-3
APPENDIX F
INFORMATION RELATING TO THE DIRECTORS, OFFICERS AND AFFILIATES OF
SOCRATES, GRYPHON, GRYPHON PARTNERS II-A, L.P. AND CADIGAN
Socrates Acquisition Corporation
The name, position and principal occupation or employment, business address
and material occupations, positions, offices or employment for the past five
years, of each director or executive officer of Socrates are set forth below.
Except as noted below, each such individual is a citizen of the United States.
NAME PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
FIVE-YEAR EMPLOYMENT HISTORY
Jeffrey L. Ott, director, Mr. Ott is a Principal of Gryphon Investors. Prior to joining Gryphon in 2001,
co-president, treasurer and Mr. Ott was a Managing Director and Partner of DB Capital Partners, Inc., the
assistant secretary........ U.S. merchant banking group of Deutsche Bank. Mr. Ott's business address is
c/o Gryphon Partners II, L.P., One Embarcadero Center, Suite 2750, San
Francisco, California, 94111 and his business telephone number is (415)
217-7400.
David Luttway, director, Mr. Luttway is vice president of Cadigan. Prior to joining Cadigan,
co-president, secretary and Mr. Luttway was a Partner of BFL Capital, LLC, an investment and advisory
assistant treasurer........ firm, from April 2000 to May 2001. Previously, Mr. Luttway was a vice
president of Schroder & Co., Inc., an investment bank. Mr. Luttway's
business address is c/o Cadigan Investment Partners, Inc., 712 Fifth Avenue,
45th Floor, New York, New York, 10019 and his business telephone number
is (212) 405-5051. Mr. Luttway is a citizen of France.
Gryphon Partners II, L.P. and Gryphon Partners II-A, L.P.
The general partner of each of Gryphon Partners II, L.P. and Gryphon
Partners II-A, L.P. is Gryphon GenPar II, LLC, a Delaware limited liability
company, the principal business of which is serving as the general partner of
Gryphon. The managing member of Gryphon GenPar II, LLC is Gryphon Investors II,
LLC, a Delaware limited liability company, the principal business of which is
serving as the managing member of Gryphon GenPar II, LLC. The managing member
of Gryphon Investors II, LLC is R. David Andrews. The business address of
Gryphon GenPar II, LLC, Gryphon Investors II, LLC and R. David Andrews is One
Embarcadero Center, Suite 2750, San Francisco, California, 94111 and the
business telephone number of such persons is (415) 217-7400.
NAME PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-
YEAR EMPLOYMENT HISTORY
R. David Andrews Mr. Andrews is President and Managing General Partner of Gryphon Investors,
which he founded in 1995. Mr. Andrews is a director of Allied Security, Inc. and
The Kinetics Group, Inc. Mr. Andrews is a citizen of the United States.
Cadigan Investment Partners, Inc.
The name, position and principal occupation or employment, business address
and material occupations, positions, offices or employment for the past five
years, of each director or executive officer of Cadigan are set forth below.
Except as noted below, the business address of each director and executive
officer of Cadigan is Cadigan Investment Partners, Inc., 712 Fifth Avenue, 45th
Floor, New York, New York, 10019, and the business
F-1
telephone number of such persons is (212) 405-5050. Except as noted below, each
such individual is a citizen of the United States.
NAME PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
FIVE-YEAR EMPLOYMENT HISTORY
Michael Tokarz Michael Tokarz has been a director and chairman of the board and investment
committee of Cadigan since July 2002. Since February 2002, he has been the
managing member of The Tokarz Group, LLC, which manages Mr. Tokarz's
personal venture capital investments. From January 1996 until February 2002,
Mr. Tokarz was a member of the limited liability company which serves as
the general partner of Kohlberg Kravis Roberts & Co. L.P. Mr. Tokarz is a
director of Walter Industries, Inc. and IDEX Corporation. Mr. Tokarz's
business address is 287 Bowman Avenue, Purchase, New York, 10577 and his
business telephone number is (914) 251-1825.
Pericles Navab Mr. Navab is a director and president of Cadigan. Prior to joining Cadigan,
Mr. Navab was a Principal at Arena Capital Partners, LLC, a leveraged
buyout firm, from January 1999 to December 2000. Previously, Mr. Navab
was a Principal at GarMark Partners, a private investment firm, from August
1996 to December 1998. Mr. Navab is also a director of American Coin
Merchandising, Inc.
David Luttway. Mr. Luttway is a vice president of Cadigan. Prior to joining Cadigan,
Mr. Luttway was a Partner of BFL Capital, LLC, an investment and advisory
firm, from April 2000 to May 2001. Previously, Mr. Luttway was a vice
president of Schroder & Co., Inc., an investment bank. Mr. Luttway is a
citizen of France.
F-2
NOBEL LEARNING COMMUNITIES, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
____________, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS, that the undersigned stockholder of
NOBEL LEARNING COMMUNITIES, INC., a Delaware corporation, does hereby constitute
and appoint and , or any one of them, with full power or
substitution, to act alone and to designate substitutes, the true and lawful
attorneys and proxies of the undersigned for and in the name and stead of the
undersigned, to vote all shares of stock of Nobel Learning Communities, Inc.
that the undersigned would be entitled to vote if personally present at the
Special Meeting of Shareholders to be held at , on , 2002 at
a.m., local time, and at any and all adjournments, postponements and
continuations thereof, upon and in respect of the following matters and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
THE PROPOSALS AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
Please mark your vote as indicated in this example [X]
ITEM 1. APPROVAL OF AGREEMENT AND PLAN OF MERGER
To approve and adopt the Agreement and Plan of Merger, dated as of August 5,
2002, as amended as of , 2002, between Nobel Learning Communities, Inc. and
Socrates Acquisition Corporation, and the merger contemplated thereby, pursuant
to which Socrates Acquisition Corporation will be merged with and into Nobel
Learning Communities, Inc., with Nobel Learning Communities, Inc. as the
surviving corporation.
FOR AGAINST ABSTAIN
[_] [_] [_]
ITEM 2. POSTPONEMENTS OR ADJOURNMENTS
In their discretion, the proxies are authorized to vote in favor of any
postponements or adjournments of the meeting, if necessary.
FOR AGAINST ABSTAIN
[_] [_] [_]
NOTE: PLEASE DATE THIS PROXY, SIGN YOUR NAME EXACTLY AS IT APPEARS HEREON, AND
RETURN PROMPTLY USING THE ENCLOSED POSTAGE PAID ENVELOPE.
JOINT OWNERS SHOULD EACH SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. WHEN SIGNING
AS AN ENTITY, PLEASE GIVE NAME OF ENTITY AND HAVE A DULY AUTHORIZED PERSON SIGN,
STATING TITLE.
Signature(s) ___________________________________ Date __________________
Signature(s) ___________________________________ Date __________________