SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: December 31, 2000
Commission File Number 1-1003
NOBEL LEARNING COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2465204
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1400 N. Providence Road, Suite 3055, Media, PA 19063
(Address of principal executive offices) (Zip Code)
(610) 891-8200
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all report(s) required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- ----------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,192,898 shares of Common
Stock outstanding at February 14, 2001.
INDEX TO FORM 10-Q
Nobel Learning Communities, Inc.
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets,
December 31, 2000 (unaudited) and June 30, 2000.................. 2
Consolidated Statements of Income for the
six months ended December 31, 2000 (unaudited)
and 1999 (unaudited)............................................. 3
Consolidated Statements of Income for the
three months ended December 31, 2000 (unaudited)
and 1999 (unaudited)............................................. 4
Consolidated Statements of Cash Flows for the
six months ended December 31, 2000 (unaudited)
and 1999 (unaudited)............................................. 5
Notes to Consolidated Interim Financial Statements............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................14
Item 4. Submission of Matters to Vote of Security Holders.................15
Item 6. Exhibits and Reports on Form 8-K..................................17
2
PART I
Financial Information
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
The Company's fiscal 2001 outlook and all other statements in this report other
than historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company believes
that its assumptions are reasonable, it cautions that there are inherent
difficulties in predicting the impact of certain factors, especially those
affecting the acceptance of the Company's newly developed and converted schools
and performance of recently acquired businesses, which could cause actual
results to differ materially from predicted results.
1
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
Current Assets December 31,2000 June 30,2000
- -------------------------------------------------------- ---------------- ------------
Cash and cash equivalents $ 3,175 $ 3,798
Accounts receivable, less allowance for 2,510 2,187
doubtful accounts of $293 and $288 in December and June of 2000 respectively
Real estate under contract 868 0
Prepaid rents 2,129 1,591
Other prepaid expenses 1,035 772
----------------- -------------
Total Current Assets 9,717 8,348
----------------- -------------
Property, & equipment at cost 51,530 45,392
Accumulated depreciation (18,236) (16,304)
----------------- -------------
Total Property & Equipment 33,294 29,088
Property and equipment held for sale 9,629 8,078
Goodwill 50,231 49,794
Deposits and other assets 3,953 3,250
----------------- -------------
Total Assets $ 106,824 $ 98,558
================= =============
Liabilities and Stockholders' Equity
- ---------------------------------------------------------
Current portion of long-term obligations $ 7,624 $ 6,230
Accounts payable and other current liabilities 8,893 8,994
Cash overdraft liability 4,215 3,768
Deferred revenue 7,383 6,235
----------------- -------------
Total Current Liabilities 28,115 25,227
----------------- -------------
Long-term obligations 28,777 23,260
Long-term subordinated debt 12,216 12,892
Deferrred gain on sale/leaseback 17 20
Minority interest in consolidated subsidiary 582 601
----------------- -------------
Total Liabilities 69,707 62,000
Stockholders' Equity:
Preferred Stock, $.001 par value; 10,000,000 shares authorized, issued and
outstanding 4,587,524 at December 31, 2000, and June 30, 2000;
$5,524 aggregate liquidation preference at December 31, 2000 5 5
and June 30, 2000.
Common Stock, $.001 par value, 20,000,000 shares authorized, issued and
outstanding 6,170,299 at December 31, 2000 and 6,126,168 at June 30, 2000. 6 6
Treasury Stock, cost; 230,510 shares (1,375) (1,375)
Additional paid in capital 39,662 39,256
Accumulated deficit (1,181) (1,334)
----------------- -------------
Total Stockholders' Equity 37,117 36,558
----------------- -------------
Total Liabilities & Stockholders' Equity $ 106,824 $ 98,558
================= =============
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
2
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the six months ended December 31, 2000 and 1999
---------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
2000 1999
----------- ----------
Revenues $ 69,954 $ 58,877
Total operating expenses 62,631 51,942
------------ -----------
School operating profit 7,323 6,935
General and administrative expenses 5,082 4,500
------------ -----------
Operating income 2,241 2,435
Interest expense 2,186 1,619
Other income (258) (82)
Minority interest in earnings of consolidated subsidiary (19) 36
------------ -----------
Income before taxes 332 862
Income taxes 139 362
------------ -----------
Net income 193 500
============ ===========
Preferred stock dividends $ 40 $ 41
------------ -----------
Net income available to common stockholders $ 153 $ 459
============ ===========
Basic earnings per share $ 0.03 $ 0.08
============ ===========
Diluted earnings per share $ 0.03 $ 0.07
============ ===========
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
3
Nobel Learning Communities Inc. and Subsidiaries
Consolidated Statements Of Income
for the three months ended December 31, 2000 and 1999
-----------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
2000 1999
--------------- --------------
Revenues $ 37,265 $ 31,532
Total operating expenses 33,115 27,324
--------------- --------------
School operating profit 4,150 4,208
General and administrative expenses 2,573 2,379
--------------- --------------
Operating income 1,577 1,829
Interest expense 1,134 815
Other income (260) (63)
Minority interest in earnings of consolidated subsidiary (12) 16
--------------- --------------
Income before taxes 715 1,061
Income taxes 300 446
--------------- --------------
Net income 415 615
=============== ==============
Preferred stock dividends $ 19 $ 21
--------------- --------------
Net income available to common stockholders $ 396 $ 594
=============== ==============
Basic earnings per share $ 0.07 $ 0.10
=============== ==============
Diluted earnings per share $ 0.06 $ 0.08
=============== ==============
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report on Form 10-K are an integral part of these financial
statements.
4
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the six months ended December 31, 2000 and 1999
-------------------------------------------------------
(Dollars in thousands)
(unaudited)
2000 1999
----------- ----------
Net Cash Provided By Operating Activities $ 1,558 $ 4,668
Cash Flows From Investing Activities:
Proceeds from sale of real estate 3,672 1,289
Capital expenditures (11,477) (6,346)
Payment for acquisitions (536) (2,363)
----------- ----------
Net Cash Provided By (Used In) Investing Activities: (8,341) (7,420)
----------- ----------
Cash Flows From Financing Activities:
Repayment of capital lease obligation (48) (45)
Payments of dividends on preferred stock (40) (41)
Proceeds from long term debt 9,171 8,604
Repayment of long term debt (2,659) (5,546)
Repayment of subordinated debt (711) (516)
Cash Overdraft 447 0
----------- ----------
Net Cash Provided by Financing Activities: 6,160 2,456
----------- ----------
Net increase (decrease) in cash and cash equivalents (623) (296)
Cash and cash equivalents at the beginning of the period 3,798 1,640
----------- ----------
Cash and cash equivalents at the end of the period $ 3,175 $ 1,344
=========== ==========
The accompanying notes and the notes in the financial statements included in the
Registrant's Annual Report Form 10-K are an integral part of these consolidated
financial statements.
5
NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
for the six months ended December 30, 2000 and 1999
(unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The consolidated financial statements have been prepared by the Registrant
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the financial
position and results of operations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with the
generally accepted accounting principals have been condensed or omitted pursuant
to such SEC rules and regulations. It is suggested that these financial
statements are read in conjunction with the consolidated financial statements
and notes thereto included in the Registrant's Annual Report on Form 10-K for
the year ended June 30, 2000.
Due to the inherent seasonal nature of the education and child care businesses,
annualization of amounts in these interim financial statements may not be
indicative of the actual operating results for the full year.
Certain prior period adjustments have been reclassified to conform to the
current year's presentation.
The Company manages its business based on geographical regions within the United
States. Under SFAS 131, "Segment Reporting", the Company has aggregated these
regions based on management's belief that these regions have met the aggregation
criteria set forth in the standard.
Note 2 - Earnings Per Share
- ---------------------------
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. In the calculation
of dilutive earnings per share, shares outstanding are adjusted to assume
conversion of the Company's non-interest bearing convertible preferred stock if
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.
6
For the Three Months December 31, For the Six Months December 31,
--------------------------------- -------------------------------
2000 1999 2000 1999
--------------------------------- -------------------------------
Basic earnings per share
- --------------------------------------
Net income $ 415 $ 615 $ 193 $ 500
Less preferred dividends $ 19 $ 21 $ 40 $ 41
------------- ------------- ------------- -------------
Net income available for
common stock $ 396 $ 594 $ 153 $ 459
------------- ------------- ------------- -------------
Average common stock 5,975 5,929 5,967 5,928
outstanding
Basic earnings per share $ 0.07 $ 0.10 $ 0.03 $ 0.08
------------- ------------- ------------- -------------
Dilutive earnings per share
- --------------------------------------
Net income available for
common stock and dilutive securities $ 415 $ 615 $ 193 $ 500
------------- ------------- ------------- -------------
Average common stock
outstanding 5,975 5,929 5,967 5,928
Options,warrants and
and convertible securities 1,433 1,443 1,433 1,443
------------- ------------- ------------- -------------
Average common stock and
dilutive securities outstanding 7,408 7,371 7,400 7,371
Dilutive earnings per share $ 0.06 $ 0.08 $ 0.03 $ 0.07
------------- ------------- ------------- -------------
7
Note 3 - Acquisitions
- ---------------------
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
44,131 shares of the Company's Common Stock (valued at $9.20 per share).
Note 4 - Commitments and Contingencies
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
will not have a material adverse effect on the Company's consolidated financial
position. The significance of these matters on the Company's future operating
results and cash flows depends on the level of future results of operations and
cash flows as well as on the timing and amounts, if any, of the ultimate
outcome.
The Company carries fire and other casualty insurance on its schools and
liability insurance in amounts which management believes are adequate for its
operations. As is the case with other entities in the education and preschool
industry, the Company cannot effectively insure itself against certain risks
inherent in its operations. Some forms of child abuse have sublimits per claim
in the general liability coverage.
8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
For the Six Months Ended December 31, 2000 vs the Six Months ended December 31,
1999
Currently, the Company operates 168 schools. Since June 2000 through February
2001, the Company has opened 23 new schools: two elementary schools, eleven
preschools, seven schools for learning challenged (the Paladin Academy schools),
three charter schools. During the last twelve months, the Company has acquired
the assets of four preschools, one school for the learning challenged and an
educational products company ("The Activities Club"). The Company has also
closed three underperforming schools.
Revenues for the six months ended December 31, 2000 increased $11,077,000 or
18.8% to $69,954,000 from $58,877,000 for the six months ended December 31,
1999. The increase in revenues is primarily attributable to the increase in
enrollment, tuition increases and the increase in the number of new and acquired
schools and businesses.
Same school revenue (schools that were opened in both periods) increased
$4,810,000 or 8.3% in the six months ended December 31, 2000 compared to the
same period of the prior year. This increase is related to tuition and
enrollment increases and the maturing of schools opened in 1999. The increase in
revenues related to the 23 new schools opened totaled $5,100,000. Schools and
businesses acquired during the last twelve months contributed additional
revenues of $2,170,000. These increases were offset by a decrease in revenues of
$1,003,000 related to the schools closings.
School operating profit for the six months ended December 31, 2000 increased
$388,000 or 5.6% to $7,323,000 from $6,935,000 for the six months ended December
31, 1999. Total school operating profit as a percentage of revenue decreased
from 11.8% to 10.5%.
Same school operating profit increased $1,606,000 or 22.9%. Same school
operating profit margin improved from 12.1% for the six months ended December
31, 1999 to 13.8% for the six months ended December 31, 2000. The increase in
same school operating profit is due to the revenue increases, lower operating
expenses and the maturing of the schools opened in 1999. For the six months
ended December 31, 2000 new schools incurred losses of $939,000. Included in
these losses were $643,000 associated with the two Arizona based charter
schools. The losses associated with the Arizona schools are attributable to
lower than expected enrollment. Schools and businesses acquired in the last
twelve months decreased school operating income by $275,000. This decrease is
attributable to the seasonal nature of The Activities Club. School product sales
are highest during the last fiscal quarter (April to June) as this is the time
period schools place orders for the next school year. The net effect of school
closings decreased school operating profit by $4,000.
General and administrative expenses increased $582,000 or 12.9% from $4,500,000
for the six months ended December 31, 1999 to $5,082,000 for the six months
ended December 31, 2000. As a percentage of revenue, general and administrative
expense decreased from 7.6% at December 31, 1999 to 7.3% at December 31, 2000.
This increase in general and administrative expenses was primarily related to
management additions necessary to support the continued growth in the Company's
specialty school and charter school strategies.
9
Operating income decreased $194,000 or 8.0% from $2,435,000 for the six months
ended December 31, 1999 to $2,241,000 for the six months ended December 31,
2000. The decrease is the result of a decrease in school operating profit as
described above and the increase in general and administrative expenses.
For the six months ended December 31, 2000, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $5,694,000. This
represents an increase of $439,000 over the comparable period. EBITDA is not a
measure of performance under generally accepted accounting principals, however
the Company and the investment community consider it an important calculation.
Interest expense increased $567,000 or 35.0% from $1,619,000 for the six months
ended December 31, 1999 to $2,186,000 for the six months ended December 31,
2000. The increase is due to increased interest rates on the Company's credit
facility and increased borrowings for acquisitions, new school development and
to fund the development of its new charter schools. This increase was offset by
a reduction in interest expense on seller subordinated debt.
Other income increased $176,000 due to interest income from investments in
minority owned school and business.
Income before taxes decreased 61.5% from $862,000 for the six months ended
December 31, 1999 to $332,000 for the six months ended December 31, 2000.
Income tax expense totaled $139,000 for the six months ended December 31, 2000
which reflects a 42% effective tax rate.
For the Second Quarter Ended December 31, 2000 vs the Second Quarter ended
December 31, 1999
Revenues for the second quarter ended December 31, 2000 increased $5,733,000 or
18.2% to $37,265,000 from $31,532,000 for the second quarter ended December 31,
1999. The increase in revenues is primarily attributable to the increase in
enrollment and to a lesser extent the increase in the number of schools.
Same school revenue (schools that were opened in both periods) increased
$1,592,000 or 5.1% in the three months ended December 31, 2000 compared to the
same period of the prior year. This increase is related to tuition and
enrollment increases and the maturing of schools opened in 1999. The increase in
revenues related to the 23 new schools opened totaled $3,369,000. Schools and
businesses acquired during the last twelve months contributed additional
revenues of $1,143,000 in the second quarter. These increases were offset by a
decrease in revenues of $371,000 related to the schools closings as compared to
the same period in the prior year.
School operating profit for the second quarter ended December 31, 2000 decreased
$58,000 or 1.4% to $4,150,000 from $4,208,000 for the second quarter ended
December 31, 1999. Total school operating profit margin decreased from 13.3% to
11.1%.
10
Same school operating profit increased $300,000 or 7.1%. Same school operating
profit margin improved from 13.5% for the three months ended December 31, 1999
to 13.7% for the three months ended December 31, 2000. The increase in same
school operating profit is due to the revenue increases, lower operating
expenses and the maturing of the schools opened in 1999. For the three months
ended December 31, 2000 new schools incurred losses of $190,000. Included in
these losses were $288,000 associated with the two Arizona based charter
schools. The losses associated with the Arizona schools are attributable to
lower than expected enrollment. Schools and businesses acquired in the last
twelve months decreased school operating income by $147,000. This decrease is
attributable to the seasonal nature of The Activities Club. School product sales
are highest during the last fiscal quarter (April to June) as this is the time
period schools place orders for the next school year. The net effect of school
closings decreased school operating profit by $21,000 as compared to the same
period in the prior year.
General and administrative expenses increased $194,000 or 8.2% from $2,379,000
for the second quarter ended December 31, 1999 to $2,573,000 for the second
quarter ended December 31, 2000. As a percentage of revenue, general and
administrative expense decreased from 7.5% at December 31, 1999 to 6.9% at
December 31, 2000.
Operating income decreased $252,000 or 13.8% from $1,829,000 for the quarter
ended December 31, 1999 to $1,577,000 for the quarter ended December 31, 2000.
The decrease is the result of a decrease in school operating profit as described
above and by the increase in general and administrative expenses and increased
new school development cost.
For the second quarter of fiscal 2000, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $3,476,000. This
represents an increase of $175,000 over the comparable period. EBITDA is not a
measure of performance under generally accepted accounting principals, however
the Company and the investment community consider it an important calculation.
Interest expense increased $319,000 or 39.1% from $815,000 for the quarter ended
December 31, 1999 to $1,134,000 for the quarter ended December 31, 2000. The
increase is due to increased interest rates on the Company's credit facility and
increased borrowings for acquisitions, new school development and to fund the
development of its new charter schools. This increase was offset by a reduction
in interest expense on seller subordinated debt.
Other income increased $197,000 due to interest income from investments in
minority owned schools and business.
Income before taxes decreased 32.6% from $1,061,000 for the quarter ended
December 31, 1999 to $715,000 for the quarter ended December 31, 2000.
Income tax expense totaled $300,000 for the quarter ended December 31, 2000,
which reflects a 42% effective tax rate.
11
Liquidity and Capital Resources
- -------------------------------
Management is pursuing a four-pronged growth strategy for the Company, which
includes (1) internal growth of existing schools through the expansion of
certain facilities, (2) new school development in both existing and new markets,
(3) strategic acquisitions, and (4) development of new education businesses. The
Company's principal sources of liquidity are (1) cash flow generated from
operations, (2) available borrowings under the Company's $35.0 million Amended
and Restated Loan and Security Agreement, (3) the use of site developers to
build schools and lease them to the Company, and (4) issuance of subordinated
indebtedness or shares of common stock to sellers in acquisition transactions.
The Company identifies growth markets through both extensive demographic studies
and an analysis of the existing educational systems in the area. The Company
seeks to grow through a cluster approach whereby several preschools feed into an
elementary school.
In order for the Company to continue its acquisition strategy and development of
new education business, the Company will continue to seek additional funds
through debt and equity financing. Also, the Company and its senior lender are
currently negotiating to increase the Company's available borrowing by
$15,000,000.
The Company anticipates that its existing principal credit facilities, cash
generated from operations and from anticipated proceeds of sale and leaseback
transactions relating to certain real properties, and continued support of site
developers to build and lease schools will be sufficient to satisfy working
capital needs, capital expenditures and renovations and the building of new
schools in the near term future. If the Company is unsuccessful in consummating
the increase in available senior lender borrowings referenced above or such sale
and leaseback transactions, it may need to postpone certain capital
expenditures. If neither of these transactions occur on a timely basis, the
Company may have to seek a temporary postponement on certain senior debt
repayments until one of the transactions mentioned above are consummated.
Adverse consequences to the Company of any such postponement would be related to
the period of delay and the amount of the capital expenditures postponed.
In March 1999 the Company entered into an Amended and Restated Loan and Security
Agreement which increased the Company's available borrowing to $35,000,000. Four
separate facilities were established under the Amended and Restated Loan and
Security Agreement: (1) $7,000,000 Working Capital Credit Facility A, (2)
$3,000,000 Working Capital Credit Facility B (which is tied to the Company's
cash management arrangement), (3) $15,000,000 Acquisition Credit Facility and
(4) $10,000,000 Term Loan.
Working Capital Credit Facility A and B funds are available until March 2002.
Under the Acquisition Credit Facility, no principal payments are required until
March 2001. At that time the outstanding principal under the Acquisition Credit
Facility will be converted into a term loan which will require principal
payments in 16 quarterly installments.
Under the Term Loan Facility, quarterly principal payments of $250,000 were
required the four quarters from April 2000 through January 2001; thereafter
quarterly installment of $562,500 are required until January 2005.
At December 31, 2000, $8,236,000 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $14,243,000 was outstanding
under the Acquisition Credit Facility and $9,250,000 was outstanding under the
Term Loan.
In October and November 2000, the Company received a total of approximately
$2,800,000 from two transactions. The Company was reimbursed for its leasehold
improvements for one of its charter schools and entered into a sale and
leaseback transaction for one of its private schools.
12
Total cash and cash equivalents decreased $623,000 from $3,798,000 at June 30,
2000 to $3,175,000 at December 31, 2000. The net decrease was related to an
increase in cash provided from operations totaling $1,558,000 and borrowings on
the senior credit facility of $9,172,000 offset by $11,471,000 in capital
expenditures for new school openings, charter schools and acquisitions.
The working capital deficit increased $1,519,000 from $16,879,000 at June 30,
2000 to $18,398,000 at December 31, 2000. The increase is primarily the result
of the increase in deferred revenue totaling $1,148,000, an increase of
$1,394,000 in current maturities in long term debt, and an increase in cash
overdraft liability of $447,000. These increases were offset by an increase of
$538,000 in prepaid rents, an increase of $323,000 in accounts receivable and an
increase in real estate under contract of $868,000. The increase in deferred
revenues is related to the prepayment of annual and semi-annual tuition by
parents at the beginning of the school year. The increase in current maturities
of long term debt is due to payments that will be required to be paid on the
Company's senior credit facility over the next twelve months.
Recently Issued Accounting Standards
- ------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. The new standard
becomes effective for the Company's fiscal year 2002. The Company does not
believe the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, which
provides guidance related to revenue recognition. SAB 101 allows companies to
report any changes in revenue recognition related to adopting its provisions as
an accounting change at the time of implementation in accordance with Accounting
Principles Board Opinion No. 20, Accounting Changes. SAB 101 becomes effective
for the fourth quarter of the Company's fiscal year 2001, however, early
implementation is acceptable. The Company does not believe the adoption of SAB
No. 101 will have a material impact on its financial position or results of
operations.
13
Part II
-------
Other Information
Item 1 - Legal Proceedings
On September 1, 2000, the Company took part in the filing of a lawsuit
entitled Nobel Learning Communities, Inc. and Paladin Academy, LLC v.
------------------------------------------------------------
Developmental Resource Center, Inc., Dr. Deborah Levy,. L.D. Learning.Com and
- -----------------------------------------------------------------------------
Emily Levy, Case No. 00-3286 CIV-KING, filed in the federal district court for
- ----------
the Southern District of Florida. The eleven count complaint alleges that two
employees of Developmental Resource Center, Inc. ("DRC"), Dr. Deborah Levy ("Dr.
Levy") and Emily Levy ("Ms. Levy"), created eleven educational books (the
"Books"), within the course and scope of their employment for DRC. The complaint
also alleges that the copyrights to the Books were transferred by DRC to Paladin
Academy, LLC ("Paladin"), pursuant to an agreement and plan of organization
signed by the Company, DRC and Dr. Levy on June 19, 1998 (the "Organization
Agreement"). In exchange, the complaint alleges that DRC received, among other
things, a twenty percent limited liability interest in Paladin (the "DRC
Membership Interest"). The complaint therefore first asks the court to enter a
judgment declaring that Paladin is the owner of the copyrights to the Books.
The complaint then asks the court to award damages to the Company as a
result of DRC's and Dr. Levy's alleged breach of certain representations and
warranties in the Organization Agreement. Next, the complaint asks the court to
award damages to the Company and to Paladin for alleged violations by DRC and
Dr. Levy of the State of Florida's Deceptive and Unfair Practices Act and
Florida's unfair competition laws. Two of the remaining counts in the complaint
deal with Dr. Levy's alleged breaches while an employee of Paladin. One seeks
damages in favor of Paladin because of Dr. Levy's alleged fraud in causing
Paladin to purchase the Books from an outside source, despite the fact that
Paladin is the owner of the copyrights to the Books. The other seeks injunctive
relief for breach of employment contract on the basis that Dr. Levy was
allegedly competing with Paladin and was diverting Paladin's business
opportunities for her own benefit. Another of the counts in the complaint is for
civil conspiracy against all of the defendants, including Ms. Levy and
LDLearning.com ("LD Learning"), Ms. Levy's company, for allegedly conspiring to
register some of the copyrights to the Books in the name of LD Learning and for
selling and distributing the Books without Paladin's consent. The last count in
the complaint alleges that based on Dr. Levy's breaches of her employment
agreement with Paladin, Nobel is entitled to repurchase the DRC Membership
Interest in accordance with the formula set forth in the Agreement of Operation
of Nobel Learning Solutions, LLC, entered into between DRC and Nobel on August
14, 1998 (the "Operation Agreement").
On October 10, 2000, the defendants filed an answer and affirmative
defenses to the complaint. The defendants generally denied the allegations and
asserted thirteen affirmative defenses. On November 17, 2000, DRC, Dr. Levy and
LD Learning filed a fifteen count amended counterclaim. The amended counterclaim
alleges, among other things, that Paladin's termination of Dr. Levy's employment
was not "for cause" and that, therefore, Nobel is not entitled to repurchase the
DRC Membership Interest and that its efforts to do so constitute conversion of
the DRC Membership Interest. In the Counterclaim, DRC and Dr. Levy also sue the
Company for breach of fiduciary duty, breach of the Operation Agreement, for an
accounting (for allegedly conspiring with Paladin to terminate Dr. Levy, for
violating the non-compete provision of the Operation Agreement and for
14
failing to provide financial information), and for breach of the Guarantees of
Payment to DRC and to Dr. Levy. Dr. Levy has sued Paladin for breach of the
employment agreement for allegedly terminating her without cause and for
requiring her to perform tasks outside the terms of the employment agreement.
The Amended Counterclaim also alleges that Dr. Levy was terminated in violation
of Florida's Whistle Blower Law. Lastly, LD Learning has sued Paladin for
copyright infringement alleging that Paladin has used the Books without
permission.
On December 4, 2000, the defendants filed Answer and Affirmative Defenses
to Defendants' Amended Counterclaim, answering only certain of the counts in the
Amended Counterclaim. In addition, the defendants filed a Motion to Dismiss
Counts II, IV, IX and X of the Amended Counterclaim. The Motion to Dismiss is
now fully briefed but has not been ruled upon by the court.
Discovery in this lawsuit has commenced with the parties exchanging
documents that they believe support their claims and making initial disclosures
of possible witnesses. Trial in this matter has been scheduled to commence at
any time after October 26, 2001.
The Company is in the process of assessing the alleged merits of the
counterclaim but believes them to be without substantial support at this time.
The Company is currently being represented by the law firm of Duane, Morris &
Heckscher, LLP. The Company intends to vigorously pursue its claims set forth in
the complaint and to vigorously defend against the counterclaim.
Item 4 - Submission of Matters to Vote of Security Holders
A. An annual meeting of the stockholders of the Company was held on November
16, 2000. The total shares eligible to vote on the record date included
5,976,599 shares of Common Stock, 1,023,694 shares of Series A Preferred
Stock, 2,500,000 shares of Series C Preferred Stock and 1,063,830 shares of
Series D Preferred Stock. Each share of Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock is convertible into 0.294,
0.25 and 0.25 shares of Common Stock, respectively. These shares represent
a total of 7,168,523 votes.
B. At the meeting:
1. Election of Director
--------------------
Three directors (John R. Frock, Eugene G. Monaco, and Robert E. Zobel) were
elected to serve until the 2003 Annual Meeting. The term of office of
Edward Chambers, A.J. Clegg and Peter Havens continues until the 2002
Annual Meeting. The term of office of Pamela S. Lewis and William L. Walton
continues until the 2001 Annual Meeting.
15
2. Ratification of Independent Auditors
------------------------------------
The selection of PricewaterhouseCoopers, LLP as the Company's independent
auditors for fiscal 2001 was approved by the requisite vote, the votes cast
being as follows:
Voted for 4,832,388
Voted against 0
Withheld 0
Abstentions 2,325
Broker Non-votes 0
---------------
4,834,713
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOBEL LEARNING COMMUNITIES, INC.
Dated: February 14, 2001 By: /s/ William E. Bailey
-----------------------------------
William E. Bailey
Vice President/Chief Financial Officer
(duly authorized officer and
principal financial officer)
Exhibits
Exhibit
Number Description of Exhibit
27 Financial Data Schedule