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: SEPTEMBER 30, 1998
Commission File Number 1-1003
NOBEL EDUCATION DYNAMICS, 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: 6,121,365 shares of Common
Stock outstanding at November 5, 1998.
INDEX TO FORM 10-Q
Nobel Education Dynamics, Inc.
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets,
September 30, 1998 (unaudited) and June 30, 1998................ 2
Consolidated Statements of Income for the
three months ended September 30, 1998 (unaudited)
and 1997 (unaudited)............................................ 3
Consolidated Statements of Cash Flows for the
three months ended September 30, 1998 (unaudited)
and 1997 (unaudited)............................................ 4
Notes to Consolidated Interim Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 6
PART II. OTHER INFORMATION
2
PART I
FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company's fiscal 1999 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 EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
September 30, June 30,
ASSETS 1998 1998
- ------ -------------------- ---------------------
Cash and cash equivalents $ 4,474 $ 408
Accounts receivable, less allowance for doubtful accounts of $133 1,193 1,130
Prepaid rent 126 1,276
Prepaid insurance and other 450 738
------- -------
Total Current Assets 6,243 3,552
------- -------
Property and equipment, at cost 31,752 31,601
Accumulated depreciation (9,961) (9,226)
------- -------
21,791 22,375
Property and equipment held for sale 1,318 1,371
Cost in excess of net assets acquired 46,075 41,753
Deposits and other assets 4,505 3,541
Deferred taxes 1,031 1,031
------- -------
Total Assets $80,963 $73,623
======= =======
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
Current portion of long-term obligations $ 2,297 $ 2,031
Accounts payable and other current liabilities 6,431 8,147
Unearned income 6,549 3,595
------- -------
Total Current Liabilities $15,277 $13,773
------- -------
Long-term obligations 16,206 20,311
Long-term subordinated debt 15,419 6,166
Capital lease obligations 138 162
Deferred gain on sale/leaseback 34 35
Minority interest in consolidated subsidiary 460 440
------- -------
Total Liabilities $47,534 $40,887
------- -------
Stockholders Equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, issued
and outstanding 4,593,542 in September 30, and June 30, 1998
$5,530 aggregate liquidation preference at September 30, 1998 and
June 30, 1998 5 5
Common stock, $.001 par value, 20,000,000 shares authorized, issued and
outstanding 6,121,365 in both September 30, and June 30, 1998 6 6
Treasury Stock, cost; 36,810 shares (375) (375)
Additional paid-in capital 39,239 38,340
Accumulated deficit (5,446) (5,240)
------- -------
Total Stockholders Equity 33,429 32,736
------- -------
Total Liabilities and Stockholders Equity $80,963 $73,623
======= =======
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 EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended September 30, 1998 and 1997
------------------------------------------------------
(Dollars in thousands except per share information)
(unaudited)
1998 1997
---- ----
Revenues $23,911 $18,926
Operating expenses 21,592 17,373
------- -------
School operating profit 2,319 1,553
General and administrative expenses 1,747 1,443
New school development costs 233 118
------- -------
Operating income (loss) 339 (8)
Interest expense 683 462
Other (income) expense (43) 3
Minority interest in earnings of consolidated subsidiary 20 19
------- -------
Income (loss) before income taxes (321) (492)
Income tax expense (benefit) (135) (207)
------- -------
Net income (loss) $ (186) $ (285)
======= =======
Preferred stock dividends $ 21 $ 26
------- -------
Net income (loss) available to common stockholders $ (207) $ (311)
======= =======
Basic earnings (loss) per share $ (0.03) $ (0.05)
======= =======
Dilutive earnings (loss) per share $ (0.03) $ (0.05)
======= =======
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 EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 1998 and 1997
------------------------------------------------------
(Dollars in thousands)
(unaudited)
1998 1997
---- ----
Net Cash Provided by Operating Activities $ 2,518 $ 2,723
Cash flows from Investing Activities:
Capital expenditures (1,134) (6,099)
Proceeds from the sale of real estate 966 150
Payment for acquisitions (3,389) (2,313)
------- -------
Net Cash Used in Investing Activities: (3,557) (8,262)
Cash Flows from Financing Activities:
Repayment of long-term debt (9,702) (144)
Cash proceeds from line of credit 5,460 5,157
Repayment of subordinated debt (608) (146)
Repayment of capital lease obligation (24) (18)
Payments of dividends on preferred stock (21) (26)
Proceeds from subordinated debt 10,000 --
------- -------
Net Cash Provided by Financing Activities: 5,105 4,823
------- -------
Net increase (decrease) in cash and cash equivalents: 4,066 (716)
Cash and cash equivalents at the beginning of period: 408 1,623
------- -------
Cash and cash equivalents at end of the period: $ 4,474 $ 907
======= =======
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.
4
NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
for the three months ended September 30, 1998 and 1997
(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, 1998.
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.
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
- ---------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which established new standards for computations for
earnings per share. The Company adopted the new standard effective December 31,
1997 and restated the prior year calculation accordingly.
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 amounts have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" for September 30,
1997. Because the Company was in a loss position, the dilutive calculation was
antidilutive and therefore the basic calculation was used. Earnings per share
are computed as follows.
September 30, September 30,
1998 1997
---- ----
Basic earnings per share:
Net loss ($186,000) ($285,000)
Less preferred stock dividends (21,000) (26,000)
--------- ---------
Net loss available for common stockholders ($207,000) ($311,000)
5
Average common stock outstanding 6,121,365 6,051,065
Basic loss per share ($0.03) ($0.05)
Note 3 - Debt
- -------------
In July 1998, the company issued a $10,000,000 senior subordinated note to
Allied Capital corporation. The senior subordinated note bears interest at 10.0%
and matures in two installments of principal, $5,000,000 in 2004 and $5,000,000
in 2005. 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 Company recorded a debt discount and allocated
$900,000 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.
Note 4 - Formation of Subsidiary and Acquisition
- -----------------------------------------------
On August 17, 1998, the Company entered into a transaction with Developmental
Resource Center, Inc. (DRC), which is owned 80% by Nobel Education Dynamics,
Inc. and 20% by Dr. Deborah Levy, a recognized leader in the field of special
education programs. The joint venture, Nobel Learning Solutions, LLC acquired
the assets of DRC. The three schools, located in Florida, specialize in full
day programs, summer camps, testing services and clinics for K-8th grade
students who have learning challenges such as dyslexia, attention deficit
disorder (ADD and ADHD) and other learning disabilities.
Note 5 - 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
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 centers 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.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The information presented herein refers to the three months ended September 30,
1998 ("first quarter of fiscal 1999") compared to the three months ended
September 30, 1997 ("comparable period").
Revenues for the first quarter of fiscal 1999 increased $4,985,000 or 26.3% to
$23,911,000. The
6
increase in revenues is primarily due to the increase in the number of schools
added after September 1997. After June 1997, the Company opened 16 new schools
and acquired 12 schools, eight of which were preschool and elementary schools
and four of which were schools for learning challenged children.
The increase in revenues relating to the 16 new school openings totaled
$1,870,000. The increase in revenues relating to the 12 acquired schools
totaled $2,256,000. Same school revenues (schools opened for all of the first
quarter of fiscal 1999 and the comparable period) increased $1,243,000, which is
related to tuition and enrollment increases. The closing of eight schools
offset these increases by $384,000.
School operating profit increased $766,000 or 49.3% to $2,319,000 for the first
quarter of fiscal 1999. As a percentage of revenues, school operating profit
increased to 9.7% in the first quarter of fiscal 1999 from 8.2% in the
comparable period. Same school operating profit increased $679,000. This
increase is attributable to increase in summer enrollments, tuition increases
and improved management of costs. Schools acquired during the last 12 months
contributed only $24,000 because these schools include elementary schools which
did not have established summer programs. Due to the timing of the
acquisitions, the Company was not able to establish a summer program that would
positively effect first quarter results. Start up losses associated with the 16
new schools, eight of which were elementary schools, amounted to $441,000 in the
first quarter of fiscal 1999. School closings positively affected school
operating profit by $79,000.
In the first quarter of fiscal 1999, the Company recognized certain reductions
in insurance and property tax expense that positively affected school operating
profit. Insurance premium cost for the most recently ended policy year were
less that expected by $225,000. Additional savings in insurance premiums are
also expected in the remainder of fiscal 1999 as compared to prior periods as a
result of reduced premium cost. Property tax expense was reduced by $200,000 in
the first quarter of fiscal 1999 as result of over estimated property tax
liability on several properties. The insurance premium savings and the reduced
property tax liability on these properties will also positively affect the
remainder of 1999, but at a significantly smaller amount in subsequent quarters.
New school development cost increased $115,000 to $233,000 in the first quarter
of fiscal 1999 as a result of the number and type of new schools opened and the
timing of the openings.
General and administrative costs increased $304,000 or 21.1% to $1,747,000. The
increase is related to the addition of management in 1997 necessary to improve
the infrastructure of the Company to support the growth in the number of
schools. As a percentage of revenue, general and administrative expenses
decreased to 7.3% for the first quarter of fiscal 1999 from 7.6% in the
comparable period.
For the first quarter of fiscal 1999, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $1,536,000. This
represents an increase of $760,000 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 $221,000 to $683,000 for the first quarter of fiscal
1999. This increase is the result of additional borrowings related to
acquisitions and an increase in the Company's average interest rate due to the
$10,000,000 senior subordinated note issued in July 1998 which bears interest at
10%.
The income tax benefit totaled $135,000 in the first quarter of fiscal 1999,
which represents a 42% effective tax rate.
7
Liquidity and Capital Resources
- -------------------------------
Management is continuing to pursue a three-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 and (3) strategic acquisitions. The Company's principal sources of
liquidity are (1) cash flow generated from operations, (2) future borrowings
under the Company's $25,000,000 revolving line of credit, (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 anticipates that its existing 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 in the near term
future.
At September 30, 1998, the principal amounts outstanding under the Revolving and
Term Facilities were $15,286,000.
In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation ("Note"). The net proceeds were used to reduce the
outstanding balance of the Company's Revolving and Term Facilities. The Note
bears interest at 10% and matures in two installments of principal: $5,000,000
in 2004 and $5,000,000 in 2005. 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 Company
recorded a debt discount and allocated $900,000 of the proceeds of the
transaction to the value of the warrants. The debt discount is being amortized
to interest expense over the term of the Note.
Total cash and cash equivalents increased $4,066,000 in the first quarter of
fiscal 1999 to $4,474,000. The increase is a function of an increase in
deferred revenue and accounts payable.
Net cash flow from operations decreased slightly by $205,000 to $2,518,000 in
the first quarter of fiscal 1999 as a result of an increase in accounts
receivable and other assets.
The working capital deficit equaled $8,003,000 at September 30, 1998 compared to
$10,221,000 at June 30, 1998. Working capital deficit decreased primarily as a
result of the increase in cash and cash equivalents.
Year 2000 Compliance
- --------------------
Management has implemented measures to ensure that the Company's information
systems and applications will recognize and process information pertaining to
the Year 2000. The measures being conducted utilize both internal and external
resources and are directed at risk assessments, remediation, acquisition of new
systems and applications, and testing of the systems and applications for Year
2000 compliance.
The Company believes that the only computer systems that are critical to its
operations are certain accounting and payroll software. The Company licenses
such software from two outside vendors. Both of these vendors have publicized
reports giving assurances that the software used by the Company is Year 2000
compliant. The Company will be testing the software to assure compliance and
will complete the testing by March 1999. The Company has completed an inventory
of all hardware, primarily personal computers and corporate network equipment.
All non-compliant hardware will be replaced by March 1999.
8
Concurrent with the Company's Year 2000 compliance efforts, the Company is
upgrading its management information system to link the schools to the corporate
office as well as to other schools. This process includes purchasing new and
replacing old equipment and software to improve management efficiencies as well
as assure Year 2000 compliance. Management anticipates that the process will be
complete by December 1999 and projects spending between $1.5 million and $2.0
million on this project.
Although the Company could be affected by the systems of other companies with
which it does business, management does not believe that the Company's business
will be materially adversely effected by the failure of third parties to be Year
2000 compliant. Because of the geographical distribution of the Company's
schools, the Company is not dependent on any one or a small group of vendors for
goods and services and the needs of our customers for our services should not be
adversely affected by Year 2000 issues.
Management expects that the Company will be Year 2000 compliant by the end of
1999. A failure to meet this deadline should not disrupt the Company's delivery
of its services to customers. However, a failure of the Company's system could
indirectly significantly impact operations, as for example, by an inability to
pay employees and vendors in a timely manner.
9
Part II
-------
Other Information
27 Financial Data Schedule.
10
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 EDUCATION DYNAMICS, INC.
Dated: November 13, 1998 By: /s/ William E. Bailey
-----------------------------------------
William E. Bailey
Vice President/Chief Financial Officer
(duly authorized officer and
principal financial officer)
11
EXHIBITS
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
12