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, 1999
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: 5,921,366 shares of Common
Stock outstanding at November 10, 1999.
INDEX TO FORM 10-Q
Nobel Learning Communities, Inc.
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets,
September 30, 1999 (unaudited) and June 30, 1999......................................... 2
Consolidated Statements of Income for the
three months ended September 30, 1999 (unaudited)
and June 30, 1999........................................................................ 3
Consolidated Statements of Cash Flows for the
three months ended September 30, 1999 (unaudited)
and 1998 (unaudited)..................................................................... 4
Notes to Consolidated Interim Financial Statements....................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K..................................................... 12
PART I
FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company's fiscal 2000 outlook and all other statements in this report other
than historical facts are forward-looking statements that involve risks and
uncertainties and are subject to change at any time. The Company derives its
forward-looking statements from its operating budgets and forecasts, which are
based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities. While the Company
believes that its assumptions are reasonable, it cautions that there are
inherent difficulties in predicting the impact of certain factors, especially
those affecting the acceptance of the Company's newly developed and converted
schools and performance of recently acquired businesses, which could cause
actual results to differ materially from predicted results.
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
Current Assets September 30,1999 June 30,1999
- --------------------------------------- ----------------- ------------
Cash and cash equivalents $4,098 $1,640
Accounts receivable, less allowance for 1,535 1,689
doubtful accounts of $177 in June and September of 1999
Prepaid rents 0 859
Other prepaid expenses 533 844
------------- -----------
Total Current Assets 6,166 5,032
------------- -----------
Property, & equipment at cost 40,496 37,024
Accumulated depreciation (13,219) (12,324)
------------- -----------
Total Property & Equipment 27,277 24,700
Property and equipment held for sale 728 1,202
Goodwill 47,396 45,725
Deposits and other assets 3,045 3,347
Deferred tax asset 1,019 1,019
------------- -----------
Total Assets $85,631 $81,025
============ ===========
Liabilities and Stockholders' Equity
- ---------------------------------------
Current portion of long-term obligations $2,753 $2,209
Accounts payable and other current liabilities 7,998 8,236
Cash Overdraft Liability 0 1,792
Deferred revenue 9,074 4,882
------------- -----------
Total Current Liabilities 19,825 17,119
------------- -----------
Long-term obligations 17,754 15,316
Long-term subordinated debt 13,431 13,831
Capital lease obligations 49 73
Deferred gain on sale/leaseback 25 27
Minority interest in consolidated subsidiary 537 514
------------- -----------
Total Liabilities 51,621 46,880
Stockholders' Equity:
Preferred Stock, $.001 par value; 10,000,000 shares authorized, issued
and outstanding 4,593,542 at September 30, 1999, and June 30, 1999; $5,530
aggregate liquidation preference at September 30, 1999 and June 30, 1999 5 5
Common Stock, $.001 par value, 20,000,000 shares authorized, issued and
outstanding 5,921,365 at both September 30, 1999 and June 30, 1999. 6 6
Treasury Stock, cost; 236,810 shares (1,375) (1,375)
Additional paid in capital 39,239 39,239
Accumulated deficit (3,865) (3,730)
Total Stockholders' Equity 34,010 34,145
------------- -----------
Total Liabilities & Stockholders' Equity $85,631 $81,025
============ ===========
The accompanying 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 three months ended September 30, 1999 and 1998
------------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
1999 1998
---------- ----------
Revenues $ 27,345 $ 23,911
Operating expenses 24,424 21,592
---------- ----------
School operating profit 2,921 2,319
General and administrative expenses 2,121 1,747
New school development costs 194 233
---------- ----------
Operating income 606 339
Interest expense 804 683
Other income (20) (43)
Minority interest in earnings of consolidated subsidiary 21 20
---------- ----------
Loss before income taxes (199) (321)
Income tax expense (84) (135)
---------- ----------
Net loss $ (115) $ (186)
========== ==========
Preferred stock dividends $ 21 $ 21
---------- ----------
Net income available to common stockholders $ (136) $ (207)
========== ==========
Basic earnings per share $ (0.02) $ (0.03)
========== ==========
Dilutive earnings per share $ (0.02) $ (0.03)
========== ==========
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 Cash Flows
for the three months ended September 30, 1999 and 1998
------------------------------------------------------
(Dollars in thousands)
(unaudited)
1999 1998
--------- ----------
Net Cash Provided By Operating Activities $5,037 $3,781
Cash Flows From Investing Activities:
Proceeds from sale of real estate 915 966
Capital expenditures (4,006) (2,397)
Payment for acquisitions (1,410) (3,389)
--------- ----------
Net Cash Provided By (Used In) Investing Activities: (4,501) (4,820)
--------- -----------
Cash Flows From Financing Activities:
Repayment of capital lease obligation (23) (24)
Payments of dividends on preferred stock (21) (21)
Proceeds from long term debt 7,900 5,460
Repayment of long term debt (5,546) (9,702)
Repayment of subordinated debt (388) (608)
Proceeds from subordinated debt 0 10,000
--------- -----------
Net Cash Provided by Financing Activities: 1,922 5,105
--------- -----------
Net increase (decrease) in cash and cash equivalents 2,458 4,066
Cash and cash equivalents at the beginning of the period 1,640 408
--------- -----------
Cash and cash eqivalents at the end of the period $4,098 $4,474
========= ===========
NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
for the three months ended September 30, 1999 and 1998
(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, 1999.
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
- ---------------------------
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. The Company
was in a loss position for the three months ended September 30, 1999 and 1998,
resulting in the calculation of dilutive earnings per share being antidilutive.
Earnings per share are computed as follows.
5
For the Three Months
-----------------------------------------------
September 30, 1999 September 30, 1998
Basic (loss) earnings per share
- ------------------------------------
Net income (loss) $ (115) $ (186)
Less preferred dividends $ 21 $ 21
Net income (loss) available for
common stock $ (136) $ (207)
Average common stock
outstanding 5,925 6,121
Basic earnings (loss) per share $ (0.02) $ (0.03)
Note 3 - 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 Center
of America, Inc., which is controlled by Knowledge Universe for a total of
$550,000 in cash. Knowledge Universe, through KU Learning, LLC, controls a
significant percentage of the Company's stock. No gain or loss on the sale was
recorded for the sale of the operations as the Company had previously written
down the carrying value of the business at December 31, 1997.
Note 4 - 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. Additionally, the
Company entered into a non-compete agreement with the former owner for a total
of $25,000. Houston Leaning 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. In connection with the acquisition, the
Company also purchased for $25,000 an option to buy the management agreement for
a charter school operating in Houston, Texas.
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.
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
will not have a material adverse effect on the Company's consolidated financial
position. The significance of these matters on the Company's
6
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.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
For the First Quarter Ended September 30, 1999 vs the First Quarter ended
September 30, 1998
Revenues for the first quarter ended September 30, 1999 increased $3,434,000 or
14.4% to $27,345,000 from $23,911,000 for the first quarter ended September 30,
1998. The increase in revenues is primarily attributable to the increase in
enrollment and to a lesser extent the increase in the number of schools.
Currently, the Company operates 138 schools. Since September 30, 1998, the
Company has opened or acquired 23 new schools: six elementary schools, six
preschools, four schools for learning challenged (the Paladin Academy schools),
one charter school and six specialty high schools (Houston Learning Academy).
The Company has also closed seven and sold ten underperforming schools, nine of
which were the Indianapolis schools disposed of in July 1999.
Same school revenue (schools that were opened in both periods) increased
$2,303,000 or 10.3% in the first quarter of 1999 compared to the prior year.
This increase is related to tuition and enrollment increases, which is partially
due to an improved summer program, and partially due to improved September
enrollments. The increase in revenues related to the 23 schools opened or
acquired totaled $1,929,000. These increases were offset by a decrease in
revenues of $797,000 related to the closing of seven and sale of ten
underperforming schools.
School operating profit for the first quarter ended September 30, 1999 increased
$602,000 or 26.0% to $2,921,000 from $2,319,000 for the first quarter ended
September of 1998. Total school operating profit margin increased from 9.7% to
10.7%. The improvement in operating margin was due to lower personnel costs
which improved 2.4% to 46.5% of revenues offset by higher insurance, taxes and
rent expense which increased 1.3% to 21.2% of revenues.
Same school operating profit increased $774,000 or 33.7%. Same school operating
profit margin improved from 9.7% for the first quarter ended September 30, 1998
to 12.0% for the first quarter ended September 30, 1999. The increase in same
school operating profit is due to the revenue increases and lower operating
expenses(primarily personnel costs). The 23 new or acquired schools accounted
for an additional $214,000 in school operating profit. School closings
positively affected the increase in school operating profit by $39,000.
This increase in school operating profit was offset by the absence of certain
reductions in insurance and property tax expense that had positively affected
school operating profit in the quarter ended September 30, 1998. In the first
quarter of last year, the Company realized savings in insurance and property tax
expense that positively affected school operating profit. Insurance premium
costs for the most recently ended policy year ended in 1998 were less than
expected by $225,000. Property tax expense was reduced by $200,000 in the first
quarter of last year as a result of over-estimated property tax liability on
several properties.
General and administrative expenses increased $374,000 or 21.4% from $1,747,000
for the first quarter ended September 30, 1998 to $2,121,000 for the first
quarter ended September 30, 1999. As a
8
percentage of revenue, general and administrative expense increased from 7.3% at
September 30, 1998 to 7.7% at September 30, 1999. This increase was related to
management additions necessary to support the continued growth of the Company.
New school development costs decreased $39,000 or 16.7% from $233,000 for the
quarter ended September 30, 1998 to $194,000 for the quarter ended September 30,
1999. The decrease is a result of timing of the opening of the schools.
Operating income increased $267,000 or 78.7% from $339,000 for the quarter ended
September 30, 1998 to $606,000 for the quarter ended September 30, 1999. The
increase is the result of an increase in school operating profit as described
above offset by the increase in general and administrative expenses.
Other income decreased $23,000 from $43,000 for the first quarter ended
September 30, 1998 to $20,000 for the first quarter ended September 30, 1999.
The decrease is due to the reduction in interest income from overnight deposits.
The Company implemented a new cash management system that uses cash to pay down
debt nightly rather than investing in overnight repurchase agreements. Also, in
connection with a sale leaseback transaction related to the development of new
schools in 1998, the Company received additional interest income.
Loss before taxes decreased 38% from a loss of $321,000 for the quarter ended
September 30, 1998 to a loss of $199,000 for the quarter ended September 30,
1999.
For the first quarter of fiscal 2000, EBITDA (defined as earnings before
interest, income taxes, depreciation and amortization) totaled $1,947,000. This
represents an increase of $331,000 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 $121,000 or 17.7% from $683,000 for the quarter ended
September 30, 1998 to $804,000 for the quarter ended September 30, 1999. The
increase is due to increased borrowings on the Company's credit facility offset
by a reduction in interest expense on seller subordinated debt.
Income tax benefit totaled $84,000 for the quarter ended September 30, 1999
which reflects a 42% effective tax rate.
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 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
9
capital needs, capital expenditures and renovations and the building of new
schools in the near term future.
The Company continues to look for quality acquisition candidates. 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, the Company will continue to seek additional funds through debt or
equity financing.
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, no principal payments are required until April
2000. Quarterly installments of $250,000 are required the first four quarters
(through January 2001); thereafter quarterly installments of $562,500 are
required until January 2005.
At September 30, 1999, $3,141,000 was outstanding under Working Capital Credit
Facility A and Working Capital Credit Facility B, $4,095,000 was outstanding
under the Acquisition Credit Facility and $10,000,000 was outstanding under the
Term Loan.
Total cash and cash equivalents increased $2,458,000 from $1,640,000 at June 30,
1999 to $4,098,000 at September 30, 1999. The net increase was related to cash
provided from operations totaling $5,037,000, cash from financing activities
(senior bank debt) totaling $1,922,000 offset by net cash used in investing
activities of $4,501,000. Cash provided from operations totaled $5,037,000 at
September 30, 1999. The increase in cash is related to an increase of
$3,845,000 in deferred revenue, a decrease in accounts receivable of $501,000
and a decrease in prepaid expenses of $1,170,000.
The working capital deficit increased $2,089,000 from $12,087,000 at June 30,
1999 to $14,176,000 at September 30, 1999. The increase is primarily the result
of the increase in deferred revenue totaling $3,845,000. The increase in
deferred revenues is related to the beginning of the school year and parents
prepaying tuition.
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 is in the process of testing Year 2000 compliance
10
for its accounting and payroll software. Tests will be competed by December
1999. The Company has completed an inventory of all hardware, primarily personal
computers and corporate network equipment. All non-compliant hardware has been
replaced.
Concurrent with the Company's Year 2000 compliance efforts, the Company upgraded
its management information system to link the schools to the corporate office as
well as to other schools. This process included purchasing new and replacing
old equipment and software to improve management efficiencies as well as assure
Year 2000 compliance. This process was completed in October 1999.
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.
11
Part II
-------
Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of August 9, 1999 between Lynn Fontana and
the Registrant.
27 Financial Data Schedule
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: November 15, 1999 By: /s/ William E. Bailey
-----------------------------------------
William E. Bailey
Vice President/Chief Financial Officer
(duly authorized officer and
principal financial officer)
12
EXHIBITS
Exhibit
Number Description of Exhibit
10.1 Employment Agreement dated as of August 9, 1999 between Lynn Fontana
and the Registrant.
27 Financial Data Schedule
13