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Nobel Learning Communities Inc – ‘10-K405’ for 6/30/98

As of:  Friday, 9/25/98   ·   For:  6/30/98   ·   Accession #:  1036050-98-1644   ·   File #:  1-10031

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/25/98  Nobel Learning Communities Inc    10-K405     6/30/98   13:501K                                   Donnelley R R & S… 14/FA

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Nobel Education Form 10-K405                          50    342K 
 4: EX-4.11     Investment Agreement Dated 06/30/98                   32    142K 
 5: EX-4.12     Senior Subordinated Note Dated 06/30/98                6     23K 
 2: EX-4.7      Eight Amendment to Loan and Security Agreement         4     22K 
 3: EX-4.8      Ninth Amendment Dated 06/30/98                         6     29K 
 8: EX-10.13    Common Stock Purchase Warrant Dated 06/30/98          17     68K 
 9: EX-10.14    First Amendment & Restated Registration Rights        14     66K 
10: EX-10.15    Executive Severancepay Plan as Amended 06/11/98       15     53K 
 6: EX-10.3     1995 Stock Incentive Plan, as Amended                 18     72K 
 7: EX-10.4     Form of Stock Option Agreement                         6     26K 
11: EX-21       List of Susidiaries of the Registrant                  1      7K 
12: EX-23       Consent of Coopers & Lybrand LLP                       1      8K 
13: EX-27       Financial Data Schedule                                2      9K 


10-K405   —   Nobel Education Form 10-K405
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
12Executive Officers of the Company
14Item 2. Properties
"Item 3. Legal Proceedings
15Item 4. Submission of Matters to a Vote of Security Holders
16Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
"1996
"1997
18Item 6. Selected Financial Data
19Management's Discussion and Analysis of Financial Condition and Results of Operations
25Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
26Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
27Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
40Earnings Per Share
44Schools
45Common Stock Warrants
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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 [Fee Required] For the fiscal year ended June 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [No Fee Required] 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.) ROSE TREE CORPORATE CENTER II 1400 N. PROVIDENCE ROAD, SUITE 3055 MEDIA, PA 19063 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 891-8200 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. [x] As of September 16, 1998, 6,121,365 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 16, 1998 was approximately $33,061,000 (based upon the closing sale price of these shares 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. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 19, 1998 (the "Proxy Statement") and to be filed within 120 days after the registrant's fiscal year ended June 30, 1998 are incorporated by reference in Part III.
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TABLE OF CONTENTS [Download Table] Item No. Page PART I 1. Business........................................................... 1 Executive Officers of the Company.................................. 10 2. Properties......................................................... 12 3. Legal Proceedings.................................................. 12 4. Submission of Matters to a Vote of Security Holders................ 13 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 14 6. Selected Financial Data............................................ 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 17 8. Financial Statements and Supplementary Data........................ 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 23 PART III 10. Directors and Executive Officers of the Registrant................. 24 11. Executive Compensation............................................. 24 12. Security Ownership of Certain Owners and Management................ 24 13. Certain Relationships and Related Transactions..................... 24 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 25
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PART I "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 schools and performance of recently acquired businesses, which could cause actual results to differ materially from predicted results. ITEM 1. BUSINESS. GENERAL Nobel Education Dynamics, Inc.'s business mission is to be the leader in the United States in providing affordable private education from preschool through eighth grade for the children of middle-income working families. The Company has been identified as a market leader "Education Management Organization" (EMO) for preschool through eighth grade. (EMO is a term used in the investment community to describe companies which manage education businesses for profit in multiple sites.) The Company's operations include preschools, elementary schools and middle schools, and several child care centers, throughout the United States, all operating as part of the "Nobel Learning Communities." To attain its objectives, Nobel builds on its experience and expertise both in education and preschool/child care. As an "education company," the Company's strategy is to offer practical solutions to a segment of the education problem in the United States. Nobel operates nationwide, with 138 schools and centers in 13 states as of September 19, 1998. In California, Nobel operates the Merryhill Schools, which is a private school system of 28 preschools, elementary schools and middle schools. Nationwide, Nobel operates preschools, schools and centers under various names in Pennsylvania, New Jersey, Virginia, Florida, Maryland, North Carolina, South Carolina, Illinois, Nevada, Oregon, Washington and Indiana. School names include Chesterbrook Academy, Evergreen Academy and Another Generation. Nobel also owns a 20% interest in an elementary school in Florida. Management is pursuing a three-pronged strategy to take advantage of the significant growth opportunities in the private education market: . internal growth at existing schools, including expansions of campus facilities . new school development in both existing and new markets . strategic acquisitions To facilitate this strategy, Nobel is applying the strengths of its curriculum-based programs to distinguish itself from its competition. The strategy also entails geographical clustering of Nobel's preschools to (i) increase market awareness, (ii) provide a lower risk method for expansion into 1
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elementary and middle schools by providing a feeder population and (iii) gain operating efficiencies in both management and costs. Nobel targets its schools and preschools to meet the needs of middle-income working parents. Most of Nobel's schools, preschools and child care centers are open from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up. In most locations, programs are available for children starting at six weeks of age. For basically the same price as standard child care, parents can leave children of various ages at a Nobel school knowing they will receive a quality education during the greater part of the day and be engaged in well-supervised activities the remainder. To complement its programs, the Company also operates (i) before and after school programs and (ii) summer camps (both sports and educational) at its various school facilities. Nobel also seeks to add other services and products which will add ancillary income and improve overall operating margins. The Company's financial strength has improved dramatically since 1992, when there was a change in management. Strategies of new management have included a change of the Company's focus to education from child care, strengthening of the Company's financial condition, divestiture of centers in mature markets and, after the Company's financial stabilization, expansion into growth areas. With the implementation of these new strategies, the equity of the Company has increased from a negative net worth of $3.8 million on December 31, 1991 to positive net worth of $33 million as of June 30, 1998. The Company's corporate office is located at Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media, PA 19063. Its telephone number is (610) 891-8200; its world wide web address is www.nobeleducation.com or www.educating.com. EDUCATIONAL PHILOSOPHY AND IMPLEMENTATION The educational philosophy of the Nobel Learning Communities is based on a sound research foundation, innovative instructional techniques and quality practice, and proprietary curricula developed by experienced educational personnel. Nobel's programs stress the development of the whole child and are based on concepts of integrated and age-appropriate learning. The 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. Every child's educational needs are considered upon entrance into a Nobel school, and progress is regularly monitored in terms of both the curriculum's objectives and the learner's cognitive, social, emotional, and physical skill development. The result is the opportunity for every Nobel student to develop a strong foundation in academic learning, positive self-esteem, and emotional and physical well-being. Since 1995, the Company has adapted the Merryhill curriculum for implementation in its other schools through the conversion of most of its child- care centers on the East Coast and in the Mid-West. In implementing the conversions, Nobel conducted staff training sessions to prepare teachers to present the curriculum-based program in the pre-school as well as at elementary grade levels. The schools instituted instructional techniques and assessment practices and adopted particular content materials in the various subject areas. Also, at conversion, the schools' computer technology was upgraded. 2
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Under the direction of Nobel's Vice President - Education, the Company circulates regular "curriculum updates," a publication to assist staff in planning their daily and weekly programs with current and effective instructional practices and materials. The Company has also established multi- media products for a "Learning Lending Library" collection. The library, which is managed out of the Company's corporate office, is available to all Nobel schools for student and teacher development and parent interest. Many of these resources support the Company's curriculum. In 1996, the Company launched its National Education Advisory Board. Under the direction of the Vice President - Education, the Board includes five nationally-known educators each of whom advises Nobel on his or her particular area of expertise: Dr. Zalman Usiskin of the University of Chicago (Mathematics); Dr. Cathy Collins Block of Texas Christian University (Reading and Language Arts); Dr. John N. Mangieri of the Institute for Effective Management (Educational Administration); Dr. Arthur L. Costa of the University of California at Sacramento (Curriculum and Teacher Development); and Dr. Drew H. Gitomer of Educational Testing Service (Testing and Evaluation). The Advisory Board helps oversee curriculum development in the Company's schools, advise on the most renowned teaching methods, and assist in finding the best instructional materials and practices to help students learn effectively and efficiently. Advisory Board members are also available to work on special projects and services that enhance the Company's school programs. The Company maintains that small class sizes are a basic ingredient of quality education. Nobel's educational philosophy is based on personalized instruction that leads to a student's active involvement in learning and understanding. The program for the Company's schools is a strong skills-based, comprehensive curriculum that is implemented in ways that attract 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, science, social studies, visual and graphic arts, music, physical education and health, and foreign language. Computer literacy and study skills are interrelated into the program, as appropriate, in all content areas. The schools employ state-of- the-art technologies, such as interactive CD-ROMs coordinated with classroom content and networking capacity. Most schools in the Nobel Learning Communities introduce a second language between the ages of two and three and continue that instruction into the pre-K, kindergarten and school age programs. The Company offers 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, California and Washington, D.C. Schools also arrange classroom presentations by parents and other volunteers, as well as organize youngsters as presenters to community groups and organizations. To enhance better the child's physical, social, emotional and intellectual growth, schools are encouraged to provide fee-based experiences specifically tailored to particular families' interest in such ancillary activities as dance, gymnastics, and music lessons. The Company's programs are implemented by experienced principals and directors and their faculties. They foster open communication, teamwork and the attention to detail required to provide a superior service. School principals and directors work closely with regional and corporate management, particularly in the regular assessment of program quality. In 1996, the groundwork was laid for a Company-wide Quality Assurance Program and, early in 1997, a Director of Quality Assurance was appointed to assess systematically each Nobel school and to provide a procedure for 3
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internal accreditation. Nobel's Quality Assurance Program sets standards consistent with the external, national accreditation systems in which the Company participates with such organizations as the National Association for the Education of Young Children (NAEYC), the National Independent Private School Association (NIPSA), and the Commission for International and Trans-Regional Accreditation (CITA). The Program also provides a formal means to recognize and reward Nobel Learning Communities educators for their outstanding performance and achievement. Similarly, the Program also furnishes guidance for the continued training and staff development of teaching personnel, using both internal trainers and external consultants. Nobel has begun development of Nobel Learning Advantage, which will consist of comprehensive tutorial and diagnostic programs. The tutoring programs of Nobel Learning Advantage will include adaptive, transitional and enrichment components within two major content areas: reading and mathematics. Each program will have a diagnostic and an instructional component that can be delivered in three grade ranges (K - 2, 3 - 5, and 6 - 8). The Company expects to complete development of the diagnostic and instructional materials in reading in all three ranges in 1998 and to implement pilot tryouts in select schools. The development of the diagnostic and instructional materials in mathematics is expected to be completed in early 1999 in all three grade ranges. Nobel plans to implement further piloting and development of full tutoring services and marketing in 1999. As part of Nobel Learning Advantage, commencing in September 1998, Nobel began to offer an assessment designed to respond to the personal needs of children three to six years old in Nobel schools. As the initial step, a trained Nobel certified diagnostician administers the Kaufman Survey of Early Academic and Language Skills (K-SEALS). This test measures skill development in five key areas critical to academic success. The diagnostician then reviews and interprets the test results with both the child's parent and teacher. Recommendations are made to personalize the child's learning program throughout the school year. The Company also entered another segment of the education industry - the education of learning-challenged children. This entry began in August 1998 with Nobel's acquisition through an 80%-owned joint venture of three Florida schools for learning-challenged children from Developmental Resource Center, Inc. (DRC). Nobel's joint venture partner is DRC's former owner, Dr. Deborah Levy, who joined Nobel as chief education officer for this business - Nobel Learning Solutions. The mission of Nobel Learning Solutions will be to improve the learning process and achievement levels of children having such learning challenges as ADD, ADHD, dyslexia and the developmentally delayed. The Company intends to develop separate schools for these children within the Nobel school clusters across the United States. As of September 19, 1998, the aggregate licensed capacity at the Company's 138 schools and centers was approximately 22,500 children. OPERATIONS / SCHOOL SYSTEMS In order to maintain uniform standards, each school and center shares consistent educational goals and operating procedures. To respond to local demands, principals are encouraged to tailor curriculums, within Nobel's standards, to meet regional needs. Management visits all schools and centers on a regular basis to review program and facility quality. 4
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Each school and center is staffed with a principal or director, teachers and teaching assistants. Principals and directors are supervised by executive directors, who report to either the Vice President - Eastern Operations or the Vice President - Western Operations. The principal or director is critical to the success of the school and is provided with ongoing training. Principals and directors have responsibility for: (i) maintaining the quality of educational services delivered at their schools, (ii) recommending pricing strategy based upon school location and local area demographics, (iii) personnel management, (iv) sales and marketing strategy for their locations and (v) fiscal management. Principals and directors submit financial reports to the Company's corporate office and to appropriate district and regional managers each week. These reports include data on current enrollment, labor costs and cash receipts. Corporate office personnel then review each report and prepare weekly combined reports by district, region and for the Company in total. Weekly or monthly tuition rates and utilization rates are continually monitored. Each school and center is measured on a monthly basis versus its individual business plan. Nobel is in the process of evaluating several state-of-the-art computer systems which would assist the principals in operating schools and provide management with enhanced operational information. The Company generally hires experienced individuals and attempts to promote from within. Employment applicants are reviewed with background checks made to verify accurate employment history and establish background, reputation and character. After hiring, the faculty is reviewed and evaluated annually both through formal evaluation and market surveys. All principals and directors are eligible for incentive compensation based on the profitability of their schools. MARKETING AND CUSTOMERS The Company's management believes that Nobel has a unique position in the marketplace and has implemented a marketing strategy to capitalize on this position. Nobel strives to differentiate itself from child care providers. In contrast with mere custodial child care, Nobel's programs stress educational development through proven curriculum programs, beginning at the preschool level and continuing through upper grades. The Company generates the majority of new enrollments from its reputation in the community and word-of-mouth recommendations of parents. Further, the Company is geographically clustering its preschools to increase local market awareness and to provide a feeder population for Nobel elementary and middle schools. The Company also markets its services through display ads, listings in local print and radio media and through distribution of promotional materials in residential areas. Marketing campaigns are conducted throughout the year, primarily at the local level by the Company's school directors and principals. In addition, the various regional offices conduct marketing programs, such as mass mailings and media advertising. NEW CENTER AND SCHOOL DEVELOPMENT; ACQUISITIONS Management expects a significant portion of Nobel's growth for the next few years to continue to be through the opening of new schools and preschools and strategic acquisitions of existing schools and preschools. 5
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New school development offers an attractive growth opportunity for Nobel to expand into both new and existing markets. Proposed development sites are presented to the Company through a network of developers across the United States. After site selection, the Company engages a developer or contractor to build a facility to the Company's specifications. Nobel currently works with several developers who purchase the land, build the facility and enter into a long-term lease with Nobel for the premises. Alternatively, Nobel purchases land itself, constructs the building with its own or borrowed funds and then seeks to enter into a sale and lease back transaction with an investor. In 1997 and fiscal 1998, Nobel opened 14 new schools and preschools. The Company plans to open approximately eight to 12 new schools and preschools in fiscal 1999 and 12 to 15 new schools and preschools in fiscal 2000. The Company's development plans are dependent on the continued availability of such developer and financing arrangements. Typically, new schools are single-story stand alone structures located near residential neighborhoods on acreage appropriate to the nature of the school. The Company carefully evaluates all proposed development sites and makes a selection based on a variety of criteria, including: 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. The Company plans to continue to expand the number of grade levels offered by its existing schools. Upon conversion, current preschools and child care centers initially offer grade levels through kindergarten or first grade, with further expansion planned. The Company also is expanding the grades offered by its other schools. In some locations, this expansion requires the construction of additions to current facilities or development of a replacement facility. Acquisition activity in 1997 and 1998 to date consisted of the following: . In January 1997, the acquisition of six preschools in Florida. . In March 1997, the acquisition of two elementary and one preschool located in San Jose, California. . In September 1997, the acquisition of two preschools and one elementary school in Las Vegas, Nevada. . In March 1998, the acquisitions of one elementary school located in each of Lake Oswego, Oregon; Seattle, Washington and North Lauderdale, Florida. . In August 1998, the acquisition through an 80% joint venture entity of schools located in southern Florida which educate children with learning disabilities (discussed above). At the closing of the January 1997 Florida acquisition, Nobel also purchased a 20% interest in a new elementary school in Florida, and Nobel entered into a joint venture agreement with the sellers to develop five additional elementary schools in Florida in which Nobel will have an 80% interest. 6
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INDUSTRY AND COMPETITION Annual spending in education is estimated to exceed $630 billion annually in the United States or approximately 10% of gross domestic product. Estimates of spending in education for preprimary grades (preschools and child care) are $30 billion while estimates of spending for kindergarten through eighth grade ("K -8") are $200 billion. Spending is projected to continue to grow through a combination of increasing per pupil expenditures and increasing school enrollments. It is estimated there are 90,000 schools in the $30 billion preschool/child care segment with $25 billion spent in the private sector, of which $10 billion is spent in the for-profit segment. Likewise, it is estimated there are 85,000 schools in the $200 billion K - 8 segment with an estimated $15 billion spent in the private sector, of which $650 million is spent in the for-profit segment. The public school market is estimated to be 110,000 schools in total, of which 76,000 are elementary, 23,000 are secondary and 11,000 are combined schools. The private school market is estimated to be 26,000 schools, of which 15,500 are elementary, 2,500 are secondary and 8,000 are combined. Of the 26,000 schools in the private school market, an estimated 20,500 are religiously affiliated and 5,500 are secular. Of the 5,500 secular schools, less than 1,000 are for-profit schools. Between 1985 and 1995, it is estimated that the public school K - 8 grade enrollment increased 19.8% from 27.03 million students to 32.38 million students while the private school K - 8 grade enrollments increased 5.6% from 4.19 million students to 4.43 million students over the same time period. The U.S. Department of Education projects public school and private school K - 8 enrollment growth between 1996 and 2006 to slow to 2%, a 700,000 enrollment increase in public schools and a 100,000 enrollment increase in private schools, respectively. While this increase may not seem large, there is significant concern that the nation's already overcrowded schools are ill-prepared to handle it. It is estimated that in excess of 4,000 new K - 8 schools must be built to relieve current overcrowding and handle the growth. Also, this growth will vary significantly in different regions of the United States. States such as California, Florida, Washington and Oregon are projected to experience high growth. These states are targeted in the Company's expansion plans. During the 1996 elections, education was the politically "hot issue" in national and state contests. The broad public debate has shifted from whether our existing K - 12 system has failed in terms of performance to which reform movements promise the best and quickest improvements. Taxpayers have experienced high costs in education expenditures without positive results. According to a 1995 Gallup poll, 71% of Americans give the nation's schools a grade of C, D or F generally and 54% give their own schools a low grade as well. Quality is low; yet, the average annual cost of educating a Kindergarten through 12/th/ grade student in the United States has risen to over $6,000 in 1995. Dismal student achievement, a growing minority gap in school completion rates and student misbehavior causing unsafe school environments are three commonly mentioned quality measurements that are lacking. Also, corporate America has become increasingly frustrated by insufficiently equipped students produced by the nation's public school systems. Education reform movements in the United States are posing alternatives to the public schools. These include charter schools, private management of public schools, vouchers, home schooling and private schools. The Company's strategy is to provide parents a quality alternative through Nobel's 7
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privately owned and operated schools utilizing a proven curriculum in a safe and challenging environment. For school age children, the Company competes with other for-profit private schools, with non-profit schools and, in a sense, with public school systems. The Company anticipates 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. Currently, the only for-profit competitor of which Nobel is aware that competes beyond a regional level is Children's World, a subsidiary of Aramark Corporation. The Company believes that the structure of the large for-profit child care companies may make it difficult for them to implement and develop programs which are based upon curriculum-intensive goals, which would require significant cultural changes. The preschool/child care market is a $30 billion highly fragmented industry, with diverse competition from both public and private sectors. Approximately eight million children are enrolled in 90,000 centers/schools, of which less than nine percent are managed by for-profit chains. Revenues of the 20 largest child care/preschool providers represent less than five percent of total segment revenues. Also seeking enrollments of pre-school age children are in-home individual child care providers and corporations that provide child care for their employees. Only one out of seven early care/education programs is rated good or excellent by the Carnegie Corporation report; four out of five programs fail quality standards. The Company believes that persons in its target market -- parents seeking curriculum-based programs for their children -- seek services not provided by child care providers without a curriculum base. Nobel believes these parents desire to give their child 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. The Company offers a national curriculum based program with excellent standards. The demand for quality preschools is increasing. More than 60% of mothers with children under six years of age are in the workplace. Both single parents and dual income families are on the rise. From 1980 to 1990, the percentage of dual income families rose from 50% to 60%. From 1970 to 1992, the percentage of married mothers who worked full time increased 16% to 37%. Combined, approximately 80% of U.S. families are either dual income or single parent households. While price is an important factor in competition in both the school age and preschool markets, the Company believes that other competitive factors also are important, including: professionally developed educational programs, well equipped facilities, trained teachers and a broad range of ancillary services, including transportation and infant care. Particularly in the preschool market, many of these services are not offered by the Company's competition. REGULATION Schools and preschools 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 the Company's personnel. 8
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INSURANCE The Company currently maintains 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. Since 1994, the Company has been able to increase significantly the sublimit applicable to such coverage. There can be no assurance that in future years the Company will not again become subject to lower limits. SERVICE MARKS The Company has registered various service marks, including Chesterbrook Academy(R), Merryhill Country School(R) and The Rocking Horse Child Care Center(R), in the United States Patent and Trademark Office. The Company believes that certain of its service marks have substantial value in its marketing in the respective areas in which its schools operate. SEASONALITY Nobel's elementary and middle schools historically have lower operating revenues in the summer due to lower summer enrollments. Summer revenues of preschools tend to remain more stable or, in some cases, increase. The Company is seeking to improve summer results through camps and other programs. EMPLOYEES On September 19, 1998, the Company employed approximately 5,200 persons, approximately 1,700 of which were employed on a part-time basis. Management believes that its relationship with its employees is satisfactory. 9
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EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: Name Age Position ----------------------------------------------------------------------------- A. J. Clegg 59 Chairman of the Board of Directors, President and Chief Executive Officer; Director John R. Frock 55 Executive Vice President - Corporate Development; Assistant Secretary; Director B. Robin Eglin 42 Executive Vice President - Real Estate Development William E. Bailey 39 Vice President and Chief Financial Officer Yvonne DeAngelo 40 Vice President - Administration and Finance; Secretary Emily Louviere 54 Vice President - Western Operations Barbara Z. Presseisen 62 Vice President - Education Barbara Sell 48 Vice President - Eastern Operations Barry S. Swirsky 42 General Counsel The following description contains certain information concerning the foregoing persons: A.J. Clegg. Mr. Clegg was named Chairman of the Board and Chief Executive Officer of the Company on May 29, 1992. Since 1989, Mr. Clegg has also served on the Advisory Board of Drexel University and, in 1996, was named as a member of the Board of Trustees of Drexel University. From June 1990 to December 1997 (but involving immaterial amounts of time since 1994), Mr. Clegg also served as the Chairman and CEO of JBS Investment Banking, Ltd., which provides investment management and consulting services to businesses and formerly provided services to the Company through an Administrative Services Agreement. 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. 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. Clegg has also 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. John R. Frock. Mr. Frock was named Executive Vice President - Corporate Development on August 1, 1994. Mr. Frock was elected to the Board of Directors of the Company on May 29, 1992. In March 1992, Mr. Frock became the President and Chief Operating Officer of JBS Investment Banking, Ltd., which provided investment management and consulting services to businesses (which 10
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included Nobel). During the past five years, Mr. Frock also served as the Chairman and Chief Executive Officer of Avant Garde Enterprises, Ltd.; President and Chief Operating Officer of SBF Communications Graphics, a business forms printer located in Philadelphia, Pennsylvania; President of Globe Ticket and Label Company; and President of the Graphics Group of Empery Corporation. B. Robin Eglin. Mr. Eglin joined the Company as Vice President - Real Estate Development in April 1995 and was named Executive Vice President in September 1998. Mr. Eglin was formerly Vice President of Carefree Learning Centers, Inc. and Keystone Real Estate Development Company, Inc., wholly-owned for-profit subsidiaries of Pennsylvania Blue Shield, where he was in charge of all real estate, finance and accounting activities. Mr. Eglin joined Carefree in 1989. William E. Bailey. Mr. Bailey joined the Company as Vice President and Chief Financial Officer in January 1998. Prior to joining the Company, Mr. Bailey was Vice President / Controller for KinderCare Learning Centers, Inc. (a national child care company) from 1993 to 1997, Corporate Controller from 1991 to 1993, and Director of Planning and Analysis from June 1989 to October 1991. Yvonne DeAngelo. Ms. DeAngelo was appointed Vice President - Finance and Administration in December 1995. She had served as Controller since March 1989. Ms. DeAngelo has also served as Secretary since May 1992. Before joining Nobel Education Dynamics, Inc., she served as Senior Auditor for Coopers and Lybrand from 1986 to 1989. Emily Louviere. Ms. Louviere joined the Company as Vice President - Western Operations in November 1997. Ms. Louviere has over fourteen years of experience in the education industry, including managing multi-site educational operations, both preschool and elementary schools. Immediately prior to joining Nobel, from November 1996 to November 1997, Ms. Louviere served as Regional Vice President of Operations of Children's World. From October 1982 to March 1995, Ms. Louviere held various positions, including District Manager, Region Manager and Western Divisional Vice President at KinderCare, where she managed up to 400 schools with over $185 million in aggregate revenue. Barbara Z. Presseisen. Dr. Presseisen was named Vice President - Education in June 1996. Dr. Presseisen served in several positions over 24 years at Research for Better Schools, one of the ten regional educational laboratories sponsored by the U.S. Department of Education, located in Philadelphia, Pennsylvania. In her most recent capacity, Director of National Networking, she worked with several major school districts on staff development and program improvement, as well as coordinated training and conferences on curriculum and student achievement with other laboratories and a number of professional associations and universities. Dr. Presseisen has authored a number of books and research reports, and has been an invited lecturer at many national and regional programs. Most recently, prior to joining Nobel, Dr. Presseisen consulted on educational design and product development for the Walt Disney Company from December 1995 to June 1996. Barbara Sell. Ms. Sell joined the Company in March 1997 as Vice President - Eastern Operations. Ms. Sell has 23 years of experience in the early childhood education field. Seventeen years of her career have been spent in operational management, accomplishing such goals as development and operation of a corporate child care division and managing an international child care division. Prior to joining Nobel, Ms. Sell was employed by KinderCare Learning Centers, with whom she was 11
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employed from 1979 through April 1996. Ms. Sell joined KinderCare in 1979 and held various positions, including District Manager, Region Manager and Vice President of Operations for over 300 schools. Barry S. Swirsky. Mr. Swirsky has been the General Counsel of the Company since September 1995 (serving as an officer since September 1997). Mr. Swirsky was previously engaged in private legal practice advising corporations and other business entities, primarily in corporate and securities matters. Mr. Swirsky commenced his legal career as an associate with Reavis & McGrath in New York, New York (since merged with Fulbright & Jaworski) (1981 to 1984), then was an associate with Dechert Price & Rhoads in Philadelphia, Pennsylvania (1984 to 1992), and then counsel to Bray Berry Martin & Reardon and a shareholder of Berry & Martin, P.C in Philadelphia, Pennsylvania (1992 to 1995). Mr. Swirsky received his J.D. from Harvard Law School in 1981. ITEM 2. PROPERTIES. At June 30, 1998, the Company operated 132 schools, preschools and child care centers (hereafter, "schools") in 13 states. At September 18, 1998, the number of schools totaled 138, located in 13 states. The Company's schools generally are located in suburban settings. At September 18, 1998, the Company's schools are geographically located as follows: 37 in California, 19 in North Carolina, 17 in Pennsylvania, 13 in Virginia, 9 each in Indiana and New Jersey, 7 in Illinois, 6 in Florida, 5 in Nevada, 3 in Washington, 2 each in South Carolina and Oregon and 1 in Maryland. The Company owns the land and buildings for eight of the schools it operates. All such properties are subject to mortgages on the real property. In addition, one school is run by a majority-owned subsidiary and operated jointly with a sponsoring employer. This subsidiary leases the buildings from a third party and operates them under a ground lease from the employer. The remaining schools are leased under long-term leases which are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs. These leases usually contain inflation related rent escalators. The Company owns the land and building of three properties in Florida and Maine, two of which are leased. The Company also from time to time purchases undeveloped land for future development. At June 30, 1998, the Company owned one such property in North Carolina and one property in Northern Virginia. The Company leases 13,837 square feet of space for its corporate offices in Media, Pennsylvania. ITEM 3. LEGAL PROCEEDINGS. 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 or results of operations. 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. 12
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 13
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PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's common stock trades on The Nasdaq Stock Market under the symbol NEDI. "The Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic securities market comprised of competing market makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and order execution systems. This market also provides specialized automation services for screen-based negotiations of transactions, on-line comparison of transactions, and a range of information services tailored to the needs of the securities industry, investors and issuers. The Nasdaq Stock Market consists of two distinct market tiers: the Nasdaq National Market/(R)/ (on which the Company's common stock trades) and the Nasdaq SmallCap Market/SM/. The Nasdaq Stock market is operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the National Association of Securities Dealers, Inc. The table below sets forth the quarterly high and low sales prices for the Company's common stock as reported by Nasdaq for each quarter during the period from January 1, 1996 through June 30, 1998 and for the first quarter to date in Fiscal 1999. [Download Table] High Low 1996 First Quarter............................. $17 5/8 $13 5/8 Second Quarter............................ 18 1/4 13 3/4 Third Quarter............................. 15 1/4 9 1/4 Fourth Quarter............................ 14 9 1/2 1997 First Quarter............................. 12 5/8 7 7/8 Second Quarter............................ 10 3/8 7 1/2 Third Quarter............................. 9 3/4 8 1/4 Fourth Quarter............................ 9 7/16 4 1/2 Fiscal 1998 First Quarter............................. 9 3/8 4 7/8 Second Quarter............................ 9 3/8 7 7/8 Fiscal 1999 First Quarter (as of September 17, 1998).. 9 3/4 5 7/8 HOLDERS At September 7, 1998, there were approximately 580 holders of record of shares of common stock. 14
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DIVIDEND POLICY The Company has never paid a dividend on its common stock and does not expect to do so in the foreseeable future. Although the payment of dividends is at the discretion of the Board of Directors, the Company intends to retain its earnings in order to finance its ongoing operations and to develop and expand its business. The Company's credit facility with its lenders prohibits the Company from paying dividends on its common stock or making other cash distributions without the lenders' consent. Further, the Company's financing documents relating to its private placement of its $10,000,000 Subordinated Note with Allied Capital Corporation prohibit the Company from paying cash dividends on its common stock without Allied's approval, and the Company's financing documents relating to its private placement of the Series C Convertible Preferred Stock to Edison Venture Fund II, L.P. prohibit the Company from paying cash dividends on its common stock, unless the dividend is permitted under the Company's bank agreement and the amount of the dividend is less than or equal to 50% of operating income less income tax. 15
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ITEM 6. SELECTED FINANCIAL DATA (in thousands except per share data) The following table sets forth selected historical financial data of the Company. This data should be read in conjunction with the Company's Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." [Enlarge/Download Table] SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------- OPERATING DATA JUNE 30, 1998 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------------------------------------------------- Revenue $ 48,995 $80,980 $58,909 $44,154 $34,372 $32,594 School operating expenses 42,142 69,858 48,871 35,762 28,032 26,514 -------------------------------------------------------------------------------------------------------------------------------- School operating profit 6,853 11,122 10,038 8,392 6,340 6,080 New school development 501 400 207 146 129 29 General and administrative expenses 3,391 5,973 4,190 3,396 2,696 2,555 Restructuring expense - 2,960 - - - - Litigation expense - - - 500 200 - -------------------------------------------------------------------------------------------------------------------------------- Operating income 2,961 1,789 5,641 4,350 3,315 3,496 Interest expense 1,044 2,047 2,004 1,840 1,223 1,718 Other (income) expense (102) (158) (482) (126) 107 (39) Minority interest 35 86 94 86 83 88 -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,984 (186) 4,025 2,550 1,902 1,729 Income tax (benefit) expense 833 250 1,562 (1,356) (438) 21 -------------------------------------------------------------------------------------------------------------------------------- Net income before extraordinary item 1,151 (436) 2,463 3,906 2,340 1,708 Extraordinary item - 449 - 62 - - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,151 (885) 2,463 3,844 2,340 1,708 Preferred dividends 51 102 109 184 199 107 -------------------------------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 1,100 $ (987) $ 2,354 $ 3,660 $ 2,141 $ 1,601 ================================================================================================================================ EBITDA (earnings before interest, taxes, depreciation and amortization expense) $ 5,118 $ 5,099 $ 8,240 $ 5,902 $ 4,188 $ 4,591 -------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE (POST SPLIT): Net income (loss) before extraordinary item $ 0.18 $ (0.09) $0.42 $ 0.79 $0.57 $0.41 Extraordinary item - (0.07) - (0.01) - - Net income (loss) $ 0.18 $ (0.16) $0.42 $ 0.78 $0.57 $0.41 DILUTIVE EARNINGS PER SHARE (POST SPLIT): Net income (loss) before extraordinary item $ 0.15 $ (0.09) $0.34 $ 0.64 $0.46 $0.38 Extraordinary item - (0.07) - (0.01) - - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.15 $ (0.16) $0.34 $ 0.63 $0.46 $0.38 ================================================================================================================================ BALANCE SHEET DATA: Working Capital (deficit) $(10,221) $(7,946) $(1,351) $ (831) $(4,197) $(3,114) Cost in excess of net assets acquired 41,753 37,439 25,601 17,274 8,888 8,923 Total assets 73,623 74,398 56,833 44,937 23,234 22,613 Short-term debt and Current portion of long-term debt 2,031 2,793 3,448 1,371 1,768 905 Long-term debt 26,477 28,470 14,226 20,272 7,846 12,545 Stockholders' equity (deficit) 32,736 31,636 32,323 16,121 8,298 3,732 16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Six months ended June 30, 1998 ("1998 period") compared to the six months ended June 30, 1997 ("1997 period") On December 19, 1997, the Company changed its fiscal year end to the end of June. Accordingly, the Company's transition period, which ended June 30, 1998, includes the six months from January 1 to June 30, 1998. To facilitate a discussion of the Company's operating performance for the 1998 period, the corresponding period in 1997 is presented. During the twelve months subsequent to June 30, 1997, the Company acquired the assets or stock of companies owning eight schools. These acquisitions included: two preschools and one elementary school in Las Vegas, Nevada; two elementary and one preschool located in Seattle, Washington; one elementary school in Portland, Oregon and one elementary school in North Lauderdale, Florida. In addition, the Company opened 12 new schools, of which six were preschools and six were elementary schools. The Company also closed nine schools whose leases expired. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for the 1998 and 1997 periods into three categories: Baseline Schools, Schools Acquired Within the Year and New School Development (dollars in thousands). [Enlarge/Download Table] SIX MONTHS % OF SIX MONTHS % OF 1998-1997 JUNE 30, 1998 REVENUE JUNE 30,1997 REVENUE VARIANCE ($) ================================================================================================ BASELINE SCHOOLS (1) Revenues $41,113 100.0% $28,517 100.0% $ 12,596 Operating Profit $ 7,534 18.3% $ 5,491 19.3% $ 2,043 ------------------------------------------------------------------------------------------------ SCHOOLS ACQUIRED WITHIN THE YEAR (2) Revenue 3,263 100.0% 7,491 100.0% (4,228) Operating Profit 460 14.1% 1,551 20.7% ( 1,091) ------------------------------------------------------------------------------------------------ NEW SCHOOL DEVELOPMENT (3) Revenues 4,619 100.0% 3,656 100.0% 963 Operating Profit (Loss) (396) (8.6)% 261 7.1% (657) ------------------------------------------------------------------------------------------------ Total Revenues $48,995 100.0% $39,664 100.0% $ 9,331 ================================================================================================ School Operating Profit Before Amortization of Goodwill 7,598 15.5% 7,303 18.4% 295 ================================================================================================ Less Amortization of Goodwill 745 1.5% 517 1.3% 228 School Operating Profit $ 6,853 14.0% $ 6,786 17.1% $ 67 ================================================================================================ (1) Baseline Schools is defined as all schools, except schools included for the year in Schools Acquired Within the Year or New School Development (see footnotes (2) and (3). (Schools which were acquired in 1997 are included in "Baseline Schools" for 1998 period results and "Schools Acquired Within the Year" for 1997period results. Schools which were first opened in 1996 are included in "Baseline Schools" for 1998 period results and "New Development" for 1997 period results.) (2) Schools Acquired Within the Year is defined as (i) schools acquired during the 12 months ended June 30, 1997 for 1997 period results and (ii) schools acquired during the 12 months ended June 30, 1998 for 1998 period results. (3) New School Development is defined as schools which have not been opened for two full fiscal years (i.e., schools opened between July 1, 1995 and June 30, 1997 for 1997 period results and schools opened between July 1, 1996 and June 30, 1998 for 1998 period results). Revenues in the Baseline Schools increased $12,596,000 or 44.2% from the 1997 to the 1998 period. The increase is a result of the combination of several factors, including (1) an increase in revenues of $9,440,000 related to acquisitions completed in fiscal 1997, (2) a $2,803,000 increase related to New Schools opened in fiscal 1996, and (3) an increase of revenues of $353,000 in all other schools. Operating profit of the Baseline Schools increased $2,043,000 as a result of (1) a $1,994,000 increase in operating profit related to the schools acquired in fiscal 1997, (2) a $213,000 increase related to the operating profit of the fiscal 1996 New Schools offset by (3) a $164,000 decrease related to the decrease in all other schools. The Company acquired eight schools during the 12 months ended June 30, 1998 with total revenues and school operating profits of $3,263,000 and $460,000 respectively for the 1998 period. The Company acquired thirteen schools during the 12 months ended June 30, 1997 with total revenues of $7,491,000 and operating profit of $1,551,000 during the 1997 period. The operating profit margins of schools included in the 1998 period was 14.1% or 6.6% below the schools included in the 1997 period. One of the eight schools included in the 1998 period was a new school that opened subsequent to the acquisition. The start-up losses associated with opening new schools contributed to this decline in operating margin. Revenues related to the New Schools opened during the period between July 1, 1996 and June 30, 1998 totaled $4,619,000 in the 1998 period or an increase of $963,000 or 26.3% compared to the schools opened during the period between July 1, 1995 and June 30, 1997 in the 1997 period. During the 12 months ended June 30, 1998, the Company opened 12 schools, five of which were elementary schools, and during the 12 months ended June 30, 1997, the Company opened eight schools, three of which were elementary schools. Operating losses totaled $396,000 in the 1998 period compared to operating income of $261,000 in the 1997 period. The increase in the losses is a result of the mix in the type of schools opened and the timing of the openings. Elementary and middle schools take longer to become profitable compared to preschools. Elementary schools typically take 24 to 36 months to become profitable compared to 18 to 24 months in a preschool. Overall, in the 1998 period, the Company's total revenues increased $9,331,000 or 23.5% and school operating profits increased $67,000, compared to the 1997 period. Meanwhile, school profit margins (after goodwill) decreased from 17.1% in 1996 to 14.0% in the 1997 period as explained above. New school development costs increased $403,000 in the 1998 period primarily because of the increase in the number of schools opened. During the 1998 period, the Company opened four elementary and one preschool as compared to two preschools in the 1997 period. Elementary schools typically have higher start- up costs than preschools. start-up costs average $225,000 for an elementary school and $125,000 for a preschool. start-up and development costs include personnel, marketing and supplies. General and administrative expenses increased $574,000 or 20.4% to $3,391,000 in the 1998 period. The increase is attributable to the increase in the Company's infrastructure to support its revenue growth. 17
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During 1997 and 1998, the Company added a Vice President of Marketing, a Human Resources Manager, a Vice President of Eastern Operations, a Vice President of Western Operations, a Summer Camp Manager, a Training Manager, several Executive Directors and other support staff. As a percentage of revenue, general and administrative expenses decreased from 7.1% of revenues in the 1997 period to 6.9% of revenues in the 1998 period. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. As a result of the factors mentioned above, operating income decreased $910,000 or 23.5% to $2,961,000 for the 1998 period as compared to the 1997 period. EBITDA (defined as earnings before interest, income taxes, depreciation and amortization), totaled $5,118,000 for the 1998 period which was $434,000 or 8.2% below the 1997 period. As a percentage of revenue, EBITDA for the 1998 period equaled 10.4% versus 13.3% for the 1997 period. EBITDA is not a measure of performance under generally accepted accounting principals, however the Company and the investment community consider it an important indicator. Interest expense increased by $200,000 or 23.4% for the 1998 period compared to the 1997 period. The increase in interest expense is a result of increased borrowings under the Company's senior debt facility and subordinated debt issued in connection with the Company's acquisitions. The provision for income taxes of $833,000 for the 1998 period was in excess of amounts computed by applying statutory federal income tax rates to income before income taxes due primarily to non-deductible goodwill incurred with acquisitions for stock and state income taxes. For acquisitions of stock of a company, purchase accounting applies for accounting purposes; but, for tax purposes, the Company inherits the historic basis of the purchased company in its assets, without any goodwill. The fiscal year ended December 31, 1997 ("1997") compared to the fiscal year ended December 31, 1996 ("1996") As of December 31, 1996, the Company operated 107 elementary schools, preschools and child care centers (sometimes collectively referred to herein as "schools"). At December 31, 1997, the Company operated 129 schools and owned a 20% interest in one elementary school. During 1997, the Company acquired the assets or stock of companies owning 17 schools. These acquisitions include: six preschools in Florida and a 20% interest in an elementary school; two preschools and one elementary school in Las Vegas, Nevada and two elementary and three preschools located in San Jose, California. Also considered for the purposes hereof as being acquired in 1997 are one elementary school in Southern California and a preschool and elementary school in Seattle, Washington acquired at the end of December 1996. In addition, the Company opened 12 new schools in 1997 of which eight were preschools and four were elementary schools (two of which were replacement schools). During 1997, the Company closed seven schools whose leases expired. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for the years ended 1997 and 1996 into three categories: Baseline Schools, Schools Acquired Within the Year and New School Development (dollars in thousands). [Enlarge/Download Table] 12 MONTHS % OF 12 MONTHS % OF 1997-1996 1997 REVENUE 1996 REVENUE VARIANCE ($) ========================================================================================================= BASELINE SCHOOLS (1) Revenues $59,567 100.0% $49,977 100.0% $ 9,590 Operating Profit $10,176 17.1% $ 9,312 18.6% $ 864 --------------------------------------------------------------------------------------------------------- SCHOOLS ACQUIRED WITHIN THE YEAR (2) Revenue 14,232 100.0% 3,437 100.0% 10,795 Operating Profit 2,345 16.5% 775 22.6% 1,570 --------------------------------------------------------------------------------------------------------- NEW SCHOOL DEVELOPMENT (3) Revenues 7,181 100.0% 5,495 100.0% 1,686 Operating Profit (Loss) (410) (5.7)% 586 10.7% (996) --------------------------------------------------------------------------------------------------------- Total Revenues $80,980 100.0% $58,909 100.0% $ 22,071 ========================================================================================================= School Operating Profit Before Amortization of Goodwill 12,111 15.0% 10,673 18.1% 1,438 ========================================================================================================= Less Amortization of Goodwill (989) 1.2% (635) 1.1% (354) School Operating Profit $11,122 13.7% $10,038 17.0% $ 1,084 ========================================================================================================= (1) Baseline Schools is defined as all schools, except schools included for the year in Schools Acquired Within the Year or New School Development (see footnotes (2) and (3). (Schools which were acquired in 1996 are included in "Baseline Schools" for 1997 results and "Schools Acquired Within the Year" for 1996 results. Schools which were first opened in 1995 are included in "Baseline Schools" for 1997 results and "New Development" for 1996 results.) (2) Schools Acquired Within the Year is defined as (i) schools acquired in 1996 for 1996 results and (ii) schools acquired in 1997 for 1997 results. (3) New School Development is defined as schools which have not been opened for two full fiscal years (i.e., schools opened in 1995 or 1996 for 1996 results and schools opened in 1996 or 1997 for 1997 results.) Revenues in the Baseline Schools increased $9,590,000 or 19.2% from 1996 to 1997. The increase is a result of the combination of several factors, including (1) an increase in revenues of $6,173,000 related to acquisitions completed in 1996, (2) a $4,636,000 increase related to New Schools opened in 1995, (3) an increase of revenues of $643,000 in schools other than Merryhill and South Carolina, offset by (4) a decrease in Merryhill enrollment resulting in a $1,003,000 decrease in revenues and (5) a decrease of $859,000 related to the revenues of six schools closed in South Carolina in 1996. Operating profit of the Baseline Schools increased $864,000 or 9.3% as a result of (1) a $1,383,000 increase in operating profit related to the schools acquired in 1996, (2) a $850,000 increase related to the operating profit of the 1995 New Schools offset by (3) a $949,000 decrease related to the decrease in the Merryhill schools and by (4) a $420,000 decrease in the remaining schools. The Company experienced both a decline in enrollment and operating profit of the Merryhill Schools located in California. The Company believes that the decrease is primarily due to the effect of the California public school initiative to decrease student/teacher class size ratios in Kindergarten to third grade classes and a weak summer program. The public school initiative affected Merryhill in several ways: (1) teacher turnover increased, (2) enrollment decreased and (3) with efforts to attract replacement teachers and retain existing teachers, average teacher salary increased. In addition to the effect of the initiative, rent expense in some of the Merryhill Schools is increasing because of recently built replacement schools, which expanded capacity. The Company has taken several steps to improve the situation. In the fourth quarter of 1997, the Company hired a Vice President of Western Operations and a Summer Camp Manager. The Company restructured operations management by adding experienced Executive Directors and other management personnel and reducing responsibility of each Executive Director to a maximum of ten schools. In 1997, the Company acquired seventeen schools with total revenues and school operating profits of $14,232,000 and $2,345,000, respectively. 18
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This is an increase in acquisition activity totaling $10,795,000 in revenues and $1,570,000 in operating profit compared to schools acquired in 1996. In 1996, the Company acquired seven schools with revenue of $3,437,000 and operating profit of $775,000. The operating profit margins of schools acquired decreased 6.1% from 22.6% in 1996 to 16.5% in 1997. The decrease in the margins of the schools acquired is related primarily to the lack of summer programs at some of these elementary schools. The elementary schools acquired in 1997 did not typically have strong summer programs. The Company initiated summer programs, but it takes time for enrollment to build. Revenues related to the New Schools built in 1996 and 1997 totaled $7,181,000 in 1997 or an increase of $1,686,000 or 30.7% compared to 1995 and 1996. In 1997, the Company built 12 schools and in 1996 the Company built seven schools. Operating loss totaled $410,000 in 1997 compared to operating income of $586,000 in 1996. The increase in the loss is a result of the mix in the type of schools opened and the timing of the openings. Elementary and middle schools take longer to become profitable compared to preschools. In 1997, the Company opened four elementary/middle schools as compared to three in 1996. Elementary schools typically take 24 to 36 months to become profitable compared to 18 to 24 months in a preschool. Overall, in 1997 the Company's total revenues increased $22,071,000 or 37.5% and school operating profits increased $1,084,000 compared to 1996. Meanwhile, school operating profit margins (after goodwill) decreased from 17.0% in 1996 to 13.7% in 1997 as explained above. New School development costs nearly doubled, increasing $193,000 or 93% to $401,000 in 1997, primarily because of the increase in the number of schools opened. The Company opened eight preschools and four elementary/middle schools for a total of twelve schools as compared to four preschools and three elementary/middle schools for a total of seven in 1996. Additionally, elementary/middle schools typically have higher start-up costs than preschools. start-up costs average $225,000 for an elementary school and $125,000 for a preschool. start-up and development costs include personnel, marketing and supplies. General and administrative expenses increased $1,783,000 or 42.6% to $5,973,000 in 1997. The increase is attributable to the increase in the Company's infrastructure to support its revenue growth. In 1997, the Company added a Chief Financial Officer, a Vice President of Marketing, a Human Resources Manager, a Vice President of Eastern Operations, a Vice President of Western Operations, a Summer Camp Manager, a Training Manager, several Executive Directors and other support staff. In addition, the Company selected and launched an Education Advisory board to oversee and assist in curriculum development. As a percentage of revenue, general and administrative expenses increased only slightly from 7.1% of revenues in 1996 to 7.4% of revenues in 1997. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. In 1997, the Company recorded a restructuring charge totaling $2,960,000 related to a combination of factors. Of the $2,960,000, $2,000,000 was related to the write-off of the goodwill recorded in connection with the acquisition of the nine schools located in Indianapolis, $789,000 was related to the write down of the book value and an accrual for lease obligations of several non-performing schools held for sale or that are scheduled to close when their leases expire, and $171,000 is related to the restructuring of management that took place in 1997 and early 1998. The schools in Indianapolis are currently for sale. As a result of the factors mentioned above, operating income decreased $3,852,000 or 68% to $1,789,000 in 1997 compared to the same period in 1996. Adjusted operating income, defined as operating income before the restructuring charge, totaled $4,749,000 in 1997, which represents a decrease of $892,000 or 15.8% compared to the prior year. In 1997 EBITDA (defined as earnings before interest, income taxes, depreciation and amortization), totaled $5,099,000 which was $3,140,000 or 38% below the prior year. As a percentage of revenue, EBITDA for 1997 equaled 6.3% versus 14.0% for 1996. Adjusted EBITDA (defined as EBITDA before the restructuring charge) equaled $8,059,000 which was $180,000 or 2% below $8,239,000 for 1996. As a percentage of revenues, adjusted EBITDA equaled 10.0% for 1997 as compared to 13.9% for the prior year. The decrease as a percentage of revenues is a result of lower operating margins and higher general and administrative expense. EBITDA is not a measure of performance under generally accepted accounting principles, however the Company and the investment community consider it an important indicator. Interest expense increased slightly by $42,000 or 2.1% for 1997 compared to 1996. While the principal amount of indebtedness outstanding under the Company's senior loan facilities increased in the fourth quarter, this increase was offset by a decrease in the interest rate, as a result of amendments to the loan documents governing the Company's principal debt facilities. Debt increased as a result of the acquisition of the Las Vegas schools and new school development which occurred during 1997. Cash raised through the private placement of common stock was used in the first half of 1997 to complete the acquisitions of Another Generation and Rainbow Bridge schools. Other income decreased $324,000 or 67% for 1997 totaling $158,000 compared to 1996 of $483,000. The decrease is primarily related to the decrease in interest income. During 1996, the Company raised $11,600,000 of net proceeds through a private issuance of common stock. The Company earned interest on these funds during the second half of 1996. The cash was used for acquisitions and the building of new schools during the later part of 1996 and early 1997. The provision for income taxes totaled $250,000 for 1997. The Company was in a pretax loss position. However, the Company recorded income taxes, primarily relating to non-deductible goodwill amortization and state and local taxes. (In the acquisition of the 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 good will.) The adjusted income tax provision (income tax before the restructuring charge) equaled $1,165,000 which represents a 42% tax rate. This represented a decrease of $397,000 or 25% compared to $1,562,000 for 1996. The tax rate in 1996 was 39%. In 1997, the Company recorded a $449,000 extraordinary expense. In December 1997, the Company refinanced its principal debt facility which combined the Term Loans with scheduled principal payments and the existing Revolving Line of Credit into Revolving Credit and Term Facilities which extends principal payment to begin in the year 2001. The change in the terms enables the Company to use cash from operations and the unused portion of the line for growth through acquisitions and New School development. Because the new loan facility terms vary significantly from the existing credit facility, the Company was required to write off the deferred financing costs which were being amortized over the term of the original loan. In the fourth quarter of 1997, the Company adopted FAS No. 128 "Earnings Per Share" which changed the earnings per share calculation. The 19
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Company restated the prior year calculation as required. Basic Earnings Per Share before the Extraordinary Item equaled ($0.09) for 1997 as compared to $0.42 for 1996, which resulted in a $0.51 decrease per share. Basic Earnings (Loss) per Share equaled ($0.16) for 1997 as compared to $0.42 for 1996 or a $0.58 decline. Adjusted Basic Earnings per Share (before the restructuring charge and extraordinary item) equaled $0.25 for 1997 as compared to $0.42 for 1996 which represents a $0.17 decrease. Dilutive Earnings (Loss) per Share before the Extraordinary Item equaled ($0.09) for 1997 as compared to $0.34 for 1996, or a $0.43 decrease. Adjusted Dilutive Earnings per Share equaled $0.22 in 1997 as compared to $0.34 in 1996 or a $0.12 per share decrease. The fiscal year ended December 31, 1996 ("1996") compared to December 31, 1995 ("1995") As of December 31, 1995 the Company operated 101 schools. At December 31, 1996, the Company operated 107 schools. During 1996, the Company acquired the assets or stock of companies owning seven schools. These acquisitions included: five preschools in Virginia and two preschools in North Carolina. (In late December 1996, the Company also acquired two schools located in Seattle, Washington and one school in Coto de Caza, California; however, for purposes hereof, these are treated as being acquired in 1997.) In addition, during 1996, the Company opened seven new schools, two of which were replacement schools. Leases of six non-core schools located in South Carolina expired and were not renewed, as planned in the 1992 restructuring of the Company. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for 1996 and 1995 into three categories, Baseline Schools, Schools Acquired Within the Year and New School Development (dollars in thousands). [Enlarge/Download Table] 12 MONTHS % OF 12 MONTHS % OF 1996-1995 ENDED 1996 REVENUE ENDED 1995 REVENUE VARIANCE ($) ============================================================================================= BASELINE SCHOOLS (1) Revenues $49,977 100.0% $32,383 100.0% $ 17,594 Operating Profit $ 9,312 18.6% $ 7,010 21.6% 2,302 --------------------------------------------------------------------------------------------- SCHOOLS ACQUIRED WITHIN THE YEAR (2) Revenue 3,437 100.0% 7,102 100.0% (3,665) Operating Profit 775 22.6% 855 12.1% (80) --------------------------------------------------------------------------------------------- NEW SCHOOL DEVELOPMENT (3) Revenues 5,495 100.0% 4,672 100.0% 823 Operating Profit 586 10.7% 859 18.4% (273) --------------------------------------------------------------------------------------------- Total Revenues $58,909 100.0% $44,157 100.0% $ 14,752 ============================================================================================= School Operating Profit Before Amortization of Goodwill 10,673 18.1% 8,724 19.8% 1,949 ============================================================================================= Less Amortization of Goodwill (635) (1.1)% (332) (0.8)% (303) School Operating Profit $10,038 17.0% $ 8,392 19.0% $ 1,646 ============================================================================================= (1) Baseline Schools is defined as all schools, except schools included for the year in Schools Acquired Within the Year or New School Development (see footnotes (2) and (3). (Schools which were acquired in 1995 are included in "Baseline Schools" for 1996 results and "Schools Acquired Within the Year" for 1995 results. Schools which were first opened in 1994 are included in "Baseline Schools" for 1996 results and "New Development" for 1995 results.) (2) Schools Acquired Within the Year is defined as (i) schools acquired in 1995 for 1995 results and (ii) schools acquired in 1996 for 1996 results. (3) New School Development is defined as schools which have not been opened for two full fiscal years (i.e., schools opened in 1995 or 1996, for 1996 results and (ii) schools opened in 1994 or 1995, for 1995 results). Revenues of the Baseline Schools increased $17,594,000 or 54.3% from 1995 to 1996. The increase is a result of several factors including (1) revenues related to the 1995 acquisition totaling $14,400,000, (2) revenues related to the 1994 New Schools totaling $3,142,000 and (3) a slight increase in the remaining schools of $52,000. The increase in the remaining schools was the result of a combination of the divestiture of six South Carolina schools in 1996 and one Florida school in 1995 creating a $712,000 revenue decrease offset by a $725,000 increase in the remaining schools which was a result of enrollment and tuition increases. The operating profit of the Baseline Schools increased $2,302,000 or 32.8% for the year ended December 31, 1996 compared to 1995. The increase is a result of (1) $1,635,000 related to the acquisitions which occurred in 1995, (2) $707,000 is related to the operating profit of the New Schools opened in 1994 and (3) offset by a slight decrease of $40,000 which was related to the remaining schools. The decrease in the remaining schools operating profit is a result of an increase in personnel costs. The operating profit margin of the Baseline Schools decreased 3.0% from 21.6% for 1995 to 18.6% for 1996. The decrease in the operating margins is the result of losses associated with the 1995 acquisition of certain schools in the Indianapolis area, and lower margins of schools acquired in the 1995 acquisition of Educo, Inc. The lower margins in the acquisitions is a result primarily of lower than expected summer performance in the Educo schools and a slower than anticipated turnaround of the Indianapolis schools. In 1996, the Company acquired seven schools with total revenues of $3,437,000 and operating profit of $775,000 for 1996. Five of the seven schools (the Virginia acquisition) were acquired in February 1996 and two of the schools located in North Carolina were acquired in November of 1996. In 1995, the Company acquired 25 schools with revenues of $7,102,000 and operating profit of $855,000 for 1995. The Company acquired six Pennsylvania schools in March 1995 and acquired the ten Educo schools and nine Indianapolis schools in September 1995. The operating margin of the schools acquired in 1996 equaled 22.6% as compared to the operating margins of the schools acquired in 1995 which equaled 12.1%. The 1995 acquisitions include the Indianapolis area schools which operated at a loss and the Educo schools which operated at a 12% operating margin. When making acquisitions, the Company takes steps to increase operating margins of Acquired Schools over a 12 to 36 month period as it implements cost controls, systems and marketing strategies. In 1996 and 1995, the Company opened 14 new schools with revenues of $5,495,000 and operating profit of $586,000 for 1996. In 1994 and 1995, the Company opened 11 new schools with revenues of $4,672,000 and operating profit of $859,000 for 1995. The operating margins in 1996 of the schools opened in 1996 and 1995 equaled 10.7%. The operating margins in 1995 of the schools opened in 1995 and 1994 schools equaled 18.4%. The variance in the margins is a result of the mix and timing of schools opened. In 1996, the Company opened three elementary/middle schools and four preschools. In 1995 the Company opened seven preschools, and in 1994 the Company opened four preschools. Generally, the Company experiences smaller losses in opening preschools as compared to elementary/middle schools and is able to reach profitability in the preschool in six to nine months as compared to elementary/middle schools which can take 12 to 36 months to become profitable. Overall, in 1996 the Company's total revenues increased $14,752,000 and operating profits increased $1,646,000, compared to 1995. Meanwhile, school operating profit margins decreased from 19.0% in 1995 to 17.0% in 1996, as explained above. 20
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General and administrative expenses increased $794,000 or 23% to $4,190,000 for 1996; however, as a percentage of revenue, general and administrative expenses decreased from 7.7% of revenues in 1995 to 7.1% of revenues in 1996. The Company enjoyed efficiencies from its growth through acquisitions. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. Operating income increased $1,291,000 or 29% to $5,641,000 for 1996. The increase is a result primarily of the increase in school operating profit. In 1995, the Company recorded $500,000 in litigation expense related to a claim by former officers of the Company which was settled. As a percent of revenue, operating income decreased slightly from 9.8% for 1995 to 9.6% for 1996, which is a result of the decrease in school operating profit margins described above. Another key measure of the Company's cash generating ability is its EBITDA (earnings before interest, taxes, depreciation and amortization expenses). EBITDA increased to $8,239,000 in 1996 from $5,902,000 in 1995 which was a 40% increase. EBITDA is not a measure of performance, under generally accepted accounting principles, however the Company and the investment community consider it an important indicator. Interest expense increased $165,000 or 9% to $2,004,000 for 1996, which was due to increased debt relating to the acquisitions and new school development. Other income increased $357,000 or more than 250% to $483,000, which was due to interest income earned on the proceeds of the private placement of approximately $11,600,000 in March 1996. Income tax expense increased $2,917,000 to $1,562,000 for 1996. The increase in taxes was due to the Company being fully taxed in 1996 as compared to recording a tax benefit in 1995 of $2,105,000. This credit was based upon the adoption of SFAS 109 "Accounting for Income Taxes" in 1992 and the subsequent reduction of the Company's valuation allowance due to its more recent historical profitable operating performance and its projections for the future. Consequently, 1996 was the first year the Company was fully taxable. The Company anticipates this trend to continue. Net income decreased $1,381,000 or 36% to $2,463,000 for 1996 as a result of the Company reversing the valuation allowance in 1995 and recording taxes in 1996 at a 38.8% rate as described above. If pretax net income in 1995 were taxed at an effective rate of 38.8%, on a pro forma basis, net income would have increased $964,000 or 64%. 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 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 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 seek additional funds through debt or equity financing. In 1997, the Company amended its credit agreement three times, the most significant of which occurred in December with the execution of the Seventh Amendment and Modification to the Loan and Security Agreement. These amendments: (1) increased the Company's borrowing capacity to $25,000,000, (2) changed the prior fixed interest rates (applicable to term loans) to variable rates, (3) provided that all revolving debt will convert to a term loan in January 2001, (4) extended terms for an additional five years for the prior term loan and six years for the prior revolving line of credit and (5) increased the number of permitted new school construction projects. Two facilities are established under the Seventh Amendment: a $3,000,000 facility (Revolving and Term Facility A) and a $22,000,000 facility (Revolving and Term Facility B). Amounts outstanding under term loans at the time of the restructuring were treated as initial outstanding balances under the new Revolving and Term Facilities. Under the new arrangements, no principal payments are required until January 1, 2001. Commencing on January 1, 2001, the Company must pay outstanding principal balance of the Revolving and Term Facilities in 60 equal monthly installments. The Company may elect to convert to a term loan portions of the Revolving and Term Facility B in increments of $2,500,000. Such term loans would be payable over sixty months. By postponing the dates of required principal payments under the Company's loans, the Seventh Amendment significantly improved the Company's cash flow requirements under these loans. The restructuring allows the Company greater flexibility in managing its cash flow and allows greater ability to use available funds to grow the Company. At June 30, 1998 and December 31, 1997, the principal amounts outstanding under the Revolving and Term Facility B were $19,426,000 and $21,576,000, and no amounts were outstanding under the Revolving and Term Facility A. 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 Company's Revolving and Term Facility A outstanding balance. The Note bears interest at 10%. The Note 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. This debt discount is being amortized to interest expense over the term of the Note. Total cash and cash equivalents decreased $2,197,000 from $2,605,000 at December 31, 1997 to $408,000 at June 30, 1998. The net decrease was due primarily to (1) cash used for acquisitions totaling approximately $3,457,000, (2) approximately $3,498,000 used for the building of New Schools and acquisition of land parcels and (3) repayment of long term debt of $14,474,000. These decreases were offset by (1) cash flow from operations of $3,299,000, (2) proceeds from the sale of property totaling 21
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$6,948,000 and (3) proceeds from borrowings under the principal credit facility of $12,526,000. The working capital deficit increased $2,275,000 from $7,946,000 at December 31, 1997 to $10,221,000 at June 30, 1998. The increase is primarily the result of the decrease in cash and cash equivalents of $2,197,000 as discussed above. CAPITAL EXPENDITURES The Company is continuously maintaining and upgrading the property and equipment of each school. During the six months ended June 30, 1998, the Company spent $4,952,000 on capital expenditures, which included $3,498,000 for new school development and $1,454,000 on upgrading existing facilities. During 1997, the Company spent approximately $15,221,000 on capital expenditures, which included $11,137,000 on new school development and $4,184,000 on upgrading existing facilities. During the six months ended June 30, 1998 and 1997, the Company received $6,948,000 and $7,451,000, respectively, from sale and leaseback transactions of new schools. TRENDS During the twelve months ended December 31, 1997, the Company experienced a decrease in enrollment at its Merryhill schools, located in California, coupled with a weaker summer program in several elementary schools. As discussed herein, the Company believes that this decrease is primarily due to the effect of California public schools' initiative to decrease student/teacher class size ratios in Kindergarten to third grade classes. This initiative affected Merryhill in several ways: (1) teacher turnover increased, (2) enrollment decreased, and (3) with efforts to attract replacement teachers and retain existing teachers, average teacher salaries increased. In addition to the effect of the public school initiative, rent expense in some of the Merryhill schools increased because of recently built replacement schools, which expanded capacity. Fall enrollment for the 1997-1998 school year were down from the previous year. This negatively affected the Company's near term earnings. In an effort to improve the performance in Merryhill schools and improve the summer programs, as well as Company-wide performance, the Company has taken several key steps. The structure of operations management has changed, with the Executive Director position replacing the Regional Manager and District Manager positions. The number of schools reporting to each Executive Director has been reduced so that each manager can spend more time in the schools. In addition, the Company has hired a Vice President of Western Operations. The Company is also searching for a President and Chief Operating Officer. In the near term, additional overhead from this management structure will have a negative impact on earnings; however, over the long term, the Company believes this strategy will prove warranted. The Company plans to respond to the growing need for improved quality education. In 1996 and 1997, the Company built new elementary and middle schools, which incur higher initial losses in the first year as compared to newly constructed preschools. The Company opened four newly constructed elementary schools in 1998, and plans to continue to development elementary schools in 1999. INFLATION The Company has not been significantly affected by inflation. 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. Since 1995, the Company has been able to increase significantly the sublimit applicable to such coverage. The Company believes it has adequate insurance coverage at this time. There can be no assurance that in future years the Company will not again become subject to lower limits. 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 application 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. Concurrent with the Company's Year 2000 compliance efforts, the Company is upgrading its management information system to link the schools to the home 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 ensure Year 2000 compliance. Management anticipates that the process will be complete by December 1999 and projects spending between $1,500,000 and $2,000,000 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 affected 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 and the needs of the Company's customers for its 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company believes it is a one segment company. 22
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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- 14 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 23
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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 incorporated herein by reference to the information set forth in the Proxy Statement. 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. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. 24
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PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS A PART OF THIS REPORT: [Download Table] 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 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 September 30, 1997, 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, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 25
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3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security Agreement") among the Registrant, certain subsidiaries of the Registrant and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment and Modification dated July 2, 1996 to the Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference.) 4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.5 Sixth Amendment and Modification dated May 5, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.) 4.6 Seventh Amendment and Modification dated December 22, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.7 Eighth Amendment and Modification dated April __, 1998 to Loan and Security Agreement. 4.8 Ninth Amendment and Modification dated as of June 30, 1998 to Loan and Security Agreement. 4.9 Revolving and Term Facility Note A dated December 22, 1997 in the principal sum of $22,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.10 Revolving and Term Facility Note B dated December 22, 1997 in the principal sum of $3,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.11 Investment Agreement dated as of June 30, 1998 between Registrant and its subsidiaries and Allied Capital Corporation 4.12 Senior Subordinated Note dated as of June 30, 1998 in the principal amount of $10,000,000 payable to the order of Allied Capital Corporation. 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 26
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10% of the Registrant's total assets. The Registrant agrees to furnish a copy of each of such instruments to the Securities and Exchange Commission upon request. 10.1 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 (the "Form S-1") and incorporated herein by reference.) 10.2 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.) 10.3 1995 Stock Incentive Plan of the Registrant, as amended. 10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. 10.5 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.) 10.6 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.) 10.7 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.) 10.8 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.) 10.9 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.) 10.10 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.) 10.11 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. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 10.12 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied Capital Corporation to purchase up to 92,172.25 shares (subject to adjustment) of the Common 27
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Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) Exhibit 10.12 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: [Download Table] 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 4 Allied Investment Corporation II 50,219.5 10.13 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. 10.14 First Amended and Restated Registration Rights Agreement dated as of June 30, 1998 by and between the Registrant and Allied Capital Corporation. 10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan Description, Issued February, 1997, as amended on June 11, 1998. 10.16 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z. Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 10.17 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.) 10.18 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.) 21 List of subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule Certain schedules (and similar attachments) to Exhibits 4.1 through 4.8 and Exhibits 4.11 and 10.11 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request. (D) FINANCIAL STATEMENT SCHEDULES. None. 28
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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. 29
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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 25, 1998 NOBEL EDUCATION DYNAMICS, INC. By: /s/ A. J. Clegg ---------------------------------- A. J. Clegg Chairman of the Board, President 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 Chairman of the Board, September 25, 1998 /s/ A. J. Clegg ----------------------- A. J. Clegg President and Chief Executive Officer and Director /s/ William Bailey Vice President, September 25, 1998 ----------------------- William Bailey Chief Financial Officer (Principal Financial Officer) /s/ Yvonne DeAngelo Vice President - Finance September 25, 1998 ----------------------- Yvonne DeAngelo and Administration (Principal Accounting Officer) /s/ Edward H. Chambers Director September 25, 1998 ----------------------- Edward H. Chambers /s/ John R. Frock Executive Vice President September 25, 1998 ----------------------- John R. Frock and Director /s/ Morgan R. Jones Director September 25, 1998 ----------------------- Morgan R. Jones 30
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Director September 25, 1998 _______________________ Peter H. Havens /s/ John H. Martinson Director September 25, 1998 ----------------------- John H. Martinson /s/ Eugene G. Monaco Director September 25, 1998 ----------------------- Eugene G. Monaco Director September 25, 1998 ----------------------- Robert Zobel 31
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REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors of Nobel Education Dynamics, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the consolidated financial position of Nobel Education Dynamics, Inc. and its subsidiaries at June 30, 1998 and December 31, 1997 and 1996, and the results of their operations and their cash flows for the six months ended June 30, 1998 and each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania August 7, 1998, except for Note 17 as to which the date is August 17, 1998 F-1
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NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) [Enlarge/Download Table] ASSETS JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 408 $ 2,605 $ 5,252 Accounts receivable, less allowance for doubtful accounts of $133 in 1998 and 1997 and $103 in 1996 1,130 1,091 779 Prepaid rent 1,276 1,046 734 Prepaid insurance and other 738 952 622 Deferred taxes -- -- 891 ----------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 3,552 5,694 8,278 ----------------------------------------------------------------------------------------------------------------------------------- Property and equipment, at cost 31,601 33,030 26,166 Accumulated depreciation (9,226) (7,856) (6,843) ----------------------------------------------------------------------------------------------------------------------------------- 22,375 25,174 19,323 Property and equipment held for sale 1,371 1,495 1,111 Note receivable -- -- 425 Cost in excess of net assets acquired 41,753 37,439 25,601 Deposits and other assets 3,541 3,288 1,978 Deferred taxes 1,031 1,308 117 ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 73,623 $ 74,398 $ 56,833 =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------------------------------------------------------------------------------------------------------- Current portion of long-term obligations $ 2,031 $ 2,793 $ 3,448 Accounts payable and other current liabilities 8,147 7,981 4,465 Unearned income 3,595 2,866 1,716 ----------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 13,773 13,640 9,629 ----------------------------------------------------------------------------------------------------------------------------------- Long-term obligations 20,311 22,497 10,808 Long-term subordinated debt 6,166 5,973 3,418 Capital lease obligations 162 208 290 Deferred gain on sale/leaseback 35 39 47 Minority interest in consolidated subsidiary 440 405 318 Total Liabilities 40,887 42,762 24,510 Commitments and Contingencies (Notes 3, 6, 9, and 16) Stockholders' Equity: Preferred stock, $.001 par value; 10,000,000 shares authorized, issued and outstanding 4,593,542 in 1998 and in 1997 and 4,697,542 in 1996 $5,530 aggregate liquidation preference at June 30, 1998 and December 31, 1997 and $5,634 in 1996 5 5 5 Common stock, $.001 par value, 20,000,000 shares authorized, issued and outstanding 6,121,365 in 1998 and in 1997 and 5,831,055 in 1996 6 6 6 Treasury Stock, cost; 36,810 shares (375) (375) -- Additional paid-in capital 38,340 38,340 37,665 Accumulated deficit (5,240) (6,340) (5,353) ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 32,736 31,636 32,323 ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 73,623 $ 74,398 $ 56,833 =================================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. F-2
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NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data) [Enlarge/Download Table] For the Six Months For the Year Ended December 31, ---------------------------------------------- Ended June 30, 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------------------------------- Revenues $ 48,995 $ 80,980 $ 58,909 $ 44,154 --------------------------------------------------------------------------------------------------------------------------- Operating expenses: Personnel costs 23,368 38,557 26,777 19,664 Center operating costs 7,023 11,932 8,755 6,640 Insurance, taxes, rent and other 9,661 16,131 11,128 7,946 Depreciation and amortization 2,090 3,238 2,211 1,512 --------------------------------------------------------------------------------------------------------------------------- 42,142 69,858 48,871 35,762 --------------------------------------------------------------------------------------------------------------------------- School operating profit 6,853 11,122 10,038 8,392 --------------------------------------------------------------------------------------------------------------------------- New school development 501 400 207 146 General and administrative expenses 3,391 5,973 4,190 3,396 Litigation claim -- -- -- 500 Restructuring expense -- 2,960 -- -- --------------------------------------------------------------------------------------------------------------------------- Operating income 2,961 1,789 5,641 4,350 --------------------------------------------------------------------------------------------------------------------------- Interest expense 1,044 2,047 2,004 1,840 Other (income) expense (102) (158) (482) (126) Minority interest in income of consolidated subsidiary 35 86 94 86 --------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,984 (186) 4,025 2,550 Income tax (benefit) expense 833 250 1,562 (1,356) --------------------------------------------------------------------------------------------------------------------------- Net income (loss) before extraordinary item 1,151 (436) 2,463 3,906 --------------------------------------------------------------------------------------------------------------------------- Extraordinary loss on early extinguishment of debt, (net of income tax benefit of $330 and $27 in 1997 and 1995, respectively) -- 449 -- 62 --------------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,151 (885) 2,463 3,844 Preferred stock dividends 51 102 109 184 --------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common stockholders $ 1,100 $ (987) $ 2,354 $ 3,660 =========================================================================================================================== Basic earnings (loss) per share Net income (loss) before extraordinary item $ 0.18 $ (0.09) $ 0.42 $ 0.79 Extraordinary item -- (0.07) -- (0.01) --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.18 $ (0.16) $ 0.42 $ 0.78 =========================================================================================================================== Dilutive earnings (loss) per share Net income (loss) before extraordinary item $ 0.15 $ (0.09) $ 0.34 $ 0.64 Extraordinary item -- (0.07) -- (0.01) --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.15 $ (0.16) $ 0.34 $ 0.63 =========================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. F-3
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NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands except share data) [Enlarge/Download Table] TREASURY AND ADDITIONAL COMMON PREFERRED STOCK COMMON STOCK PAID-IN STOCK -------------------- --------------------- SHARES AMOUNT SHARES AMOUNT CAPITAL ISSUABLE ------------------------------------------------------------------------------------------------------------------------------------ Balance as of January 1, 1995 4,984,320 $ 5 15,445,063 $ 15 $ 19,645 $ -- Stock options exercised -- -- 150,000 -- 113 -- Warrants exercised -- -- 100,000 -- 50 -- Common shares issuable -- -- -- -- -- 2,000 Issuance of preferred stock 1,063,830 1 -- -- 1,999 -- Conversion of preferred stock (543,000) 638,568 1 (1) -- One-for-four reverse stock split -- -- (12,238,537) (12) 12 -- Preferred dividends -- -- -- -- -- -- Net income ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995 5,505,150 $ 6 4,095,094 $ 4 $ 21,818 $ 2,000 ==================================================================================================================================== Stock options and warrants exercised and -- -- 63,750 -- 500 -- related tax benefit Common shares issuable -- -- 312,500 1 1,999 (2,000) Common shares issued -- -- 122,270 -- 1,740 -- Private placement of common stock, net of transaction costs -- -- 1,000,000 1 11,607 -- Conversion of preferred stock (807,608) (1) 237,441 -- 1 -- Preferred dividends -- -- -- -- -- -- Net income -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1996 4,697,542 $ 5 5,831,055 $ 6 $ 37,665 -- ==================================================================================================================================== Stock options and warrants exercised and -- -- 256,750 -- 682 -- related tax benefit Conversion of preferred stock (104,000) -- 33,560 -- -- -- Other -- -- -- (7) -- Treasury stock Preferred dividends -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 4,593,542 $ 5 6,121,365 $ 6 $ 38,340 $(375) ==================================================================================================================================== Preferred dividends -- -- -- -- -- -- Net income -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1998 4,593,542 $ 5 6,121,365 $ 6 $ 38,340 $(375) ==================================================================================================================================== ACCUMULATED DEFICIT TOTAL --------------------------------------------------------------------------------------------------- Balance as of January 1, 1995 $ (11,367) $ 8,298 Stock options exercised -- 113 Warrants exercised -- 50 Common shares issuable -- 2,000 Issuance of preferred stock -- 2,000 Conversion of preferred stock -- -- One-for-four reverse stock split -- -- Preferred dividends (184) (184) Net income 3,844 3,844 --------------------------------------------------------------------------------------------------- December 31, 1995 $ (7,707) $ 16,121 =================================================================================================== Stock options and warrants exercised and -- 500 related tax benefit -- -- Common shares issuable -- -- Common shares issued -- 1,740 Private placement of common stock, net of transaction costs -- 11,608 Conversion of preferred stock -- -- Preferred dividends (109) (109) Net income 2,463 2,463 --------------------------------------------------------------------------------------------------- December 31, 1996 $ (5,353) $ 32,323 =================================================================================================== Stock options and warrants exercised and -- 682 related tax benefit Conversion of preferred stock -- -- Other -- 7 Treasury stock -- (375) Preferred dividends (102) (102) Net loss (885) (885) --------------------------------------------------------------------------------------------------- December 31, 1997 $ (6,340) $ 31,636 =================================================================================================== Preferred dividends (51) (51) Net income 1,151 1,151 --------------------------------------------------------------------------------------------------- June 30, 1998 $ (5,240) $ 32,736 =================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. F-4
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NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flow (Dollars in thousands) [Enlarge/Download Table] For the Six Months For the Year Ended December 31, --------------------------------------- Ended June 30, 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income (Loss) $ 1,151 $ (885) $ 2,463 $ 3,844 ------------------------------------------------------------------------------------------------------------------------------- Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 1,964 3,230 2,202 1,586 Provision for losses on accounts receivable 96 345 87 97 Provision for restructuring 0 2,960 0 0 Provision for deferred taxes 277 (300) 1,207 0 Minority interest in income 35 86 94 86 Early extinguishment of debt 0 779 0 89 Reversal of tax valuation allowance 0 0 0 (1,481) Changes in Assets and Liabilities Net of Acquisitions: Accounts receivable (134) (612) (139) (128) Prepaid assets (17) (641) (74) (188) Other assets and liabilities 1,088 (228) (243) (176) Unearned income (562) 213 (133) 46 Accounts payable and accrued expenses (599) 2,400 (689) 262 ------------------------------------------------------------------------------------------------------------------------------- Total Adjustments 2,148 8,232 2,312 193 ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 3,299 7,347 4,775 4,037 ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (4,952) (15,221) (12,776) (2,052) Proceeds from sale of property and equipment 6,948 7,451 8,636 251 Payment for acquisitions net of cash acquired (3,457) (10,145) (4,968) (9,101) Payment of earn out related to acquisition (1,500) 0 0 0 Other 0 0 0 (146) ------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (2,961) (17,915) (9,108) (11,048) ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from term loan and revolving line of credit 12,526 18,641 6,000 7,500 Proceeds from subordinated debt 0 0 0 6,000 Proceeds from real estate mortgage 0 0 0 3,567 Proceeds from other debt 0 0 1,500 3,672 Transaction costs related to issuance of debt and stock 0 0 0 (1,091) Proceeds from issuance of common stock 0 0 11,608 163 Repayment of long term debt (14,474) (9,682) (7,023) (11,699) Repayment of subordinated debt (497) (1,164) (6,334) 0 Repayment of capital lease obligation (39) (71) (50) (56) Proceeds from issuance of preferred stock 0 0 0 2,000 Dividends paid to preferred stockholders (51) (102) (108) (184) Proceeds from exercise of stock options 0 299 277 0 ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities (2,535) 7,921 5,870 9,872 ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,197) (2,647) 1,537 2,861 Cash and cash equivalents at beginning of year 2,605 5,252 3,715 854 ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 408 $ 2,605 $ 5,252 $ 3,715 =============================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. F-5
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NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES SUPPLEMENTAL SCHEDULES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) [Enlarge/Download Table] For the Six Months For the Year Ended December 31, ------------------------------------------------ Ended June 30, 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during year for: Interest $ 992 $ 2,005 $ 1,973 $ 1,824 Income taxes 157 728 434 137 Noncash financing and investing activities Tax benefit related to exercise of stock options and warrants -- -- 224 -- Acquisitions Fair value of tangible assets acquired 1,432 2,404 841 6,848 Cost in excess of net assets acquired 4,876 14,844 8,979 8,727 Cash acquired -- -- (573) (30) Liabilities assumed (1,291) (1,352) (685) (934) Notes issued (1,560) (5,751) (1,854) (3,310) Escrow held -- -- -- (200) Common shares issued -- -- (1,740) (2,000) ----------------------------------------------------------------------------------------------------------------- Total cash paid for acquisitions $ 3,457 $ 10,145 $ 4,968 $ 9,101 ================================================================================================================= The accompanying notes are an integral part of these consolidated financial statements. F-6
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NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY BACKGROUND: Nobel Education Dynamics, Inc. (the "Company") was founded in 1982 and commenced operations in 1984. The Company operates private pre-schools, elementary schools and middle schools located in California, the Mid- Atlantic states, North Carolina, South Carolina, Virginia, Illinois, Indiana, Washington, Florida, Oregon and Nevada. 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 subsidiary. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at 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. RECOGNITION OF REVENUES: Revenue is recognized as the services are performed. 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. 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. COST IN EXCESS OF NET ASSETS ACQUIRED: The Company's policy is to amortize cost in excess of net assets acquired related to acquisitions over 30 years for preschools and 40 years for elementary schools. Management has evaluated the life cycles of similar schools and determined that these lives are consistent with a historical range for private elementary education. In evaluating potential acquisitions of child care centers, management considers not only the current child care operations but also the outlook for these centers as elementary schools. The excess of purchase price over net assets acquired is amortized on a straight-line basis. Amortization expense amounted to $591,000, $1,005,000, $651,000, and $342,000 for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996, and 1995, respectively. Accumulated amortization at June 30, 1998, December 31, 1997 and 1996 was $3,745,691, $3,170,262 and $2,289,599, respectively. The Company reviews its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows in accordance with FAS 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of". If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss is recognized in the income statement and certain disclosures regarding the impairment are made in the financial statements. INCOME TAXES: The Company accounts for income taxes using the asset and liability method, in accordance with FAS 109, "Accounting for Income Taxes". Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A valuation allowance is recorded based on the uncertainty regarding the ultimate realizability of deferred tax assets. REVERSE STOCK SPLIT: On September 22, 1995, the stockholders approved a one-for-four reverse stock split of the Company's common stock. The Company effected the reverse split on September 28, 1995. For every four shares of common stock, each stockholder received one share of common stock. All historical share and per share amounts reflect the reverse stock split (except for the consolidated statement of stockholders' equity). 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 years calculation accordingly. The restatement did not result in a material change from amounts previously reported. 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-dividend 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. F-7
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Earnings per share are computed as follows (dollars in thousands except per share data): [Enlarge/Download Table] FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 ---------------------------------------------------------------------------------------------------- Basic (loss) earnings per share: Net (loss) income $ 1,151 $ (885) $ 2,463 $ 3,844 Less preferred stock dividends 51 102 109 184 ---------------------------------------------------------------------------------------------------- Net income available for common stock 1,100 (987) 2,354 3,660 Average common stock outstanding 6,121,365 6,052,625 5,545,605 4,688,355 Basic earnings (loss) per share $ 0.18 $ (0.16) $ 0.42 $ 0.78 Diluted earnings (loss) per share: Net (loss) income available for common stock and dilutive securities $ 1,151 $ (987) $ 2,463 $ 3,844 Average common stock outstanding 6,121,365 6,052,625 5,545,605 4,688,355 Additional common shares resulting from dilutive securities: Options, warrants and convertible preferred stock 1,395,686 N/A 1,717,178 1,440,786 ---------------------------------------------------------------------------------------------------- Average common stock and dilutive securities outstanding 7,517,051 6,052,625 7,262,783 6,129,141 Diluted earnings (loss) per share $ 0.15 $ (0.16) $ 0.34 $ 0.63 CONCENTRATIONS OF CREDIT RISK 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 monitors its exposure for credit losses and maintains allowances for anticipated losses. RECLASSIFICATIONS Certain prior year amounts have been reclassified in the current year for comparative purposes. (2) CHANGE IN FISCAL YEAR In the last quarter of 1997, the Company changed its fiscal year end to the end of June. Accordingly, the Company's transition period, which ended June 30, 1998 includes the six months from January 1 to June 30, 1998. There were 52 weeks in each of fiscal 1997, 1996 and 1995 and 26 weeks in fiscal 1998. The following unaudited results of operations for the six months ending June 30, 1997 are presented for comparative purposes and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for that period (dollars in thousands, except per share data). [Enlarge/Download Table] SIX MONTHS ENDED JUNE 30, 1997 (unaudited) -------------------------------------------------------------------------------------------- Revenues $39,664 Operating expenses 32,878 -------------------------------------------------------------------------------------------- School operating profit 6,786 New school development 98 General and administrative expenses $ 2,817 -------------------------------------------------------------------------------------------- Operating income 3,871 -------------------------------------------------------------------------------------------- Interest expense 854 Other income (5) Minority interest in earnings of consolidated subsidiary 49 -------------------------------------------------------------------------------------------- Income before income taxes 2,973 Income tax expense 1,249 -------------------------------------------------------------------------------------------- Net income 1,724 -------------------------------------------------------------------------------------------- Preferred stock dividends 51 -------------------------------------------------------------------------------------------- Net income available to common stockholders $ 1,673 ============================================================================================ Basic earnings per share $0.28 ============================================================================================ Dilutive earnings per share $0.23 ============================================================================================ (3) ACQUISITIONS: During the six months ended June 30, 1998 and the years ended December 31, 1997 and 1996, the Company completed various acquisitions, all of which are accounted for using the purchase method, which are described below. The results of operations for all acquisitions are included in the Consolidated Statement of Income from the date of acquisition. 1998 ACQUISITIONS In March and May 1998, the Company completed the acquisition of four elementary schools and one preschool. The Company acquired the assets of Touchstone Elementary School in Lake Oswego, Oregon, which has a capacity for 150 students. The Company acquired the stock of Lake Forest Park Montessori School, Inc., owner of Lake Forest Park Montessori School, in Seattle, Washington, which has a capacity of 250 students. The Company acquired the assets of the Western School, located in North Lauderdale, Florida, which has a capacity for 350 children. Lastly, the Company acquired the Brighton Schools in Seattle, Washington. The Brighton Schools consist of an elementary school and a preschool with a combined capacity of 319 students. The aggregate purchase price for the four acquisitions equaled $3,457,000 in cash, $1,560,000 in subordinated notes payable over five years and approximately $1,291,000 in assumed liabilities. 1997 ACQUISITIONS: ACQUISITION OF ANOTHER GENERATION ENTERPRISES INC. In January 1997, the Company purchased Another Generation Enterprises Inc. and certain related corporations, which owned six preschools located in Broward County and Palm Beach County, Florida with a capacity of 1,200 children. The aggregate purchase price for the stock totaled $4,543,000, with $3,643,000 in cash, $750,000 in notes and approximately $150,000 in assumed liabilities. Also in January 1997, the Company purchased a 19.99% interest in the Sagemont School located in Weston, Florida from the principal owners of Another Generation Enterprises Inc. The Sagemont F-8
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School is an elementary school with a capacity of 340 students which opened in the Fall of 1996. The Company also formed a joint venture with such persons to develop five additional elementary schools in Florida, each of which the Company will own 80%. ACQUISITION OF RAINBOW BRIDGE SCHOOLS In April 1997, the Company acquired the Rainbow Bridge schools located in San Jose, California. Rainbow Bridge schools include two private elementary and middle schools and three preschools, with combined licensed capacity of 950. The purchase price of the acquisitions totaled $7,508,000, $5,140,000 paid in cash and $2,368,000 paid in notes (including amounts paid on an "earn out" based on achievement of certain earnings targets). ACQUISITION OF LAS VEGAS SCHOOLS In September 1997, the Company purchased three schools located in Las Vegas, Nevada, formerly operating as Hillpointe Elementary School and Warren Walker Preschools, with current combined licensed capacity of 670. The Hillpointe Elementary School is a new school which opened in September 1997. The purchase price of the acquisition totaled approximately $3,800,000, $2,300,000 paid in cash, $700,000 paid in notes and $800,000 in assumed liabilities. 1996 ACQUISITIONS: ACQUISITION OF VIRGINIA PRESCHOOLS: Pursuant to an acquisition agreement in February 1996, the Company acquired all the assets of four Virginia corporations, each of which operates a preschool in Virginia. The purchase price consisted of (i) $3,200,000 in cash, (ii) a five-year note in the principal amount of $337,000 bearing interest at the rate of 7% per annum and (iii) a cash earn-out payment of $25,000 paid in October 1996. The Company also entered into a five year non-compete agreement that requires monthly payments of $1,667 through February 2001. Also in February 1996, the Company acquired the assets of a fifth Virginia preschool for 96,192 shares of the Company's common stock (valued at $1,500,000 for financial statement purposes), and a cash earn- out payment of $12,500 paid in October 1996. ACQUISITION OF MACGREGOR CREATIVE SCHOOLS, OAK RIDGE PRIVATE SCHOOL AND EVERGREEN ACADEMY: In November 1996, the Company acquired the assets of MacGregor Creative Schools located in Cary, North Carolina. MacGregor Creative Schools consisted of two preschools with aggregate capacity of 408 children. In December 1996, the Company acquired the assets of Oak Ridge Private School, an elementary school located in Coto de Caza, California. Oak Ridge Private School has potential licensed capacity of 198 children. In December 1996, the Company acquired the stock of Montessori House, Inc., which owned Evergreen Academy located in Seattle, Washington. Evergreen Academy consists of one elementary/middle school and one preschool with aggregate licensed capacity of 400 children. A portion of the purchase price for this transaction was paid on January 2, 1997. The purchase prices of these three transactions totaled approximately $2,560,000 in cash, $780,000 in subordinated notes, $240,000 in stock (26,078 shares) and approximately $300,000 in assumed liabilities. 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 1998, 1997 and 1996 all occurred at the beginning of 1996. These 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 1996, 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). [Enlarge/Download Table] FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 (UNAUDITED) (UNAUDITED) ---------------------------------------------------------------------------------------------------- Revenues $50,747 $90,283 $81,700 Net income before extraordinary item 1,279 252 3,242 Earning per share Basic $ 0.21 $ 0.04 $ 0.58 Diluted $ 0.17 $ 0.03 $ 0.44 (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 $2,364,000, $6,000,000 and $3,040,000 at June 30, 1998, December 31, 1997 and 1996, 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) PROPERTY AND EQUIPMENT: The balances of major property and equipment classes, excluding property and equipment held for sale, were as follows (dollars in thousands): [Enlarge/Download Table] JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------------------------------------------------------------------- Land $ 3,147 $ 3,461 $ 4,105 Buildings 6,154 6,685 8,936 Assets under capital lease obligations 913 913 913 Leasehold improvements 5,947 5,358 4,477 Furniture and equipment 12,573 10,593 7,723 Construction in progress 2,867 6,020 12 ---------------------------------------------------------------------------------------- 31,601 33,030 26,166 Accumulated depreciation (9,226) (7,856) (6,843) ---------------------------------------------------------------------------------------- $22,375 $25,174 $19,323 ======================================================================================== Depreciation expense was $1,325,000, $2,096,000, $1,560,000, and $1,150,000 for the six months ended June 30, 1998 and for the years 1997, 1996 and 1995, respectively. Amortization of capital leases included in depreciation expense amounted to $7,320 in the six months ended June 30, 1998, and $14,640 in each of the years 1997, 1996, and 1995. Accumulated amortization of capital leases F-9
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amounted to $468,000, $461,000, and $446,000 as of June 30, 1998, December 31, 1997, and 1996, respectively. (6) RESTRUCTURING AND PROPERTY AND EQUIPMENT HELD FOR SALE In the fourth quarter of 1997 the Company approved a restructuring plan which included (1) reorganization of the geographic school districts, (2) reorganization of the structure of operations management, (3) the decision to close several schools and to write down the book value of the assets of schools which are non-performing, (4) placing non-performing schools for sale and (5) hiring of a Chief Operating Officer (President). In an effort to improve Company performance, the Company restructured its existing operations management. The Executive Director position replaced both the Regional Manager and the District Manager positions. The number of schools for which each manager is responsible has been reduced so that each can spend more time in the schools. In conjunction with the restructuring, the Company recorded a $2,960,000 charge in December 1997. The restructuring charge included (1) a $2,000,000 write down of the cost in excess of net assets acquired related to schools located in Indianapolis, (2) $789,000 related to the closing of non- performing schools, and (3) $171,000 related to the costs associated with the restructuring of the management team. The write down of fixed assets and cost in excess of net assets acquired was determined based on the estimated selling prices of these assets based on prior experience from comparable situations and information provided by outside brokers. Non cash charges included in the $2,960,000 charge were $2,269,019. During the six months ended June 30, 1998, cash payments related to the closing of non-performing schools and cost associated with the restructuring of the management team were $144,897 and $129,837, respectively. The amounts reflected in the table below for 1996 reflect certain properties located in the Southeast related to a prior restructuring. The balances of major property and equipment held for sale were as follows (dollars in thousands): [Download Table] JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------------------------------------------------------------- Land $ 219 $ 219 $ 512 Buildings 741 741 940 Leasehold improvements 936 623 - Furniture and equipment 629 1,030 374 Accumulated depreciation (1,154) (1,118) (715) -------------------------------------------------------------------------------- $ 1,371 $ 1,495 $ 1,111 ================================================================================ (7) DEBT: Debt consisted of the following (dollars in thousands): [Enlarge/Download Table] JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------------------------------------------------------------------------- LONG TERM OBLIGATIONS: Revolving and Term Credit Facility $19,427 $21,574 $11,770 1st mortgages, due in varying installments over three to twenty years with fixed interest rates ranging from 11% to 12%. 281 301 1,002 Notes payable to sellers from various acquisitions, due in varying installments over three to fifteen years with fixed interest rates varying from 8% to 12%. 257 288 644 Other 758 484 239 ------------------------------------------------------------------------------------------------- Total long term obligations $20,723 $22,647 $13,655 Less current portion (412) (150) (2,847) ------------------------------------------------------------------------------------------------- $20,311 $22,497 $10,808 ================================================================================================= SUBORDINATED DEBT: Subordinated debt agreements, due in varying installments over five to ten years with fixed interest rates varying from 7% to 8%. $ 7,697 $ 8,534 $ 3,947 ------------------------------------------------------------------------------------------------- Less current portion (1,531) (2,561) (529) ------------------------------------------------------------------------------------------------- $ 6,166 $ 5,973 $ 3,418 ================================================================================================= DEBT: On August 31, 1995, the Company completed a $23,000,000 refinancing (the "Refinancing") which consisted of the placement of: (1) a $7,500,000 revolving line of credit and a $7,500,000 term loan, both financed through Summit Bank (the "Credit Agreement"); (2) $6,000,000 of subordinated debentures with Allied Capital Corporation and affiliated entities (collectively, "Allied"); (3) 1,063,830 shares of Series D Convertible Preferred Stock sold to Allied for a purchase price of $2,000,000; and (4) warrants sold to Allied to acquire an aggregate of 309,042 shares of the Company's Common Stock, subject to certain adjustments under anti-dilution provisions, for a purchase price of $100. The Refinancing resulted in an extraordinary loss of $62,000 related to the write-off of the unamortized loan origination fees in 1995. On November 1, 1996, the Company amended the Credit Agreement which increased the Company's revolving line of credit from $7,500,000 to $10,000,000 and extended the maturity dates of the loans. F-10
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In 1997, the Company amended its credit agreement three times, the most significant of which occurred in December with the execution of the Seventh Amendment and Modification to the Credit Agreement. These amendments: (1) increased the Company's borrowing capacity to $25,000,000, (2) changed the prior fixed interest rates (applicable to term loans) to variable rates, (3) provided that all revolving debt will convert to a term loan in January 2001, (4) extended terms for an additional five years for the prior term loan and six years for the prior revolving line of credit and (5) increased the number of permitted new school construction projects. Two facilities are established under the Seventh Amendment: a $3,000,000 facility (Revolving and Term Facility A) and a $22,000,000 facility (Revolving and Term Facility B). Amounts outstanding under term loans at the time of the restructuring were treated as initial outstanding balances under the new Revolving and Term Facilities. Under the new arrangements, no principal payments are required until January 1, 2001. Commencing on January 1, 2001, the Company must pay outstanding principal balance of the Revolving and Term Facilities in 60 equal monthly installments. Interest on the unpaid principal balance of Revolving and Term Facility A accrues at a variable interest rate ("Floating Rate") equal to the base rate of Summit Bank plus 25 basis points (subject to reduction, based on performance). Interest on the unpaid principal balance of Revolving and Term Facility B accrues at a variable interest rate equal to the Floating Rate or a LIBOR-based rate (at the Company's option, chosen at the beginning of any interest rate period). Interest rates on the outstanding borrowings as of June 30, 1998 ranged from 8.0% to 8.5% with an effective weighted average rate of 8.5%. The Company may elect to convert to a term loan portions of the Revolving and Term Facility B in increments of $2,500,000. Such term loans would be payable over sixty months. By postponing the dates of required principal payments under the Company's loans, the Seventh Amendment significantly improved the Company's cash flow requirements under these loans. The restructuring allows the Company greater flexibility in managing its cash flow and allows greater ability to use available funds to grow the Company. Because of the significant change in the repayment terms of the senior loan, in accordance with Emerging Issue Task Force Issue 96-19 "Debtors Accounting for Modification of Debt Instrument", the Company wrote off the financing fees related to the prior financing totaling $779,000 on a pretax basis. The charge was recorded as an extraordinary item and accordingly shown tax effected. At June 30, 1998 and December 31, 1997, the principal amounts outstanding under the Revolving and Term Facility B were $19,427,000 and $21,574,000, and no amounts were outstanding under the Revolving and Term Facility A. The Company's debt agreements contain restrictive covenants regarding the payment of common stock dividends and the maintenance of ratios related to debt to earnings before interest, taxes, depreciation and amortization. Maturities of long-term obligations are as follows: $1,943,000 in 1999, $2,000,000 in 2000, $1,978,000 in 2001, $1,792,000 in 2002, $878,000 in 2003, and $401,000 in 2004 and thereafter. The terms of the Company's credit facility with Summit Bank, as amended, require principal payments commencing January 1, 2001. The Company borrows and repays on the facilities from time to time, as cash becomes available or is needed. Therefore, the maturities of the Revolving and Term Credit Facilities have not been included in the above figures. 8) ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES: Accounts payable and other current liabilities were as follows (dollars in thousands): [Enlarge/Download Table] JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------------------------------------------------------------------------------- Accounts payable $1,029 $1,508 $ 788 Reserve for closed centers 644 832 100 Accrued payroll and related items 1,791 1,673 1,189 Accrued rent 600 563 420 Accrued property taxes 1,514 1,063 1,065 Other accrued expense 2,569 2,342 903 -------------------------------------------------------------------------------------------------- $8,147 $7,981 $4,465 ================================================================================================== (9) 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, 1998 (dollars in thousands): OPERATING LEASES [Download Table] SCHOOLS CLOSED TO BE CONTINUING SCHOOLS DIVESTED SCHOOLS TOTAL ------------------------------------------------------------------------- 1999 $ 253 $ 591 $ 15,072 $ 15,916 2000 200 591 14,319 15,110 2001 176 590 13,940 14,706 2002 172 573 13,180 13,925 2003 132 485 12,490 13,107 2004 and thereafter 224 3,477 89,870 93,571 ------------------------------------------------------------------------- Total minimum lease obligations $1,157 $6,307 $158,871 $166,335 ========================================================================= CAPITAL LEASES 1999 $ 116 2000 105 2001 77 2002 0 ------------------------------------------------------------------------- Total minimum lease obligations $ 298 ------------------------------------------------------------------------- Less amount representing interest 48 ------------------------------------------------------------------------- Present value of capital lease obligations 250 ------------------------------------------------------------------------- Less current portion 88 ------------------------------------------------------------------------- $ 162 ========================================================================= 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 $7,103,000, $11,157,000, $8,113,000, and $5,829,000 for the six months ended June 30, 1998 and the years ended December 31, 1997, F-11
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1996 and 1995, respectively. These leases are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs. The Company entered into agreements to assign or sublease leases for five centers under development and nine centers which were operating. The 14 assigned leases have remaining terms from four years to 14 years. Under the agreements, the Company is contingently liable if the assignee is in default under the lease. Contingent future rental payments under the assigned leases are as follows (dollars in thousands): 1999 $ 674 2000 $ 657 2001 $ 595 2002 $ 589 2003 and thereafter $1,798 (10) STOCKHOLDERS' EQUITY: PREFERRED STOCK: In connection with the Refinancing (see Note 7), on August 31, 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, 1998, December 31, 1997 and 1996, 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 discussed below under "Common Stock 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, 1998, December 31, 1997 and 1996, 2,500,000 shares were outstanding. On July 20, 1993, the Company completed a private placement of 2,484,320 shares of its Series A Convertible Preferred Stock at 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. At June 30, 1998, December 31, 1997 and 1996, 1,029,712, 1,029,712 and 1,133,712 shares were outstanding, respectively. 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. PRIVATE PLACEMENT OF COMMON STOCK: On March 5, 1996, the Company raised approximately $11,600,000 net proceeds through the issuance of 1,000,000 shares of common stock at $12 per share. COMMON STOCK WARRANTS: In connection with the Refinancing (see Note 7) on August 31, 1995, the Company issued to Allied warrants to acquire an aggregate of 309,042 shares of the Company's Common Stock. On May 28, 1997, Mr. Clegg exercised a warrant to purchase 187,500 shares at a purchase price of $2.00 per share. Mr. Clegg paid the exercise price of the warrant by delivery of 36,810 shares of Common Stock valued at $10.19 per share, which was the fair market value of the Common Stock on the date of the exercise. Accordingly, the Company recorded the shares acquired from Mr. Clegg as treasury stock on the balance sheet. 1995 STOCK INCENTIVE PLAN On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan. On September 19, 1997, 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 750,000. 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 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 F-12
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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. Option activity (adjusted for the 4:1 reverse split) with respect to the Company's stock incentive plans and other employee options was as follows: OUTSTANDING OPTIONS WEIGHTED AVERAGE NUMBER RANGE EXERCISE PRICE ------------------------------------------------------------------- Balance, January 1, 1995 79,775 $ 3.00 to $ 13.00 $ 4.57 ------------------------------------------------------------------- Granted 102,950 $11.625 $11.625 Canceled - - - - Exercised (37,500) $ 3.00 to $ 4.00 $ 3.75 ------------------------------------------------------------------- Balance, December 31, 1995 145,225 $ 3.00 to $ 13.00 $ 9.78 =================================================================== Granted 60,500 $ 10.50 to $ 15.81 $ 11.52 Canceled (28,175) $11.625 $11.625 Exercised (28,750) $ 4.00 to $ 6.00 $ 3.75 ------------------------------------------------------------------- Balance, December 31, 1996 148,800 $ 3.00 to $ 15.81 $ 12.67 =================================================================== Granted 183,200 $ 7.88 to $ 10.50 $ 9.48 Canceled (54,575) $ 3.00 to $ 13.00 $ 11.50 Exercised ( 6,250) $ 3.50 to $ 13.50 $ 11.50 ------------------------------------------------------------------- Balance, December 31, 1997 271,175 $ 3.00 to $ 16.50 $ 10.75 =================================================================== Granted 156,507 $ 5.06 to $ 9.250 $ 5.90 Canceled (13,250) $ 7.87 to $11.625 $ 10.02 Exercised 0 $ - to $ - $ - ------------------------------------------------------------------- Balance, June 30, 1998 414,432 $ 3.00 to $ 16.50 $ 8.15 =================================================================== At June 30, 1998, December 31, 1997 and 1996, 417,943, 545,940 and 269,813 shares, respectively, remained available for options or stock grants under the 1995 Stock Incentive Plan and 77,191 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 in 1996 and 1995 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): JUNE 30, YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 ----------------------------------------------------------------------- Net (loss) income - as reported 1,151 $ (885) $2,463 $3,844 Net (loss) income - pro forma 863 (1,222) 2,365 3,841 Net (loss) income per share - as reported $ .018 $ (0.16) $ 0.42 $ 0.78 Net (loss) income per share - pro forma $ 0.14 $ (0.20) $ 0.41 $ 0.78 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 in 1998, 1997 and 1996: Expected dividend yield 0% Expected stock price volatility 39.23% Risk-free interest rate 5.42 - 5.80% Expected life of options 3 years Activity (adjusted for the 4:1 reverse split) with respect to warrants outstanding at June 30, 1998 is as follows: [Enlarge/Download Table] NUMBER RANGE ------------------------------------------------------------------------------------------------ Balance, January 1, 1995 430,000 $2.00 to $4.00 Granted 309,042 $7.52 Canceled - - - Exercised (25,000) $2.00 ------------------------------------------------------------------------------------------------ Balance, December 31, 1995 714,042 $2.00 to $7.52 ------------------------------------------------------------------------------------------------ Granted - - - Canceled - - - Exercised (25,000) $4.13 - ------------------------------------------------------------------------------------------------ Balance, December 31, 1996 689,042 $2.00 to $7.52 ------------------------------------------------------------------------------------------------ Granted - - - Canceled (5,000) $2.00 to $7.52 Exercised (250,000) $2.00 ------------------------------------------------------------------------------------------------ Balance, December 31, 1997 434,042 $4.00 to $7.52 ------------------------------------------------------------------------------------------------ Granted - Canceled - Exercised - ------------------------------------------------------------------------------------------------ Balance, June 30, 1998 434,042 $4.00 to $7.52 ------------------------------------------------------------------------------------------------ (11) OTHER (INCOME) EXPENSE: Other (income) expense consists of the following (dollars in thousands): [Enlarge/Download Table] FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------- Interest income $ (95) $(179) $(470) $(142) Rental income (17) (77) (143) (194) Depreciation related to rental properties 9 33 73 82 Other projects - (2) - 29 Costs related to centers held for sale 1 67 58 99 --------------------------------------------------------------------------------------------------- $ (102) $(158) $(482) $(126) =================================================================================================== (12) RELATED-PARTY TRANSACTIONS: Legal services were rendered to the Company by Drinker Biddle & Reath, of which a director of the Company is a partner. The Company expects this firm to continue to provide such services during 1998. Fees paid to the firm for the six months ended June 30, 1998 and for the years 1997, 1996 and 1995 totaled $2,028, $36,000, $128,000, and $704,000, respectively. F-13
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(13) INCOME TAXES: Current tax provision (dollars in thousands): [Enlarge/Download Table] FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------- Federal $467 $ 26 $ 62 $ 34 States 89 194 293 91 ----------------------------------------------------------------------------------------------- $556 $ 220 $ 355 $ 125 Deferred tax provision 277 30 $ 1,207 (1,481) ----------------------------------------------------------------------------------------------- $833 $ 250 $ 1,562 $(1,356) =============================================================================================== 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): [Enlarge/Download Table] FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 ------------------------------------------------------------------------------------------- U.S. federal statutory rate $674 ($ 63) $ 1,364 $ 867 State taxes, net of federal tax benefit 54 $ 137 $ 119 $ 127 Benefit from realization of net operating losses 0 0 0 ($996) Reduction in valuation allowance 0 0 0 $(1,481) Goodwill and other 105 176 79 127 ------------------------------------------------------------------------------------------- $833 $ 250 $ 1,562 $(1,356) =========================================================================================== 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): [Enlarge/Download Table] FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30, 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------ DEFERRED DEFERRED DEFERRED DEFERRED TAX ASSETS TAX ASSETS TAX ASSETS TAX ASSETS (LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES) ------------------------------------------------------------------------------------------------------------ Depreciation ($725) ($576) $ (383) $ (241) Provision for center closings and other restructurings 1,534 1,635 379 1,270 Net operating losses 0 0 801 720 AMT credit carryforward 95 94 90 126 Other 127 155 121 116 ------------------------------------------------------------------------------------------------------------ Net deferred tax asset $1,031 $1,308 $1,008 $1,991 ============================================================================================================ In 1995, based on three years of positive net income and the analysis of projections for the years 1996 through 1999, the Company removed the remaining valuation allowance. Accordingly, such amounts were recorded as a credit to income tax expense in the respective periods. (14) 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. Nobel's matching contributions under the Plan were $60,000, $90,000, $74,000 and $61,000 for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995, respectively. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments approximates carrying value. The following methods and assumptions were considered by the Company in determining its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value. Debt: The estimated fair value of the Company's debt as a whole was based on the discounted cash flows of all debt instruments. (16) COMMITMENTS AND CONTINGENCIES: 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 centers 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. (17) SUBSEQUENT EVENTS 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. FORMATION OF SUBSIDIARY AND ACQUISITION On August 17, 1998, the Company entered into a joint venture 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. F-14
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EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit 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 September 30, 1997, 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, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security Agreement") among the Registrant, certain subsidiaries of the Registrant and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment and Modification dated July 2, 1996 to the Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference.) 4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.5 Sixth Amendment and Modification dated May 5, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.) 4.6 Seventh Amendment and Modification dated December 22, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.7 Eighth Amendment and Modification dated April __, 1998 to Loan and Security Agreement. 4.8 Ninth Amendment and Modification dated as of June 30, 1998 to Loan and Security Agreement. 4.9 Revolving and Term Facility Note A dated December 22, 1997 in the principal sum of $22,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.10 Revolving and Term Facility Note B dated December 22, 1997 in the principal sum of $3,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.11 Investment Agreement dated as of June 30, 1998 between Registrant and its subsidiaries and Allied Capital Corporation 4.12 Senior Subordinated Note dated as of June 30, 1998 in the principal amount of $10,000,000 payable to the order of Allied Capital Corporation. 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
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10% of the Registrant's total assets. The Registrant agrees to furnish a copy of each of such instruments to the Securities and Exchange Commission upon request. 10.1 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 (the "Form S-1") and incorporated herein by reference.) 10.2 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.) 10.3 1995 Stock Incentive Plan of the Registrant, as amended. 10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. 10.5 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.) 10.6 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.) 10.7 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.) 10.8 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.) 10.9 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.) 10.10 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.) 10.11 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. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 10.12 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied Capital Corporation to purchase up to 92,172.25 shares (subject to adjustment) of the Common
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Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) Exhibit 10.12 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: [Download Table] 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 4 Allied Investment Corporation II 50,219.5 10.13 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. 10.14 First Amended and Restated Registration Rights Agreement dated as of June 30, 1998 by and between the Registrant and Allied Capital Corporation. 10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan Description, Issued February, 1997, as amended on June 11, 1998. 10.16 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z. Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 10.17 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.) 10.18 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.) 21 List of subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule Certain schedules (and similar attachments) to Exhibits 4.1 through 4.8 and Exhibits 4.11 and 10.11 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request.

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