Item 1. Business.
General
We are a leading for-profit provider of education and school management services for the pre-elementary through 12/th/ grade market. Our programs are offered through a network of private schools, charter schools, schools for learning challenged students, and alternative high schools, under the global brand name "Nobel Learning Communities". These schools typically provide summer camps and before-and-after school programs. Our credo is "Quality Education Maximizing a Child's Life Opportunities."
Our schools are located in California, Pennsylvania, New Jersey, Virginia, Florida, Maryland, North Carolina, South Carolina, Georgia, Illinois, Nevada, Texas, Arizona, Oregon and Washington. The schools operate under various names, including Chesterbrook Academy (East, South and Midwest), Merryhill School (West), Evergreen Academy (Northwest), Paladin Academy (learning challenged) and Houston Learning Academy (alternative high schools). As of September 18, 2001, we had 171 schools in 15 states, with an aggregate capacity of approximately 28,000 children.
We are pursuing a four-pronged strategy to take advantage of the significant growth opportunities in the private education market:
. internal organic growth at existing schools, including expansions of campus facilities
. new school development in both existing and new markets
. strategic acquisitions
. development of new businesses.
Our strategy is based on meeting the educational needs of children, beginning with infancy. We encourage our children to stay with Nobel schools as they advance each school year, within our geographic clusters called "Nobel Learning Communities." Through the use of strategically designed clusters, we seek to increase market awareness, achieve operating efficiencies, and provide cross- marketing opportunities, particularly by providing feeder populations from pre-
elementary school to elementary school, and elementary school to middle school, and to and from our other specialty programs. Centralized administration provides control of program quality and development and significant operating efficiencies.
We seek to distinguish our schools from our competition with qualitative and quantitative program outcomes. At each level, we support a child's development with age appropriate curriculum-based programs. We foster learning through accredited schools with small classes, supported by technology and early introduction of a foreign language. Further, in certain locations, we serve those with special needs through our schools for learning challenged and alternative high schools. We believe that the empirical results support the quality of our programs. Standardized test results have shown that our students perform one and one-half to three grade levels above national norms in reading and mathematics.
Many of our schools operate from 6:30 a.m. to 6:00 p.m., allowing early drop- off and late pick-up by working parents. In most locations, programs are available for children starting at six weeks of age. For a competitive price, parents can feel comfortable leaving their children at a Nobel school knowing they will receive both a quality education and engage in well-supervised activities.
Most of our schools complement their programs with before and after school programs and summer camps (both sports and educational). Some of our schools have swimming pools. Our schools also seek to improve margins by providing ancillary services and products, such as book sales, uniform sales and portrait services.
We were organized in 1984 as The Rocking Horse Childcare Centers of America, Inc. In 1993, new management changed our strategic direction to expand into private elementary education. This change in direction coincided with the change of our name to Nobel Education Dynamics, Inc. In 1998, we changed our name to Nobel Learning Communities, Inc. to reflect the organizational model that we use today, which supports cross-marketing and operational synergies within the "Nobel Learning Communities."
Our corporate office is located at Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media, PA 19063. Our telephone number is (610) 891-8200.
Educational Philosophy and Implementation
Our educational philosophy is based on a foundation of sound research, innovative instructional techniques and quality practice and proprietary curricula developed by experienced educators. Our programs stress the development of the whole child and are based on concepts of integrated and age- appropriate learning. Our curricula recognize that each child develops according to his or her own abilities and timetable, but also seek to prepare every student for achievement in accordance with national content standards and goals. Every child's individual educational needs and skills are considered upon entrance into a Nobel school. Progress is regularly monitored in terms of both the curriculum's objectives and the child's cognitive, social, emotional and physical skill development. The result is the opportunity for each of our students
to develop a strong foundation in academic learning, positive self-esteem, and emotional and physical well-being, based on a personalized approach.
Under the direction of our Chief Education Officer, we have developed curriculum guidelines for each grade level and content area to assist principals and teachers in planning their daily and weekly programs. At our educator's Web site we have linked the curriculum guidelines to the products and services that are most appropriate for addressing our guidelines. The Web site also provides our educators with links to Nobel's frameworks and philosophy as well as other resources that support our educational mission.
In 1996, we launched our National Education Advisory Board. Under the direction of Lynn Fontana, our Executive Vice President - Education, the Board includes six nationally known educators each of whom advises Nobel on his or her particular area of expertise:
. Dr. Barbara Presseisen, our retired Vice President of Education (Cognitive Development)
. 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) (Professor Emeritus)
. Dr. Drew H. Gitomer of Educational Testing Service (Testing and Evaluation).
. Dr. Janet Katz, Curriculum Coordinator, Upper Saddle River Schools (Curriculum and Instruction).
The Advisory Board helps oversee the development of our curriculum guidelines, advises on how best to integrate innovation into our schools and how best to prepare our teachers to implement programs that address the curriculum guidelines. Advisory Board members are also available to work on special projects and services that enhance our school programs.
We maintain that small schools, small classes, qualified teachers, clearly articulated curriculum guidelines and excellent educational materials are basic ingredients of quality education. Our philosophy is based on personalized instruction that leads to a student's active involvement in learning and understanding. The program for our schools is a skills-based and developmentally appropriate comprehensive curriculum. We implement the curriculum in ways that stimulate the learner's curiosity, enhance students' various learning styles, and employ processes that contribute to lifelong achievement. Academic areas addressed include reading readiness and reading, spelling, writing, handwriting, mathematics readiness and mathematics, science, social studies, visual and graphic arts, music, physical education and health, and foreign language. Computer literacy and study skills are integrated into the program, as appropriate, in all content areas. Our
schools employ state-of-the-art equipment, with interactive software. Most schools in the Nobel Learning Communities introduce a second language between the ages of three and four and continue that instruction into the pre-K, kindergarten and school age programs.
We offer sports activities and supplemental programs, which include day field trips coordinated with the curriculum to such places as zoos, libraries, museums and theaters, and, at the middle schools, overnight trips to such places as Yosemite National Park, California and Washington, D.C. Schools also arrange classroom presentations by parents, community leaders and other volunteers, as well as organize youngsters as presenters to community groups and organizations. To enhance 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 instrumental music lessons.
We recognize that maintaining the quality of our teachers' capabilities and professionalism is essential to sustaining our students' high level of academic achievement and our profitability. We sponsor professional development days covering various aspects of teaching and education, using both internal trainers and external consultants. Staff members are recognized for the completion of continuing education experiences, encouraged to pursue formal advanced learning, and rewarded for outstanding performance and achievement. Our educators serve on task forces and committees who regularly review and revise guidelines, programs, tools and current teaching methods.
We seek to assure that our schools meet or exceed the standards of appropriate accrediting agencies through an internal quality assurance program. Many Nobel schools are accredited, or are currently seeking accreditation, by the National Association for the Education of Young Children (NAEYC), the National Independent Private Schools Association (NIPSA), or the Commission on International and Trans-Regional Accreditation (CITA).
Operations / School Systems
In order to maintain uniform standards, our schools share consistent educational goals and operating procedures. To respond to local demands, principals are encouraged to tailor curriculums, within Nobel's standards, to meet local needs. Our management visits all schools and centers on a regular basis to review program and facility quality.
Critical to our educational and financial success are our school principals, who are responsible to manage school personnel and finances, to ensure teacher adherence to our curriculum guidelines, and to implement local sales and marketing strategies. We treat each school as a separate cost center, holding each accountable for its own performance. Each school prepares an annual budget and submits weekly financial data to the corporate office, and to appropriate district and division managers. Tuition revenue, operating costs, and utilization rates are continually monitored, with each school measured weekly in relation to our business plan and prior year performance. Executive Directors, another critical component to our success, oversee the principals in their management responsibilities and they report to regional Vice Presidents of Operations. School principals and directors work closely with regional and corporate management, particularly in the regular assessment of program quality.
Principals and directors are also responsible to raise additional revenues through ancillary programs, such as sales of school uniforms, candy, children's portraits and school stores. Our corporate office undertakes central management of several significant ancillary programs. This central management has enabled us to obtain more favorable terms from vendors and to encourage more active participation from schools.
We hire qualified individuals and prefer to promote from within. Employment applicants are reviewed with background checks made to verify accurate employment history and establish understanding of the candidate's background, reputation and character. After hiring, our faculty is reviewed and evaluated annually through a formal evaluation. process All of our principals and directors are eligible for incentive compensation based on the profitability of their schools.
Marketing and Customers
We generate the majority of new enrollments from our reputation in the community and word-of-mouth recommendations of parents. Further, we group our pre-elementary schools geographically to increase local market awareness and to supply a student population for our elementary and middle schools. Our educational continuum from pre-elementary school through elementary and middle school also helps demonstrate to parents our educational focus. We market our services through yellow page advertising, print ads in local publications, radio, and through distribution of promotional materials in residential areas. Marketing campaigns are conducted throughout the year, primarily at the local level by our school directors and principals. In addition, the various regional offices conduct targeted marketing programs, such as mass mailings and media advertising.
In our marketing, we strive to differentiate ourselves from our competition through the quality of our programs. We emphasize the features and benefits of our schools, including advanced learning, comprehensive curricula, small class sizes, national accreditation, credentialed teachers, before and after school programs and summer camps. We promote early age introduction of foreign language and technology use, and evaluation progress, including the results of standardized tests, which show that our school age children perform one and one- half to three grade levels above national norms.
Corporate Development - Nobel Learning Communities (NLC) Strategy and Implementation
Our growth has been primarily through the opening of new schools and making strategic acquisitions of existing schools. Before we enter a new market, we devote significant resources to evaluating that market's potential. Evaluation criteria include the number and age of children living in proximity to the site; family income data; incidence of two- wage earner and single parent families; traffic patterns; wage and fixed cost structure; competition; price elasticity; family educational data; local licensing requirements; and real estate costs.
We consider not just the ability of a new market to sustain a single school, but also our ability to support the successful development of a regional cluster of our schools - a Nobel Learning Community ("NLC") - where pre-elementary schools provide a pipeline of students to our elementary schools and other programs. We believe that development of NLC is key to our
running efficient, geographically concentrated operations. Our goal is for each Nobel school within NLC to function independently - and also benefit from cross- marketing, cross-referral and brand awareness within the NLC. The combination school structure also allows sharing of resources and costs. Examples include shared athletic facilities, swimming pools, gymnasiums, transportation services, the employment of regional maintenance employees, and the after-hours use of classroom facilities.
New School Development
Since June 2000 through June 2001 we opened five elementary schools (including two charter schools), 11 pre-elementary schools, six Paladin Academy schools, one Houston Learning Academy alternative high school and one charter high school. From July 1, 2001 through September 18, 2001, we have opened one pre- elementary school, one elementary and one Paladin Academy school. Throughout the remainder of the twelve months ended June 30, 2002 ("fiscal 2002") we plan to open approximately five elementary schools, five preschools, one Paladin Academy school and one Houston Learning Academy alternative high school.
Proposed development sites are presented to us through a network of developers and land realtors across the United States. After site selection, we engage a developer or contractor to build a facility to our specifications. We currently work with several developers who purchase the land, build the facility and lease the premises to us under a long-term lease. Alternatively, we purchase land, construct the building with our own or borrowed funds and then seek to enter into a sale and lease back transaction with an investor. Our development plans are dependent on the continued availability of developer and financing arrangements.
When we enter a new market, we typically first open pre-elementary schools as a foundation for the NLC. Pre-elementary schools can build enrollments more quickly than elementary school, since most communities do not provide free pre- elementary school. As NLC matures, our pre-elementary schools can supply a student feeder population to Nobel elementary and middle schools and other programs. Our current models for construction of new elementary school facilities embody this mutual supportive concept. In addition to the elementary grades, our new elementary schools typically include pre-elementary classes and, possibly, Paladin Academy classes. As enrollment increases, pre-elementary and Paladin Academy classes can expand to a new facility. In some cases, we plan at the outset for construction of a second building on the same campus after such growth has been attained. Typically, our new schools are single-story stand alone structures located near residential neighborhoods on acreage appropriate to the nature of the school.
Acquisitions
Since 1994, Nobel has acquired 78 schools: 50 pre-elementary schools, 22 elementary schools and six high schools. We strive to make only acquisitions which are strategic in nature: to enhance our presence within an existing cluster; to establish a base in a new geographic area with growth potential; or to provide an entry into a new business (e.g., learning challenged students). Key acquisition criteria are reputation, accretion to earnings, geographic location in markets with excellent demographics and growth prospects, ability to integrate into existing NLCs or become the foundation for new NLCs, and quality of personnel.
Recently, we have used strategic acquisitions to expand our market offerings. These acquisitions not only allow us to enter markets we believe have strong potential, but also present opportunities for profitable synergies with our other educational offerings. In August 1998, we commenced our special education offerings with the acquisition of the Developmental Resource Centers in Southern Florida. With our September 1999 acquisition of the Houston Learning Academy schools, we offer alternative high schools for children who require a more individualized learning environment. This acquisition also gave us potential to expand into the summer school market. The acquisition of The Activities Club facilitated our entry into the summer program and after school program curriculum-based products for the public, charter, and private school markets. Our equity interest in and strategic alliance with Total Education Solutions expanded our special education services to charter and public schools. We expect acquisitions to continue to be a part of our growth strategy.
Paladin Academy(TM)
Our Paladin Academy schools serve the needs of learning-challenged and developmentally delayed students. Through these schools, our mission is to improve the learning process and achievement levels of children and adults with dyslexia, attention deficit disorder and other learning difficulties. We offer clinical day schools, tutoring clinics and summer programs, as well as psycho- educational and developmental testing and community outreach programs.
Paladin Academy day schools offer full day programs serving the special needs of students from kindergarten through high school. The goal of Paladin Academy is to enable students to re-enter mainstream school programs after two to three years. We offer one-on-one tutorial clinics to our day school students, as supplemental instruction, and to other children, college students and adults who require an educational therapy program.
As of September 18, 2001, we operated 18 Paladin Academy schools. These include three "stand-alone" private schools in South Florida acquired in our August 1998 purchase of the assets of Development Resource Centers, one additional school acquired in February 2000 also in South Florida, one additional stand alone school in Seattle, Washington and thirteen schools located within Nobel elementary schools. As a part of our combination school strategy, most of our new Paladin Academy schools are conducted in classrooms of Nobel Learning Communities elementary schools. Paladin Academy schools are now located in Florida, Virginia, North Carolina, Washington, California, Nevada and New Jersey.
We believe that NLC clusters will foster the development of the Paladin Academy schools. Existing Nobel schools cluster can refer students requiring special help to Paladin Academy; our marketing efforts can foster name recognition of all services available within the Nobel Learning Community. Also, we can reduce start-up costs and absorbs overhead expense for new Paladin Academy schools by utilizing excess capacity at existing and new elementary schools. Paladin Academy schools can also share beneficial plant and equipment resources, such as soccer fields, basketball courts and the gymnasiums of schools at which they are located, or to which they are proximate.
We plan to expand Paladin Academy schools within Nobel school clusters across the United
States. Further, as Paladin Academy develops broader market recognition independent of our private elementary schools, we plan to roll out the program independently across the United States. Our ultimate goal is to become the premier national operator of special education schools.
Expanding our initiatives in special education, in May 2000, we invested in Total Education Solutions, which provides special education services to charter schools and public schools who, because of lack of internal capabilities or other reasons, wish to out-source their provision of special education programs (which, under federal law, they are required to provide to select students).
Charter Schools
In July 1999, we began management of our first charter school, The Philadelphia Academy Charter School in Philadelphia, PA, which serves 624 students in Kindergarten through eight grade. Our performance under management of that contract resulted in the March 2000 award of two additional contracts to manage new charter schools in Philadelphia (one opened in September 2000 and the other opened in September 2001). Under these management agreements, we provide administrative and development/construction management services to the charter schools pursuant to four or five-year terms, subject to extension. The actual holders of the charters, non-profit entities managed by a board of directors or trustees, fund their own operations, through payments from the School District of Philadelphia. As part of the arrangements with the charter schools, Nobel leases the charter school premises from a third party, and subleases the premises to the non-profit entity.
Further adding to our charter school operations, in May 2000, we acquired two charter schools in Arizona: the Fletcher Heights Charter Elementary School in Peoria, Arizona and the Desert Heights Elementary School, which opened in Glendale, Arizona in August 2000. In contrast to our Philadelphia charter schools and charters for which we are applying in other states, we hold the charter and own and operate the Arizona charter schools independently, as Arizona law permits the charter funds to be paid directly to a for-profit corporation. Through our strategic alliance with Total Education Solutions, we also provide special education services to 25 additional charter schools.
We intend to pursue additional charter school opportunities in states with charter laws which allow charter school management arrangements to be economically viable (e.g., attractive charter school reimbursement policies per pupil and management flexibilities). We also consider geographic criteria. We seek highly populated urban markets, particularly those with struggling public schools, and proximity to existing NLC schools. While our private schools are typically located in affluent suburban markets, charter schools can allow us to offer our education programs to more urban locations.
We also plan to pursue growth in charter school management by competing for contracts at existing charter schools. These include both charter management contracts which are up for renewal and charters currently being managed by the local not-for-profit administration.
Since our charter schools operate under a charter granted by a state or school board authority,
we would lose the right to operate a school if the charter authority were to revoke the charter. Typically, the charter holder is community group which engages us to manage the school under a management agreement, so the charter authority could base such revocation on actions of the charter holder, which are outside of our control. Also, many state charter school statutes require periodic reauthorization. If state charter school legislation in such states were not reauthorized or were substantially altered, our charter opportunities in the charter school market could be materially adversely affected.
Houston Learning Academy
In September 1999, we acquired all the capital stock of Houston Learning Academy (HLA), an operator of five alternative high schools in the Houston metropolitan marketplace. HLA schools offer a half day fully accredited high school program, as well as summer school (to approximately 2,000 students in Summer 2000), tutorials and special education classes to residential hospitals. HLA schools' programs feature very small class sizes and individualized attention. Many students who attend HLA desire to engage in other activities in the afternoons or are attracted to the flexibility of the schools' curriculum. We plan to grow the HLA concept by leveraging our existing school model and accreditation to other Texas metropolitan areas (Dallas, San Antonio), followed by introduction into existing and future Nobel markets. We believe HLA and Paladin Academy schools will have significant marketing and other synergies. For example, since HLA programs run primarily in the morning, we can use the same facilities to conduct Paladin Academy programs in the afternoons.
Nobel Education Solutions
We are building our Educational Services division, Nobel Education Solutions, on the platform established by our December 1999 acquisition of The Activities Club. The Activities Club provides before-and-after-school programs, summer camps, and theme-based programs to public schools, private schools, and corporations. We plan to introduce NES programs throughout our existing and planned NLCs to further leverage our existing customer relationships, brand equity and infrastructure. We also plan to market NES programs to public schools and other alternative schools.
Industry and Competition
Annual spending for education and training is estimated to exceed $740 billion annually in the United States or approximately 10% of gross domestic product. Estimates of spending on education for preprimary grades (pre-elementary schools and child care) are $34 billion while estimates of spending for kindergarten through twelfth grade ("K -12") are $358 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 over 100,000 schools in the $34 billion pre- elementary school/child care segment, of which $11.5 billion is spent in the for-profit segment. Likewise, it is estimated there are 85,000 schools in the $358 billion K - 12 segment, of which $18.5 billion 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.
The market for learning challenged schools (part of the over-all K-12 market) is very fragmented and is estimated to be $9.6 billion and servicing approximately 8 million children. The market for tutorial and diagnostic services is estimated to be $12 to $18 billion, with Sylvan Learning Centers and Huntington Learning Centers being the principal competitors. Corporate sponsored schools, which are currently almost entirely pre-elementary schools, with 8,300 workplace childcare centers, is estimated to be a $2 billion market, and has grown at 20% to 25% per year since 1992. The largest competitor is Bright Horizons, with annual revenue of approximately $250 million. We believe that these markets have significant potential, and we intend to actively pursue growth in these markets; although our efforts may not be successful.
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 the growth. 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 our expansion plans.
Education is a politically "hot issue", both nationally and in many local areas. 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 prepared students produced by the nation's public school systems.
Education reform movements in the United States are posing alternatives to the public schools.
Among others, these include charter schools, private management of public schools, vouchers, home schooling and private schools. Our strategy is to provide parents a quality alternative through Nobel's privately owned and operated schools utilizing a proven curriculum in a safe and challenging environment.
To attract school age children, we compete with other for-profit private schools, with non-profit schools and, in a sense, with public school systems. We anticipate that, given the perceived potential of the education market, well- financed competition may emerge, including possible competition from the large for-profit child care companies. The only for-profit competitor that integrates elementary and pre-elementary schools of which Nobel is aware which currently competes beyond a regional level is Children's World, a subsidiary of Aramark Corporation. We believe 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 measured outcomes, accreditation, curriculum-intensive goals, which would require significant cultural changes and capital investment.
The pre-elementary school/child care market is a $34 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 45 largest child care/pre-elementary school providers represent approximately 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. We believe that persons in our target market - parents seeking curriculum-based learning programs for their children - seek services beyond those provided by child care providers without curriculum based learning. We believe these parents desire to give their 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. We offer a national curriculum based program with excellent standards.
The demand for quality pre-elementary schools is increasing. More than 60% of married mothers with children under six years of spend their days 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 1997, the percentage of women who worked full time increased 39% to 57%. 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 pre-elementary school markets, we believe 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 pre-elementary school market, many of these services are not offered by many of our competitors.
Charter schools, voucher programs, and home schooling are growing rapidly in the United
States, largely in response to acknowledged shortcomings in the traditional public school system. Charter schools are now legal in 37 states, the District of Columbia, and Puerto Rico. Charter schools receive public funds (to be used to fund all expenses, excluding the purchase of real estate) on a per student basis. Charter schools, however, are not bound by most regulations governing public schools. Initially viewed as an experiment when the first charter school opened in 1992, 1,700 charter schools presently serve 350,000 students nationwide. Moreover, greater than two-thirds of these schools have enrollment waiting lists. The United States had approximately 2,000 charter schools at the end of 2000, a number that is expected to grow to 6,000 schools by 2010. Currently, for-profit companies manage only about 10% of the charter schools in the United States. This number is expected to triple over the next five years as the benefits of professional management are validated and established charter school management companies, such as us, enter the market. Major competitors in charter school management include Edison Schools, Inc., Advantage Schools, Beacon Education Management, Charter Schools USA, The Leona Group, National Heritage Academy and SABIS Educational Systems. Other private school operators and post-secondary education providers could possibly enter the charter school market.
Regulation
Schools and pre-elementary schools are subject to a variety of state and local regulations and licensing requirements. These regulations and licensing requirements vary greatly from jurisdiction to jurisdiction. Governmental agencies generally review the safety, fitness and adequacy of the buildings and equipment, the ratio of staff personnel to enrolled children, the dietary program, the daily curriculum, compliance with health standards and the qualifications of our personnel.
Our charter schools are subject to substantial additional federal and state regulation since they are funded by public monies. Under our charter school management agreements, the charter entity is ultimately responsible for compliance with these regulations; we are responsible for such compliance in our Arizona charter schools. Significant among federal laws is the Individuals with Disabilities in Education Act. This act requires that students with qualified disabilities receive an appropriate education through special education and related services provided in a manner reasonably calculated to enable the child to receive educational benefit in the least restrictive environment. The charter school's obligation to provide these potentially extensive services, and the attendant financial exposure, varies depending on state law. Other laws applicable to our charter schools include the Family Educational Rights and Privacy Act (which protects the privacy of a student's educational record), the Gun-Free Schools Act (which requires us to effect certain policies, assurances and reports at our charter schools regarding the discipline of students who bring weapons to our schools) and various civil rights laws.
Insurance
We currently maintain comprehensive general liability, workers' compensation, automobile liability, property, excess umbrella liability and student accident insurance. The policies provide for a variety of coverage and are subject to various limits. Companies involved in the education and care of children, however, may not be able to obtain insurance for the total risks inherent in their operations. In particular, general liability coverage can have sublimits per claim for child
abuse. We believe we have adequate insurance coverage at this time. There can be no assurance that in future years we will not again become subject to lower limits.
Service Marks
We have registered various service marks, including Chesterbrook Academy(R) and Merryhill Country School(R) in the United States Patent and Trademark Office. We believe that certain of our service marks have substantial value in our marketing in the respective areas in which our schools operate.
Seasonality
Our elementary and middle schools historically have lower operating revenues in the summer due to lower summer enrollments. Summer revenues of pre- elementary schools tend to remain more stable or, in some cases, increase. We continue to seek to improve summer results through camps and other programs.
Employees
On September 18, 2001, we employed approximately 4,600 persons, approximately 1,400 of whom were employed on a part-time or seasonal basis. We believe that our relationship with our employees is satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
Name Age Position ------------------------------------------------------------------------
A. J. Clegg 62 Chairman of the Board of Directors and Chief Executive Officer; Director
Daryl A. Dixon 41 President and Chief Operating Officer
John R. Frock 58 Executive Vice President - Corporate Development; Assistant Secretary; Director
William E. Bailey 42 Vice President and Chief Financial Officer
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 Nobel on May 29, 1992. Since 1996, Mr. Clegg has also served as a member of the Board of Trustees of Drexel University. From June 1990 to December 1997 (but involving immaterial amounts of time between 1994 and 1997), Mr. Clegg also served as the Chairman and CEO of JBS Investment Banking, Ltd., which provided investment management and consulting services to businesses, including Nobel. 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. In August 2000, Mr. Clegg was recognized as "Education Entrepreneur of the Year" by the Association of Education Practitioners and Providers.
Daryl A. Dixon. Mr. Dixon joined Nobel as President and Chief Operating Officer in February 1999. Mr. Dixon was formerly an executive with NovaCare, Inc., where he served as President and General Manager of NovaCare, Inc.'s Long-term Care Services (formerly, the Contract Rehabilitation Division) from January 1994 to January 1999 and Vice President, Operations of the Contract Rehabilitation Division from November 1992 until January 1994. Mr. Dixon spent ten years in various management positions with Manor Health Care, including three years of Vice President - Operations.
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 Nobel 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, including Nobel.
William E. Bailey. Mr. Bailey joined Nobel as Vice President and Chief Financial Officer in January 1998. Prior to joining Nobel, 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.
Item 2.
Item 2. Properties.
At September 18, 2001, we operated 171 schools on 10 owned and 161 leased properties in 15 states. Our schools are geographically distributed as follows: 31 in California, 22 in North Carolina, 23 in Pennsylvania, 21 in Virginia,18 in Florida, 14 in New Jersey, 10 in Illinois, eight in Texas, eight in Washington, seven in Nevada, three in Oregon, two in South Carolina, two in Arizona, one in Georgia, and one in Maryland. Our schools generally are located in suburban settings.
The land and buildings which we own are subject to mortgages on the real property. Our leased properties are leased under long-term leases which are typically triple-net leases requiring us to pay all applicable real estate taxes, utility expenses and insurance costs. These leases usually contain inflation related rent escalators.
From time to time, we purchase undeveloped land for future development; however, at June 30, 2001, we did not hold any such properties. We also own the land and building of three properties in Florida and Maine at which we formerly operated day care centers; two of these properties are leased to third parties.
We lease 14,022 square feet of space for our corporate offices in Media, Pennsylvania.
Item 3.
Item 3. Legal Proceedings.
We are engaged in legal actions arising in the ordinary course of our business. We believe that the ultimate outcome of all such matters will not have a material adverse effect on our consolidated financial position or results of operations. The significance of these matters on our future operating results and cash flows depends on the level of future results of operations and cash flows as well as on the timing and amounts, if any, of the ultimate outcome.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
Our common stock trades on The Nasdaq National Market under the symbol NLCI.
The table below sets forth the quarterly high and low bid prices for our common stock as reported by Nasdaq for each quarter during the period from July 1, 1999 through June 30, 2001 and for the first quarter to date in Fiscal 2002.
High Low
Fiscal 2000 (July 1, 1999 to June 30, 2000)
First Quarter.................................. 6 1/8 4 1/4 Second Quarter................................. 9 5 1/8 Third Quarter.................................. 9 5/16 6 1/2 Fourth Quarter................................. 8 3/16 5 15/16
Fiscal 2001 (July 1, 2000 to June 30, 2001)
First Quarter.................................. 10 7 3/4 Second Quarter................................. 8 7/8 4 15/32 Third Quarter.................................. 10 1/4 5 33/64 Fourth Quarter................................. 10 7 35/64
Fiscal 2002
First Quarter (through of September 18, 2001).. 9 6 1/4
Holders
At September 18, 2001, there were approximately 500 holders of record of shares of common stock.
Dividend Policy
We have never paid a dividend on our common stock and do not expect to do so in the foreseeable future. Although the payment of dividends is at the discretion of the Board of Directors, we intend to retain our earnings in order to finance our ongoing operations and to develop and expand our business. Our credit facility with our lenders prohibits us from paying dividends on our common stock or making other cash distributions without the lenders' consent. Further, our financing documents relating to our private placement of our $10,000,000 Subordinated Note with Allied Capital Corporation prohibit us from paying cash dividends on our common stock without Allied's approval, and our financing documents relating to our private placement of the Series C Convertible Preferred Stock to Edison Venture Fund II, L.P. prohibit
us from paying cash dividends on our common stock, unless the dividend is permitted under our bank agreement and the amount of the dividend is less than or equal to 50% of our operating income less income tax.
Item 6.
Item 6. Selected Financial Data.
Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations ---------------------
Fiscal Year ended June 30, 2001 ('2001") compared to the twelve months ended June 30, 2000 ('2000")
The Company's Fiscal year ends on June 30. The fiscal year ended June 30, 2001 was a 52 week year and the fiscal year ended June 30, 2000 was a 53 week year.
Currently, the Company operates 171 schools. Since June 2000 through June 2001, the Company has opened 24 schools and acquired two new schools: three elementary schools, eleven preschools, six schools for learning challenged (the Paladin Academy schools), one alternative high school (Houston Learning Academy) three charter schools (includes two Arizona charter schools purchased in 2000). The Company has also closed three underperforming schools.
Revenues in 2001 increased $20,545,000 or 16.1% to $147,952,000 in 2001 from $127,407,000 for 2000. After adjusting 2000 to a comparable 52-week basis, revenues would have increased approximately $22,345,000 or 17.9%. The increase in revenues is primarily attributable to the increased enrollment, tuition increases and the increase in the number of new and acquired schools.
Same school revenue (schools that were opened in both periods) increased $7,974,000 from $124,926,000 in 2000 to $132,900,000 in 2001 or 6.4%. This increase is related to tuition and enrollment increases and the maturing of schools opened in 1999. The increase in revenues that related to the 24 new schools totaled $12,503,000. Acquired schools contributed additional revenues of $1,962,000. The revenues for The Activities Club ('TAC"), a business purchased in December 1999, decreased $238,000 from $640,000 in 2000 to $402,000 in 2001. These increases were offset by a decrease in revenues of $1,656,000 related to closed schools.
School operating profit for 2001 increased $837,000 or 4.8% to $18,166,000 from $17,329,000 in 2000. Total school operating profit as a percentage of revenue decreased from 13.6% to 12.3%.
Same school operating profit increased $1,898,000 from $17,397,000 in 2000 to $19,295,000 in 2001 or 10.9%. Same school operating profit margin improved from 13.9% in 2000 to 14.5% in 2001. The increase in same school operating profit is due to the revenue increases and the maturing of the schools opened in 1999. For 2001 new schools incurred losses of $711,000. Included in these losses were
$923,000 associated with the Company's two Arizona based charter schools. The losses associated with the Arizona schools are attributable to lower than expected enrollment. Acquired schools increased school operating income by $253,000. In 2001, operating results from TAC were a loss of $474,000 or a decrease of $550,000 as compared to 2000. If TAC is unsuccessful in receiving additional orders or contracts to purchase its products, the future operations of TAC could continue to be negatively affected. The net effect of school closings decreased school operating profit by $53,000.
General and administrative expenses increased $1,262,000 or 13.0% to $11,004,000 in the 2001. As a percentage of revenue, general and administrative expenses decreased from 7.6% of revenues in 2000 to 7.4% of revenues in 2001. Management is continuing to build the infrastructure needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percentage of revenues. The increase in general and administrative expense is primarily related to management additions necessary to support the continued growth in the Company's private schools and specialty schools. Other increases in general and administrative expenses include an increase in fees for professional services and expenses related to new school locations that were cancelled.
As a result of the factors mentioned above, operating income decreased $425,000 to $7,162,000 for 2001 as compared to the 2000. Operating income as a percentage of revenue increased from 5.9% in 2000 to 4.8% in 2001.
EBITDA (defined as earnings before interest, income taxes, depreciation and amortization) before cumulative effect of change in accounting principle, totaled $14,624,000 for 2001 which was $681,000 above 2000. As a percentage of revenue, EBITDA for 2001 equaled 9.9% versus 10.9% in 2000. 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 by $798,000 or 23.7% for 2001 as compared to 2000. The increase in interest expense is a result of increased borrowings under the Company's senior debt facility and an increase in interest rates on the Company's floating rate senior debt.
The provision for income taxes of $1,596,000 for 2001 was in excess of amounts computed by applying statutory federal income tax rates to income before income taxes due primarily to non-deductible goodwill incurred with acquisitions for stock and state income taxes. For acquisitions of stock of a company, purchase accounting applies for accounting purposes; but, for tax purposes, the Company inherits the historic basis of the purchased company in its assets, without any goodwill.
Change in Accounting Principle
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, which provides guidance related to revenue recognition. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. SAB 101 is effective for the fourth quarter of Company's fiscal year 2001.
Previously, the majority of registration fees were deferred when received and recorded in September to coincide with fall enrollment. Registration fees for students enrolled during the school year were recorded when received. Under the accounting method adopted retroactive to July 1, 2000, the Company now recognizes school registration fees over the typical school year of August to June. Summer camp registration fees are now recognized during months June, July and August. The cumulative effect of the change on prior years resulted in a SAB 101 modifies the recognition of fee income but has no impact on cash flow or the operations of the Company charge to income (net of taxes) of $295,000 which was recognized during 2001.
Fiscal Year ended June 30, 2000 ("2000") compared to the twelve months ended June 30, 1999 ("1999").
The fiscal year ended June 30, 2000 was a 53 week year and the fiscal year ended June 30, 1999 was a 52 week year.
During 2000, the Company acquired the assets or stock of companies owning 14 schools. These acquisitions include: six alternative high schools in Houston, Texas and four preschools in Illinois, New Jersey, Texas and Georgia, one elementary school in New Jersey, two charter schools in Arizona and one special education school in Florida. In addition, the Company opened eleven new schools, of which five were preschools, two were elementary schools, three were specialty schools, and one charter school. The Company also closed 12 schools, nine of which related to the Indianapolis divestiture.
Revenues in 2000 increased $17,645,000 or 16.1% to $127,407,000 in 2000 from $109,762,000 for 1999. After adjusting 2000 to a comparable 52-week basis, revenues would have increased approximately $15,845,000 or 14.2%. The increase in revenues is primarily attributable to the increased enrollment, tuition increases and the increase in the number of new and acquired schools.
Same school revenue (schools that were opened in both periods) increased $13,031,000 from $103,927,000 in 1999 to $116,958,000 in 2000 or 12.5%. This increase is related to tuition and enrollment increases and the maturing of schools opened in 1998. The increase in revenues that related to the eleven new schools totaled $5,663,000. Acquired schools contributed additional revenues of $3,124,000. The revenues for TAC, a business purchased in December 1999 contributed $640,000. These increases were offset by a decrease in revenues of $4,813,000 related to the closed schools.
School operating profit for 2000 increased $4,042,000 or 30.4% to $17,329,000 from $13,287,000 in 1999. Total school operating profit as a percentage of revenue increased from 12.1% to 13.6%.
Same school operating profit increased $3,050,000 from $13,718,000 in 1999 to $16,768,000 in 2000 or 22.2%. Same school operating profit margin improved from 13.2% in 1999 to 14.3% in 2000. The increase in same school operating profit is due to the revenue increases, lower operating expenses and the maturing of the schools opened in 1998. For 2000, new schools contributed $333,000 in school operating income. Acquired schools increased school operating income by $273,000. Operating income from TAC was $75,000. The net effect of school closings increased school operating profit by $309,000.
General and administrative expenses increased $2,025,000 or 26.2% to $9,742,000 in the 2000. As a percentage of revenue, general and administrative expenses increased from 7.0% of revenues in 1999 to 7.6% of revenues in 2000. The increase is attributable to the increase in the Company's infrastructure to support its specialty school and charter school growth initiatives. During 2000, the Company opened or acquired 10 specialty schools and 3 charter schools. Management is continuing to build the infrastructure needed for growth of the Company.
As a result of the factors mentioned above, operating income increased $2,017,000 to $7,587,000 for 2000 as compared to the 1999. Operating income as a percentage of revenue increased from 5.1% in 1999 to 5.9% in 2000.
EBITDA (defined as earnings before interest, income taxes, depreciation and amortization), totaled $13,943,000 for 2000 which was $2,820,000 above 1999. As a percentage of revenue, EBITDA for 2000 equaled 10.9% versus 10.1% 1999. 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 by $375,000 or 12.5% for 2000 as compared to the 1999. The increase in interest expense is a result of increased borrowings under the Company's senior debt facility in connection with Company's acquisitions and an increase in interest rates on the Company's floating rate senior debt.
The provision for income taxes of $1,793,000 for 2000 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.
Liquidity and Capital Resources
Management is pursuing a four-pronged growth strategy for the Company, which includes (1) internal growth of existing schools through the expansion of certain facilities, (2) new school development in both existing and new markets, (3) strategic acquisitions, and (4) development of new education businesses. The Company's principal sources of liquidity are (1) cash flow generated from operations, (2) future borrowings under the Company's $40.0 million Amended and Restated Loan and Security Agreement, (3) the use of site developers to build schools and
lease them to the Company, and (4) issuance of subordinated indebtedness or shares of common stock to sellers in acquisition transactions. The Company identifies growth markets through both extensive demographic studies and an analysis of the existing educational systems in the area. The Company seeks to grow through a cluster approach whereby several preschools feed into an elementary school. In order for the Company to continue its acquisition strategy and development of new education business, the Company will continue to seek additional funds through debt and equity financing.
The Company anticipates that its existing available principal credit facilities, cash generated from operations, and continued support of site developers to build and lease schools will be sufficient to satisfy working capital needs, capital expenditures, and renovations and the building of new schools during fiscal 2002.
Since 1995, the Company has amended its credit facility three times. Each amendment increased borrowing capacity. In May 2001, the Company entered into its most recent Amended and Restated Loan and Security Agreement which increased the Company's borrowing capacity to $40,000,000. Three separate facilities were established under the Amended and Restated Loan and Security Agreement: (1) $10,000,000 Working Capital Credit Facility (2) $15,000,000 Acquisition Credit Facility and (3) $15,000,000 Term Loan. The Term Loan Facility will mature on April 1, 2006 and provides for $2,143,000 annual interim amortization with the balance paid at maturity. Under the Acquisition Credit Facility, no principal payments are required until April 2003. At that time, the outstanding principal under the Acquisition Credit Facility will be converted into a term loan which will require principal payments in 16 quarterly installments. The Working Capital Credit Facility is scheduled to terminate on April 1, 2003. Nobel's obligations under the credit facilities are guaranteed by subsidiaries of Nobel and collateralized by a pledge of stock of Nobel subsidiaries.
At June 30, 2001, a total of $27,398,000 was outstanding under the amended and restated loan agreement; $1,053,000 was outstanding under Working Capital Credit Facility, $11,345,000 was outstanding under the Acquisition Credit Facility and $15,000,000 was outstanding under the Term Loan.
In July 1998, the Company issued a $10,000,000 senior subordinated note to Allied Capital Corporation. In May, 2001, the Company amended it $10,000,000 senior subordinated note. The amendment modified the principal repayments from two installments of $5,000,000 in 2004 and 2005 to two installments of $5,000,000 in 2006 and 2007. In addition, the interest rate on the note increases from 10% at June 30, 2001 to 12% at October 1, 2001. Payments on the note are subordinate to the Company's senior bank debt. In connection with the financing transaction, the Company also issued to Allied Capital Corporation warrants to acquire 531,255 shares of the Company's common stock at $8.5625 per share. The exercise
price was reduced to $7.00 per share on May 31, 2000 based on the terms of the warrant requiring adjustment to the trailing 30 day average high and low stock price on that date. The Company recorded a debt discount and allocated $899,000 of the proceeds of the transaction to the value of the warrants. This debt discounting is being amortized to interest expense over the term of the note.
Total cash and cash equivalents decreased $2,477,000 from $3,798,000 at June 30, 2000 to $1,321,000 at June 30, 2001. The net decrease was due primarily to (1) capital expenditures of $15,224,000, (2) issuance of notes receivables of $2,788,000 and (3) the repayment of long term debt of $13,864,000. This decrease was offset by (1) cash flow from operations of $6,259,000, (2) proceeds from term loan and revolving line of credit of $16,498,000 and (3) proceeds from sale of property and equipment of $8,268,000. In August 2001, the Company received repayment on one of its notes receivable of $1,664,000.
The working capital deficit decreased $1,493,000 from $16,946,000 at June 30, 2000 to $15,453,000 at June 30, 2001. The decrease is primarily the result of the increase in current notes receivable and a decrease in accounts payable and accrued liabilities. This decrease was offset by an increase in cash overdraft liability and a decrease in cash and cash equivalents.
Capital Expenditures
The Company is continuously maintaining and upgrading the property and equipment of each school. During 2001, the Company spent approximately $15,224,000 on capital expenditures, which included $9,587,000 for new school development and $5,637,000 on upgrading existing facilities. . During 2000, the Company spent approximately $13,056,000 on capital expenditures, which included $8,947,000 for new school development and $4,109,000 on upgrading existing facilities
During 2001, the Company received $8,268,000 from sale and leaseback transactions of new schools and reimbursements of cost incurred by the Company from owner- developers of new sites. During 2000, the Company received $1,699,000 from sale and leaseback transactions of new schools and $550,000 for the sale of under performing schools.
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. 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.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Corporation. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, amortization of goodwill, including goodwill recorded in past business combinations will discontinue upon adoption of this standard. In addition, goodwill recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The Corporation is currently reviewing the provisions of SFAS 141 and SFAS 142 and assessing the impact of adoption.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the areas of interest rates and interest rate swaps agreements.
Interest Rates
The Company's exposure to market risk for changes in interest rates relate primarily to debt obligations. The Company has no cash flow exposure due to rate changes on its 10%, $10,000,000 senior subordinated debt at June 30, 2001 and June 30, 2000. The Company also has no cash flow exposure on certain mortgages, notes payable and subordinate debt agreements aggregating $6,471,000 and $8,681,000 million at June 30, 2001 and June 30, 2000, respectively. However, the Company does have cash flow exposure on two of its credit facilities under the Amended and Restated Loan and Security Agreement. The Working Capital and the Acquisition Credit Facility are subject to variable LIBOR or prime base rate pricing. Accordingly, a 1% change in the LIBOR rate and the prime rate would have resulted in interest expense changing by approximately $205,000 and $84,000 million in fiscal 2001 and 2000, respectively.
Interest Rate Swap Agreement
In connection with the May 2001 amendment to the Company's Amended and Restated Loan and Security Agreement, it entered an interest rate swap agreement on the $15,000,000 Term Loan Facility. The Company uses this derivative financial instrument to manage its exposure to fluctuations in interest rates. The instrument involves, to varying degrees, market risk, as the instrument is subject to rate and price fluctuations, and elements of credit risk in the event the counterparty should default. The Company does not enter into derivative transactions for trading purposes. At June 30, 2001 the Company's interest rate swap contract outstanding had a total notional amount of $14,464,000 million and becomes effective August 1, 2001. The notional amounts serves solely as a basis for the calculation of payments to be exchanged and are not a measure of the exposure of the Company through the use of derivatives. Under the interest rate swap contract, the Company agrees to pay a fixed rate of 4.99% and the counterparty agrees to make payments based on 3-month LIBOR.
Item 8.
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 through F- 15 below.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
PART III
Item 10.
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.
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.
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.
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.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Report:
Page ---- (1) Financial Statements.
Report of Independent Accountants............................ Consolidated Balance Sheets.................................. Consolidated Statements of Income............................ Consolidated Statements of Stockholders' Equity.............. Consolidated Statements of Cash Flows........................ Supplemental Schedules for Consolidated Statements of Cash Flow.................................................... Notes to Consolidated Financial Statements...................
(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 December 31, 1998, and incorporated herein by reference.)
3.2 Registrant's Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the Registrant's Current Report on Form 8-K filed on June 14, 1993 and incorporated herein by reference.)
3.3 Registrant's Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.)
3.4 Registrant's Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. (Filed as Exhibit B to Exhibit 1.1 to Registrant's Registration Statement on Form 8-A, dated May 30, 2000 and incorporated herein by reference.)
3.5 Registrant's Amended and Restated By-laws. (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 Amended and Restated Loan and Security Agreement dated March 9, 1999 between the Registrant and its subsidiaries, as borrowers, and Summit Bank, in its capacity as Agent and the financial institutions listed on Schedule A attached thereto (as such schedule may be amended, modified or replaced from time to time), in their capacity as Lenders. (Certain schedules (and similar attachments) to Exhibit 4.1 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request.) (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference.)
4.2 First Amendment, dated December 17, 1999, to Amended and Restated Loan and Security Agreement by and among Registrant and its subsidiaries and Summit Bank, as Agent and Lender (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and incorporated herein by reference.)
4.3 Second Amendment, dated May 24, 2000, to Amended and Restated Loan and Security Agreement by and among Registrant and its subsidiaries and Summit Bank, as Agent and Lender. (Filed as Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 and incorporated herein by reference.)
4.4 Investment Agreement dated as of June 30, 1998 between Registrant and its subsidiaries and Allied Capital Corporation. (Filed as Exhibit 4.11 to the Registrant's Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)
4.5 Amended and Restated Senior Subordinated Note dated as of May 24, 2001 in the principal amount of $10,000,000 payable to the order of Allied Capital Corporation.
The Registrant has omitted certain instruments defining the rights of holders of long-term debt in cases where the indebtedness evidenced by such instruments does not exceed 10% of the Registrant's total assets. The Registrant agrees to furnish a copy of each of such instruments to the Securities and Exchange Commission upon request.
4.6 Third Amendment, dated as of May 24, 2001, to Amended and Restated Loan and Security Agreement by and among Registrant and its subsidiaries and Fleet National Bank, as successor by merger to Summit Bank, as Agent and Lender.
4.7 Fourth Amendment, dated as of July 5, 2001, to Amended and Restated Loan and Security Agreement by and among Registrant and its subsidiaries and Fleet National Bank, as successor by merger to Summit Bank, as Agent and Lender.
4.8 Amended and Restated Acquisition Credit Facility Note, dated as of May 24, 2001 in the principal amount of $11,250,000 payable to Fleet National Bank, as successor by merger to Summit Bank.
4.9 Amended and Restated Term Note, dated as of May 24, 2001 in the principal amount of $11,250,000 payable to Fleet National Bank, as successor by merger to Summit Bank.
10.1 Rights Agreement, dated as of May 16, 2000, between Registrant and Stocktrans, Inc., as Rights Agent, which includes, as Exhibit B, thereto the Form of Rights Certificate. (Filed as Exhibit 1.1 to Registrant's Registration Statement on Form 8- A, dated May 30, 2000 and incorporated herein by reference.)
10.2 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.)
10.3 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.)
10.4 1995 Stock Incentive Plan of the Registrant, as amended. (Filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)
10.5 Form of Non-Qualified Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. (Filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)
10.6 Form of Incentive Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. (Filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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).
10.12 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.)
10.13 Investment Agreement dated as of August 30, 1995 by and among the Registrant, certain subsidiaries of the Registrant and Allied Capital Corporation and its affiliated funds. (Certain schedules (and similar attachments) to Exhibit 4.1 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request.) (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.)
10.14 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 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 10.14 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:
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
10.15 Common Stock Purchase Warrant dated as of June 30, 1998 entitling Allied Capital Corporation to purchase up to 531,255 shares (subject to adjustment) of the Common Stock of the Registrant. (Filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)
10.16 First Amended and Restated Registration Rights Agreement dated as of June 30, 1998 by and between the Registrant and Allied Capital Corporation. (Filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)
10.17 Nobel Learning Communities, Inc. Senior Executive Severance Pay Plan Statement and Summary Plan Description as modified February 3, 2000. (Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and incorporated herein by reference.)
10.18 Nobel Learning Communities, Inc. Executive Severance Pay Plan Statement and Summary Plan Description as modified February 3, 2000. (Filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and incorporated herein by reference.)
10.19 Employment Agreement dated January 25, 1999 between the Registrant and Daryl Dixon. (Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference.)
10.20 Employment Agreement dated August 9, 1999 between the Registrant and Lynn Fontana. (Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference.)
10.21 First Amendment dated February 3, 2000 of Employment Agreement dated as of August 9, 1999 between Registrant and Lynn Fontana. (Filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and incorporated herein by reference.)
10.22 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.)
10.23 Contingent Severance Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. (Filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.)
10.24 Special Incentive Agreement dated as of November 20, 1999 between A. J. Clegg and the Registrant. (Filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference.)
10.25 Employment and Termination Agreement dated as of August 2001 between A.J. Clegg and the Registrant.
10.26 Employment and Termination Agreement dated as of August 2001 between John R. Frock and the Registrant.
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
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.
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 28, 2001 NOBEL LEARNING COMMUNITIES, INC.
By: /s/ A. J. Clegg ------------------------------------ A. J. Clegg Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Position Date
/s/ A. J. Clegg Chairman of the Board, September 28, 2001 ----------------------- A. J. Clegg Chief Executive Officer and Director (Principal Executive Officer)
/s/ William Bailey Executive Vice President and September 28, 2001 ----------------------- William Bailey Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Edward H. Chambers Director September 28, 2001 ----------------------- Edward H. Chambers
/s/ John R. Frock Executive Vice President September 28, 2001 ----------------------- John R. Frock and Director
/s/ Peter H. Havens Director September 28, 2001 ---------------------- Peter H. Havens
/s/ Pamela S. Lewis Director September 28, 2001 ---------------------- Pamela S. Lewis
/s/ Eugene G. Monaco Director September 28, 2001 ---------------------- Eugene G. Monaco
/s/ William L. Walton Director September 28, 2001 ---------------------- William L. Walton
/s/ Robert Zobel Director September 28, 2001 ---------------------- Robert Zobel
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Nobel Learning Communities, Inc:
In our opinion, the consolidated financial statements listed in the index appearing under item 14(a)(1) present fairly, in all material respects, the financial position of Nobel Learning Communities, Inc. and its subsidiaries at June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Footnote 1 to the Company's Consolidated Financial Statements, effective July 1, 2000, the Company changed its method of recognizing revenue.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania August 17, 2001
Nobel Learning Communities, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Nobel Learning Communities, Inc. and Subsidiaries Consolidated Statements of Income (Dollars in thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
Nobel Learning Communities, Inc. and Subsidiaries Consolidated Statements of Cash Flow (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Nobel Learning Communities, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 2001, 2000 and 1999 (Dollars in thousands except share data)
The accompanying notes are an integral part of these consolidated financial statements.
Nobel Learning Communities, Inc. and Subsidiaries Supplemental Schedules for Consolidated Statements of Cash Flow (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Nobel Learning Communities, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Company Background:
Nobel Learning Communities, Inc. (the "Company"), formerly Nobel Education Dynamics, Inc., was incorporated in 1982 and commenced operations in 1984. The Company operates private schools, schools for the learning challenged, specialty high schools and charter schools located in California, Pennsylvania, New Jersey, Maryland, North Carolina, South Carolina, Virginia, Georgia, Texas, Arizona, 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:
The Company recognizes revenue for educational services as earned. Revenues include tuition, fees and non-tuition revenue, reduced by discounts and scholarships. The Company receives fees for registration, education and other services.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, which provides guidance related to revenue recognition. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. SAB 101 is effective for the fourth quarter of Company's fiscal year 2001.
Previously, the majority of registration fees were deferred when received and recorded in September to coincide with fall enrollment. Registration fees for students enrolled during the school year were recorded when received. Under the accounting method adopted retroactive to July 1, 2000, the Company now recognizes school registration fees over the typical school year of August to June. Summer camp registration fees are now recognized during months June, July and August. The cumulative effect of the change on prior years resulted in a charge to income (net of taxes) of $295,000 which was recognized during fiscal 2001.
Cash and Cash Equivalents:
The Company considers cash on hand, cash in banks, and cash investments with maturities of three months or less when purchased as cash and cash equivalents. The Company maintains funds in accounts in excess of FDIC insurance limits; however, the Company minimizes the risk by maintaining deposits in high quality financial institutions.
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.
Goodwill
The Company's policy is to amortize goodwill 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. Goodwill is amortized on a straight-line basis.
Amortization expense amounted to $1,660,000, $1,484,000, and $1,385,000, for the years ended June 30, 2001, 2000 and 1999, respectively. Accumulated amortization at June 30, 2001 and 2000, was $8,292,000 and $6,614,000, 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.
In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Corporation. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after
June 30, 2001. Under SFAS 142, amortization of goodwill, including goodwill recorded in past business combinations, will discontinue upon adoption of this standard. In addition, goodwill recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The Corporation is currently reviewing the provisions of SFAS 141 and SFAS 142 and assessing the impact of adoption.
Intangible Assets
Intangible assets include non-compete agreements, trademarks and other identifiable intangibles acquired in acquisitions. Such intangibles are being amortized over the life of the intangibles ranging from 3 - 20 years.
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.
Earnings Per Share:
Earnings per share are based on the weighted average number of shares outstanding and common stock equivalents during the period. In the calculation of dilutive earnings per share, shares outstanding are adjusted to assume conversion of the Company's convertible preferred stock if they are dilutive. In the calculation of basic earnings per share, weighted average number of shares outstanding are used as the denominator. Earnings per share are computed as follows (dollars in thousands except per share data):
Year ending June 30, ------------------------------------ 2001 2000 1999 Basic earnings per share: -------------------------
Net income $1,501 $2,478 $1,593
Less preferred dividends 81 82 83 ------------------------------------ Net income available for common stock 1,420 2,396 1,510 ------------------------------------
Average common stock outstanding 5,980,986 5,929,811 6,038,136
------------------------------------ Basic earnings per share $0.24 $0.40 $0.25 ====================================
Diluted earnings per share: ---------------------------
Net income available for common stock and dilutive securities $1,501 $2,478 $1,593
Average common stock outstanding 5,980,986 5,929,811 6,038,136
Additional common shares resulting from dilutive securities:
Options; warrants and convertible preferred stock 1,535,014 1,543,123 1,316,200 ------------------------------------ Average common stock and dilutive securities outstanding 7,516,000 7,472,934 7,354,336
------------------------------------ Dilutive earnings per share $0.20 $0.33 $0.22 ====================================
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 has investments in other entities. The collectability of such investments is dependent upon the financial performance of these entities. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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.
Risk and Uncertainites
Future results of operations of the Company involve a number of risks and uncertainties. Factors that could affect future operating results and cause actual results to vary materially from historical results include, but are not limited to, consumer acceptance of the Company's business strategy with respect to expansion into new and existing markets, the Company's debt and related financial covenants, difficulties in managing the Company's growth including attracting and retaining qualified personnel, a large portion of the Company's assets represent goodwill, increased competition, changes in government policy and regulation, ability to obtain additional capital required to fully implement business plan, the Company's investment in Total Education Solutions, Inc. ("TES")(See footnote 8).
Negative developments in these areas could have a material effect on the Company's business, financial condition and results of operations.
Adoption of New Accounting Pronouncement
Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The Company has one derivative that is not designed as a hedging relationship and therefore the fair value amount, which is immaterial, is reflected through current period earnings. The adoption SFAS 133 did not result in any adjustment to income or to OCI. The Company uses derivative instruments to manage exposure to interest rate risks. The Company's objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of interest rate exposures.
Reclassifications
Certain prior year amounts for the fiscal year ended June 30, 2000 and 1999 have been reclassified to conform to the presentation adopted in fiscal 2001.
2. Acquisitions and Dispositions:
During the years ended June 30, 2001, 2000, and 1999, 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.
2001 Acquisition
In August 2000, the Company acquired the assets of Rainbow World Day Care School in Chalfont, Pennsylvania, with a capacity of 180 students and estimated revenues of $845,000. The purchase price consisted of $493,000 in cash and an aggregate of 44,131 shares of the Company's Common Stock (valued at $9.20 per share).
2000 Dispositions
On July 30, 1999, the Company sold the business operations of the nine schools located in the vicinity of Indianapolis, Indiana to, Children's Discovery Centers of America, Inc., which is controlled by Knowledge Universe, for a total of $550,000 in cash. Knowledge Universe, through KU Learning, LLC owns a significant percentage of the Company's stock. No gain or loss was recorded for the sale of the operations as the Company had written down the carrying value of the business at December 31, 1997.
2000 Acquisitions
On September 9, 1999, the Company acquired the capital stock of Houston Learning Academy, Inc., which operates schools in Houston, Texas for a purchase price of $1,350,000 in cash and $615,000 in a subordinated note. Houston Learning Academy is an alternative high school program, consisting of five schools and several hospital contracts. Revenues total approximately $1,600,000, and capacity equals approximately 370 students for the schools for the last fiscal year.
On August 2, 1999, the Company acquired the land, building and assets of Atlantic City Prep School located in Northfield, New Jersey for approximately $757,000. The school has a capacity of 200 children and annual revenues of approximately $400,000.
On December 17, 1999, the Company entered into a transaction with Children's Out-of-School Time, Inc. ("COST") to form The Activities Club, Inc. ("TAC"), which is owned 80% by the Company and 20% by COST. In the transaction, Nobel contributed $625,000 to the capital of TAC, and TAC distributed such cash to COST. TAC also issued to COST a 7% subordinated promissory note in the amount of $175,000. If a specified earnings threshold is met, Nobel will be required to make an additional cash payment to TAC, which TAC would then distribute to COST. Further, commencing in December 2002, COST has the right to require Nobel to purchase its interest in TAC for the greater of $500,000 and a formula price based on TAC's earnings before interest, taxes, depreciation and amortization.
On December 3, 1999, the Company acquired the assets of Play and Learn Child Development Center in Illinois, with a capacity of 100 students and estimated annual revenues of $600,000. On February 11, 2000, the Company acquired the assets of High Road Academy in Boca Raton, Florida, with a capacity of 100 students and estimated annual revenues of $700,000. High Road Academy is a specialty school for children with learning disabilities. On February 17, 2000, the Company acquired the assets of David Sikes Child Care, Inc., in Norcross, Georgia with the capacity of enrollment for 252 children and estimated annual revenues of $822,000. In June 2000, the company acquired the assets of the Cross Creek School in Plano, Texas with a capacity of 180 students and estimated annual revenues of $1,000,000. The purchase price for these four schools totaled $2,724,000 of which $2,342,000 was in cash, $702,000 was in subordinated notes and $100,000 was in assumed liabilities.
During April 2000, the Company received a statewide charter in the State of Arizona to permit it to own and operate charter schools in that state. This charter enabled the Company to acquire, in May 2000, the business assets and real estate of two charter schools in the greater Phoenix, Arizona metropolitan area with a capacity of 1,367 students. The Company agreed to pay the developer and the operator of the schools (collectively, the "Sellers") an aggregate purchase price of $9,838,000, subject to certain post-closing adjustments.
When the Company obtained fee title to the schools in May, the Company (i) paid cash to the Sellers in the combined amount of $7,189,000 on account of the $9,838,000 purchase price, (ii) held back $600,000 of the purchase price pending delivery by one of the seller's certain furniture, fixtures and equipment associated with the operation of the schools and (iii) issued promissory notes to the Sellers (in the aggregate amount of $2,049,000) on account of the purchase price. Simultaneously with the closing of this transaction, the Company entered into a sale and leaseback transaction with a third party developer for one of the two schools (located in the city of Peoria) (the "Peoria School"), pursuant to which the Company received $6,200,000 in sales proceeds and entered into a long-term operating lease that gives the Company the right to occupy and operate the Peoria School. The Company took over operations at the Peoria School immediately upon the end of the 1999-2000 school year.
The second charter school was an elementary school located in the City of Glendale (the "Glendale School"). Unlike the Peoria School, the Glendale School was not open and operating at the time that the Company obtained fee title to the school in May 2000. The Company completed construction of the Glendale School and placed the facility in service during the 2000-2001 school year. The Company directly funded the cost of completing construction , opening and operating the Glendale School.
The promissory notes to the Seller's (in the aggregate face amount of $2,049,000) (the "Arizona Promissory Notes") were due and payable by no later than December 28, 2000 (the "Initial Maturity Date"). The Company's obligations under the Arizona Promissory Notes, however, are subject to (i) certain rights of set off under the transaction documents, and (ii) adjustment, based upon, among other things, certain cost overruns experienced, and/or savings realized, by the Company in connection with the completion of construction of the Glendale School. Prior to the Initial Maturity Date, the Company exercised its right of set-off under the transaction documents. Each of the Sellers has now instituted litigation against the Company seeking collection of the Arizona Promissory Notes, and disputing the Company's exercise of its right of set-off. Management intends to defend vigorously its rights under the transaction documents; however, as a practical matter, Management believes it highly likely that the pending litigation will be settled. Now that the Glendale School has been completed, the Company plans to enter into a sale and leaseback transaction, the proceeds of which will be used (i) to pay to the Sellers any amounts then due and payable under the Arizona Promissory Notes (and/or in connection with any settlement of the pending litigation) and (ii) to recoup, in part, the funds expended by the Company to complete the Glendale School.
1999 Acquisitions
In June 1999, the Company acquired the assets of Flint Ridge Preschool in Leesburg, Virginia, which has a capacity of 190 students. The purchase price equaled $478,355 in cash and $207,543 in a subordinated note payable over five years.
In August 1998, the Company entered into a transaction with Developmental Resource Center, Inc. (DRC) to form Paladin Academy, LLC, which is owned 80% by the Company and 20% by DRC. DRC is owned by Dr. Deborah Levy, a recognized leader in the field of special education programs. The three schools formerly owned by DRC, located in Florida, specialize in full day programs, summer camps, testing services and clinics for K-12th grade students who have learning challenges such as dyslexia, attention deficit disorder (ADD and ADHD) and other learning disabilities. In connection with a settlement agreement dated April 30, 2001 with DRC, DRC transferred to the Company all its equity interest in Paladin Academy, LLC which is now owned 100% by the Company.
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 2001 and 2000 all occurred at the beginning of 2000. The results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of 2000, or of the results which may occur in the future. Further, the information gathered from some acquired companies are estimates since some acquirees did not maintain information on a period comparable with the Company's fiscal year-end (dollars in thousands).
Year ended Year ended June 30, 2001 June 30, 2000 (unaudited) (unaudited) --------- --------- Revenues $148,115 $134,486 Net income before change in accounting principle $1,980 $2,860
Earnings per share Basic $0.33 $0.48 Diluted $0.25 $0.37
3. 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 $537,000 and $2,069,000
at June 30, 2001 and 2000, 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.
4. Notes Receivable
A note receivable of $1,664,000 represents amounts due from People for People, Inc. related to construction cost for a proposed charter school financed by the Company. The principal amount of the note is due August 31, 2001, and interest therein will be paid in installments thereafter. Interest on the note accrued at 2.5% over prime from July 11, 2000 to April 16, 2001 and at 14% through maturity. People for People entered into a mortgage loan agreement on April 16, 2001 to fund the remaining construction cost and, upon the completion of construction, to repay amounts due the Company. Accrued interest on the note at June 30, 2001 was 109,000. On August 31, the $1,664,000 note was paid in full.
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):
June 30, 2001 June 30, 2000
Land $ 2,832 $ 3,127 Buildings 5,741 6,321 Assets under capital lease obligations 913 913 Leasehold improvements 17,686 10,855 Furniture and equipment 24,827 23,384 Construction in progress 19 792 ------------- ------------- $ 52,018 $ 45,392 Accumulated depreciation (20,792) (16,665) ------------- ------------- $ 31,226 $ 28,727 ============= =============
Depreciation expense was $4,879,000, $4,354,000, and $3,545,000 for the years ended June 30, 2001, 2000 and 1999, respectively. Amortization of capital leases included in depreciation expense amounted to $15,000 for the years June 30, 2001 and 2000. Accumulated amortization of capital leases amounted to 512,000 and $498,000 at June 30, 2001 and June 30, 2000, respectively.
6. Restructuring
In conjunction with a December 1997 restructuring plan, the Company recorded a $2,960,000 charge. 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. At June 30, 2001, all charges related to this restructuring plan have been incurred.
7. Property Held for Sale
The amounts reflected in the table below include certain properties for sale pending sale and leaseback transactions. The balances of property held for sale were as follows (dollars in thousands):
June 30, 2001 June 30, 2000 ------------- -------------- Land $1,839 $2,519 Buildings 4,315 5,200 Leasehold improvements 110 842 Furniture and equipment 122 402 Accumulated depreciation (391) (885) ------------- ------------- $5,995 $8,078 ============= =============
8. Investments:
On May 24, 2000, Nobel entered into a Credit Agreement with Total Education Solutions, Inc. ("TES"), pursuant to which Nobel agreed to advance to TES, as requested through May 24, 2001, the sum of $2,250,000. This loan is convertible into TES common stock representing 30% of TES's outstanding common stock (as of the date of closing), subject to adjustment in accordance with anti-dilution provisions if not earlier converted, the loan is due on May 24, 2005. In connection with the loan transaction, Nobel also purchased a warrant to purchase an additional 10% of TES common stock (subject to similar anti-dilution provisions) at an exercise price of $100. In consideration of the issuance of the warrant, Nobel paid to TES $250,000 and agreed to provide to TES certain management services for a period of one year. The Warrant will not become exercisable unless at least $3,500,000 of senior secured financing has been made available to TES on competitive terms. At June 30, 2001 and 2000, $2,225,000 and $250,000 was outstanding under the Credit Agreement, respectively.
9. Debt:
Debt consisted of the following (dollars in thousands):
June 30, 2001 June 30, 2000 -------------- -------------- Long Term Obligations: Revolving and term credit facility $27,398 $ 24,764 First mortgages, due in varying installments over three to 20 years with fixed interest rates ranging from 11% or 12% 147 192
Notes payable to sellers from various acquisitions, due in varying installments over three to 15 years with fixed interest rates varying from 8% to 12% 118 147
Other 135 211
-------------- -------------- $27,798 $25,314 -------------- --------------
Less current portion (2,272) (2,054) -------------- -------------- $25,526 $23,260 ============== ==============
Long Term Subordinated Debt: Senior subordinated note due 2005 interest at 10%, payable quarterly. Net of original issue discount of $514,000 at June 30, 2001 $ 9,486 $ 9,357
Subordinated debt agreements, due in varying installments over five to 10 years with fixed interest rates varying from 7% to 8% 6,071 8,131 --------------- -------------- Total subordinated debt 15,557 17,488 Less current portion (4,142) (4,239) --------------- -------------- $11,415 $13,249 =============== ==============
Credit Facility.
Since 1995, the Company has amended its credit facility three times. Each amendment increased borrowing capacity. In May 2001, the Company entered into its most recent Amended and Restated Loan and Security Agreement which increased the Company's borrowing capacity to $40,000,000. Three separate facilities were established under the Amended and Restated Loan and Security Agreement: (1) $10,000,000 Working Capital Credit Facility (2) $15,000,000 Acquisition Credit Facility and (3) $15,000,000 Term Loan. The Term Loan Facility will mature on April 1, 2006 and provides for $2,143,000 annual interim amortization with the balance paid at maturity. Under the Acquisition Credit Facility, no principal payments are required until April 2003. At that time, the outstanding principal under the Acquisition Credit Facility will be converted into a term loan which will require principal payments in 16 quarterly installments. The Working Capital Credit Facility is scheduled to terminate on April 1, 2003. Nobel's obligations under the credit facilities are guaranteed by subsidiaries of Nobel and collateralized by a pledge of stock of Nobel subsidiaries.
The credit facilities bear interest, at Nobel's option, at either of the following rates, which may be adjusted in quarterly increments based on the achievement of performance goals: (1) an adjusted LIBOR rate plus a debt to EBITDA-dependent rate ranging from 1.50% to 2.75%, or (2) a floating rate plus a debt to EBITDA-dependent rate ranging from -0.25% to 100.00%.
EBITDA is defined by the credit facilities as net income before interest expense, income taxes, depreciation and amortization.
At June 30, 2001, a total of $27,398,000 was outstanding under the amended and restated loan agreement; $1,053,000 was outstanding under Working Capital Credit Facility, $11,345,000 was outstanding under the Acquisition Credit Facility and $15,000,000 was outstanding under the Term Loan.
The interest rate at June 30, 2001 for $24,000,000 outstanding was at 6.53%, which was adjusted Libor plus 2.5%. The remaining $3,398,000 outstanding was at 7.5%. The interest rate at June 30, 2000 for $9,750,000 outstanding was 7.5% and the remaining amount of $15,014,000 was 9.5%.
Nobel also pays a commitment fee on the Working Capital and Acquisition Facilty calculated at a rate, which may be adjusted quarterly in increments based on a debt to EBITDA -dependent ratio, ranging from 0.25% to 0.50% per year on the undrawn portion of the commitments under the credit facilities. At June 1, 2001, the commitment fee rate was 0.375%. This fee is payable quarterly in arrears.
In addition, Nobel pays a letter of credit fee based on the face amount of each letter of credit calculated at the rate per year then applicable to loans under the revolving credit facility bearing interest based on adjusted LIBOR rate plus a debt to EBITDA-dependent rate ranging from 1.50% to 2.75%. At June 30, 2001, the letter of credit fee rate was 2.50%, which included the fronting fee. These fees are payable quarterly in arrears. In addition, Nobel will pay customary transaction charges in connection with any letter of credit. At June 1, 2001, Nobel had $ 337,000 committed under outstanding letters of credit.
The credit facilities contain customary covenants and provisions that restrict Nobel's ability to change its business, declare dividends, grant liens, incur additional indebtedness, make capital expenditures. In addition, the credit facilities provide that Nobel must meet or exceed defined interest coverage ratios and must not exceed leverage ratios.
In connection with the May amendment to the Company's Amended and Restated Loan and Security Agreement, it entered an interest rate swap agreement on the $15,000,000 Term Loan Facility.
The Company uses this derivative financial instrument to manage its exposure to fluctuations in interest rates. The instrument involves, to varying degrees, market risk, as the instrument is subject to rate and price fluctuations, and elements of credit risk in the event the counterparty should default. The Company does not enter into derivative transactions for trading purposes. At June 30, 2001 the Company's interest rate swap contract outstanding had a total notional amount of $14,464,000 million and becomes effective August 1, 2001. The notional amounts serves solely as a basis for the calculation of payments to be exchanged and are not a measure of the exposure of the Company through the use of derivatives. Under the interest rate swap contract, the Company agrees to pay a fixed rate of 4.99% and the counterparty agrees to make payments based on 3-month LIBOR.
In July 1998, the Company issued a $10,000,000 senior subordinated note to Allied Capital Corporation. In May, 2001, the Company amended it $10,000,000 senior subordinated note. The amendment modified the principal repayments from two installments of $5,000,000 in 2004 and 2005 to two installments of $5,000,000 in 2006 and 2007. In addition, the interest rate on the note increases from 10% at June 30, 2001 to 12% at October 1, 2001. Payments on the note are subordinate to the Company's senior bank debt. In connection with the financing transaction, the Company also issued to Allied Capital Corporation warrants to acquire 531,255 shares of the Company's common stock at $8.5625 per share. The exercise
price was reduced to $7.00 per share on May 31, 2000 based on the terms of the warrant requiring adjustment to the trailing 30 day average high and low stock price on that date. The Company recorded a debt discount and allocated $899,000 of the proceeds of the transaction to the value of the warrants. This debt discounting is being amortized to interest expense over the term of the note.
Maturities of long-term obligations are as follows: $6,414,000 in 2002, $3,487,000 in 2003, $5,559,000 in 2004, $6,257,000 in 2005, and $22,152,000 in 2006 and thereafter.
10. Accounts Payable and Other Current Liabilities:
Accounts payable and other current liabilities were as follows (dollars in thousands):
June 30, 2001 June 30, 2000 --------------- -------------- Accounts payable $ 2,105 $ 2,652 Reserve for closed centers -- 236 Accrued payroll and related items 1,647 1,303 Accrued rent 345 394 Accrued taxes 186 1,271 Other accrued expense 2,395 3,141 --------------- -------------- $ 6,678 $ 8,997 =============== ==============
11. Cash Overdraft Liability:
Cash overdrafts represent unfunded checks drawn on zero balance accounts that have not been presented for funding to the Company's banks. The overdrafts are funded, without bank finance charges, as soon as they are presented.
12. 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, 2001 (dollars in thousands):
Operating Leases 2002 $ 22,796 2003 21,933 2004 21,413 2005 20,432 2006 18,915 2007 and thereafter 113,401 Total minimum lease obligations $218,890
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 $21,469,000, $17,596,000, and $16,595,000, for the years ended June 30, 2001, 2000 and 1999, These leases are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs.
At of June 30, 2001, the Company entered into a sale and leaseback transaction with the Company's CEO. The total proceeds to the Company were $3,800,000 and the related lease term is 20 years. Future obligations under the lease are included in the table above.
The Company's tenancy under 17 leases have been assigned or sublet to third parties. If such parties default, the Company is contingently liable. Contingent future rental payments under the assigned leases are as follows (dollars in thousands):
2002 $ 1,246 2003 $ 1,258 2004 $ 1,239 2005 $ 1,186 2006 and thereafter $ 3,156
13. Stockholders' Equity:
Preferred Stock: ----------------
In 1995, the Company issued 1,063,830 shares of the Company's Series D Convertible Preferred Stock for a purchase price of $2,000,000. The Series D Preferred Stock is convertible to Common Stock at a conversion rate, subject to adjustment, of 1/4 share of Common Stock for each share of Series D Convertible Preferred Stock. Holders of Series D are not entitled to dividends, unless dividends are declared on the Company's Common Stock. Upon liquidation, the holders of shares of Series D Convertible Preferred Stock are entitled to receive, before any distribution or payment is made upon any Common Stock, $1.88 per share plus any unpaid dividends. At June 30, 2001 and 2000, 1,063,830 shares were outstanding.
On August 22, 1994, the Company completed a private placement of an aggregate of 2,500,000 shares of Series C Convertible Preferred Stock and the Series 1 Warrants and Series 2 Warrants for an aggregate purchase price of $2,500,000. The Series C Preferred Stock is convertible into Common Stock at a conversion rate, subject to adjustment, of 1/4 share of Common Stock for each share of Series C Convertible Preferred Stock. Holders of shares of Series C Convertible Preferred Stock are not entitled to dividends unless dividends are declared on the Company's Common Stock. Upon liquidation, the holders of shares of Series C Convertible Preferred Stock are entitled to receive, before any distribution or payment is made upon Common Stock, $1.00 per share plus any unpaid dividends. The Series 1 Warrants are exercisable at $4.00 per share, subject to adjustment, and expire on August 19, 2001. The Series 2 Warrants have terminated pursuant to their terms. At June 30, 2001 and 2000, 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. Shares outstanding at June 30, 2001 and 2000 were 1,023,694. Each share of Series A Preferred Stock entitles the holder to an $.08 per share annual dividend.
Each share of Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock entitles the holder to a number of votes equal to the number of full shares of Common Stock into which such share is convertible. Except as otherwise required by law, holders of Preferred Stock vote together with the Common Stock, and not as a separate class, in the election of directors and on each other matter submitted to a vote of the stockholders.
Stockholder Rights Plan: ------------------------
In May 2000, the Board of Directors of the Company approved a Stockholder Rights Plan. Under the Stockholder Rights Plan, preferred stock purchase rights were distributed as a dividend at the rate of one Right for each share of Common Stock outstanding as of the close of business on June 1, 2000. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $18.00.
The Rights will not be exercisable unless a person or group acquires, or announces the intent to acquire, beneficial ownership under certain circumstances. The Rights are redeemable for $.001 per Right at the option of the Board of Directors at any time prior to the close of business on the tenth business day after the announcement of a stock acquisition event. If not redeemed, the Rights will expire on May 31, 2010. Prior to the date upon which the rights would become exercisable under the Plan, the Company's outstanding stock certificates will represent both the shares of Common Stock and the Rights, and the Rights will trade only with the shares of Common Stock.
The Rights are designed to provide the Board of Directors sufficient time to evaluate proposed change-in-control transactions by encouraging potential acquirers to negotiate with the Board of Directors before attempting a tender offer for the Company. The Rights are not intended to prevent transactions on terms that are fair to the Company's stockholders nor to deter any potential acquirer who is willing to complete a transaction on such terms.
Common Stock Warrants: ----------------------
In connection with a $10,000,000 senior subordinated note issued to Allied Capital Corporation in July 1998, the Company issued warrants to acquire an aggregate of 531,255 shares of the Company's common stock at $8.5625 per share. The exercise price was
reduced to $7.00 per share on May 31, 2000, based on the terms of the warrant requiring adjustment to the trailing 30 day average high and low stock price.
In connection with a debt refinancing in August, 1995, the Company issued to Allied Capital Corporation warrants to acquire an aggregate of 309,042 shares of the Company's Common Stock.
At June 30, 2001, 2000 and 1999, 965,267 warrants were outstanding with an exercise price of $4.00 to $7.52 per share.
2000 Stock Option Plan for Consultants
In February 2000, the Company established the 2000 stock option plan for consultants. This plan reserved up to an aggregate of 200,000 shares of common stock of the Company for issuance in connection with non-qualified stock options for non-employee consultants. At June 30, 2001 and 2000, 35,000 options have been granted under this plan. At June 30, 2001, $29,000 in compensation expense has been recorded in accrued liabilities.
1995 Stock Incentive Plan:
On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan. On November 18, 1999, the stockholders approved amendments to the 1995 Stock Incentive Plan, including an increase in the number of shares of common stock available for issuance under the Plan to 1,300,000. Under the Plan, common stock may be issued in connection with stock grants, incentive stock options and non-qualified stock options. The purpose of the Plan is to attract and retain quality employees. All grants to date under the Plan (other than a certain stock grant which was terminated) have been non-qualified stock options or incentive stock options which vest over three years (except that options issued to directors vest in full six months following the date of grant).
1988 Stock Option and Stock Grant Plan:
During 1988, the Company established the 1988 stock option and stock grant plan. This plan reserved up to an aggregate of 125,000 shares of common stock of the Company for issuance in connection with stock grants, incentive stock options and non-qualified stock options.
1986 Stock Option and Stock Grant Plan:
During 1986, the Company established a stock option and stock grant plan, which was amended in 1987. The 1986 Plan, as amended, reserved up to an aggregate of 216,750 shares of common stock of the Company for issuance in connection with stock grants, incentive stock options and non-qualified stock options.
The number of options granted under the 1995 Stock Incentive Plan is determined from time to time by the Compensation Committee of the Board of Directors, except for options granted to non-employee directors, which is determined by a formula set forth in the Plan. Incentive stock options are granted at market value or above, and non-qualified stock
options are granted at a price fixed by the Compensation Committee at the date of grant. Options are exercisable for up to ten years from date of grant.
Option activity with respect to the Company's stock incentive plans and other employee options was as follows:
Of the 110,088 options granted during 2001 and 423,725 options granted during 1999, 25,000 and 110,000 options, respectively, were granted outside of the Company's stock incentive plans. At June 30, 2001 and June 30, 2000, 571,002 and 565,455 shares, respectively, remained available for options or stock grants under the 1995 Stock Incentive Plan and 702,625 options were exercisable under such Plan and earlier stock option plans.
The Company has adopted the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Company's stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been decreased to the pro forma amounts indicated below (dollars in thousands except per share data):
For the Year ended June 30, ---------------------------------- 2001 2000 1999
Net income: - as reported $1,501 $2,478 $1,593 - pro forma $ 897 $2,157 $1,379
Basic earnings per share - as reported $ 0.24 $ 0.40 $ 0.25 - pro forma $ 0.15 $ 0.35 $ 0.21
Diluted earnings per share - as reported $ 0.20 $ 0.33 $ 0.22 - pro forma $ 0.12 $ 0.29 $ 0.19
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:
2001 2000 ---- ---- Expected dividend yield 0% 0% Expected stock price volatility 44.24% 47.67% Risk-free interest rate 5.77% 5.27% Expected life of options 3 years 3 years
14. Other (Income) Expense:
Other (income) expense consists of the following (dollars in thousands):
Year Ending June 30, ---------------------------------- 2001 2000 1999
Interest income $ (426) (118) (188) Rental income (39) (46) (49) Depreciation related to rental properties 18 17 18 Other projects 22 - (31) Cost related to schools held for sale 1 2 2 ----- ------ ------ $ (424) (145) (248) ===== ====== ======
15. Income Taxes:
Current tax provision (dollars in thousands):
Year Ending June 30, --------------------------- 2001 2000 1999 ---------------------------
Federal $ 788 $ 902 $ 587
State 115 (79) (5)
------ ------ ------ $ 903 $ 823 $ 582
Deferred tax provision 451 970 571 ------ ------ ------ $1,354 $1,793 $1,153 ====== ====== ======
The difference between the actual income tax rate and the statutory U.S. federal income tax rate is attributable to the following (dollars in thousands):
Year Ending June 30, --------------------------- 2001 2000 1999 ---------------------------
U.S. federal statutory rate $ 984 $1,495 $ 934
State taxes, net of federal tax benefit 70 128 82
Goodwill and other 300 170 137
------ ------ ------ $1,354 $1,793 $1,153 ====== ====== ======
Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws.
Temporary differences and carry forwards which give rise to a significant portion of deferred tax assets and liabilities are as follows (dollars in thousands):
Year Ending June 30, ------------------------ 2001 2000 1999 ------------------------ tax assets (liabilities)
Goodwill amortization $(702) $(468) $ (374)
Depreciation (264) (174) (307)
Provision for school closings and other restructuring - 60 906
AMT credit carryforward and state net operating losses 647 732 591
Other - - 203
----- ----- ------ (319) 150 1,019 ----- ----- ------
Valuation allowance (141) (141) -
----- ----- ------ Net deferred tax (liability) asset $(460) $ 9 $1,019 ===== ===== ======
A valuation allowance was established against the Company's deferred tax asset related to state tax net operating loss carryforwards due to the Company's lack of earnings history of certain of the Company's subsidiaries in those states and, accordingly, the uncertainty as to the realizability of the asset.
The Company has state net operating loss carryforwards aggregating to approximately $7,000 as of June 30, 2001, which can be carried forward from seven to twenty years depending on the state and will expire between 2005 and 2020, if not utilized.
16. 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 $238,000, $169,000, and $161,000 for the years ended June 30, 2001, 2000 and 1999, respectively.
17. Fair Value of Financial Instruments:
Fair value estimates, methods and assumptions are set forth below for Nobel's financial instruments at June 30, 2001, and June 30, 2000.
Cash and cash equivalents, receivables, investments and current liabilities: Fair value approximates the carrying value of cash and cash equivalents, receivables and current liabilities as reflected in the consolidated balance sheets at June 30, 2001 and 2000 because of the short-term maturity of these instruments. The fair value of Nobel's investments is not readily determinable as the related securities are not actively traded.
The Company believes the fair value of its $2,250,000. investment in TES approximates its cost (see Note 8). This represents management's best estimate using TES's latest available financial projections.
Long-term debt: Based on recent market activity, the carrying value of Nobel's 10% senior subordinated notes of $9,486,000 at June 30, 2001 and $9,357,000 at June 30, 2000, approximated market value. The carrying values for Nobel's remaining long-term debt of $33,869,000 and $33,371,000 at June 30, 2001 and 2000, respectively, approximated market value based on current rates that management believes could be obtained for similar debt.
Interest rate instruments: The fair value of the interest rate swap is the estimated amounts that the Company would pay or receive to terminate the instrument at June 30, 2001, estimated by discounting expected cash flows using quoted market interest rates. At June 30, 2001, the Company would have had to pay $17,000 to terminate the interest rate swap.
18. 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 schools and liability insurance in amounts which management believes is adequate for its operations. As is the case with other entities in the education and preschool industry, the Company cannot effectively insure itself against certain risks inherent in its operations. Some forms of child abuse have sublimits per claim in the general liability coverage.
19. Segment Information
The Company manages its schools based on 18 geographical regions within the United States. In FY 2000 the company acquired Houston Learning Academy and TAC (see Note 2) and began managing charter schools. These operations have different characteristics and are managed separately from the school operations. These operations do not currently meet the quantification criteria and therefore are not deemed reportable under Statement of Financial Accounting Standards 131, "Disclosures about Segments of an Enterprise and Related Information" and are reflected in the "other" category.
The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies."
The table below presents information about the reported operating income of the company for the fiscal years ended June 30, 2001 and 2000, (dollars in thousands):
Private Schools Other Total -------- -------- -------- June 30, 2001 ------------- Revenues $139,726 8,226 147,952 School operating profit $ 17,945 221 18,166 Depreciation and amortization $ 5,983 603 6,586
June 30, 2000 ------------- Revenues $125,176 2,231 127,407 School operating profit $ 16,910 419 17,329 Depreciation and amortization $ 5,739 87 5,826
June 30, 1999 ------------- Revenues $109,762 109,762 School operating profit $ 13,287 13,287 Depreciation and amortization $ 5,009 5,009
19. Subsequent events:
On August 19, 2001, 125,000 Series 1 Warrants issued in connection with the Series C Convertible Preferred Stock were exercised at $4.00 per share.
20. Quarterly Results of Operations (unaudited): (In thousands, except per share data and market price of stock)
The following table shows certain unaudited financial information for the Company for the interim periods indicated. As discussed in Note 1, the Company changed its method of revenue recognition related to registration fees effective July 1, 2000. Accordingly, the following unaudited quarterly operating results have been restated for the fiscal year ended June 30, 2001 to reflect the impact of the change in accounting principle as if adopted on July 1, 2000. Additionally, quarterly results may vary from year to year depending on the timing and amount of revenues and costs associated with new center development and acquisitions.