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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number 1-1003
NOBEL LEARNING COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2465204
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1615 West Chester Pike 19382
West Chester, PA
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (484) 947-2000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities Registered Pursuant to
Section 12(g) of the Act:
Common Stock, par value
$.001 per share
(Title of each class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No_____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 3, 2002, 6,544,953 shares of common stock were outstanding.
The aggregate market value of the shares of common stock owned by non-affiliates
of the Registrant as of September 3, 2002 was approximately $30,256,000 (based
upon the closing sale price of these shares on such date as reported by Nasdaq).
Calculation of the number of shares held by non-affiliates is based on the
assumption that the affiliates of the Company include the directors, executive
officers and stockholders who have filed a Schedule 13D or 13G with the Company
which reflects ownership of at least 10% of the outstanding common stock or have
the right to designate a member of the Board of Directors, and no other persons.
The information provided shall in no way be construed as an admission that any
person whose holdings are excluded from the figure is an affiliate or that any
person whose holdings are included is not an affiliate and any such admission is
hereby disclaimed. The information provided is included solely for record
keeping purposes of the Securities and Exchange Commission.
-ii-
TABLE OF CONTENTS
Item
No. Page
PART I
1. Business ....................................................................... 1
Executive Officers of the Company .............................................. 8
2. Properties ..................................................................... 10
3. Legal Proceedings .............................................................. 10
4. Submission of Matters to a Vote of Security Holders ............................ 10
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters ................................................ 11
6. Selected Financial Data ........................................................ 13
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............................... 14
7A. Quantitative and Qualitative Disclosures About Market Risk ..................... 22
8. Financial Statements and Supplementary Data .................................... 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ......................................... 22
PART III
10. Directors and Executive Officers of the Registrant ............................. 23
11. Executive Compensation ......................................................... 26
12. Security Ownership of Certain Owners and Management ............................ 37
13. Certain Relationships and Related Transactions ................................. 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............... 44
iii
PART I
ITEM 1. BUSINESS.
Recent Developments
Nobel Learning Communities, Inc. ("NLCI" or "the Company") has entered
into an Agreement and Plan of Merger, dated as of August 5, 2002, with Socrates
Acquisition Corporation ("Socrates"), a corporation newly formed by Gryphon
Partners II, L.P. and Cadigan Investment Partners, Inc. (the "Buying Group"),
both of which are engaged principally in the business of investing in companies.
Under the merger agreement, Socrates will be merged into NLCI, with NLCI as the
surviving corporation (the "Merger"). If the Merger is completed, each issued
and outstanding share of NLCI common stock and preferred stock (calculated on an
as-converted basis to the nearest one-hundredth of a share) will be converted
into the right to receive $7.75 in cash, without interest, except for certain
shares and options held by the NLCI directors and executive officers identified
in the merger agreement as a rollover stockholder, which will continue as, or be
converted into, equity interests of the surviving corporation. In addition, if
the Merger is completed, each outstanding option and warrant that is exercisable
as of the effective time of the Merger will be canceled in exchange for (1) the
excess, if any, of $7.75 over the per share exercise price of the option or
warrant multiplied by (2) the number of shares of common stock subject to the
option or warrant exercisable as of the effective time of the merger, net of any
applicable withholding taxes. Following the Merger, NLCI will continue its
operations as a privately held company. The Merger is contingent upon
satisfaction of a number of conditions, including approval of NLCI's
stockholders, the receipt of regulatory and other approvals and consents, the
absence of any pending or threatened actions that would prevent the consummation
of the transactions contemplated by the merger agreement and receipt of
financing. There can be no assurance that these or other conditions to the
Merger will be satisfied or that the Merger will be completed. If the Merger is
not completed for any reason, it is expected that the current management of
NLCI, under the direction of the NLCI Board of Directors, will continue to
manage NLCI as an ongoing business.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
Certain statements set forth in or incorporated by reference in this
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, whether and when the Merger will be consummated, our outlook for
Fiscal 2003, other statements in this report other than historical facts
relating to the financial conditions, results of operations, plans, objectives,
future performance and business of the Company. In addition, words such as
"believes," "anticipates," "expects," "intends," "estimates," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Such statements are based on our
currently available operating budgets and forecasts, which are based upon
detailed assumptions about many important factors such as market demand, market
conditions and competitive activities. While we believe that our assumptions are
reasonable, we caution that there are inherent difficulties in predicting the
impact of certain factors, especially those affecting the acceptance of our
newly developed schools and businesses and performance of recently acquired
businesses, which could cause actual results to differ materially from predicted
results. Readers are cautioned that the forward-looking statements reflect
management's analysis only as of the date hereof, and the Company assumes no
obligation to update these statements. Actual future results, events and trends
may differ materially from those expressed in or implied by such statements
depending on a variety of factors set forth throughout this 10-K. With respect
to any forward-looking statements regarding the Merger, these factors include,
but are not limited to, the risks that stockholder approval, financing and
regulatory and other governmental and third-party clearances and consents may
not be obtained in a timely manner or at all and that other conditions to the
Merger may not be satisfied.
General
The Company is a for-profit provider of education for the pre-elementary
through 12th grade market and school management services. Our programs are
offered through a network of private schools, charter schools, schools for
learning challenged students, and special purpose 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 Arizona, California, Florida, Georgia, Illinois,
Maryland, Nevada, New Jersey, North Carolina, Oregon, Pennsylvania, South
Carolina, Texas, Virginia and Washington. The schools operate under
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various names, including Chesterbrook Academy (East, South and Midwest),
Merryhill School (West), Evergreen Academy (Northwest), Paladin Academy
(learning challenged) and Houston Learning Academy and Saber Academy (special
purpose high schools). As of September 3, 2002, we operated 179 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; and
. development of new businesses.
Our pre-elementary and elementary strategy is based on meeting the
educational needs of children, beginning with infancy. We encourage our children
to stay with our 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 a more
individualized approach to learning through our small schools with small
classes, with curricula that integrates community-based learning and that is
supported by technology. Further, in certain locations, we serve those with
special needs through our schools for learning challenged and special purpose
high schools. We believe that the empirical results support the quality of our
programs. Standardized test results have shown that, on average, our students
perform one and one-half to three grade levels above national norms in reading
and mathematics.
Many of our pre-elementary and elementary 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 one
of our schools knowing the children will receive both a quality education and
engage in well-supervised activities.
Most of our pre-elementary and elementary 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 1985, The Rocking Horse Childcare Centers of America, Inc.
merged into a publicly-traded entity that had been incorporated in 1983. 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 1615 West Chester Pike, West Chester, PA
19382. Our telephone number is (484) 947-2000.
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. Each child's individual educational needs and
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skills are considered upon entrance into one of our schools. 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 our framework and philosophy as well as other
resources that support our educational mission.
We maintain that small schools, small classes, qualified teachers, clearly
articulated curricula 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. 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 the child's physical, social, emotional and intellectual growth,
schools are encouraged to provide fee-based experiences specifically tailored to
particular families' interests 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 licensing and accrediting agencies through an internal quality
assurance program. Many of our 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) and its
regional affiliates.
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 curricula, within the standards of Nobel
Learning Communities, to meet local needs. Members of our management visit 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
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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 report
to regional Vice Presidents of Operations. School principals and Executive
Directors work closely with regional and corporate management, particularly in
the regular assessment of program quality.
Principals and Executive Directors are also responsible to raise additional
revenues through ancillary programs, such as sales of school uniforms,
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
Executive 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 a more individualized approach to learning, comprehensive
curricula, small class sizes, accreditation, credentialed teachers, before and
after school programs and summer camps. We promote early age introduction of
foreign language and technology use. We evaluate student progress regularly,
including the administration of standardized tests, which show that, on average,
our school age children perform one and one-half to three grade levels above
national norms.
Corporate Development - Nobel Learning Communities 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 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.
New School Development
Since June 2001 through June 2002, we opened four pre-elementary schools
and two Paladin Academy schools. From July 1, 2002 through September 3, 2002, we
have opened four pre-elementary schools, two elementary schools and one Saber
Academy special purpose high school. Throughout the remainder of the twelve
months ended June 30, 2003 ("Fiscal 2003") we plan to open approximately, six
Paladin Academy schools.
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.
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Acquisitions
Since 1994, we have acquired 74 schools: 47 pre-elementary schools, 21
elementary schools and six special purpose high schools. We strive to make only
acquisitions that 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, or become the foundation for new, Nobel
Learning Communities and quality of personnel.
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 special purpose 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.
Paladin Academy
Our Paladin Academy schools serve the needs of children with learning
challenges. 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 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 students in our general education
program, as well as to students from other schools who require a clinical
educational approach.
As of September 3, 2002, we operated 14 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 nine schools located
within our 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, Nevada, New Jersey, North Carolina, Virginia and Washington.
We plan to expand Paladin Academy schools within our 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 be a
recognized national operator of special education schools.
Expanding our initiatives in special education, since May 2000, under terms
of a credit agreement, we have advanced funds to 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, Pennsylvania, which serves
624 students in kindergarten through eighth 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 services such as, 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
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from the School District of Philadelphia. In some cases, as part of the
arrangements with the charter schools, we lease the charter school premises from
a third party and sublease 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 contracts, 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.
We also plan to pursue moderate 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 a
community group that 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 / Saber Academy
In September 1999, we acquired all the capital stock of Houston Learning
Academy ("HLA"), an operator of five special purpose high schools in the Houston
metropolitan marketplace. HLA schools offer a half-day high school program, as
well as summer school, tutorials and special education classes to residential
hospitals that are fully accredited by the Southern Association of Colleges and
Schools. HLA schools' programs feature 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) under the
name Saber Academy, followed by introduction into existing and future Nobel
Learning Community markets. We believe HLA / Saber Academy and Paladin Academy
schools will have significant marketing and other synergies. For example, since
HLA / Saber Academy programs run primarily in the morning, we can use the same
facilities to conduct Paladin Academy programs in the afternoons.
Industry and Competition
Education reform movements in the United States are posing alternatives to
the public schools. Among others, these reforms include charter schools, private
management of public schools, home schooling, private schools and, on a limited
basis, voucher programs. Our strategy is to provide parents a quality
alternative through our 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 material for-profit competitor
that integrates elementary and pre-elementary schools of which we are aware
which currently competes beyond a regional level is Children's World, a
subsidiary of Aramark Corporation.
We offer a national curriculum based program with excellent 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 children 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.
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,
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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.
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 benefits 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 become subject to lower limits or substantial increase in insurance
premiums.
Service Marks
We have registered various service marks in the United States Patent and
Trademark Office, including, among others, Chesterbrook Academy(R), Merryhill
Country School(R), Camp Zone (R) and The Activities Club (R). 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 somewhat more stable. We continue to seek
to improve summer results through camps and other programs.
Employees
On September 3, 2002, we employed approximately 3,900 persons,
approximately 1,170 of whom were employed on a part-time or seasonal basis. We
believe that our relationship with our employees is satisfactory.
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EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
Name Age Position
- ---- --- --------
A. J. Clegg 63 Chairman of the Board of Directors and Chief Executive
Officer; Director
John R. Frock 59 Vice Chairman - Corporate Development; Assistant
Secretary; Director
Robert E. Zobel 54 Vice Chairman - Corporate Affairs and Chief Financial
Officer; Director
D. Scott Clegg 39 Vice Chairman - Operations, President and Chief
Operating Officer
Dr. Lynn A. Fontana 54 Executive Vice President - Education and Chief
Education Officer
Gary V. Lea 48 Vice President - Southern Operations
Kimberly D. Pablo 39 Vice President - Western Operations
Kathleen L. Willard 53 Vice President - Northern Operations
The following description contains certain information concerning the
foregoing persons:
A. J. Clegg. Mr. A. J. Clegg was named Chairman of the Board of Directors
and Chief Executive Officer of NLCI in May, 1992. Since 1996, Mr. A. J. 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. A. J. Clegg also served as the Chairman and CEO of JBS
Investment Banking, Ltd., a provider of investment management and consulting
services to businesses, including NLCI. 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. A. J. 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. A. J.
Clegg 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. A. J. Clegg was recognized as "Education Entrepreneur of the
Year" by the Association of Education Practitioners and Providers. Mr. A. J.
Clegg is the father of D. Scott Clegg, NLCI's Vice Chairman - Operations,
President and Chief Operating Officer.
John R. Frock. Mr. Frock was appointed Vice Chairman - Corporate
Development of NLCI in April 2002. Prior to such appointment, Mr. Frock had been
Executive Vice President - Corporate Development since August 1, 1994. Mr. Frock
was elected to the Board of Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief Operating Officer of JBS Investment
Banking, Ltd., a provider of investment management and consulting services to
businesses, including NLCI.
Robert E. Zobel. Mr. Zobel was appointed Vice Chairman - Corporate Affairs
and Chief Financial Officer of NLCI in April 2002. Between February 2001 and
April 2002, Mr. Zobel served as Vice President, Chief Administrative Officer and
Secretary of MARS, Inc., a start up retail organization. Mr. Zobel was Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of MARS,
Inc. from February 1996 until February 2001. From 1974 through February 1996,
Mr. Zobel was associated with Deloitte & Touche LLP (formerly Touche Ross & Co.)
as an employee and since September 1981 as a partner. Mr. Zobel earned a B.A.
degree from Claremont
8
McKenna College, a J.D. degree from Willamette University College of Law and a
LLM degree in tax from Boston University. Mr. Zobel has been a director of NLCI
since 1998.
D. Scott Clegg. Mr. D. Scott Clegg rejoined NLCI as Vice Chairman -
Operations, President and Chief Operating Officer in February 2002. Previously,
Mr. D. Scott Clegg had been with NLCI from 1993 until 1997, commencing with his
appointment as Vice President - Operations for the Merryhill Country Schools
division in June 1993, and culminating with his appointment in early 1996 as
Vice President - Operations, with responsibility for nationwide operations. Mr.
D. Scott Clegg left NLCI in 1997, to become a principal and founder of Pathways
Education Group, L.L.C., a management consulting firm serving the public and
private sectors in education. He was formerly Vice President of New Business
development at JBS Investment Banking, Ltd. Mr. D. Scott Clegg also served as
General Manager and Chief Operating Officer of Dynasil Corporation of America, a
public company, and also served as a member of Dynasil's board of directors. Mr.
D. Scott Clegg is the son of A. J. Clegg, our Chairman and Chief Executive
Officer.
Dr. Lynn A. Fontana. Dr. Fontana joined NLCI August of 1999 as Executive
Vice President - Education and Chief Education Officer. She is responsible for
the educational programs, professional development, technology integration and
quality assurance in NLCI's network of schools. Dr. Fontana has been actively
involved in educational research and development for more than twenty-five
years. As a research associate professor at George Mason University she directed
educational projects funded by public and private foundations including the
National Science Foundation, Bell Atlantic Foundation, Corporation for Public
Broadcasting, the Defense Advanced Research Projects Agency, and the Department
of Defense Education Activity. Prior to joining the research faculty at George
Mason University, Dr. Fontana was Vice President for Educational Activities at
WETA. Dr. Fontana has a B.A. in history and political science from Juniata
College and a Ph.D. in social studies education from Indiana University. She
taught high school history for eight years in public schools in Pennsylvania and
New Jersey. Dr. Fontana has served on the Board of Trustees of National History
Day for 10 years and on the editorial board for World Book Publishing for six of
the last eight years.
Gary V. Lea. Mr. Lea was appointed Vice President - Southern Operations in
June of 2001. Mr. Lea joined NLCI in January of 2000 as Executive Director. Mr.
Lea was formerly with KinderCare Learning Centers, Inc. from July 1988 through
August of 1996, as a Regional Vice President covering 11 states and 150 schools.
He has also had extensive experience in the restaurant and service industry. He
was formerly the Director of Operations with Boston Market for a large southwest
territory. Mr. Lea attended Southwest Missouri State University where he earned
a B.S in Business and Psychology.
Kimberly D. Pablo. Ms. Pablo has been with NLCI since it acquired Merryhill
Schools in 1989. She ran one of NLCI's three largest schools for approximately
four years as a principal, during which time enrollment grew at that school from
150 students to 250 students. In 1997 Ms. Pablo was promoted to one of two
District Managers, and ran a successful district of 13 elementary, middle and
preschools. In 1999, she was promoted to Vice President - Western Operations.
Ms. Pablo graduated with a BA from Humboldt State University in CA and received
her Masters Degree in Organizational Management in 1999.
Kathleen L. Willard. Ms. Willard was named Vice President - Northern
Operations in December of 1999. Between January 1997 and December of 1999, Ms.
Willard was the Executive Director for the Florida district schools of NLCI.
From 1985 to 1997, prior to the acquisition of the schools in Florida by NLCI,
Ms. Willard served as a school administrator with Another Generation Preschools
(a privately held preschool company in the Ft. Lauderdale area).
9
Item 2. Properties.
At September 3, 2002, we operated 179 schools on 10 owned and 169 leased
properties in 15 states. Our schools are geographically distributed as follows:
four in Arizona, 29 in California, 17 in Florida, one in Georgia, 13 in
Illinois, one in Maryland, seven in Nevada, 15 in New Jersey, 24 in North
Carolina, three in Oregon, 23 in Pennsylvania, two in South Carolina, ten in
Texas, 22 in Virginia and eight in Washington. 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, 2002, 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 22,500 square feet of space for our corporate offices in West
Chester, Pennsylvania.
Item 3. Legal Proceedings.
We are a party in various suits and claims that arise in the ordinary
course of our business. Our management currently believes that the ultimate
disposition 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.
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of NLCI. Named as
defendants in the complaint are NLCI, members of the NLCI Board of Directors and
one former member of the NLCI Board of Directors. The plaintiff alleges, among
other things, that the proposed merger is unfair and that the current and former
NLCI directors breached their fiduciary duties by failing to disclose fully
material non-public information related to the value of NLCI and by engaging in
self-dealing. The complaint seeks an injunction, damages and other relief. NLCI
was served with the complaint on August 22, 2002.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
PART II
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, 2000 through June 30, 2002 and for the first quarter to date in Fiscal 2003.
High Low
Fiscal 2001 (July 1, 2000 to June 30, 2001)
First Quarter ........................................ 10.000 7.750
Second Quarter ....................................... 8.875 4.688
Third Quarter ........................................ 10.250 5.516
Fourth Quarter ....................................... 10.000 7.550
Fiscal 2002 (July 1, 2001 to June 30, 2002)
First Quarter ........................................ 9.000 6.250
Second Quarter ....................................... 8.250 4.800
Third Quarter ........................................ 7.480 5.050
Fourth Quarter ....................................... 7.230 5.150
Fiscal 2003
First Quarter (through September 3, 2002 ............. 7.600 5.010
Holders
At September 3, 2002, there were approximately 342 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.
11
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of June 30,
2002:
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity compensation plans
issued upon exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column (a))
Plan category warrants and rights warrants and rights
-------------
(a) (b) (c)
Equity compensation plans
approved by security holders 728,237 7.228 662,273
Equity compensation plans not
approved by security holders 100,000 8.363 --
------- ----- --
Total: 828,237 7.365 662,273
======= ===== =======
Options issued outside of the stockholder-approved plans have been issued with
features substantially similar to those of the stockholder-approved plans.
Item 6. Selected Financial Data.
Six Months
For the years ending June 30, Ended Year Ended
------------------------------------------- ------------- -------------
Operating Data 2002 2001 2000 1999 June 30, 1998 December 1997
--------- --------- ---------- --------- ------------- -------------
Revenue $ 156,279 $ 147,952 $ 127,407 $ 109,762 $ 48,995 $ 80,980
School operating expenses 136,190 129,786 110,078 96,475 42,643 70,258
--------- --------- ---------- --------- ------------- -------------
School operating profit 20,089 18,166 17,329 13,287 6,352 10,722
General and administrative expenses 11,776 11,004 9,742 7,717 3,391 5,973
Restructuring expense - - - - - 2,960
--------- --------- ---------- --------- ------------- -------------
Operating income 8,313 7,162 7,587 5,570 2,961 1,789
Interest expense 3,637 4,171 3,373 2,998 1,044 2,047
Other income (160) (424) (145) (248) (102) (158)
Minority interest 34 23 88 74 35 86
--------- --------- ---------- --------- ------------- -------------
Income (loss) before income taxes 4,802 3,392 4,271 2,746 1,984 (186)
Income tax expense 1,968 1,596 1,793 1,153 833 250
--------- --------- ---------- --------- ------------- -------------
Net (loss) income before Cumulative effect
of change in accounting principal and
extraordinary item 2,834 1,796 2,478 1,593 1,151 (436)
Cumulative effect of accounting change - 295 - - -
Extraordinary item - - - - - 449
--------- --------- ---------- --------- ------------- -------------
Net income (loss) 2,834 1,501 2,478 1,593 1,151 (885)
Preferred dividends 82 81 82 83 51 102
--------- --------- ---------- --------- ------------- -------------
Net income available to common stockholders' $ 2,752 1,420 2,396 1,510 1,100 (987)
========= ========= ========== ========= ============= =============
Basic earnings per share:
Net income (loss) before Cumulative effect
of change in accounting principle and
extraordinary item $ 0.44 $ 0.29 $ 0.40 $ 0.25 $ 0.18 $ (0.09)
Cumulative effect of accounting change - (0.05) - - - -
Extraordinary item - - - - - (0.07)
--------- --------- ---------- --------- ------------- -------------
Net income (loss) $ 0.44 $ 0.24 $ 0.40 $ 0.25 $ 0.18 $ (0.16)
========= ========= ========== ========= ============= =============
Dilutive earnings per share:
Net income (loss) before Cumulative effect
of change in accounting principle and
extraordinary item $ 0.38 $ 0.24 $ 0.33 $ 0.22 $ 0.15 $ (0.09)
Cumulative effect of accounting change (a) - (0.04) - - - -
Extraordinary item - - - - - (0.07)
--------- --------- ---------- --------- ------------- -------------
Net income (loss) $ 0.38 $ 0.20 $ 0.33 $ 0.22 $ 0.15 $ (0.16)
========= ========= ========== ========= ============= =============
EBITDA (b)
(earnings before interest, taxes,
depreciation and amortization expense) $ 14,514 $ 14,624 $ 13,943 $ 11,123 $ 5,243 $ 4,803
--------- --------- ---------- --------- ------------- -------------
Balance Sheet Data:
Working capital deficit $ (13,325) $ (15,453) $ (16,946) $ (12,087) $ (10,221) $ (7,946)
Goodwill and intangibles, net 49,521 50,012 51,447 47,319 43,754 37,923
Total assets 102,980 101,784 98,618 81,025 75,020 74,398
Short-term debt and
Current portion of long-term debt 4,488 6,414 6,293 2,209 2,031 2,793
Long-term debt 35,729 36,941 36,509 29,147 26,477 28,470
Stockholders' equity 42,487 38,601 36,558 34,145 32,736 31,636
(a) Cumulative effect of accounting change represents the effect of the
adoption of Staff Accounting Bulletin 101, Revenue Recognition.
(b) EBITDA is defined by the Company as its net income before interest expense,
income taxes, depreciation, amortization and cumulative effect of a change
in accounting principle. EBITDA is not intended to indicate that cash flow
is sufficient to fund all of the Company's cash needs or represent cash
flow from operations as defined by accounting principals generally
accepted in the United States of America. EBITDA should not be used as a
tool for comparison as the computation may not be similar for all
companies.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company has entered into an Agreement and Plan of Merger, dated as
of August 5, 2002, with Socrates Acquisition Corporation ("Socrates"), a
corporation newly formed by Gryphon Partners II, L.P. and Cadigan Investment
Partners, Inc. (collectively with Gryphon Partners II-A, L.P., the "Buying
Group"), both of which are engaged principally in the business of investing in
companies. Under the merger agreement, Socrates will be merged into NLCI, with
NLCI as the surviving corporation (the "Merger"). If the Merger is completed,
each issued and outstanding share of NLCI common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
will be converted into the right to receive $7.75 in cash, without interest,
except for certain shares and options held by the NLCI directors and executive
officers identified in the merger agreement as a rollover stockholder, which
will continue as, or be converted into, equity interests of the surviving
corporation. In addition, if the Merger is completed, each outstanding option
and warrant that is exercisable as of the effective time of the Merger will be
canceled in exchange for (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant multiplied by (2) the number of shares
of common stock subject to the option or warrant exercisable as of the effective
time of the merger, net of any applicable withholding taxes. Following the
Merger, NLCI will continue its operations as a privately held company. The
Merger is contingent upon satisfaction of a number of conditions, including
approval of NLCI's stockholders, the receipt of regulatory and other approvals
and consents, the absence of any pending or threatened actions that would
prevent the consummation of the transactions contemplated by the merger
agreement and receipt of financing. There can be no assurance that these or
other conditions to the Merger will be satisfied or that the Merger will be
completed. If the Merger is not completed for any reason, it is expected that
the current management of NLCI, under the direction of the NLCI Board of
Directors, will continue to manage NLCI as an ongoing business.
It is currently anticipated that the total amount of funds necessary to
complete the Merger and the related transactions is approximately $108,900,000
(assuming that no NLCI stockholders exercise and perfect their appraisal
rights). The Buying Group has received commitments, subject to various
conditions, from financial institutions in an aggregate amount sufficient,
taking into account the amounts to be contributed as equity financing, to fund
these requirements. The receipt of third-party financing is a condition to
completion of the Merger. Of this amount, $47,500,000 is expected to be funded
from a equity investment in the Company by Socrates and stockholders who are
converting their shares into equity interests in the surviving corporation and
an additional $50,000,000 is expected to be funded through new credit
facilities. These funds are expected to be used to pay NLCI's stockholders and
certain option holders and warrant holders, other than stockholders who are
converting their shares into equity interest in the surviving corporation, to
refinance debt, and to pay fees and expenses related to the Merger. Following
completion of the Merger, the senior secured credit facility and the senior
subordinated notes are expected to be repaid through cash flow generated from
operations in the ordinary course of business and/or through refinancing.
The Company anticipates that it will expense in the first and second
quarter of Fiscal 2003 approximately $800,000 of legal, professional and other
registration fees incurred in connection with the Merger.
Results of Operations
Fiscal Year ended June 30, 2002 ("Fiscal 2002") compared to Fiscal Year ended
June 30, 2001("Fiscal 2001")
At June 30, 2002, the Company operated 174 schools. Since June 30, 2001,
the Company has opened six new schools: four preschools and two schools for
learning challenged (the Paladin Academy schools). The Company has also closed
three schools.
Revenues for Fiscal 2002 increased $8,327,000 or 5.6% to $156,279,000 from
$147,952,000 for Fiscal 2001. The increase in revenues is primarily attributable
to tuition increases, the maturing of schools opened in Fiscal 2001 and the
opening of nine new schools.
Same school revenue (schools that were opened in both periods) increased
$6,908,000 or 4.7% in Fiscal 2002 compared to Fiscal 2001. This increase is
related to tuition increases of approximately 5% and the maturing of schools
opened in Fiscal 2001 offset by a decrease in enrollment in many of the
Company's preschools due
14
primarily as a result of the economy which often times results in the loss of
employment by at least one parent with a child in preschool. The increase in
revenues related to the new schools opened totaled $1,766,000. Revenues related
to The Activities Club increased $257,000. These increases were offset by a
decrease in revenues of $604,000 related to school closings.
School operating profit in Fiscal 2002 increased $1,923,000 or 10.6% to
$20,089,000 from $18,166,000 for Fiscal 2001. Total school operating profit
margin increased from 12.3% for Fiscal 2001 to 12.9% for Fiscal 2002. The
results for Fiscal 2002 include the effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
which resulted in a $1,677,000 reduction in goodwill amortization expense. (See
Note 7 to the financial statements.)
Same school operating profit increased $3,324,000 or 17.6% in Fiscal 2002
compared to Fiscal 2001. Same school operating profit margin improved from 12.9%
in Fiscal 2001 to 14.4% in Fiscal 2002. Excluding the effect of the adoption of
SFAS 142, same school operating profit increased $1,695,000 or 9.0%. The
increase in same school operating profit is due to the effect of the adoption of
SFAS 142, the maturing of schools opened in Fiscal 2001 and lower school level
expenses as a percentage of revenue. New schools opened in Fiscal 2002 incurred
a loss of $1,126,000. Pre-opening expense (start-up cost) for schools to open in
Fiscal 2003 was $516,000. The Activities Club ("TAC"), a business purchased in
December 1999, reduced its operating loss for Fiscal 2002 by $294,000 from
$474,000 in Fiscal 2001 to $180,000 in Fiscal 2002. School closings negatively
affected the change in school operating profit by $53,000.
General and administrative expenses increased $772,000 or 7.0% from
$11,004,000 in Fiscal 2001 to $11,776,000 in Fiscal 2002. As a percentage of
revenue, general and administrative expense was 7.5% for Fiscal 2002 and 7.4%
for Fiscal 2001. This increase in general and administrative expenses was
primarily related to additional corporate staffing, increased rent related to
new corporate office location and increased fees for professional and legal
services.
As a result of the factors mentioned above, operating income increased
$1,151,000 from $7,162,000 in Fiscal 2001 to $8,313,000 in Fiscal 2002.
Operating income as a percentage of revenue increased from 4.8% in Fiscal 2001
to 5.3% in Fiscal 2002.
Other income decreased $264,000 during Fiscal 2002 as compared to the
comparable period in the prior year. This decrease was primarily due to a
decrease in interest income from investments and notes receivable. Other income
for Fiscal 2002 also includes the gain recognized on the settlement of a
promissory note of $383,000 and the write-off of expenses related to
unsuccessful transactions of $344,000.
For Fiscal 2002, EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization) totaled $14,514,000. This represents a decrease
of $110,000 over the comparable period. EBITDA is not intended to indicate that
cash flow is sufficient to fund all of the Company's cash needs or represent
cash flow from operations as defined by accounting principles generally accepted
in the United States of America. In addition, EBITDA should not be used as a
tool for comparison as the computation may not be similar for all companies.
Interest expense decreased $534,000 or 12.8% from $4,171,000 for Fiscal
2001 to $3,637,000 for Fiscal 2002. The decrease is due to decreased interest
rates on the Company's senior credit facility and a decrease in interest
associated with subordinated notes due to repayments. The decreases were offset
by an increase in the Company's senior subordinated debt which increased from
10.0% to 12.0% in October 2001.
Income tax expense totaled $1,968,000 for Fiscal 2002, which reflects a 41%
effective tax rate. The reduction in the tax rate from Fiscal 2001 is
principally caused by the implementation of FAS 142, as the Company is no longer
amortizing non-deductible goodwill.
15
Fiscal 2001 compared to the twelve months ended June 30, 2000 ("Fiscal 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.
At June 30, 2001, the Company operated 171 schools. Since June 2000 through
June 2001, the Company 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 (HLA) and three charter
schools (including the two Arizona charter schools purchased in 2000). The
Company also closed three underperforming schools.
Revenues in Fiscal 2001 increased $20,545,000 or 16.1% to $147,952,000 in
Fiscal 2001 from $127,407,000 for Fiscal 2000. After adjusting Fiscal 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 Fiscal 2000 to $132,900,000 in Fiscal 2001 or
6.4%. This increase was related to tuition and enrollment increases and the
maturing of schools opened in Fiscal 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 TAC decreased $238,000 from
$640,000 in Fiscal 2000 to $402,000 in Fiscal 2001. These increases were offset
by a decrease in revenues of $1,656,000 related to closed schools.
School operating profit for Fiscal 2001 increased $837,000 or 4.8% to
$18,166,000 from $17,329,000 in Fiscal 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
Fiscal 2000 to $19,295,000 in Fiscal 2001 or 10.9%. Same school operating profit
margin improved from 13.9% in Fiscal 2000 to 14.5% in Fiscal 2001. The increase
in same school operating profit was due to the revenue increases and the
maturing of the schools opened in Fiscal 1999. For Fiscal 2001, new schools
incurred losses of $711,000. Included in these losses was $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 Fiscal 2001, operating
results from TAC were a loss of $474,000 or a decrease of $550,000 as compared
to Fiscal 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 Fiscal 2001. As a percentage of revenue, general and
administrative expenses decreased from 7.6% of revenues in Fiscal 2000 to 7.4%
of revenues in Fiscal 2001. The increase in general and administrative expense
related primarily 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
canceled.
As a result of the factors mentioned above, operating income decreased
$425,000 to $7,162,000 for Fiscal 2001 as compared to that for Fiscal 2000.
Operating income as a percentage of revenue increased from 5.9% in Fiscal 2000
to 4.8% in Fiscal 2001.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization) before the cumulative effect of a change in accounting principles,
totaled $14,624,000 for Fiscal 2001 which was $681,000 above Fiscal 2000. As a
percentage of revenue, EBITDA for Fiscal 2001 equaled 9.9% versus 10.9% in
Fiscal 2000. EBITDA is not intended to indicate that cash flow is sufficient to
fund all of the Company's cash needs or represent cash flow from operations as
defined by accounting principles generally accepted in the United States of
America. In addition, EBITDA should not be used as a tool for comparison as the
computation may not be similar for all companies.
16
Interest expense increased by $798,000 or 23.7% for Fiscal 2001 as compared
to Fiscal 2000. The increase in interest expense was 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 Fiscal 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 Revenue Recognition
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.
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
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 that was recognized during 2001. SAB
101 modifies the recognition of fee income but has no impact on cash flow or the
operations of the Company.
Liquidity and Capital Resources
Fiscal 2002 Cash Flows
Total cash and cash equivalents increased $466,000 from $1,321,000 at June
30, 2001 to $1,787,000 at June 30, 2002. The net increase was primarily related
to cash provided from operations totaling $10,548,000, repayments on notes
receivable of $1,680,000, proceeds from the exercise of stock options and
warrants of $1,510,000 and an increase in borrowings under the Senior Credit
Facility of $819,000. These sources of cash were offset by $8,673,000 in capital
expenditures, a decrease in cash overdraft liability of $1,864,000 and
repayments of subordinated debt of $3,865,000.
The working capital deficit decreased $2,128,000 from $15,453,000 at June
30, 2001 to $13,325,000 at June 30, 2002. The decrease is primarily the result
of a decrease of $1,864,000 in cash overdraft liability and a decrease of
$1,926,000 in current maturities of long-term debt. This decrease was offset by
an increase in unearned income totaling $370,000 and a decrease of $1,585,000 in
notes receivable. The increase in unearned income is related to the prepayment
of annual and semi-annual tuition by parents and by registration fees collected
at the beginning of the school year.
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 2003, but acquisitions will be limited in number.
In addition, the Company is committed to a plan and is actively marketing
approximately $6,000,000 in real estate for a potential sale leaseback
transaction.
Long-Term Obligations and Commitments
In May 2001, the Company entered into its current 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
17
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 2004. At that time, the outstanding principal
under the Acquisition Credit Facility will be converted into a term loan that
will require principal payments in 16 quarterly installments. The Working
Capital Credit Facility is scheduled to terminate on April 1, 2004. In addition,
the credit facilities provide that NLCI must meet or exceed defined interest
coverage ratios and must not exceed leverage ratios.
At June 30, 2002, the Company was not in compliance with two credit
facility financial covenant ratios. The Company, however, received a waiver for
the breach of the interest coverage ratio and adjusted leverage ratio at June
30, 2002. In addition, the breached ratios were amended and restated to lower
ratio requirements for Fiscal 2003. The Company's interest coverage ratio
increased from a ratio of EBITDA of 3.5 times interest expense or higher to 4.0
times interest expense or higher at June 30, 2002. The Company's ratio was 3.99
times EBITDA at June 30, 2002. The Company's adjusted leverage ratio decreased
from 4.5 times EBITDA or plus rent expenses to 4.25 times EBITDA plus rent
expense at June 30, 2002. The Company's ratio was 4.37 times EBITDA plus rent
expense at June 30, 2002. The Company is in compliance with all other bank
covenant requirements.
At June 30, 2002, a total of $28,217,000 was outstanding and $9,353,000 was
available under the Amended and Restated Loan Agreement. There was $2,084,000
outstanding under the Working Capital Credit Facility, $13,276,000 was
outstanding under the Acquisition Credit Facility, $12,857,000 was outstanding
under the Term Loan and $287,000 in outstanding letters of credit. In addition,
the Company has $12,000,000 outstanding under subordinated debt agreements as
well as significant commitments under operating lease agreements. The following
is a summary of these obligations (dollars in thousands):
Contractual Obligations Less than 2-4 Year 5 and
Total 1 year years after
---------------------------------------------------------
Long-term obligations $40,217 4,488 26,781 8,948
Interest rate swap 376 63 313
Operating leases 228,682 25,127 69,890 133,665
---------------------------------------------------------
Total $269,275 $29,678 $96,984 $142,613
=========================================================
The Company announced on August 6, 2002 that it had entered into a merger
agreement with Socrates under which the Company would be the surviving
corporation. The Company has incurred, and will continue to incur, substantial
fees for services in connection with this transaction that heretofore have been
capitalized. If the transaction is consummated, these fees will be allocated to
the equity and debt financing of the transaction and thereafter treated in
accordance with generally accepted accounting principles. In the event the
transaction is not consummated, these fees will be expensed at that time. The
resulting write off may be material and may be sufficiently large that the
Company will find itself out of compliance with the covenants associated with
its existing senior debt. We cannot determine at this time whether any such
write off would be material or would cause the Company to be in default under
the credit facility with its senior lender.
The Company also has significant commitments with certain of its executives
that would be triggered upon a change in control and certain termination events.
Capital Expenditures
The Company is continuously maintaining and, where necessary, upgrading the
property and equipment of each school. During Fiscal 2002, the Company spent
approximately $8,673,000 on capital expenditures, which included $2,259,000 for
new school development, $5,758,000 on upgrading existing facilities and $656,000
related to new corporate offices. During Fiscal 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 Fiscal 2002, the Company received $390,000 from the sale of 2 closed
schools. During Fiscal 2001, the Company received $8,268,000 from sale and
leaseback transactions of new schools.
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 become
subject to lower limits or substantial increases in insurance premiums.
Recently Issued Accounting Standards
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and expands on the guidance provided by
18
SFAS No. 121 with respect to cash flow estimations. SFAS No. 144 becomes
effective for the Company in Fiscal 2003. The Company is evaluating SFAS No. 144
and has not yet determined the full impact of adoption on its financial position
but will reclass property and equipment held for sale as part of total property
and equipment as the assets are still in use.
On April 30, 2002 the Financial Accounting Standards Board ("FASB") issued
Statement 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. FASB 145 rescinds Statement 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. Early application of the provisions of FASB 145 may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which FASB 145 is issued. The Company has elected to adopt FASB 145 as of the
beginning of Fiscal 2002.
The Company had a promissory note obligation related to the purchase of a
school in Arizona of $1,408,000 issued in June 2000. The promissory note was
settled for $1,025,000 on February 14, 2002 resulting in a gain of $383,000. As
a result of the adoption of FASB 145, the Company recorded the gain as other
income during the quarter ended March 31, 2002. The impact on diluted earnings
per share for the quarter and year to date March 31, 2002 was $0.03 per share
(net of tax).
On July 30, 2002, FASB issued Statement 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
FASB 146 is to be applied prospectively to exit or disposal activities initiated
after December 21, 2002.
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Predicting future events is inherently an imprecise activity
and as such requires the use of judgment. Actual results may vary from estimates
in amounts that may be material to the financial statements.
The Company's significant accounting policies are described in note 1 to
the consolidated financial statements. The following accounting policies are
considered critical to the preparation of the Company's financial statements due
to the estimation processes and business judgment involved in their application.
Revenue Recognition
Tuition revenues, net of discounts and other revenues are recognized as
services are performed. Any tuition payments received in advance of the time
period for which service is to be performed is recorded as unearned revenue.
Charter school management fees are recognized based on a contractual
relationship with the charter school and do not include any tuition revenue
received by the charter school. Certain fees may be received in advance of
services being rendered, in which case the fee revenue is deferred and
recognized over the appropriate period of service. The Company's net revenues
meet the criteria of SAB No. 101, including the existence of an arrangement, the
rendering of services, a determinable fee and probable collection.
Accounts Receivable
The Company's accounts receivable are comprised primarily of tuition due
from governmental agencies and parents. Accounts receivable are presented at
estimated net realizable value. The Company uses estimates in determining the
collectibility of its accounts receivable and must rely on its evaluation of
historical trends, governmental funding processes, specific customer issues and
current economic trends to arrive at appropriate reserves. Material differences
may result in the amount and timing of bad debt expense if actual experience
differs significantly from management estimates.
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 also has investments in other entities. The collectibility 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.
19
Long-lived and Intangible Assets
Under the requirements of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets, the Company assesses the potential impairment of property and
equipment and identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An
asset's value is impaired if management's estimate of the aggregate future cash
flows, undiscounted and without interest charges, to be generated by the asset
are less than the carrying value of the asset. Such cash flows consider factors
such as expected future operating income and historical trends, as well as the
effects of demand and competition. To the extent impairment has occurred, the
loss will be measured as the excess of the carrying amount of the asset over the
fair value of the asset. Such estimates require the use of judgment and numerous
subjective assumptions, which, if actual experience varies, could result in
material differences in the requirements for impairment charges.
Goodwill
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2001. Under SFAS No. 142, goodwill is no longer amortized but
reviewed for impairment annually, or more frequently if certain indicators
arise. As a result, the Company ceased amortization of goodwill, the effect of
which was a reduction of $1,677,000 of amortization expense for the year ended
June 30, 2002.
The net carrying value of goodwill was $48,376,000 as of July 1, 2001 (the
Company's adoption date of SFAS 142). The Company completed the "first step"
impairment test as required under SFAS 142 at December 31, 2001 and determined
that the recognition of an impairment loss was not necessary. The fair value of
the Company's ten reporting units was estimated using the expected present value
of future cash flows. In estimating the present value the company used
assumptions based on the characteristics of the reporting unit including
discount rates (ranging from 13% to 20%). For two of the reporting units fair
value approximated their carrying value while for the remaining eight reporting
units fair value exceeded carrying value. For the two reporting units where fair
value approximated carrying value, goodwill allocated to these reporting units
totaled $7,806,000 and $4,676,000. Accordingly, the Company updated its analysis
at June 30, 2002 and concluded that no impairment was required for these two
reporting units. Goodwill will be assessed for impairment at least annually or
upon an adverse change in operations. The annual impairment testing required by
SFAS No. 142 will require judgments and estimates and could require us to write
down the carrying value of our goodwill and other intangible assets in future
periods.
Long Term Note Receivable
The Company has a $2,600,000 note receivable pursuant to a Credit Agreement
with Total Education Solutions ("TES") due May 2005, of which $2,250,000 is
convertible into 30.0% ownership of TES. TES, established in 1997, provides
special education services to charter schools and public schools which, 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). The proceeds received by TES have been
used for the expansion of its product throughout California and plans to enter
other states. Although TES's revenues have grown since the origination of the
credit agreement, TES has also incurred losses as a result of building the
infrastructure to service other regions.
As part of our evaluation of the carrying value of TES, we consider a
number of positive and negative factors affecting TES including:
. Operating results and outlook for TES;
. Expected future cash flows;
. Current conditions and trends in the industry;
. Other industry comparables; and
. Our plans and ability to continue to hold this investment.
In evaluating the investment in TES, a discounted cash flow analyses was
prepared for TES based on a recent financing discussion memorandum. The cash
flow analyses indicated that the investment in TES has a value greater than our
current carrying value. In addition, we reviewed other objective evidence
including recent comparable
20
transactions similar to TES, industry publications supporting the market and
growth rates and TES's ongoing discussions with third parties regarding
additional financing.
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 as income in the period of enactment. A
valuation allowance is recorded based on the uncertainty regarding the ultimate
realizability of deferred tax assets.
The Company files a U.S. federal income tax return and various state income
tax returns, which are subject to examination by tax authorities. This process
involves estimating the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The Company's estimated tax liability is subject to change
as examinations of specific tax years are completed in the respective
jurisdictions including possible adjustments related to the nature and timing of
deductions and the local attribution of income.
21
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 12.0%, $10,000,000 senior subordinated debt at June 30, 2002 and
June 30, 2001. The Company also has no cash flow exposure on certain mortgages,
notes payable and subordinate debt agreements aggregating $2,386,000 and
$6,471,000 at June 30, 2002 and June 30, 2001, 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 1.0% change in the LIBOR rate and the prime rate would
have resulted in interest expense changing by approximately $143,000 and
$206,000 in Fiscal 2002 and Fiscal 2001, 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, 2002 the Company's interest rate
swap contract outstanding had a total notional amount of $12,857,000. Under the
interest rate swap contract, the Company agrees to pay a fixed rate of 5.48% and
the counterparty agrees to make payments based on 3-month LIBOR. The market
value of the interest rate swap agreement at June 30, 2002 was a liability of
$376,000, net of taxes and is included as a component of Accumulated Other
Comprehensive Loss, of which a portion is expected to be reclassified to the
consolidated statement of income within one year.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary financial information specified by
this Item, together with the Reports of the Company's independent accountants
thereon, are included in this Annual Report on Form 10-K on pages F-1 through
F-26 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item with respect to the directors of the
Company is listed below. 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.
The names of the directors and certain information about them, are set
forth below:
Director
Name of Director Age Principal Occupation Since
- --------------------------------------------------------------------------------------------
Continuing Director with a term expiring in 2004 (Class II Directors):
Daniel L. Russell 37 Principal Private Finance Group, Allied 2001
Capital Corporation
Continuing Director with a term expiring in 2002 (Class III Directors):
Edward Chambers 65 Executive Vice President - Finance and 1988
Administration of Wawa, Inc.
A.J. Clegg 63 Chairman of Board of Directors and Chief 1992
Executive Officer of the Company
Peter H. Havens 48 Chairman of Baldwin Management, LLC 1991
Continuing Director with a term expiring in 2003 (Class I Directors):
John R. Frock 59 Vice Chairman - Corporate Development of 1992
the Company
Eugene G. Monaco 74 Judge, Delaware County District Court 1995
(retired)
Robert E. Zobel 54 Vice Chairman - Corporate Affairs and Chief 1998
Financial Officer of the Company
The following description contains certain information concerning the
directors, including current positions and principal occupations during the past
five years.
Edward H. Chambers. Mr. Chambers has served as Executive Vice President
- - Finance and Administration of Wawa, Inc. since March 1988. During the period
April 1984 through March 1988, he served as President and Chief Executive
Officer and as a director, of Northern Lites, Ltd., an owner and operator of
quick-service restaurants operating pursuant to a franchise from D'Lites of
America, Inc. From 1982 to July 1984, Mr. Chambers was President - Retail
Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service
restaurants. He is also a director of Riddle Memorial Hospital.
A. J. Clegg. Mr. A. J. Clegg was named Chairman of the Board and Chief
Executive Officer of NLCI in May 1992. Since 1996, Mr. A. J. 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. A. J. Clegg served as the Chairman and CEO of JBS Investment Banking,
Ltd., a provider of investment management and consulting services to businesses,
including NLCI. 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. A.
J. 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
23
senswitches. Mr. A. J. Clegg 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. A. J. Clegg was recognized as
"Education Entrepreneur of the Year" by the Association of Education
Practitioners and Providers. Mr. A. J. Clegg is the father of Mr. D. Scott
Clegg, NLCI's Vice Chairman - Operations, President and Chief Operating Officer.
John R. Frock. Mr. Frock was appointed Vice Chairman - Corporate
Development of NLCI in April 2002. Prior to such appointment, Mr. Frock had been
Executive Vice President - Corporate Development since August 1, 1994. Mr. Frock
was elected to the Board of Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief Operating Officer of JBS Investment
Banking, Ltd., a provider of investment management and consulting services to
businesses, including NLCI.
Peter H. Havens. Mr. Havens is Chairman of Baldwin Management, LLC, an
investment management concern. Previously, he was the Executive Vice President
of Bryn Mawr Bank Corporation overseeing the Investment Management and Trust
Division. From 1982 through May 1995, Mr. Havens served as manager of Kewanee
Enterprises, a private investment firm located in Bryn Mawr, Pennsylvania. He is
also chairman of the board of directors of Petroferm, Inc., a director of
Independence Seaport Museum and Lankenau Hospital Foundation and a Trustee
Emeritus of Ursinus College.
Eugene G. Monaco. Mr. Monaco has both a J.D. from Temple Law School and
M.S. in Mechanical Engineering from the University of Delaware and, from January
1, 1990 until his retirement in late 1995, served as a Judge for the Delaware
County District Court. He also served as an Instructor in Kinematics and
Dynamics at Drexel University, a Lecturer in child abuse at Penn State
University and was the Chief Negotiator for the Rose Tree Media School Board. He
also served as Assistant District Attorney in Media, Pennsylvania and
Engineering Negotiator for Westinghouse Electric for 32 years.
Daniel L. Russell. Mr. Russell is a Principal in the Private Finance
Group at Allied Capital Corporation. Prior to joining Allied Capital in 1998,
Mr. Russell served in the financial services practice of KPMG Peat Marwick LLP
from 1991 to 1998, including serving as a Senior Manager from 1996 to 1998. Mr.
Russell is a director of The Hillman Group, SunSource Technology Services, Inc.
and HealthASPex. Mr. Russell is a Certified Public Accountant.
Robert E. Zobel. Mr. Zobel was appointed Vice Chairman - Corporate
Affairs and Chief Financial Officer of NLCI in April 2002. Between February 2001
and April 2002, Mr. Zobel served as Vice President, Chief Administrative Officer
and Secretary of MARS, Inc., a start up retail organization. Mr. Zobel was Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of MARS,
Inc. from February 1996 until February 2001. From 1974 through February 1996,
Mr. Zobel was associated with Deloitte & Touche LLP (formerly Touche Ross & Co.)
as an employee and since September 1981 as a partner. Mr. Zobel earned a B.A.
degree from Claremont McKenna College, a J.D. degree from Willamette University
College of Law and a LLM degree in tax from Boston University. Mr. Zobel has
served as a director of NLCI since 1998.
During the last five years, no director or executive officer of the Company
has:
(i) filed a petition for bankruptcy;
(ii) been convicted in a criminal proceeding; or
(iii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result
of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or
mandating activities subject to, federal or state securities
laws or finding any violation with respect to such laws.
On March 11, 2002, Pamela Lewis resigned from the NLCI Board of
Directors for personal reasons unrelated to the Company. On April 30, 2002, the
Company's Board of Directors reduced the number of directors on the Company's
Board, from eight to seven.
24
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
Common Stock, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common
Stock. Executive officers, directors and ten percent stockholders are required
by SEC regulations to furnish the Company with a copy of all Section 16(a) forms
("Forms 3, 4, and 5") that they file. To the Company's knowledge, based solely
on a review of copies of the Forms 3, 4 and 5 furnished to the Company and
written representations with respect to all transactions in the Company's
securities effected during the period from July 1, 2001 through June 30, 2002,
all officers, directors and beneficial owners complied with the applicable
Section 16(a) filing requirements except that (i) Mr. A.J. Clegg inadvertently
failed to file a report on Form 4 in connection with the exercise of a warrant
to purchase 20,161 shares of the Company's Common Stock, (ii) Mr. Robert E.
Zobel inadvertently failed to report timely on Form 4 dispositions of Common
Stock beneficially owned by him, and (iii) Messrs. D. Scott Clegg and Robert E.
Zobel each inadvertently failed to report timely a grant of options (made both
under the 1995 Stock Incentive Plan and outside of NLCI's option plans) to
purchase Common Stock in Fiscal 2002. We have been advised by Messrs. A.J.
Clegg, D. Scott Clegg and Robert E. Zobel that they are in the process of
completing their filings.
25
Item 11. Executive Compensation.
The information required by this Item is listed below.
Compensation Tables
The following tables contain compensation data for the Chief Executive
Officer and certain other of the Company's four other most highly compensated
executive officers (based on total annual salary and bonus for Fiscal 2002) (the
"Named Executive Officers").
Summary Compensation Table
-----------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------------------------
Other Securities All
Name and Fiscal Annual Underlying Other
Principal Position Year Salary Bonus Compensation(1) Options/SARs Compensation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
A.J. Clegg 2002 $ 329,648 $ 80,644(3) - - $ 6,752
Chairman, President and 2001 316,154 144,639(4) - - 7,383
Chief Executive Officer 2000 314,007 141,477 - 110,000 6,391
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Frock 2002 $ 180,869 $ - - - $ 2,164
Vice Chairman - 2001 145,846 - $ 14,626 - 2,073
Corporate Development 2000 141,846 66,636 - - 2,676
- -----------------------------------------------------------------------------------------------------------------------------------
Robert E. Zobel(5)
Vice Chairman - 2002 $ 35,385 $ - $ 3,792 65,000 $ -
Corporate Affairs and 2001 - - - - -
Chief Financial Officer 2000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
D. Scott Clegg(5)
Vice Chairman - 2002 $ 126,923 (6)$ - $ 3,000 65,000 $ -
Operations, President and 2001 - - - - -
Chief Operating Officer 2000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Dr. Lynn A. Fontana
Executive Vice President - 2002 $ 126,040 $ - $ 21,389 - $ 1,561
Education and Chief 2001 113,960 - 22,468 - 368
Education Officer 2000 98,526 20,360 0 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Daryl A. Dixon (7) 2002 $ 174,540 (8)$ - $ 97,777 - $ 1,159
Former President and 2001 265,000 - 49,326 - 312
Chief Operating Officer 2000 260,615 117,205 49,858 - 302
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The amounts reported for Mr. Frock consist of $7,800 for automobile
expenses in Fiscal 2001 and $6,826 for health insurance in Fiscal
2001. The amounts reported for Mr. Zobel in Fiscal 2002 consist of
$1,200 for automobile expense and $2,592 for health insurance. The
amounts reported for Mr. D. Scott Clegg in Fiscal 2002 consist of
$3,000 for automobile expense. The amounts reported for Dr. Fontana
consist of $9,362 and $9,362 for loan forgiveness for relocation or
moving expenses in Fiscal 2002 and 2001, respectively, $6,000and
$6,000 for automobile expenses for Fiscal 2002 and 2001 , respectively
and $6,026 and $7,106 for health insurance in Fiscal 2002 and 2001 ,
respectively. The amounts reported for Mr. Dixon consist of $36,750,
$34,100 and $35,303 in respect of loan forgiveness in Fiscal 2002,
2001 and 2000, respectively, $4,200, $8,400 and $8,400 for automobile
expenses in Fiscal 2002, 2001 and 2000, respectively, $6,027, $6,826
and $6,155 for health insurance in Fiscal 2002, 2001 and 2000,
respectively, $7,644 in Fiscal 2002 for unused vacation and $43,156 in
Fiscal 2002 for options exercised. Perquisites and other personal
benefits for Messrs. A. J. Clegg for all years; Mr. Frock in Fiscal
2002 and 2000 and Dr. Fontana in fiscal 2000 did not exceed 10% of
such executive officer's salary and bonus and accordingly have been
omitted from the table as permitted by the rules of the SEC.
26
(2) Other compensation in Fiscal 2002 for Messrs. A. J. Clegg, Frock and Dixon
and Dr. Fontana consisted of payments of (i) $5,848, $2,164, $216, and
$260, respectively, in respect of life insurance, and (ii) $905, $0, $943,
and $1,301, respectively; in respect of Company matching 401(k) plan
contributions.
(3) Payment date for $80,644 of bonus payable under Mr. A. J. Clegg's Special
Incentive Agreement was accelerated by NLCI's compensation committee from
November 20, 2001 to August 19, 2001 in connection with his exercise of
warrants to purchase shares of NLCI's Common Stock. Mr. A. J. Clegg has
voluntarily deferred payment to him of the remaining $56,689 of this bonus.
(4) Includes $7,306 of interest accrued from November 20, 2000, the date bonus
payment was due, until June 22, 2001, the date bonus payment was actually
made.
(5) Mr. Zobel joined the Company in April 2002 and Mr. D. Scott Clegg joined
the Company in February 2002.
(6) Includes $50,000 Mr. D. Scott Clegg received during Fiscal 2002 as a
consultant immediately preceding his employment with the Company.
(7) Mr. Dixon resigned form the Company effective November 30, 2001 and
continued to serve as a consultant through February 18, 2002.
(8) Includes $71,598 Mr. Dixon received during Fiscal 2002 as a consultant
immediately following his resignation.
27
Options/Stock Appreciation Rights Granted in Fiscal 2002
---------------------------------------------------------------------------------------
Potential Realized Value
Individual Grants at Assumed Annual Rates
of Stock Price
------------------------------------------------------------ Appreciation for Option
Term (10 yrs) (3)
---------------------------
% of Total
Number of Options/
Securities SARs
Underlying Granted Exercise At 5% At 10%
Option/ to all or Annual Annual
Name of SARs Employees in Base Price Expiration Growth Growth
Executive Granted (1) Fiscal 2002 (2) per Share Date Rate Rate
- -------------------------------------------------------------------------------------------------------------------------
A.J. Clegg 0 0.00% n/a n/a $ 0 $ 0
John R. Frock 0 0.00% n/a n/a $ 0 $ 0
Robert E. Zobel 65,000 48.15% $5.85 02/21/2012 $239,137 $299,531
D. Scott Clegg 65,000 48.15% $5.85 02/21/2012 $239,137 $299,531
Dr. Lynn A. Fontana 0 0.00% n/a n/a $ 0 $ 0
(1) Options granted vest in increments of one-third of the total number of
options granted on the first, second and third anniversary dates of
the date of grant.
(2) During Fiscal 2002, the Company granted to employees options to
purchase an aggregate of 135,000 shares of Common Stock.
(3) The potential realizable values are based on an assumption that the
stock price of the shares of Common Stock of the Company appreciate at
the annual rate shown (compounded annually) from the date of grant
until the end of the option term. These values do not take into
account contractual provisions of the options which provide for
termination of an option following termination of employment,
nontransferability, or vesting. These amounts are calculated based on
the requirements promulgated by the SEC and do not reflect the
Company's estimate of future stock price growth of the shares of the
Company's Common Stock.
Aggregated Option/Stock Appreciation Rights Exercised in Fiscal 2002
and Value of Options at June 30, 2002
Exercised in Number of Unexercised Value of Unexercised
Fiscal 2002 Options at June 30, 2002 In-the-Money Options at
June 30, 2002
-------------------------------------------------------------------------------------
Shares
Acquired
Name of on Value Un- Un-
Executive Exercise Realized Exercisable exercisable Exercisable exercisable
- -----------------------------------------------------------------------------------------------------------------------
A.J. Clegg 0 0 238,333 36,667 $120,030 $ 0
John R. Frock 0 0 92,682 0 $107,220 $ 0
Robert E. Zobel 0 0 6,561 65,000 $ 0 $62,595
D. Scott Clegg 0 0 65,000 $ 0 $62,595
Dr. Lynn A. Fontana 0 0 3,333 1,667 $ 3,126 $ 1,564
None of the above named executive officers held any stock appreciation
rights at June 30, 2002.
Compensation of Directors
The Company pays directors an annual retainer of $10,000 (except directors
who are also employees of the Company, who receive $6,000), which is paid
quarterly, and pays members of committees of the Board of Directors $750 per
meeting for each committee meeting attended. In addition, members of the
Company's special committee of the Board of Directors will be paid a retainer in
the amount of $15,000, and the Chair of the special committee of the Board of
Directors will be paid a retainer in the amount of $25,000 (plus, in each such
case, such other amounts as may be deemed to be appropriate by the Board of
Directors following the date on which such retainers are paid), such retainers
to be in lieu of the normal policy of the Company for the attendance of meetings
of the special
28
committee. (Executive officers' compensation reported in the Summary
Compensation Table does not include these fees.)
The Company's 1995 Stock Incentive Plan, as amended, provides that as of
the date 90 days following the closing of each fiscal year that the Plan is in
effect, each individual serving as a director of the Company who is not an
officer or employee of the Company will be granted a nonqualified stock option
to purchase 5,000 shares of Common Stock if the Company's pre-tax income for
such fiscal year increased at least 20% from the prior fiscal year and if the
individual served as a director for the entire fiscal year then ended (or a
proportionate lesser number of shares if the individual served as a director for
less than the entire fiscal year). In Fiscal 2002, no shares were subject to
annual grant, and, pursuant to the Plan, no director received an option to
purchase any shares of Common Stock.
Executive Severance Plan
In March 1997, the Company adopted an Executive Severance Pay Plan (the
"Severance Pay Plan"). The Severance Pay Plan covered certain officers and key
executives of the Company and such other additional employees or positions as
determined by written resolution of the Board from time to time (collectively,
the "Eligible Executives"). Under the Severance Pay Plan, if the employment of
an Eligible Executive with the Company terminates following a Change in Control
(as defined in the Severance Pay Plan) of the Company, under specified
circumstances, the Eligible Executive will be entitled to receive the severance
benefit specified in the Severance Pay Plan. The amount payable to an Eligible
Executive would equal (a) the Eligible Executive's salary for a period of months
equal to six plus the number of years of service of the Eligible Executive as of
the date of termination (or two times the number of years of service, if he or
she has completed at least three years of service as of the termination date),
subject to a maximum of 18 months' pay, plus (b) the bonus which would have been
payable to the Eligible Executive for the year in which employment was
terminated pro rated based on the number of months of employment in the year of
termination. In December 2001, the Severance Pay Plan was amended to remove a
provision which would have given Eligible Executives the right to receive
benefits under the Severance Pay Plan by terminating their employment
voluntarily, for any reason, within one month following the date of a Change of
Control.
Senior Executive Severance Plan
In February 2000, the Company adopted an amended Senior Executive Severance
Pay Plan (the "Executive Severance Pay Plan"), which replaced the Executive
Severance Pay Plan adopted in March 1997, for five of the Company's executive
officers. Under the Senior Executive Severance Pay Plan, if the employment of an
Executive Officer covered by the Executive Severance Pay Plan (collectively, the
"Eligible Senior Executives") terminates following a Change in Control (as
defined therein) of the Company, under specified circumstances, the Eligible
Senior Executive will be entitled to receive the severance benefit specified in
the Executive Severance Pay Plan. The amount payable to an Eligible Senior
Executive would equal (a) the Eligible Executive's salary for a period of months
equal to (i) twelve plus the number of years of service of the Eligible
Executive as of the date of termination if he has completed less than three
years of services, (ii) twelve plus two times the number of years of service, if
he has completed three or four years of service as of the termination date, or
(iii) twelve plus 2.99 times the number of years of service, if he has completed
at least five years of service as of the termination date; but in no event more
35.99 months, plus (b) the bonus which would have been payable to the Eligible
Executive for the year in which employment was terminated pro rated based on the
number of months of employment in the year of termination. In December 2001, the
Executive Severance Pay Plan was amended to remove a provision that would have
given Eligible Senior Executives the right to receive benefits under the
Executive Severance Pay Plan by terminating their employment voluntarily, for
any reason, within one month following the date of a Change in Control.
Employment Agreements with Executive Officers
Daryl A. Dixon - President and Chief Operating Officer
The Company entered into a three-year employment agreement with Daryl Dixon
upon his commencement of employment in February 1999. Mr. Dixon's annual base
salary was $265,000 and beginning in the Fiscal 2000, Mr. Dixon became eligible
to receive an annual bonus of up to 50% of his base salary for achieving the
Company's business plan and up to an additional 50% of his base salary for
achieving above business plan targets. Pursuant to his employment agreement, on
his first day of employment, the Company granted Mr. Dixon options to purchase
29
150,000 shares of Common Stock, vesting over a three-year period. The Company
also agreed to provide Mr. Dixon with a $8,400 per year car allowance, term life
insurance in the amount of $260,000 for his benefit and other benefits provided
to the Company's senior executives. Further, upon commencement of his
employment, the Company loaned Mr. Dixon the sum of $90,000 (to repay a loan
with his prior employer) (the "Dixon Loan"), accruing interest at a rate of 8%
per annum. Each month during Mr. Dixon's employment, the Company forgave 1/36 of
the principal amount and associated interest of the Dixon Loan. Mr. Dixon agreed
not to compete against the Company during the term of his employment and for two
years thereafter.
The Company entered into a certain Separation Agreement and Mutual Release
with Mr. Dixon dated November 30, 2001. Pursuant to that agreement, Mr. Dixon's
employment with the Company terminated on that date, and he agreed to continue
to serve the Company as a consultant through February 18, 2002 (the "Transition
Period"). During the Transition Period, Mr. Dixon was compensated at a pro rated
amount equivalent to $265,000 per year. In addition, Mr. Dixon received a lump
sum payment equal to the number of days of vacation which had accrued but were
unused, multiplied by his prorated daily compensation. The Company also agreed
to permit Mr. Dixon, during the Transition Period, to continue to participate in
any health and insurance plans maintained by the Company for its employees
generally, and permitted the stock options granted to Mr. Dixon under his
employment agreement to continue to vest through the Transition Period. The
Company also agreed that, during the Transition Period, it would continue to
forgive 1/36 of the principal amount and associated interest of the Dixon Loan.
Finally, Mr. Dixon agreed that, until the ninetieth day following the end of the
Transition Period, he would not publicly sell more than 1,200 shares of NLCI
common stock in any one day, in a public sale (provided, that Mr. Dixon would be
permitted to sell any amount of shares as a private trade (i.e., any trade not
reflected on any securities exchange, quotation system or SRO) to any beneficial
owner of less than 5% of the Company's Common Stock).
Dr. Lynn Fontana - Executive Vice President - Education and Chief Education
Officer
The Company entered into a three-year employment agreement with Dr. Lynn
Fontana upon her commencement of employment in August 1999. Dr. Fontana's annual
base salary was $110,000 and she was eligible for an annual bonus according to a
bonus plan established by the Company annually. The Company also agreed to
provide Dr. Fontana with a $6,000 per year car allowance and loaned to Dr.
Fontana the sum of $25,000 for relocation expenses, accruing interest at a rate
of 8% per annum. On each anniversary date during Dr. Fontana's employment, the
Company forgave 1/3 of the principal amount and associated interest of this
loan. In connection with her employment agreement, on her first day of
employment, the Company granted Dr. Fontana options to purchase 5,000 shares of
Common Stock, vesting over a three-year period.
On February 3, 2000, the Company and Dr. Fontana amended her employment
agreement to provide that the loan to Dr. Fontana for moving expenses would be
forgiven if her employment with the Company was terminated due to a Change in
Control (as defined in her employment agreement). Dr. Fontana is currently paid
$131,000 under the terms of her employment agreement.
D. Scott Clegg - Vice Chairman - Operations, President and Chief Operating
Officer
On March 18, 2002, we named D. Scott Clegg our Vice Chairman - Operations,
President and Chief Operating Officer. It is expected that Mr. D. Scott Clegg
will execute a three-year employment agreement that will provide for, among
other things, an annual base salary of $200,000, and an annual bonus of up to
100% of his base salary for achieving business plan targets. In connection with
this anticipated employment agreement, on his first day of employment, the
Company granted Mr. D. Scott Clegg options to purchase 65,000 shares of Common
Stock, vesting over a three-year period. The Company also agreed to provide Mr.
D. Scott Clegg with a $7,200 per year car allowance, term life insurance in the
amount of $200,000 for his benefit and other benefits provided to the Company's
senior executives. Further, upon commencement of his employment, the Company
advanced to Mr. D. Scott Clegg the sum of $35,000 for relocation expenses (the
"D. Scott Clegg Relocation Allowance"). Each month during Mr. D. Scott Clegg's
employment, the Company will forgive 1/36 of the principal amount and associated
interest of the D. Scott Clegg Relocation Allowance. It is also anticipated that
Mr. D. Scott Clegg will agree not to compete against the Company during the term
of his employment and for two years thereafter.
30
Robert E. Zobel - Vice Chairman - Corporate Affairs and Chief Financial Officer
On April 29, 2002, we named Robert E. Zobel our Vice Chairman - Corporate
Affairs and Chief Financial Officer. It is expected that Mr. Zobel will execute
a three-year employment agreement that will provide for, among other things, an
annual base salary of $230,000, and an annual bonus of up to 100% of his base
salary for achieving business plan targets. In connection with this anticipated
employment agreement, on his first day of employment, the Company granted Mr.
Zobel options to purchase 65,000 shares of Common Stock, vesting over a
three-year period. The Company also agreed to provide Mr. Zobel with a $7,200
per year car allowance, term life insurance in the amount of $230,000 for his
benefit and other benefits provided to the Company's senior executives. Further,
upon commencement of his employment, the Company advanced to Mr. Zobel the sum
of $50,000 for relocation expenses (the "Zobel Relocation Allowance"). Each
month during Mr. Zobel's employment, the Company will forgive 1/36 of the
principal amount and associated interest of the Zobel Relocation Allowance. It
is also anticipated that Mr. Zobel will agree not to compete against the Company
during the term of his employment and for two years thereafter.
Other Agreements with Executive Officers
The Company and Mr. A. J. Clegg are parties to a Special Incentive
Agreement entered into November 20, 1999 which provides that on each of the
first, second and third anniversaries of the date of such agreement, if Mr. A.
J. Clegg is employed by the Company on such anniversary date, the Company will
pay him an incentive payment in the amount of $137,333. Such agreement also
provides that if there is a Change in Control (as defined in the agreement) of
the Company, within 30 days of the occurrence of such Change in Control, the
Company will pay to Mr. A. J. Clegg any such incentive payments which have not
yet been paid (in lieu of making payment on the applicable anniversary date).
The Company and Mr. Frock are parties to a Noncompete Agreement which
provides that the Company will make a payment to Mr. Frock of $255,000 following
his termination for any reason if, within 30 days of his termination date, Mr.
Frock delivers a letter to the Company agreeing not to engage in specified
activities in competition with the Company for four years. The Company and Mr.
Frock are also parties to a Contingent Severance Agreement which provides that
if Mr. Frock's employment is terminated because (i) the Company terminates Mr.
Frock's employment without Cause (as defined in the agreement), or (ii) Mr.
Frock resigns following a Change in Control (as defined in the agreement),
within 20 days following the date of termination, the Company must make a
severance payment to Mr. Frock in such amount. The Company will not under any
circumstance be required to make a payment to Mr. Frock under both the
Noncompete Agreement and the Contingent Severance Agreement.
On August 29, 2001, the Company entered into Employment and Termination
Agreements with each of Mr. A. J. Clegg and Mr. Frock. These agreements provide,
as to each of these executives, that if the Company terminates the executive's
employment other than for cause or his death or disability, the Company will pay
to that executive, as severance, an amount equal to 2.99 times his average
earnings for the five full calendar years preceding such termination. In
addition, upon such termination, the Company will continue to provide, at its
cost, family health insurance coverage to the executive and his spouse for the
remainder of their lives or, in the event that the Company is unable under its
then-current group health insurance plan to provide such family health insurance
coverage, the Company will reimburse the executive and his spouse up to $24,000
per year for the cost of obtaining similar health insurance coverage. Upon such
termination, the Company will also provide the executive with two full, annual
scholarships per year for life to the Company school of his choice.
In the Employment and Termination Agreements, each executive also agrees
not to compete with the Company for a period of three years following
termination of his employment, in exchange for which the Company would, for each
such year, pay to Mr. A. J. Clegg the sum of $100,000 and to Mr. Frock the sum
of $50,000. In the event that the executive voluntarily terminates his
employment with the Company, the Company will provide the executive with a
five-year consulting contract, for which Mr. A. J. Clegg would be paid not less
than $200,000 per year and Mr. Frock not less than $100,000 per year and which
would provide each executive with the health insurance and scholarships
described above. Finally, the Company agrees to provide Mr. A. J. Clegg with a
life insurance policy with a benefit of $640,000 and Mr. Frock with a life
insurance policy with a benefit of $360,000.
The aggregate amount of payments and benefits provided under each
executive's Employment and Termination Agreement will be offset against the
aggregate amount of any payments or benefits owed to that executive under the
31
Company's Severance Pay Plan, but not, in the case of Mr. Frock, by any payments
or benefits under Mr. Frock's Noncompete Agreement or Contingent Severance
Agreement.
Executive Compensation
Report of the Compensation Committee. At the beginning of Fiscal 2002, the
Company's Compensation Committee was comprised of three outside directors of the
Company, Messrs. Chambers (Chairman), Walton and Zobel. In November 2001,
following Mr. Daniel Russell's election to the Board of Directors to succeed Mr.
Walton, Mr. Russell replaced Mr. Walton on the Company's Compensation Committee,
Ms. Lewis replaced Mr. Chambers, and Mr. Russell became the Chairman of the
Compensation Committee. In April 2002, when Mr. Zobel became the Company's Vice
Chairman - Corporate Affairs and Chief Financial Officer and following Ms.
Lewis' resignation as a director of the Company, Eugene Monaco was named to the
Company's Compensation Committee to replace Mr. Zobel, and Mr. Chambers replaced
Ms. Lewis.
At least annually, the Compensation Committee reviews the compensation
levels of the Company's executive officers and certain other key employees and
makes recommendations to the Board of Directors regarding compensation of such
persons. In general, the Compensation Committee endeavors to base the
compensation of the executive officers on individual performance, performance
against established financial goals based on the Company's strategic plan, and
comparative compensation paid to executives of direct competitors and of
non-financial service companies.
The Compensation Committee's review of compensation, other than that of the
Chairman and Chief Executive Officer, is based on the recommendations of the
Company's internal compensation committee, which consists of Mr. A. J. Clegg
(Chairman and Chief Executive Officer) and Mr. Frock (Vice Chairman -Corporate
Development). Executive officers' compensation generally consists of base salary
(which comprises a significant portion of total compensation), bonus (which is
based on the Company's performance and/or specific goals), fringe benefits and
stock options. All executive officers are reviewed annually for performance.
Salary changes are effective in October. Bonuses are distributed after the
results of the audit of the financial statements have been verified.
The Chairman and Chief Executive Officer's compensation for Fiscal 2002
included an annual base salary of $333,300, a bonus plan based on the Company's
net income as compared to the annual plan submitted to and approved by the Board
of Directors in June 2001, and the Compensation Committee's subjective
evaluation of the Company's and the Chief Executive Officer's performance, and
customary fringe benefits. Mr. A. J. Clegg's salary reflected a 4.2% increase
over the prior period. In November 1999, in order to provide additional
incentive to Mr. A. J. Clegg, the Compensation Committee entered into a Special
Incentive Agreement with Mr. A. J. Clegg which provides that on each of the
first, second and third anniversaries of the date of such agreement, if employed
by the Company on such anniversary date, Mr. A. J. Clegg will receive an
incentive payment (apart from any other compensation) in the amount of $137,333.
In August 2001, in order to provide additional incentive to Messrs. A. J.
Clegg and Frock, the Compensation Committee approved Employment and Termination
Agreements with each of Mr. A. J. Clegg and Mr. Frock. These agreements provide,
as to each of these executives, that if the Company terminates the executive's
employment other than for cause or his death or disability, the Company will pay
to that executive, as severance, an amount equal to 2.99 times his average
earnings for the five full calendar years preceding such termination. In
addition, upon such termination, the Company will continue to provide, at its
cost, family health insurance coverage to the executive and his spouse for the
remainder of their lives or, in the event that the Company is unable under its
then-current group health insurance plan to provide such family health insurance
coverage, the Company will reimburse the executive and his spouse up to $24,000
per year for the cost of obtaining similar health insurance coverage. Upon such
termination, the Company will also provide the executive with two full, annual
scholarships per year for life to the Company school of his choice.
In Fiscal 2002 the bonus plan of each executive officer included a formula
component, providing a bonus of up to 100% of base salary based on the Company's
performance as compared to the Company's Business Plan. Based on such formula,
no executive officer received a bonus. Further, at the discretion of the
Company's internal executive committee and the Compensation Committee together,
bonuses could be awarded based on accomplishments of individual goals, which is
in addition to the bonus percentage awarded under the formula component, up to a
maximum total bonus (together with the formula-based component) of 100% of base
salary. No discretionary bonuses were approved.
32
Compensation Committee
Mr. Edward H. Chambers
Mr. Daniel L. Russell
Mr. Eugene G. Monaco
Report of the Audit Committee
Membership and Role of the Audit Committee
At the beginning of Fiscal 2002, the Audit Committee of the Company's Board
of Directors (the "Audit Committee") was comprised of three outside directors,
Messrs. Chambers, Havens and Zobel, appointed by the Board of Directors. In
April 2002, when Mr. Zobel became the Company's Vice Chairman - Corporate
Affairs and Chief Financial Officer, Daniel Russell was named to the Audit
Committee to replace Mr. Zobel. Each member of the Audit Committee is
independent as defined under the National Association of Securities Dealers'
listing standards, and at least one member has past experience in accounting or
related financial management experience. The Audit Committee is governed by a
written charter adopted and approved by the Board of Directors.
Review of the Company's Audited Financial Statements for Fiscal 2002
The Audit Committee has reviewed and discussed the audited financial
statements of the Company for the fiscal year ended June 30, 2002 with the
Company's management. The Audit Committee has discussed with
PricewaterhouseCoopers LLP, the Company's independent public accountants, the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees).
The Audit Committee has also received the written disclosures and the
letter from PricewaterhouseCoopers LLP relating to their independence as
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and the Audit Committee has discussed with
PricewaterhouseCoopers LLP the independence of that firm.
The Audit Committee has also considered whether the provision of non-audit
services by PricewaterhouseCoopers LLP is compatible with maintaining
PricewaterhouseCoopers LLP's independence.
Based on the Audit Committee's reviews and discussions noted above, the
Audit Committee recommended to the Board of Directors that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002, for filing with the SEC.
Audit Committee
Mr. Edward H. Chambers
Mr. Peter H. Havens
Mr. Daniel L. Russell
33
Audit and Related Fees
Fees to Accountants for Services Rendered During Fiscal 2002
Audit Fees
The aggregate fees billed to the Company by PricewaterhouseCoopers LLP for
professional services for the audit of the Company's annual financial statements
for Fiscal 2002 and the review of the Company's financial statements included in
the Company's quarterly reports on Form 10-Q for Fiscal 2002 totaled $130,000.
Financial Information Systems Design and Implementation Fees
The Company did not engage PricewaterhouseCoopers LLP to provide, during
Fiscal 2002, any services for the Company regarding the design or implementation
of the Company's financial information systems, within the meaning of Rule
2-01(c)(4)(ii) of Regulation S-X.
All Other Fees
Fees billed to the Company by PricewaterhouseCoopers LLP during Fiscal 2002
for all other non-audit services rendered to the Company, including tax related
services, totaled $260,000.
34
Stock Performance
The following line graph compares the cumulative total stockholder return
on the Company's Common Stock with the total return of the Nasdaq Stock Market
(U.S. Companies) and an index of peer group companies for the period June 30,
1997 through June 30, 2002 as calculated by the Center for Research in Security
Prices. The graphs assume that the value of the investment in the Company's
Common Stock and each index was $100 at June 30, 1997 and that all dividends
paid by the companies included in the indexes were reinvested.
[GRAPHIC]
Comparison of Five Year Cumulative Total Return
CRSP Total Returns Index for: 6/97 6/98 6/99 6/00 6/01 6/02
---- ---- ---- ---- ---- ----
- ------- Nobel Learning Communities, Inc. 100.0 105.9 58.8 92.6 89.1 68.1
- -- -- -- Nasdaq Stock Market 100.0 131.6 189.1 279.6 151.6 103.3
- (U.S Companies)
- - - - - Self-Determined Peer Group 100.0 148.0 130.5 109.0 173.9 133.8
The self determined peer group includes: Bright Horizons Family Solutions,
Inc.; Childtime Learning Centers, Inc.; DeVry Inc.; ITT Educational Services,
Inc.; Sylvan Learning Systems, Inc. and Tesseract Group Inc.
Notes:
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization
of the previous trading day.
35
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100 at 6/30/97.
36
Item 12. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth certain information regarding the
beneficial ownership of NLCI common stock as of September 3, 2002 (1) all those
known by NLCI to be beneficial owners of more than 5% of its common stock
(including preferred stock convertible into common stock); (2) each director;
(3) each Named Executive Officer; and (4) all executive officers and directors
of NLCI as a group. The number of shares beneficially owned by each person is
determined under the rules of the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. Unless otherwise
indicated, the address for each of the stockholders listed below is c/o Nobel
Learning Communities, Inc., 1615 West Chester Pike, West Chester, PA 19382.
Beneficial Owner Beneficial Ownership
- ---------------- Number of Percent of
Shares Total (1) (2)
---------- -------------
KU Learning, L.L.C. (3) ............................................... 1,903,500 30.1%
Edison Venture Fund II, L.P. (4) ...................................... 654,018 9.6
Allied Capital Corporation (5) ........................................ 1,106,256 14.9
Dimensional Fund Advisors Inc. (6) .................................... 354,900 5.6
Socrates Acquisition Corporation (7) .................................. 853,501 12.3
Cadigan Investment Partners, Inc. (7) ................................. 853,501 12.3
Gryphon Partners II, L.P. (7) ......................................... 853,501 12.3
Gryphon Partners II-A, L.P. (7) ....................................... 853,501 12.3
A.J. Clegg (8) ........................................................ 713,354 10.5
Robert E. Zobel (9) ................................................... 15,265 *
John R. Frock (10) .................................................... 124,882 1.9
Daniel L. Russell (11) ................................................ 0 *
Peter H. Havens (12) .................................................. 20,109 *
Edward H. Chambers (13) ............................................... 27,730 *
Eugene G. Monaco (14) ................................................. 10,500 *
D. Scott Clegg (15) ................................................... 0 *
Daryl A. Dixon (16) ................................................... 0 *
Lynn A. Fontana (17) .................................................. 5,000 *
All executive officers and directors as a group (9 persons) (18) ...... 916,840 13.2%
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except (a) for shares indicated as
beneficially owned by any of the rollover stockholders, which are subject
to voting agreements with Socrates under which each agreed to vote shares
of common stock and preferred stock owned by him in favor of the merger and
granted to Socrates an irrevocable proxy to vote shares of common stock and
preferred stock owned by him for the adoption and approval of the merger
agreement and the merger and (b) as otherwise indicated in the footnotes to
this table.
(2) Applicable percentages are based on 6,314,452 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) Based on Schedule 13D/A filed with the SEC on November 10, 1999. KU
Learning, L.L.C. ("KU Learning") may be deemed to share voting and
dispositive power with its sole member, Knowledge Universe Learning, Inc.,
and Knowledge Universe, Inc., the sole stockholder of Knowledge Universe
Learning, Inc. Includes 20,000 shares over which KU Learning and its
affiliates do not have dispositive power and as to which KU Learning and
its affiliates disclaim beneficial ownership. The address of the principal
business office of KU Learning, Knowledge Universe Learning, Inc. and
Knowledge Universe, Inc. is 844 Moraga Drive, Los
37
Angeles, CA 90049.
(4) Based on information provided to NLCI in connection with its 2001 annual
meeting. Edison Venture Fund II, L.P. may be deemed to share voting and
dispositive power with Edison Partners II, L.P., its sole general partner.
Includes 524,179 shares issuable upon conversion of 2,096,714 shares of
Series C Convertible Preferred Stock. Edison Venture Fund II, L.P. is a
private limited partnership engaged primarily in making private placement
investments. The address of the principal business office of Edison Venture
Fund II, L.P. is 997 Lenox Drive #3, Lawrenceville, NJ 08648.
(5) Includes warrants to purchase 840,298 shares and 265,958 shares issuable
upon conversion of 1,063,830 shares of Series D Convertible Preferred Stock
owned by Allied Capital Corporation and its affiliates, all of which are
closed-end management investment companies registered under the Investment
Company Act of 1940, as amended. The address of the principal business
office of Allied Capital Corporation is 1919 Pennsylvania Avenue N. W.,
Suite 300, Washington, D.C. 20006.
(6) Based on Schedule 13G/A filed with the SEC on February 12, 2002.
Dimensional Fund Advisors Inc. is an investment advisor registered under
Section 203 of the Investment Company Act of 1940, as amended and serves as
investment manager to certain other commingled group trusts and separate
accounts that own the shares. In its role as investment advisor or manager,
Dimensional Fund Advisors Inc. possesses voting and/or investment power
over the shares owned by the funds it manages or advises. Dimensional Fund
Advisors Inc. disclaims beneficial ownership of these shares. The address
of the principal business office of Dimensional Fund Advisors Inc. is 1299
Ocean Avenue, 11/th/ Floor, Santa Monica, CA 90401.
(7) As a result of the voting agreements between Socrates and each of A.J.
Clegg, D. Scott Clegg, John Frock and Robert Zobel, Socrates and each
member of the buying group may be deemed to have acquired beneficial
ownership of 853,501 shares of NLCI's common stock (determined on an
as-converted basis), which includes options to acquire 337,576 shares
exercisable within 60 days of September 3, 2002, 159,789 shares issuable
upon the conversion of 543,500 shares of Series A preferred stock and
100,806 shares issuable upon conversion of 403,226 shares of Series C
preferred stock, representing approximately 12.3% of the outstanding NLCI
common stock. Socrates, Gryphon, Gryphon Partners II-A, L.P. and Cadigan
each disclaim any beneficial ownership of the shares of NLCI capital stock
that are covered by the voting agreements. The address of the principal
business office of Socrates, Gryphon and Gryphon Partners II-A, L.P. is One
Embarcadero Center, San Francisco, CA 94111. The address of the principal
business of Cadigan is 712 Fifth Avenue, 45th Floor, New York, NY 10019.
(8) Includes options to acquire 238,333 shares exercisable within 60 days of
September 3, 2002, 140,385 shares issuable upon conversion of 477,500
shares of Series A Convertible Preferred Stock and 100,806 shares issuable
upon conversion of 403,226 shares of Series C Convertible Preferred Stock.
Also includes 24,854 shares held by Mr. A.J. Clegg's children, over which
Mr. A.J. Clegg has sole voting authority, 6,000 shares held by Mr. A.J.
Clegg's grandchildren, over which Mr. A.J. Clegg has sole voting and
dispositive power, and 170,815 shares held jointly by Mr. A.J. Clegg and
his spouse, over which Mr. A.J. Clegg and his spouse have joint voting and
dispositive authority. Does not include 8,500 shares of common stock owned
by Mr. A.J. Clegg's wife, as to which Mr. A.J. Clegg disclaims beneficial
ownership. Mr. A.J. Clegg has agreed to vote all of his shares in favor of
the merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes options to acquire 6,561 shares exercisable within 60 days of
September 3, 2002. Also includes 4,000 shares held of record by a
closely-held Florida corporation over which Mr. Zobel has sole voting
power. Also includes 4,704 shares issuable upon conversion of 16,000 shares
of Series A Convertible Preferred Stock held by a family partnership of
which Mr. Zobel is a general partner and over which he has sole voting
power, and as to which Mr. Zobel disclaims beneficial ownership. Does not
include 1,000 shares held in a custodian account for Mr. Zobel's children,
of which Mr. Zobel's wife is custodian, as to which Mr. Zobel disclaims
beneficial ownership. Mr. Zobel has agreed to vote all of his shares in
favor of the merger agreement and the merger and has granted Socrates an
irrevocable proxy to vote his shares in favor of the merger agreement and
the merger.
(10) Includes options to acquire 92,682 shares exercisable within 60 days of
September 3, 2002 and 14,700 shares issuable upon conversion of 50,000
shares of Series A Convertible Preferred Stock. Mr. Frock has agreed to
vote all of his shares in favor of the merger agreement and the merger and
has granted Socrates an irrevocable proxy to vote his shares in favor of
the merger agreement and the merger.
(11) Does not include 265,958 shares issuable upon conversion of 1,063,830
shares of Series D Convertible Preferred Stock owned by Allied Capital
Corporation and 840,298 shares of common stock issued upon the exercise of
warrants held by Allied Capital Corporation that may be deemed to be
beneficially owned by Mr. Russell. Mr. Russell disclaims beneficial
ownership of any shares held by Allied Capital Corporation. Mr.
38
Russell's address is c/o Allied Capital Corporation, 1919 Pennsylvania
Avenue N.W., Suite 300, Washington, D.C. 20006.
(12) Includes options to acquire 14,750 shares exercisable within 60 days of
September 3, 2002 and 3,234 shares issuable upon conversion of 11,000
shares of Series A Convertible Preferred Stock. Does not include 375 shares
held by J.P. Havens TFBO his son and 500 shares held by J.P. Havens TFBO
his daughter over which Mr. Havens has sole voting and dispositive
authority and as to which Mr. Havens disclaims beneficial ownership. Also
does not include 6,250 shares held by his spouse over which Mr. Havens has
sole voting and dispositive authority and as to which Mr. Havens disclaims
beneficial ownership.
(13) Includes options to acquire 14,750 shares exercisable within 60 days of
September 3, 2002 and 1,470 shares issuable upon conversion of 5,000 shares
of Series A Convertible Preferred Stock.
(14) Includes options to acquire 7,500 shares exercisable within 60 days of
September 3, 2002 and 3,000 shares held in joint tenancy with his wife.
(15) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(16) Mr. Dixon's address is c/o Reflectx Staffing Services, 3317 Oakmonst
Terrace, Longwood, FL 32779.
(17) Includes options to acquire 5,000 shares exercisable within 60 days of
September 3, 2002.
(18) Includes information contained in the notes above, as applicable.
Series A Convertible Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of the Company's Series A Convertible Preferred Stock as of September
3, 2002 by (1) all those known by NLCI to be beneficial owners of more than 5%
of its Series A Convertible Preferred Stock; (2) each director; (3) each Named
Executive Officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purpose. Unless otherwise indicated, the
address for each of the stockholders listed below is c/o Nobel Learning
Communities, Inc., 1615 West Chester Pike, West Chester, PA 19382.
Beneficial Owner Beneficial Ownership
- ---------------- Number of Percent of
Shares Total (1) (2)
------ -------------
Socrates Acquisition Corporation (3) ................................ 543,500 53.1%
Cadigan Investment Partners, Inc. (3) ............................... 543,500 53.1
Gryphon Partners II, L.P. (3) ....................................... 543,500 53.1
Gryphon Partners II-A, L.P. (3) ..................................... 543,500 53.1
A.J. Clegg (4) ...................................................... 477,500 46.6
Robert E. Zobel (5) ................................................. 16,000 1.6
John R. Frock (6) ................................................... 50,000 4.9
Daniel L. Russell ................................................... 0 *
Peter H. Havens (7) ................................................. 11,000 1.1
Edward H. Chambers .................................................. 5,000 *
Eugene G. Monaco .................................................... 0 *
D. Scott Clegg (8) .................................................. 0 *
Daryl A. Dixon ...................................................... 0 *
Lynn A. Fontana ..................................................... 0 *
Emanuel Shemin (9) .................................................. 101,487 9.9
All executive officers and directors as a group (9 persons) (10) .... 559,500 54.7%
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except (a) for shares indicated as
beneficially owned by any of the rollover stockholders, which are subject
to
39
voting agreements with Socrates under which each agreed to vote shares of
preferred stock owned by him in favor of the merger and granted to Socrates
an irrevocable proxy to vote shares of common stock and preferred stock
owned by him for the adoption and approval of the merger agreement and the
merger and (b) as otherwise indicated in the footnotes to this table.
(2) Applicable percentages are based on 1,023,694.11 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) As a result of the voting agreements between Socrates and each of A.J.
Clegg, Scott Clegg, John Frock and Robert Zobel, Socrates and each member
of the buying group may be deemed to have acquired beneficial ownership of
543,500 shares of Series A preferred stock. Socrates, Gryphon, Gryphon
Partners II-A, L.P. and Cadigan each disclaim any beneficial ownership of
the shares of NLCI capital stock that are covered by the voting agreements.
The address of the principal business office of Socrates, Gryphon and
Gryphon Partners II-A, L.P. is One Embarcadero Center, San Francisco,
California, 94111. The address of the principal business office of Cadigan
is 712 Fifth Avenue, 45th Floor, New York, New York, 10019.
(4) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(5) Consists of 16,000 shares of Series A Convertible Preferred Stock held by a
family partnership of which Mr. Zobel is a general partner and over which
he has sole voting power. Mr. Zobel disclaims beneficial ownership of these
shares. Mr. Zobel has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(6) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Does not include 4,000 shares of Series A Convertible Preferred Stock held
by J.P. Havens TFBO his son and 5,000 shares of Series A Convertible
Preferred Stock held by J.P. Havens TFBO his daughter over which Mr. Havens
has sole voting and dispositive authority and as to which Mr. Havens
disclaims beneficial ownership.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) As reflected on the records of the Company's transfer agent, Mr. Shemin's
address is 800 South Ocean Blvd. LPH4, Boca Raton, Florida 33432.
(10) Includes information contained in the notes above, as applicable.
40
Series C Convertible Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of the Company's Series C Convertible Preferred Stock as of September
3, 2002 by (1) all those known by NLCI to be beneficial owners of more than 5%
of its Series C Convertible Preferred Stock ; (2) each director; (3) each Named
Executive Officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purposes. Unless otherwise indicated, the
address for each of the stockholders listed below is c/o Nobel Learning
Communities, Inc., 1615 West Chester Pike, West Chester, Pennsylvania 19382.
Beneficial Owner Beneficial Ownership
---------------- Number of Percent of
Shares Total (1) (2)
------ -------------
Socrates Acquisition Corporation (3) .............................. 403,226 16.1%
Cadigan Investment Partners, Inc. (3) ............................. 403,226 16.1
Gryphon Partners II, L.P. (3) ..................................... 403,226 16.1
Gryphon Partners II-A, L.P. (3) ................................... 403,226 16.1
Edison Venture Fund II, L.P. (4) .................................. 2,096,714 83.9
A.J. Clegg (5) .................................................... 403,226 16.1
Robert E. Zobel (6) ............................................... 0 *
John R. Frock (7) ................................................ 0 *
Daniel L. Russell ................................................. 0 *
Peter H. Havens ................................................... 0 *
Edward H. Chambers ................................................ 0 *
Eugene G. Monaco .................................................. 0 *
D. Scott Clegg (8) ................................................ 0 *
Daryl A. Dixon .................................................... 0 *
Lynn A. Fontana ................................................... 0 *
All executive officers and directors as a group
(9 persons) (9) ................................................... 403,226 16.1%
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except (a) for shares indicated as
beneficially owned by any of the rollover stockholders, which are subject
to preferred agreements with Socrates under which each agreed to vote
shares of common stock and preferred stock owned by him in favor of the
merger and granted to Socrates an irrevocable proxy to vote shares of
voting stock owned by him for the adoption and approval of the merger
agreement and the merger and (b) as otherwise indicated in the footnotes to
this table.
(2) Applicable percentages are based on 2,499,940 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) As a result of the voting agreements between Socrates and each of A.J.
Clegg, Scott Clegg, John Frock and Robert Zobel, Socrates and each member
of the buying group may be deemed to have acquired beneficial ownership of
403,226 shares of Series C preferred stock. Socrates, Gryphon and Cadigan
each disclaim any beneficial ownership of the shares of NLCI capital stock
that are covered by the voting agreements. The address of the principal
business office of Socrates and Gryphon is One Embarcadero Center, San
Francisco, California, 94111. The address of the principal business office
of Cadigan is 712 Fifth Avenue, 45th Floor, New York, New York 10019.
(4) Based on information provided to NLCI in connection with its 2001 annual
meeting. Edison Venture Fund II, L.P. may be deemed to share voting and
dispositive power with Edison Partners II, L.P., its sole general partner.
Edison Venture Fund II, L.P. is a private limited partnership engaged
primarily in making private placement investments. The address of the
principal business office of Edison Venture Fund II, L.P. is 997 Lenox
Drive #3, Lawrenceville, NJ 08648.
(5) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
41
(6) Mr. Zobel has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates an irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates an irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes information contained in the notes above, as applicable.
Series D Convertible Preferred Stock
The following table sets forth certain information regarding the beneficial
ownership of the Company's Series D Convertible Preferred Stock as of September
3, 2002 by (1) all those known by NLCI to be beneficial owners of more than 5%
of its Series D Convertible Preferred Stock; (2) each director; (3) each Named
Executive Officer; and (4) all executive officers and directors of NLCI as a
group. The number of shares beneficially owned by each person is determined
under the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purpose. Unless otherwise indicated, the
address for each of the stockholders listed below is c/o Nobel Learning
Communities, Inc., 1615 West Chester Pike, West Chester, PA 19382.
Beneficial Owner Beneficial Ownership
---------------- Number of Percent of
Shares Total (1) (2)
------ -------------
Allied Capital Corporation (3) ............................ 1,063,830 100%
A.J. Clegg (4) ............................................ 0 *
Robert E. Zobel (5) ....................................... 0 *
John R. Frock (6) ......................................... 0 *
Daniel L. Russell (7) ..................................... 0 *
Peter H. Havens ........................................... 0 *
Edward H. Chambers ........................................ 0 *
Eugene G. Monaco .......................................... 0 *
D. Scott Clegg (8) ........................................ 0 *
Daryl A. Dixon ............................................ 0 *
Lynn A. Fontana ........................................... 0 *
All executive officers and directors as a group (9 persons) (9) .... 0 *
- --------------------
* Less than one percent
(1) This table is based on information supplied by officers, directors and
principal stockholders of NLCI and on any Schedules 13D or 13G filed with
the SEC. On that basis, NLCI believes that each of the stockholders named
in this table has sole voting and dispositive power with respect to the
shares indicated as beneficially owned except as otherwise indicated in the
footnotes to this table.
(2) Applicable percentages are based on 1,063,830 shares outstanding on
September 3, 2002, adjusted as required by rules promulgated by the SEC.
(3) Consists of 1,063,830 shares of Series D Convertible Preferred Stock owned
by Allied Capital Corporation and its affiliates, all of which are
closed-end management investment companies registered under the Investment
Company Act of 1940, as amended. The address of the principal business
office of Allied Capital Corporation is 1919 Pennsylvania Avenue N.W.,
Suite 300, Washington, D.C. 20006.
(4) Mr. A.J. Clegg has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
42
(5) Mr. Zobel has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(6) Mr. Frock has agreed to vote all of his shares in favor of the merger
agreement and the merger and has granted Socrates and irrevocable proxy to
vote his shares in favor of the merger agreement and the merger.
(7) Does not include 1,063,830 shares of Series D Convertible Preferred Stock
owned by Allied Capital Corporation that may be deemed to be beneficially
owned by Mr. Russell. Mr. Russell disclaims beneficial ownership of any
shares held by Allied Capital Corporation. Mr. Russell's address is c/o
Allied Capital Corporation, 1919 Pennsylvania Avenue N. W., Suite 300,
Washington, D.C. 20006.
(8) Mr. D. Scott Clegg has agreed to vote all of his shares in favor of the
merger agreement and the merger and has granted Socrates and irrevocable
proxy to vote his shares in favor of the merger agreement and the merger.
(9) Includes information contained in the notes above, as applicable.
Item 13. Certain Relationships and Related Transactions.
In July 1998, the Company issued a $10,000,000 10% senior subordinated note
(the "Allied Note") to Allied Capital Corporation, of which Daniel L. Russell, a
director of the Company, is a principal. Payments on the Allied 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 Common Stock and granted to Allied Capital Corporation
certain rights to require the Company to register the shares of Common Stock
issuable upon exercise of the warrants under the Securities Act of 1933.
In May 2001, the Company amended the Allied Note. Under the original Allied
Note, interest accrued at the rate of 10% until the Note had been repaid. The
amendments now provide that interest will accrue at the rate of 10% until
October 31, 2001; at the rate of 12% from November 1, 2001 through June 30, 2005
and at the rate of 13% from July 1, 2005 until the Note has been repaid. In
connection with the modification of the Allied Note, the Company paid to Allied
Capital Corporation a fee of $150,000. The entire principal of the Allied Note
is currently outstanding.
The Company loaned to Daryl Dixon, the Company's President and Chief
Operating Officer, the sum of $90,000 upon the commencement of his employment
(to repay a loan with his prior employer). The loan accrued interest at a rate
of 8% per annum. Each month during Mr. Dixon's employment, the Company forgave
1/36 of the principal amount and associated interest of this loan. The loan was
forgiven in full on February 18, 2002.
In June 2001, the Company sold a school property in Manalapan, New Jersey,
to Mr. A. J. Clegg and his wife, Stephanie Clegg, d/b/a Tiffany Leasing, a
Pennsylvania sole proprietorship, in a transaction approved by the Board of
Directors. The purchase price for the property was $3,857,000, based on the
appraised value of the property as determined by an independent third party
appraiser. Simultaneously with the closing of the sale, the Company leased the
property back from Tiffany Leasing under a 20-year lease, with an initial annual
rent of approximately $450,000 per year. The lease is a triple net lease,
pursuant to which the Company is responsible for all costs of the property,
including maintenance, taxes and insurance. The Company also has two 5-year
options to renew the lease at the end of the original lease term. Apart from
increasing the length of the original lease term, the terms and conditions of
the purchase and lease are substantially the same as the final terms and
conditions previously negotiated by the Company with a disinterested third party
which had been interested in buying and leasing the property, but which did not
ultimately consummate the transaction for reasons unrelated to the Company or
the proposed terms.
During Fiscal 2002 but prior to the time he was employed by the Company, D.
Scott Clegg, the son of A. J. Clegg, received $50,000 for payment of services as
a consultant to the Company.
43
PART IV
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 ............................................. F-1
Consolidated Balance Sheets ................................................... F-2
Consolidated Statements of Income ............................................. F-3
Consolidated Statements of Stockholders' Equity ............................... F-4
Consolidated Statements of Cash Flows ......................................... F-5
Supplemental Schedules for Consolidated Statements of Cash Flow ............... F-6
Notes to Consolidated Financial Statements .................................... F-7
(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted as not
applicable or not required under the instructions contained in
Regulation S-X or the information is included elsewhere in the
financial statements or notes thereto.
(b) Reports on Form 8-K.
None.
(c) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit
Number Description of Exhibit
2.1 Agreement and Plan of Merger by and between Socrates Acquisition
Corporation and Nobel Learning Communities, Inc., dated as of
August 5, 2002. (Filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed on August 8, 2002, and incorporated
herein by reference).
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, 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 A
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 as modified November 15,
2001. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 2001, and
incorporated herein by reference.)
4.1 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.)
44
4.2 Amendment No. 1 to the Rights Agreement of Nobel Learning
Communities, Inc., dated as of August 4, 2002, between Nobel
Learning Communities, Inc. and Stocktrans, Inc., as Rights Agent.
(Filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K,
filed on August 8, 2002, and incorporated herein by reference.)
4.3 Amendment No. 2 to the Rights Agreement of Nobel Learning
Communities, Inc., dated as of August 5, 2002, between Nobel
Learning Communities, Inc. and Stocktrans, Inc., as Rights Agent.
(Filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K,
filed on August 8, 2002, and incorporated herein by reference.)
10.1 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 10.1 have not been filed. The Registrant
will furnish supplementally a copy of any omitted schedules or
attachments to the SEC 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.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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. (Filed as Exhibit 4.5 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
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 SEC upon request.
10.6 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. (Filed as Exhibit 4.6 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
10.7 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. (Filed as Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
10.8 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. (Filed
as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001, and incorporated herein by
reference).
10.9 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. (Filed as Exhibit 4.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001, and incorporated herein by reference).
45
10.11 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,
and incorporated herein by reference.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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 SEC upon request.) (Filed as Exhibit 4A to the Registrant's
Current Report on Form 8-K, filed on September 11, 1995, and
incorporated herein by reference.)
10.23 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied
Capital Corporation to purchase up to 23,178.25 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, filed on September 11,
1995, and incorporated herein by reference.)
Exhibit 10.23 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:
46
Number of Shares
of Common Stock
Warrant No. Holder (subject to adjustment)
----------- ------ -----------------------
2 Allied Capital Corporation II 142,932.25
3 Allied Investment Corporation 92,713.00
4 Allied Investment Corporation II 50,219.50
10.24 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.)
10.25 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.)
10.26 Nobel Learning Communities, Inc. Senior Executive Severance Pay Plan
Statement and Summary Plan Description as modified February 3, 2000 and
December 21, 2001. (Filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001, and
incorporated herein by reference.)
10.27 Nobel Learning Communities, Inc. Executive Severance Pay Plan Statement
and Summary Plan Description as modified February 3, 2000 and
December 21, 2001. (Filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001, and
incorporated herein by reference.)
10.28 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.)
10.29 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.)
10.30 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.)
10.31 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.)
10.32 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.)
10.33 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.)
10.34 Employment and Termination Agreement dated as of August 2001 between A.
J. Clegg and the Registrant. (Filed as Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2001, and incorporated herein by reference).
10.35 Employment and Termination Agreement dated as of August 2001 between
John R. Frock and the Registrant. (Filed as Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2001, and incorporated herein by reference).
10.36 Separation Agreement and Mutual Release, dated as of November 30, 2001,
between Daryl Dixon and Registrant. (Filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001, and incorporated herein by reference)
21 List of subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers L.L.P.
(d) Financial Statement Schedules.
47
None.
48
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.
49
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 23, 2002 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 23, 2002
- ---------------- Chief Executive Officer and
A. J. Clegg Director (Principal Executive
Officer)
/s/ Robert E. Zobel Vice Chairman-- Corporate Affairs September 23, 2002
- -------------------- and Chief Financial Officer and
Robert E. Zobel Director (Principal Financial
and Accounting Officer)
/s/ Edward H. Chambers Director September 23, 2002
- ----------------------
Edward H. Chambers
/s/ John R. Frock Vice Chairman-- Corporate September 23, 2002
- ----------------- Development and Director
John R. Frock
/s/ Peter H. Havens Director September 23, 2002
- -------------------
Peter H. Havens
/s/ Eugene G. Monaco Director September 23, 2002
- --------------------
Eugene G. Monaco
/s/ Daniel L. Russell Director September 23, 2002
- ---------------------
Daniel L. Russell
50
CERTIFICATIONS
I, A.J. Clegg, certify that:
1. I have reviewed this annual report on Form 10-K of Nobel Learning
Communities, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 23, 2002
/s/ A.J. Clegg
- ---------------
A.J. Clegg
Chief Executive Officer
I, Robert E. Zobel, certify that:
1. I have reviewed this annual report on Form 10-K of Nobel Learning
Communities, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 23, 2002
/s/ Robert E. Zobel
- --------------------
Robert E. Zobel
Chief Financial Officer
51
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, 2002 and 2001, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2002, 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
September 3, 2002
F-1
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
June 30, 2002 June 30, 2001
----------------- ----------------
ASSETS
Cash and cash equivalents $ 1,787 $ 1,321
Accounts receivable, less allowance for doubtful 2,685 2,858
accounts of $468 in 2002 and $351 in 2001
Notes receivable 251 1,836
Prepaid rent 2,408 2,142
Prepaid insurance and other 2,543 1,896
----------------- ----------------
Total Current Assets 9,674 10,053
----------------- ----------------
Property and equipment, at cost 60,287 52,218
Accumulated depreciation (26,303) (20,792)
----------------- ----------------
33,984 31,426
----------------- ----------------
Property and equipment held for sale 5,605 5,995
Goodwill 48,376 48,376
Intangible assets, net 1,145 1,636
Long term note receivable 2,600 2,225
Deposits and other assets 1,596 2,073
----------------- ----------------
Total Assets $ 102,980 $ 101,784
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations $ 4,488 $ 6,414
Current portion of swap contract 63 -
Cash overdraft liability 3,564 5,428
Accounts payable and other current liabilities 7,528 6,678
Unearned income 7,356 6,986
----------------- ----------------
Total Current Liabilities 22,999 25,506
----------------- ----------------
Long-term obligations 25,411 25,526
Long-term subordinated debt 10,318 11,415
Swap contract 313 -
Deferred gain on sale/leaseback 28 15
Deferred taxes 1,192 460
Minority interest in consolidated subsidiary 232 261
----------------- ----------------
Total Liabilities $ 60,493 $ 63,183
----------------- ----------------
Commitments and Contingencies (Notes 14 and 20)
Stockholders' Equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, issued and outstanding 4,587,464 in
both 2002 and 2001. $5,524 aggregate liquidation
preference at June 30, 2002 and 2001 5 5
Common stock, $0.001 par value; 20,000,000 shares
authorized, issued and outstanding 6,544,953 in 2002 and
6,212,561 in 2001. 6 6
Treasury stock, cost; 230,510 shares in 2002 and 2001 (1,375) (1,375)
Additional paid-in capital 41,389 39,879
Retained earnings 2,838 86
Accumulated other comprehensive loss (376) -
----------------- ----------------
Total Stockholders' Equity 42,487 38,601
----------------- ----------------
Total Liabilities and Stockholders' Equitiy $ 102,980 $ 101,784
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share data)
For the year ended June 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Revenues $ 156,279 $ 147,952 $ 127,407
--------- --------- ---------
Operating expenses:
Personnel costs 74,616 72,057 60,541
School operating costs 23,410 23,183 19,514
Insurance, taxes, rent and other 31,790 27,369 23,493
Depreciation and amortization 5,671 6,586 5,826
New school development 703 591 704
--------- --------- ---------
136,190 129,786 110,078
--------- --------- ---------
School operating profit 20,089 18,166 17,329
--------- --------- ---------
General and administrative expenses 11,776 11,004 9,742
--------- --------- ---------
Operating income 8,313 7,162 7,587
Interest expense 3,637 4,171 3,373
Other income (160) (424) (145)
Minority interest in income of
consolidated subsidiary 34 23 88
--------- --------- ---------
Income before income taxes and change in
accounting principle 4,802 3,392 4,271
Income tax expense 1,968 1,596 1,793
--------- --------- ---------
Net income before change in
accounting principle $ 2,834 $ 1,796 $ 2,478
--------- --------- ---------
Cumulative effect of change in accounting
principle, (net of income tax benefit of
$242) - 295 -
--------- --------- ---------
Net income 2,834 1,501 2,478
Preferred stock dividends 82 81 82
--------- --------- ---------
Net income available to common
stockholders $ 2,752 $ 1,420 $ 2,396
========= ========= =========
Basic earnings per share:
Net income before cumulative effect
of change in accounting principle $ 0.44 $ 0.29 $ 0.40
Cumulative effect of change in accounting principle - (0.05) -
--------- --------- ---------
Net income $ 0.44 $ 0.24 $ 0.40
========= ========= =========
Dilutive earnings per share:
Net income before cumulative effect
of change in accounting principle $ 0.38 $ 0.24 $ 0.33
Cumulative effect of change in accounting principle - (0.04) -
--------- --------- ---------
Net income $ 0.38 $ 0.20 $ 0.33
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2002, 2001 and 2000
(Dollars in thousands except share data)
Treasury and Retained
Additional Common Earnings/
Preferred Stock Common Stock Paid-In Stock Accumulated
---------------------------- -------------------------
Shares Amount Shares Amount Capital Issuable Deficit
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 1999 4,593,542 $ 5 6,121,365 $ 6 $ 39,239 $ (1,375) $ (3,730)
=========== =========== =========== =========== =========== =========== ===========
Net income -- 0 0 0 0 0 2,478
Stock options exercised -- -- 3,333 -- 17 -- --
Conversion of preferred stock (6,078) -- 1,470 -- -- -- --
Preferred dividends -- -- -- -- -- -- (82)
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 2000 4,587,464 $ 5 6,126,168 $ 6 $ 39,256 $ (1,375) $ (1,334)
=========== =========== =========== =========== =========== =========== ===========
Net income -- -- -- -- -- -- 1,501
Stock options exercised -- -- 42,262 -- 217 -- --
Common Stock issued related to
acquisitions -- -- 44,131 -- 406 -- --
Preferred dividends -- -- -- -- -- -- (81)
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 2001 4,587,464 $ 5 6,212,561 $ 6 $ 39,879 $ (1,375) $ 86
=========== =========== =========== =========== =========== =========== ===========
Comprehensive income:
Net income -- -- -- -- -- -- 2,834
Swap contract, net of tax -- -- -- -- -- -- --
Total comprehensive income
Stock options and warrants
exercised -- -- 332,392 -- 1,510 -- --
Preferred dividends -- -- -- -- -- -- (82)
----------- ----------- ----------- ----------- ----------- ----------- -----------
June 30, 2002 4,587,464 $ 5 6,544,953 $ 6 $ 41,389 $ (1,375) $ 2,838
=========== =========== =========== =========== =========== =========== ===========
Accumulated
Other
Comprehensive
Loss Total
------ -----------
June 30, 1999 $ -- $ 34,145
====== ===========
Net income -- $ 2,478
Stock options exercised -- $ 17
Conversion of preferred stock -- $ --
Preferred dividends -- $ (82)
------ -----------
June 30, 2000 $ -- $ 36,558
====== ===========
Net income -- $ 1,501
Stock options exercised -- $ 217
Common Stock issued related to
acquisitions -- $ 406
Preferred dividends -- $ (81)
------ -----------
June 30, 2001 $ -- $ 38,601
====== ===========
Comprehensive income:
Net income -- $ 2,834
Swap contract, net of tax (376) $ (376)
-----------
Total comprehensive income $ 2,458
Stock options and warrants
exercised -- $ 1,510
Preferred dividends -- $ (82)
------ -----------
June 30, 2002 $ (376) $ 42,487
====== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-4
Nobel Learning Communities, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Dollars in thousands)
For the year ended June 30,
----------------------------------
2002 2001 2000
----------------------------------
Cash Flows from Operating Activities:
Net income $ 2,834 $ 1,501 $ 2,478
-------- -------- --------
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 6,075 7,061 6,299
Amortization of debt discount 129 128 128
Provision for losses on accounts receivable 491 900 372
Provision for deferred taxes 732 451 970
Minority interest in income 34 23 88
Other 50 273 -
Changes in Assets and Liabilities
Net of Acquisitions:
Accounts receivable (363) (1,569) (8)
Prepaid assets (912) (1,669) (384)
Other assets and liabilities 421 204 185
Unearned income 370 725 124
Accounts payable and accrued expenses 687 (1,769) (82)
-------- -------- --------
Total Adjustments 7,714 4,758 7,692
-------- -------- --------
Net Cash Provided by Operating Activities 10,548 6,259 10,170
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (8,673) (15,224) (13,408)
Proceeds from sale of property and equipment 657 8,268 2,449
Payment for acquisitions net of cash acquired - (539) (6,669)
Issuance of notes receivable (425) (2,788) -
Repayment of notes receivable 1,680 - -
-------- -------- --------
Net Cash Used in Investing Activities (6,761) (10,283) (17,628)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from term loan and revolving line of credit 2,962 16,498 12,114
Repayment of long term debt (2,143) (13,864) (2,116)
Repayment of subordinated debt (3,865) (2,319) (2,209)
Debt issuance cost - (490) -
Proceeds from capital lease 311 - -
Repayment of capital lease obligation (150) (74) (84)
Dividends paid to preferred stockholders (82) (81) (82)
Cash overdraft (1,864) 1,660 1,976
Proceeds from exercise of stock options and warrants 1,510 217 17
-------- -------- --------
Net Cash Provided by Financing Activities (3,321) 1,547 9,616
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 466 (2,477) 2,158
Cash and cash equivalents at beginning of year 1,321 3,798 1,640
-------- -------- --------
Cash and cash equivalents at end of year $ 1,787 $ 1,321 $ 3,798
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Nobel Learning Communities, Inc. and Subsidiaries
Supplemental Schedules for Consolidated Statements of Cash Flow
(Dollars in thousands)
For the year ended June 30,
-------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Supplemental Disclosures of Cash
Flow Information
Cash paid during year for:
Interest $ 3,351 4,302 3,206
Income taxes $ 1,175 1,431 302
Acquisitions
Fair value of tangible assets acquired $ - 173 5,011
Goodwill and intangibles $ - 809 5,708
Liabilities assumed $ - (38) (931)
Notes issued $ - - (3,119)
Common shares issued $ - (405) -
-------------- -------------- --------------
Total cash paid for acquisitions $ - 539 6,669
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
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") was organized in 1984 as
The Rocking Horse Childcare Centers of America, Inc. In 1985, The Rocking Horse
Childcare Centers of America, Inc. merged into a publicly-traded entity that had
been incorporated in 1983. The Company operates private schools, schools for the
learning challenged, specialty high schools and charter schools located in
Arizona, California, Florida, Georgia, Illinois, Maryland, Nevada, New Jersey,
North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia and
Washington.
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 subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Recognition of Revenues:
Tuition revenues, net of discounts, and other revenues are recognized as
services are performed. Any tuition payments received in advance of the time
period for which service is to be performed is recorded as unearned revenue.
Charter school management fees, which represent approximately 1.2% of revenues,
are recognized based on a contractual relationship with the charter school and
do not include any tuition revenue received by the charter school. Certain fees
may be received in advance of services being rendered, in which case the fee
revenue is deferred and recognized over the appropriate period of service. The
Company's net revenues meet the criteria of the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, including the existence of an arrangement, the rendering
of services, a determinable fee and probable collection.
In December 1999, the Securities and Exchange Commission issued SAB 101,
which provides guidance related to revenue recognition.
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
SAB 101 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.
Accounts Receivable and Credit Risk:
The Company's accounts receivable are comprised primarily of tuition due
from governmental agencies and parents. Accounts receivable are presented at
estimated net realizable value. The Company uses estimates in determining the
collectibility of its accounts receivable and must rely on its evaluation of
historical trends, governmental funding processes , specific customer issues and
current economic trends to arrive at appropriate reserves. Material differences
may result in the amount and timing of bad debt expense if actual experience
differs significantly from management estimates.
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 also 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.
F-7
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.
Long-Lived and Intangible Assets:
Under the requirements of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets, the Company assesses the potential impairment of property and
equipment, and identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An
asset's value is impaired if management's estimate of the aggregate future cash
flows, undiscounted and without interest charges, to be generated by the asset
are less than the carrying value of the asset. Such cash flows consider factors
such as expected future operating income and historical trends, as well as the
effects of demand and competition. To the extent impairment has occurred, the
loss will be measured as the excess of the carrying amount of the asset over the
fair value of the asset. Such estimates require the use of judgment and numerous
subjective assumptions, which, if actual experience varies, could result in
material differences in the requirements for impairment charges.
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 as income in the period of enactment. A
valuation allowance is recorded based on the uncertainty regarding the ultimate
realizability of deferred tax assets.
The Company files a U.S. federal income tax return and various state income
tax returns, which are subject to examination by tax authorities. This process
involves estimating the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The Company's estimated tax liability is subject to change
as examinations of specific tax years are completed in the respective
jurisdictions including possible adjustments related to the nature and timing of
deductions and the local attribution of income.
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 as of 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 Uncertainties:
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
the business plan, and the Company's recoverability of the note receivable from
Total Education Solutions, Inc. ("TES")(See footnote 10).
F-8
Negative developments in these areas could have a material effect on the
Company's business, financial condition and results of operations.
Accounting for Derivatives:
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This standard, as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments, Certain Hedging
Activities," an amendment of FASB Standard No. 133, establishes accounting and
reporting standards requiring that every derivative instrument, such as interest
rate swap agreements, be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The company records its derivatives at fair
value within the consolidated balance sheet and the changes in fair value of the
derivatives are either reported in earnings or are reported in other
comprehensive loss in stockholder's equity. The fair value represents the
estimated amount the Company would receive or pay to terminate their interest
rate swap agreements taking into consideration current interest rates (see Note
11). Derivatives are limited in use and are not entered into for speculative
purposes.
New Accounting Pronouncements:
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and expands on the guidance provided by SFAS No. 121 with
respect to cash flow estimations. SFAS No. 144 becomes effective for the
Company's fiscal year 2003. The Company is evaluating SFAS No. 144 and has not
yet determined the full impact of adoption on its financial position but will
reclass property and equipment held for sale as part of total property and
equipment as the assets are still in use.
On April 30, 2002 the Financial Accounting Standards Board (FASB) issued
Statement 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. FASB 145 rescinds Statement 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. Early application of the provisions of FASB 145 may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which FASB 145 is issued. The Company has elected to adopt FASB 145 as of the
beginning 2002.
The Company had a promissory note obligation related to the purchase of a
school in Arizona of $1,408,000 issued in June 2000. The promissory note was
settled for $1,025,000 on February 14, 2002 resulting in a gain of $383,000. As
a result of the adoption of FASB 145, the Company recorded the gain as other
income during the quarter ended March 31, 2002. The impact on diluted earnings
per share for the quarter and year to date March 31, 2002 was $0.03 per share
(net of tax).
On July 30, 2002, the Financial Accounting Standards Board (FASB) issued
Statement 146, Accounting for Costs Associated with Exit or Disposal Activities.
The standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. FASB 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002.
Reclassifications:
Certain prior year amounts for the fiscal year ended June 30, 2001 have
been reclassified to conform to the presentation adopted in fiscal 2002.
2. Earnings Per Share:
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the period. In the calculation
of dilutive earnings per share, shares outstanding are adjusted to assume
conversion of the Company's options, warrants, and 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):
F-9
Year ending June 30,
------------- ------------- -------------
2002 2001 2000
------------- ------------- -------------
Basic earnings per share:
- ---------------------------------
Net income $ 2,834 $ 1,501 $ 2,478
Less preferred dividends 82 81 82
Net income available for
------------ ------------ ------------
common stock 2,752 1,420 2,396
------------ ------------ ------------
Average common stock outstanding 6,197,936 5,980,986 5,929,811
------------ ------------ ------------
Basic earnings per share $ 0.44 $ 0.24 $ 0.40
============ ============ ============
Diluted earnings per share:
- ---------------------------------
Net income available for common stock
and dilutive securities $ 2,834 $ 1,501 $ 2,478
Average common stock outstanding 6,197,936 5,980,986 5,929,811
Additional common shares resulting from dilutive securities:
Options, warrants and convertible
preferred stock 1,276,767 1,535,014 1,543,123
Average common stock and dilutive
------------ ------------ ------------
securities outstanding 7,474,703 7,516,000 7,472,934
------------ ------------ ------------
Dilutive earnings per share $ 0.38 $ 0.20 $ 0.33
============ ============ ============
3. Acquisitions and Dispositions:
During the years ended June 30, 2001, and 2000, the Company completed
various acquisitions, all of which are accounted for using the purchase method,
as 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.
F-10
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,
the Company 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 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 2000, 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 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. The
Arizona
F-11
Promissory Notes were settled between the Company and the Seller's for
$1,025,000 during fiscal year 2002 which resulted in a gain of $383,000. The
Company recorded the gain as other income during the quarter ended March 31,
2002 as it did not meet the criteria for treatment as an extraordinary item as
provided for in APB opinion 30. (See note 1)
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
Fiscal 2001 and Fiscal 2000 all occurred at the beginning of Fiscal 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 Fiscal 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
4. Cash Equivalents:
The Company has an agreement with its primary bank that allows the bank to
act as the Company's principal in making daily investments with available funds
in excess of a selected minimum account balance. This investment amounted to
$572,000 and $537,000 at June 30, 2002 and 2001, respectively. The Company's
funds were invested in money market accounts, which exceed federally insured
limits. The Company believes it is not exposed to any significant credit risk on
cash and cash equivalents as such deposits are maintained in high quality
financial institutions.
5. Notes Receivable:
At June 30, 2001, the Company had a current note receivable of $1,664,000
due from People for People, Inc. related to construction cost for a proposed
charter school financed by the Company. Interest on the note accrued at 2.5%
over prime from July 11, 2000 to April 16, 2001 and at 14% through August 13,
2001. The principal amount of the note was repaid August 13, 2001. Accrued
interest is being repaid in installments. At June 30, 2002, accrued interest
outstanding was $178,000.
F-12
6. 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, 2002 June 30, 2001
-------------------- ---------------------
Land $ 2,831 $ 2,832
Buildings 6,128 5,741
Assets under capital lease obligations 1,224 913
Leasehold improvements 20,644 17,686
Furniture and equipment 29,452 25,027
Construction in progress 8 19
-------------------- ---------------------
$ 60,287 $ 52,218
Accumulated depreciation (26,303) (20,792)
-------------------- ---------------------
$ 33,984 $ 31,426
==================== =====================
Depreciation expense was $5,584,000, $4,879,000, and $4,354,000 for the years
ended June 30, 2002, 2001 and 2000, respectively. Amortization of capital leases
included in depreciation expense amounted to $183,000, $15,000 for the years
June 30, 2002 and 2001, respectively. Accumulated amortization of capital leases
amounted to $695,000 and $512,000 at June 30, 2002 and June 30, 2001,
respectively.
7. Goodwill:
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, effective July 1, 2001. Under SFAS
No. 142, goodwill is no longer amortized but reviewed for impairment annually,
or more frequently if certain indicators arise. As a result, the Company ceased
amortization of Goodwill, the effect of which was a reduction of $1,677,000 of
amortization expense for the year ended June 30, 2002.
The net carrying value of goodwill was $48,376,000 as of July 1, 2001 (the
Company's adoption date of SFAS 142). The Company completed the "first step"
impairment test as required under SFAS 142 at December 31, 2001 and determined
that the recognition of an impairment loss was not necessary. The fair value of
the Company's ten reporting units was estimated using the expected present value
of future cash flows. In estimating the present value the company used
assumptions based on the characteristics of the reporting unit including
discount rates ( ranging from 13% to 20%). For two of the reporting units fair
value approximated their carrying value while for the remaining eight reporting
units fair value exceeded carrying value. For the two reporting units where fair
value approximated carrying value, goodwill allocated to these reporting units
totaled $7,806,000 and $4,676,000. Accordingly, the Company updated its analysis
at June 30, 2002 and concluded that no impairment was required for these two
reporting units. Goodwill will be assessed for impairment at least annually or
upon an adverse change in operations. The annual impairment testing required by
SFAS No. 142 will require judgments and estimates and could require us to write
down the carrying value of our goodwill and other intangible assets in future
periods.
F-13
The impact on prior year financial results, as if FAS 142 had been in effect is
as follows (dollars in thousands):
Year ending June 30, Year ending June 30,
----------------- ------------ ---------------- -------------
2001 2001 2000 2000
As reported Pro forma As reported Pro forma
----------------- ------------ ---------------- -------------
Earnings before taxes and change in
accounting principle $3,392 $3,392 $4,271 $4,271
Goodwill amortization - 1,629 - 1,484
------------------------------ ------------------------------
Adjusted earnings before taxes and
change in accounting principle
3,392 5,021 4,271 5,755
Income tax expense 1,596 2,058 1,793 2,360
------------------------------ ------------------------------
Net income before change in
accounting principle $1,796 $2,963 $2,478 $3,395
============================== ==============================
Basic earnings per share $ 0.29 $ 0.48 $ 0.40 $ 0.56
============================== ==============================
Diluted earnings per share $ 0.24 $ 0.39 $ 0.33 $ 0.45
============================== ==============================
8. Intangible Assets, net:
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.
At June 30, 2002 and 2001 the Company's intangibles assets were as follows
(dollars in thousands):
June 30, 2002 June 30, 2001
Intangible assets
Non-compete $ 2,493 $ 2,493
Other 901 901
------------- ----------------
3,394 3,394
Accumulated amortization (2,249) (1,758)
------------- ----------------
$ 1,145 $ 1,636
============= ================
Amortization expense for intangible assets was $491,000, $454,000 and $496,000
for the years ended June 30, 2002, 2001 and 2000, respectively. Amortization of
intangible assets will be as follows: $309,000 in 2003, $96,000 in 2004, $74,000
in 2005, $48,000 in 2006 and $618,000 in 2007 and thereafter.
F-14
9. 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, 2002 June 30, 2001
------------------ --------------------
Land $ 1,645 $ 1,839
Buildings 3,960 4,315
Leasehold improvements 110 110
Furniture and equipment 45 122
Accumulated depreciation (155) (391)
------------------- --------------------
$ 5,605 $ 5,995
=================== =================---
10. Long Term Note Receivable:
The Company has a $2,600,000 note receivable pursuant to of a Credit
Agreement with TES due May 2005 of which $2,250,000 is convertible into 30%
ownership of TES. TES, established in 1997, provides special education services
to charter schools and public schools which, 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). Prior to the financing provided from the Company in May 2000,
TES was marginally profitable as it provided its services to schools in a small
regional area of Southern California. The proceeds received by TES have been
used for the expansion of its product throughout California and plans to enter
other states. Although TES's revenues have grown since the origination of the
credit agreement, TES has also incurred losses as a result of building the
infrastructure to service other regions.
As part of the evaluation of the carrying value of TES, a number of positive
and negative factors affecting TES were considered including:
. Operating results and outlook for TES;
. Expected future cash flows
. Current conditions and trends in the industry;
. Other industry comparables; and
. The Company's plans and ability hold this investment.
In evaluating the investment in TES, a discounted cash flow analyses was
prepared for TES based on a recent financing discussion memorandum. The cash
flow analysis indicated that the investment in TES has a value greater than the
current carrying value. In addition, other objective evidence including recent
comparable transactions similar to TES, industry publications supporting the
market and growth rates and TES's ongoing discussions with third parties
regarding additional financing was reviewed.
F-15
11. Debt:
Debt consisted of the following (dollars in thousands):
June 30, 2002 June 30, 2001
---------------- ----------------
Long Term Obligations:
Revolving and term credit facility $ 28,217 $ 27,398
First mortgages and notes payable to sellers due in
varying installments over three to 15 years with
fixed interest rates ranging from 8% to 12% 179 265
Capitalized lease obligation 162 -
Other 93 135
---------------- ----------------
$ 28,651 $ 27,798
---------------- ----------------
Less current portion (3,240) (2,272)
---------------- ----------------
$ 25,411 $ 25,526
================ ================
Long Term Subordinated Debt:
Senior subordinated note due 2005 interest at 12%,
payable quarterly. Net of original issue discount of
$386,000 at June 30, 2002 $ 9,614 $ 9,486
Subordinated debt agreements, due in varying
installments over five to 10 years with fixed interest
rates varying from 7% to 8% 1,952 6,071
---------------- ----------------
Total subordinated debt 11,566 15,557
Less current portion (1,248) (4,142)
---------------- ----------------
$ 10,318 $ 11,415
================ ================
Credit Facility.
Since 1995, the Company amended its credit facility agreement 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, 2004. 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, 2002, a total of $28,217,000 was outstanding and $9,353,000 was
available under the amended and restated loan agreement; $2,084,000 was
outstanding under Working Capital Credit Facility, $13,276,000 was outstanding
under the Acquisition Credit Facility and $12,857,000 was outstanding under the
Term Loan.
The interest rate at June 30, 2002 for the Working Capital Credit Facility
of $2,084,000 outstanding and $3,276,000 for the Acquisition Credit Facility was
at 5.5%, which was prime plus 0.75%. Interest rate on the remaining $10,000,000
outstanding on the Acquisition Credit Facility was 4.38%, which was adjusted
Libor plus 2.5%. The interest rate on the Term Loan was 7.98%, which was fixed
Libor of 5.48% (see interest rate swap agreement below) plus 2.5%.
F-16
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%.
Nobel also pays a commitment fee on the Working Capital and Acquisition
Facility 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
30, 2002, 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
30, 2002, Nobel had $287,000 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.
At June 30, 2002, the Company was not in compliance with two credit
facility financial covenant ratios. As a result, the Company received a waiver
for the breach of the interest coverage ratio and adjusted leverage ratio at
June 30, 2002. In addition, the breached ratios were amended and restated to
lower ratio requirements for fiscal year 2003. The Company's interest coverage
ratio increased from a ratio of EBITDA of 3.5 times interest expense or higher
to 4.0 times interest expense or higher at June 30, 2002. The Company's ratio
was 3.99 times EBITDA at June 30, 2002. The Company's adjusted leverage ratio
decreased from 4.5 times EBITDA or plus rent expenses to 4.25 times EBITDA plus
rent expense at June 30, 2002. The Company's ratio was 4.37 times EBITDA plus
rent expense at June 30, 2002. The Company is in compliance with all other bank
covenant requirements.
In connection with the May 2001 amendment to the Company's Amended and
Restated Loan and Security Agreement, the Company entered an interest rate swap
agreement in 2002 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, 2002 the Company's interest rate swap contract outstanding
had a total notional amount of $12,857,000. Under the interest rate swap
contract, the Company agrees to pay a fixed rate of 5.48% and the counterparty
agrees to make payments based on 3-month LIBOR. The market value of the interest
rate swap agreement at June 30, 2002 was a liability of $376,000, net of taxes
and is included as a component of Accumulated Other Comprehensive Loss, of which
a portion is expected to be reclassified to the consolidated statement of income
within one year.
In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation. In May, 2001, the Company amended its $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
increased 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 discount is being amortized to interest expense over the
term of the note.
Maturities of long-term obligations are as follows: $4,488,000 in 2003,
$7,399,000 in 2004, $5,076,000 in 2005, $14,306,000 in 2006, and $8,948,000 in
2007 and thereafter.
F-17
12. Accounts Payable and Other Current Liabilities:
Accounts payable and other current liabilities were as follows
(dollars in thousands):
June 30, 2002 June 30, 2001
----------------- -----------------
Accounts payable $ 2,349 $ 2,105
Accrued payroll and related items 1,805 1,647
Accrued rent 424 345
Accrued taxes 282 186
Other accrued expense 2,668 2,395
----------------- -----------------
$ 7,528 $ 6,678
================= =================
13. 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.
14. 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, 2002 (dollars in thousands):
Operating Leases
2003 $ 25,127
2004 24,520
2005 23,433
2006 21,937
2007 20,138
2008 and thereafter 113,527
--------
Total minimum lease
obligations $228,682
========
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 $23,929,000, $21,469,000, and $17,596,000,
for the years ended June 30, 2002, 2001 and 2000, These leases are typically
triple-net leases requiring the Company to pay all applicable real estate taxes,
utility expenses, maintenance and insurance costs.
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):
2003 $ 1,258
2004 $ 1,239
2005 $ 1,187
2006 $ 942
2007 and thereafter $ 2,214
F-18
15. 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, 2002 and 2001, 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. At June 30, 2002 and 2001, 2,500,000 shares were outstanding.
The Series 1 Warrants are exercisable at $4.00 per share, subject to
adjustment, and were to expire on August 19, 2001. On August 19, 2001, the
holders of 125,000 Series 1 Warrants issued in connection with the Series C
Convertible Preferred Stock exercised their warrants at $4.00 per share. The
Series 2 Warrants have terminated pursuant to their terms.
In 1993, the Company issued 2,484,320 shares of Company's Series A
Convertible Preferred Stock for 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, 2002 and 2001 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.
F-19
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 $7.52 per share.
At June 30, 2002, 2001 and 2000, 840,267, 965,267, and 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, 2002 and 2001, 92,000 options have
been granted under this plan. At June 30, 2002 and 2001, $55,000 and $29,000,
respectively, in compensation expense have 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.
F-20
Option activity with respect to the Company's stock incentive plans and other
employee options was as follows:
Weighted
Average
Number Range Price
------------ --------------------------- ----------
(in dollars)
Balance June 30, 1999 836,804 3.75 to 16.44 6.39
----------- ---------- ------------- ----------
Granted 180,788 5.87 to 8.13 7.53
Exercised (3,333) 5.06 5.06 5.06
Canceled (33,467) 5.06 to 11.62 7.31
----------- ---------- ------------- ----------
Balance June 30, 2000 980,792 3.75 to 16.44 6.88
----------- ---------- ------------- ----------
Granted 110,088 8.88 9.13 8.93
Exercised (42,262) 4.68 to 6.00 5.13
Canceled (87,968) 4.68 to 11.63 7.86
----------- ---------- ------------- ----------
Balance June 30, 2001 960,650 3.75 to 16.44 7.16
----------- ---------- ------------- ----------
Granted 140,000 5.85 to 8.00 5.93
Exercised (207,392) 4.69 to 5.75 4.87
Canceled (65,021) 3.75 to 11.63 5.31
----------- ---------- ------------- ----------
Balance June 30, 2002 828,237 3.75 to 16.44 7.36
=========== ========== ============= ==========
Of the 140,000 options granted during 2002 50,000 options were granted
outside of the Company's stock incentive plans. At June 30, 2002 and June 30,
2001, 554,273 and 571,002 shares, respectively, remained available for options
or stock grants under the 1995 Stock Incentive Plan and 662,273 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,
---------------------------------------
2002 2001 2000
Net income:
- - as reported $ 2,834 $ 1,501 $ 2,478
- - pro forma $ 2,432 $ 897 $ 2,157
Basic earnings per share
- - as reported $ 0.44 $ 0.24 $ 0.40
- - pro forma $ 0.38 $ 0.15 $ 0.35
Diluted earnings per share
- - as reported $ 0.38 $ 0.20 $ 0.33
- - pro forma $ 0.32 $ 0.12 $ 0.29
F-21
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:
2002 2001
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 36.07% 44.24%
Risk-free interest rate 4.44% 5.77%
Expected life of options 3 years 3 years
16. Other (Income) Expense:
Other (income) expense consists of the following (dollars in thousands):
Year Ending June 30,
----------------------------------------------
2002 2001 2000
-------------- -------------- ----------------
Interest income $ (161) (426) (118)
Rental income (expense) 11 (39) (46)
Depreciation related to rental properties 29 18 17
Gain on settlement of note payable (383) - -
Transaction costs 344 - -
Other - 23 2
-------------- -------------- ----------------
$ (160) (424) (145)
============== ============== ================
17. Income Taxes:
Current tax provision (dollars in thousands):
Year Ending June 30,
--------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Federal $ 1,070 $ 788 $ 902
State 166 115 (79)
--------------- --------------- ---------------
1,236 903 823
Deferred tax provision 732 451 970
--------------- --------------- ---------------
$ 1,968 $ 1,354 $ 1,793
=============== =============== ===============
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,
--------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
U.S. federal statutory rate $ 1,681 $ 984 $ 1,495
State taxes, net of federal tax benefit 83 70 128
Goodwill and other 204 300 170
--------------- --------------- ---------------
$ 1,968 $ 1,354 $ 1,793
=============== =============== ===============
F-22
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,
--------------------------------------------------
2002 2001 2000
--------------------------------------------------
tax assets (liabilities)
Goodwill amortization $ (2,242) $ (702) $ (468)
Depreciation 21 (264) (174)
Provision for school closings and
other restructuring - - 60
AMT credit carryforward and state
net operating losses 986 647 732
Other 184 - -
--------------- ---------------- -----------------
(1,051) (319) 150
--------------- ---------------- -----------------
Valuation allowance (141) (141) (141)
--------------- ---------------- -----------------
Net deferred tax (liability) asset $ (1,192) $ (460) $ 9
=============== ================ =================
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 $6,938,000 as of June 30, 2002, which can be carried forward from
seven to twenty years depending on the state and will expire between 2005 and
2020, if not utilized.
18. 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. The Company's
matching contributions under the Plan were $269,000, $238,000, and $169,000 for
the years ended June 30, 2002, 2001 and 2000, respectively.
19. Fair Value of Financial Instruments:
Fair value estimates, methods and assumptions are set forth below for
Nobel's financial instruments at June 30, 2002, and June 30, 2001.
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, 2002 and 2001 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 fair value of the $2,600,000 note receivable from TES exceeds its
carrying value. (see Note 10). 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 12% senior subordinated notes of $9,614,000 at June 30, 2002 and
$9,486,000 at June 30, 2001, approximated market value. The carrying values for
F-23
Nobel's remaining long-term debt of $30,603,000 and $33,869,000 at June 30, 2002
and 2001, 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, 2002, the Company would have had to
pay $637,000 to terminate the interest rate swap.
20. Commitments and Contingencies:
In addition to the legal proceedings described below in Note 22, 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.
The Company also has significant commitments with certain of its executives
that would be triggered upon a change in control or certain termination events
as discussed in Part III of report on Form 10-K contained herein.
21. Related Party Transactions:
In June 2001, the Company sold a school property in Manalapan, New Jersey,
to Mr. A. J. Clegg, d/b/a Tiffany Leasing, a Pennsylvania sole proprietorship,
in a transaction approved by the Board of Directors. The purchase price for the
property was $3,857,000, based on the appraised value of the property as
determined by an independent third party appraiser. Simultaneously with the
closing of the sale, the Company leased the property back from Tiffany Leasing
under a 20-year lease, with an initial annual rent of approximately $450,000 per
year. The Company is responsible for all costs of the property, including
maintenance, taxes and insurance. The Company also has two 5-year options to
renew the lease at the end of the original lease term. Apart from increasing the
length of the original lease term, the terms and conditions of the purchase and
lease are substantially the same as the final terms and conditions previously
negotiated by the Company with a disinterested third party which had been
interested in buying and leasing the property, but which did not ultimately
consummate the transaction for reasons unrelated to the Company or the proposed
terms.
22. Segment Information:
The Company manages its schools based on 3 geographical regions within the
United States. In FY 2000 the Company acquired Houston Learning Academy and The
Activities Club 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."
F-24
The table below presents information about the reported operating income of the
company for the fiscal years ended June 30, 2002, 2001 and 2000, (dollars in
thousands):
Private
Schools Other Corporate Total
----------- --------- ------------ ------------
June 30, 2002
-----------------
Revenues $ 146,717 9,562 - 156,279
School operating profit $ 19,507 582 - 20,089
Depreciation and
amortization $ 4,819 852 404 6,075
Goodwill $ 46,428 1,948 - 48,376
Segment assets $ 82,505 14,532 5,943 102,980
June 30, 2001
-----------------
Revenues $ 139,726 8,226 - 147,952
School operating profit $ 17,945 221 - 18,166
Depreciation and
amortization $ 5,983 603 475 7,061
Goodwill $ 46,428 1,948 - 48,376
Segment assets $ 80,798 14,257 6,729 101,784
June 30, 2000
-----------------
Revenues $ 125,176 2,231 - 127,407
School operating profit $ 16,910 419 - 17,329
Depreciation and
amortization $ 5,739 87 473 6,299
Goodwill $ 47,196 2,299 - 49,495
Segment assets $ 83,426 8,881 6,311 98,618
23. Subsequent events:
The Stockholder Rights Plan was amended on August 4, 2002, and August 5,
2002, by Amendment No. 1 and Amendment No. 2, respectively, as part of the
negotiation and execution of the Agreement and Plan of Merger, dated as of
August 5, 2002 (the "Merger Agreement"), with Socrates Acquisition Corporation
("Socrates"), a corporation newly formed by Gryphon Partners II, L.P. and
Cadigan Investment Partners, Inc. (collectively, the "Buying Group"), both of
which are engaged principally in the business of investing in companies.
On August 5, 2002, the Company entered into the Merger Agreement. Under the
Merger Agreement, Socrates will be merged into the Company, with the Company as
the surviving corporation (the "Merger"). If the Merger is completed, each
issued and outstanding share of the Company's common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
will be converted into the right to receive $7.75 in cash, without interest,
except for certain shares and options held by the the Company's directors and
executive officers identified in the merger agreement as a rollover stockholder,
which will continue as, or be converted into, equity interests of the surviving
corporation. In addition, if the Merger is completed, each outstanding option
and warrant that is exercisable as of the effective time of the Merger will be
canceled in exchange for (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant multiplied by (2) the number of shares
of common stock subject to the option or warrant exercisable as of the effective
time of the merger, net of any applicable withholding taxes. Following the
Merger, the Company will continue its operations as a privately held company.
The Merger is contingent upon satisfaction of a number of conditions, including
approval of the Company's stockholders, the receipt of regulatory and other
approvals and consents, the absence of any pending or threatened actions that
would prevent the consummation of the transactions contemplated by the merger
agreement and receipt of financing. There can be no assurance that these or
other conditions to the Merger will be satisfied or that the Merger will be
completed. If the Merger is not completed for any reason, it is expected that
the current management of the Company, under the direction of the Company's
Board of Directors, will continue to manage the Company as an ongoing business.
It is currently anticipated that the total amount of funds necessary to
complete the Merger and the related transactions is approximately $108,900,000
(assuming that no NLCI stockholders exercise and perfect their appraisal
rights). The Buying Group has received commitments, subject to various
conditions, from financial institutions in an aggregate amount sufficient,
taking into account the amounts to be contributed as equity financing, to fund
these requirements. The receipt of third-party financing is a condition to
completion of the Merger. Of this amount, $47,500,000 is expected to be funded
from an equity investment in the Company by Socrates and stockholders who are
converting their shares into equity interests in the surviving corporation and
an additional $50,000,000 is expected to be funded through new credit
facilities. These funds are expected to be used to pay NLCI's stockholders and
certain option holders and warrant holders, other than stockholders who are
converting their shares into equity interests in the surviving corporation, to
refinance debt, and to pay fees and expenses related to the Merger. Following
completion of the Merger, the senior secured credit facility and the senior
subordinated notes are expected to be repaid through cash flow generated from
operations in the ordinary course of business and/or through refinancing.
F-25
The Company's Board of Directors, acting upon the unanimous recommendation
of the Special Committee of the Board comprised of three disinterested
directors, approved the transaction. In reaching its decision, the Special
Committee and the Board received a fairness opinion from the Company's financial
advisor, Legg Mason Wood Walker, Incorporated.
The Company anticipates that it will expense in the first and second
quarter of fiscal 2003 approximately $800,000 of legal, professional and other
registration fees incurred in connection with the Merger.
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of the Company. Named as
defendants in the complaint are the Company, members of the Company Board of
Directors and one former member of the Company's Board of Directors. The
plaintiff alleges, among other things, that the Merger is unfair and that the
Company's directors breached their fiduciary duties by failing to fully disclose
material non-public information related to the value of the Company and by
engaging in self-dealing. The complaint seeks an injunction, damages and other
relief. The Company was served with the complaint on August 22, 2002.
24. 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.
Operating Net income Earnings (loss) per share Market price
------------------------- ---------------------
Revenue Profit (loss) Basic Diluted High Low
----------- ------------ ---------- -------------- --------- ---------- --------
Fiscal 2002 (1)
- ----------------
September 30, 2001 $ 34,423 $ (39) $ (540) $ (0.09) $ (0.09) $ 9.000 $ 6.250
December 31, 2001 39,892 2,530 946 0.15 0.13 8.250 4.800
March 31, 2002 40,737 2,633 1,032 0.16 0.14 7.480 5.050
June 30, 2002 41,227 3,189 1,396 0.22 0.18 7.230 5.150
Fiscal 2001 (2)
- ---------------
September 30, 2000 31,530 (495) (1,111) (0.19) (0.19) 10.000 7.750
December 31, 2000 37,673 1,985 595 0.10 0.08 8.875 4.688
March 31, 2001 39,204 2,584 820 0.13 0.11 10.250 5.516
June 30, 2001 39,552 3,094 1,201 0.20 0.16 10.000 7.550
(1) Results for Fiscal 2002 reflect the adoption of FAS 142 which excludes
goodwill amortization
(2) Results for Fiscal 2001 have been restated to reflect the adoption of SAB
101, Revenue Recognition in the first quarter of Fiscal 2001.
F-26