-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LQcgWBKCNx0gDJnO6OiL4KtVy+Dr7+OXlybdlsbpGyQUZeDf4Mdy1RTvBiEPGUS4 zlJ9uBOQYs91G8ZlqmUg5w== 0001036050-97-000092.txt : 19970414 0001036050-97-000092.hdr.sgml : 19970414 ACCESSION NUMBER: 0001036050-97-000092 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970411 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBEL EDUCATION DYNAMICS INC CENTRAL INDEX KEY: 0000721237 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CHILD DAY CARE SERVICES [8351] IRS NUMBER: 222465204 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-12631 FILM NUMBER: 97578784 BUSINESS ADDRESS: STREET 1: ROSE TREE CORPORATE CENTER II STREET 2: 1400 N PROVIDENCE RD STE 3055 CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6094829100 FORMER COMPANY: FORMER CONFORMED NAME: ROCKING HORSE CHILD CARE CENTERS OF AMERICA INC /DE/ DATE OF NAME CHANGE: 19931222 FORMER COMPANY: FORMER CONFORMED NAME: PETRIE CORP DATE OF NAME CHANGE: 19851031 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 1 [x] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [No Fee Required] Commission File Number 1-1003 NOBEL EDUCATION DYNAMICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2465204 (State or other jurisdiction (IRS Employer of incorporation or organization Identification No.) ROSE TREE CORPORATE CENTER II 1400 N. PROVIDENCE ROAD, SUITE 3055 MEDIA, PA 19063 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 891-8200 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.001 PER SHARE (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of March 13, 1997, 5,831,955 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 March 13, 1997 was approximately $56,964,700 (based upon the closing sale price of these shares as reported by NASDAQ). Calculation of the number of shares held by non-affiliates is based on the assumption that the affiliates of the Company include only directors, executive officers and stockholders filing Schedules 13D or 13G with the Company. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is an affiliate or that any person whose holdings are included is not an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes of the Securities and Exchange Commission. DOCUMENTS INCORPORATED BY REFERENCE None ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Fiscal year 1996 compared to fiscal year 1995. As of December 31, 1995 the Company operated 101 elementary schools, preschools and child care centers (sometimes collectively referred to herein as "schools"). At December 31, 1996, the Company operated 107 schools. At March 20, 1997, the Company operated 118 schools and owned a 20% interest in one elementary school. During 1996, the Company acquired the assets or stock of companies owning ten schools. These acquisitions included: five preschools in Virginia (School's Out, Inc. and related companies); two preschools in North Carolina, operating as the MacGregor Creative Schools; two schools located in Seattle, Washington, operating as Evergreen Academy; and one school in Coto de Caza, California, operating as Oak Ridge Private School. In addition, during 1996, the Company opened seven new schools, two of which were replacement schools. Leases of six non-core schools located in South Carolina expired and were not renewed, as planned in the 1992 restructuring of the Company. In early January 1997, the Company acquired six preschools in Florida, operating as Another Generation, and a 20% interest in an elementary school in Ft. Lauderdale, Florida. The Company also opened two new schools, one in New Jersey and one in North Carolina, in March 1997. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for the years ended December 31, 1996 and 1995 into three categories, Baseline Schools (defined as all schools opened as of December 31, 1993), Acquired Schools and New Schools (defined as schools acquired or newly opened since December 31, 1993):
% of % of 1996-1995 1996 Revenue 1995 Revenue Variance ($) ---- ------- ---- ------- ------------ BASELINE SCHOOLS Revenues $32,115,443 100.00% $32,379,813 100.00% $ (264,370) Operating Profit $ 6,754,000 21.03% $ 6,695,236 20.68% $ 58,764 ----------- ------ ----------- ------ ----------- ACQUIRED SCHOOLS Revenue $17,958,065 100.00% $ 7,102,124 100.00% $10,855,941 Operating Profit $ 2,044,162 11.38% $ 855,474 12.05% $ 1,188,688 ----------- ------ ----------- ------ ----------- NEW SCHOOLS Revenues $ 8,835,880 100.00% $ 4,672,430 100.00% $ 4,163,450 Operating Profit $ 1,032,497 11.69% $ 695,173 14.88% $ 337,324 ----------- ------ ----------- ------ ----------- Total Net Revenues $58,909,388 100.00% $44,154,367 100.00% $14,755,021 =========== ====== =========== ====== =========== Total School $ 9,830,659 16.69% $ 8,245,883 18.68% $ 1,584,776 Operating Profit =========== ====== =========== ====== ===========
13 In 1996, Baseline Schools showed a $264,370 revenue decline. This was caused by a combination of the divestiture of six South Carolina schools in 1996 and one Florida school in 1995 creating a $712,358 revenue reduction, partially offset by a $447,988 increase in the remaining schools. Despite the revenue decrease, the operating profit from Baseline Schools increased $58,764, as the previously identified divested schools generated losses in 1995. Operating margins of the Baseline Schools remained consistent at 21% in both 1996 and 1995. In 1996, Acquired Schools as a group generated a $10,855,941 increase in revenues compared to 1995. Operating profits of Acquired Schools increased $1,188,688 in 1996 compared to 1995. Both the revenue and operating profit increases were caused by the 1996 twelve month full year impact of the three acquisitions made during 1995 plus the partial year impact of two acquisitions made in 1996. Operating profit margins reduced slightly to 11.4% in 1996 from 12% in 1995. This reduction was caused by several factors: (1) since two of the 1995 acquisitions were made on September 1, 1995, the Company avoided the traditionally lower margin summer months, which was not the case in 1996 and (2) the 1995 acquisition of nine schools located in Indianapolis generated a $101,000 operating loss in 1996 compared to a $55,000 profit in 1995. When the Company acquired these Indianapolis schools, it had anticipated increased enrollment levels and reduced personnel expenses. This has not been achieved to date. The Company is actively addressing these issues and expects improvement in 1997. Removing the negative impact of Indianapolis, operating margins of Acquired Schools would have increased to 14.7% in 1996 from an adjusted (without Indianapolis) operating margin of 13.4% in 1995. Operating margins in Acquired Schools have the added burden of amortization expense of goodwill. Goodwill amortization related to Acquired Schools totaled $372,000 and $64,000 in the years ended 1996 and 1995, respectively. Operating margins in Acquired Schools before the amortization of goodwill totaled 13.45% and 12.94% for the years ending 1996 and 1995, respectively. When making acquisitions, the Company takes steps to increase operating margins of Acquired Schools over a twelve to thirty- six month period, as it implements cost controls, systems and marketing strategies. In 1996 New Schools generated a $4,163,450 revenue increase compared to 1995. This growth is from the combination of the maturing of the eleven preschools that opened in 1994 and 1995 and the first-year impact of the seven new schools (four preschools, two elementary and one middle school) opened in 1996. Operating profit increased $337,324 in 1996 from 1995 despite a $272,230 loss from the seven 1996 New Schools. As New Schools opened in 1994 and 1995 matured, their operating profit improved by $609,554. Operating profit margins of New Schools reduced to 11.7% in 1996 from 14.9% in 1995 mainly due to the $272,230 loss from the seven 1996 New Schools which compared to a $57,355 loss for the seven 1995 new preschools. The magnitude of the operating loss from the New Schools opened in 1996 is increased by the mix of these schools. Generally, the Company experiences smaller initial start up losses in preschools than elementary or middle schools. It has also been the Company's experience to reach profitability in new preschools in six to nine months compared to elementary or middle schools which can take twelve to twenty-four months to become profitable. 14 Overall, in 1996 the Company's total revenues increased $14,755,021 and operating profits increased $1,584,776, compared to 1995. Meanwhile, operating profit margins decreased from 18.7% in 1995 to 16.7% in 1996 as explained above. General and administrative expenses increased $793,810 or 23% to $4,189,750 for the year ended December 31, 1996; however, as a percentage of revenue, general and administrative expenses decreased from 7.7% of revenues in 1995 to 7.1% of revenues in 1996. The Company enjoyed efficiencies from its growth through acquisitions. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. Operating income increased $1,290,966 or 29% to $5,640,909 for the year ended December 31, 1996. The increase is a result primarily of the increase in school operating profit. In 1995, the Company recorded $500,000 in litigation expense related to a claim by former officers of the Company which has been settled. As a percent of revenue, operating income decreased slightly from 9.8% for the year ended December 31, 1995 to 9.6% for the year ended December 31, 1996, which is a result of the decrease in school operating profit margins described above. Net cash provided by operating activities increased to $4,775,059 in 1996 compared to $4,037,239 in 1995 which was an 18% increase. Another key measure of the Company's cash generating ability is its EBITDA (earnings before interest, taxes, depreciation and amortization expenses). EBITDA increased to $8,239,000 in 1996 from $5,902,000 in 1995 which was a 40% increase. EBITDA is not a measure of performance, under generally accepted accounting principles, however the Company and the investment community consider it a key indicator. Interest expense increased $164,829 or 9% to $2,004,392 for the year ended December 31, 1996, which was due to increased debt relating to the acquisitions and new school development. Other income increased $356,923 or more than 250% to $482,647 which was due to interest income earned on the proceeds of the private placement of approximately $11,600,000 in March 1996. Pretax income increased $1,474,389 or 58% to $4,024,685 for the year ended December 31, 1996 as compared to the prior year. The increase is a result of (1) an increase in operating profit as a result of the growth of the Company and (2) interest income related to the approximately $11,600,000 private placement. Income tax expense increased $2,917,383 to $1,561,793 for the year ended December 31, 1996. The increase in taxes was due to the Company being fully taxed in 1996 as compared to recording a tax benefit in 1995 of $2,105,400. This credit was based upon the adoption of SFAS 109 in 1992 and the subsequent reduction of the Company's valuation allowance due to its more recent historical profitable operating performance and its projections for the future. Consequently, 1996 is the first year the Company is fully taxable. The Company anticipates this trend to continue. Net income decreased $1,380,994 or 36% to $2,462,892 for the twelve months ended December 31, 1996 as a result of the Company reversing the valuation allowance in 1995 and recording taxes in 1996 at a 38.8% rate as described above. If pretax net income in 1995 were taxed at an effective rate of 38.8%, on a pro forma basis, net income would have increased $964,111 or 64%. Fully diluted earnings per share, on the same pro forma basis, would have increased from $.25 per share in 1995 to $.34 per share in 1996, or a 36% increase. 15 Fully diluted earnings per share decreased from $.63 per share for the year ended December 31, 1995 to $.34 for the year ended December 31, 1996. Common shares and shares equivalents on a fully diluted base increased 1,133,662 or 18.5% from 6,129,121 for the year ended December 31, 1995 to 7,262,783 for the year ended December 31, 1996, as a result of raising equity capital and issuing stock in connection with acquisitions. Fiscal year 1995 compared to fiscal year 1994. As of December 31, 1994, the Company operated 68 schools. During the year ended December 31, 1995, the Company acquired in both assets and stock transactions, 27 operating schools, and three schools under development, which consisted of (1) eight schools operated by Carefree Learning Centers, and three under development, located in Pennsylvania, (2) ten schools operated by Educo, Inc., located in Maryland, Virginia, North Carolina and South Carolina and (3) nine schools operated by Children Today, Inc., located in Indiana. In addition, the Company opened seven new schools in various locations and divested one school in Florida. As of December 31, 1995, the Company operated a total of 101 schools. Following is a chart which breaks down revenues, school operating profit and school operating profit margins in 1995 and 1994 into three categories of Baseline Schools, Acquired Schools and New Schools:
% of % of 1995-1994 1995 Revenue 1994 Revenue Variance ($) ---- ------- ---- ------- ----------- BASELINE SCHOOLS Revenues $32,379,813 100.00% $32,448,399 100.00% $ (69,187) Operating Profit $ 6,695,236 21.01% $ 6,037,123 18.61% $ 658,236 ----------- ------ ----------- ------ ---------- ACQUIRED SCHOOLS Revenues $ 7,102,124 100.00% $ 0 0.00% $7,102,124 Operating Profit $ 855,474 12.05% $ 0 0.00% $ 885,474 ----------- ------ ----------- ------ ---------- NEW SCHOOLS Revenues $ 4,672,430 100.00% $ 1,923,102 100.00% $2,749,328 Operating Profit $ 695,173 14.88% $ 173,841 9.04% $ 521,332 ----------- ------ ----------- ------ ----------
16 Total Net Revenues $44,154,367 100.00% $34,371,501 100.00% $9,782,866 =========== ====== =========== ====== ========== Total School $ 8,245,883 18.68% $ 6,210,964 18.07% $2,034,919 Operating Profit =========== ====== =========== ====== ==========
In 1995, Baseline Schools showed a $69,187 decline compared to 1994. This decline was caused by the divestiture of non-core southeastern centers in late 1994 reducing revenues by $442,432 partially offset by a $373,245 increase in the remaining schools. Despite the revenue decline, the operating profit from Baseline Schools increased $658,236 as the previously identified centers generated losses in 1994. Operating margins improved significantly in 1995 to 21% from 18.6% in 1994 primarily due to the divestiture of the southeastern centers. In 1995, Acquired Schools generated $7,102,124 in revenues, operating profits of $885,474 and operating profit margins of 12.94%. Operating margins of Acquired Schools have the added burden of amortization expense of goodwill. Operating margins before amortization of goodwill was 13%. There were no Acquired Schools in 1994. In 1995, New Schools generated a $2,749,328 increase in revenues compared to 1994. This growth is from the combination of the maturing of the four preschools opened in 1994 and the first year impact of the seven preschools opened in 1995. Operating profit increased $521,332 in 1995 from 1994 despite a $57,355 loss for the seven 1995 new preschools developed. As the four new preschools opened in 1994 increased their operating profits by $578,687. Operating profit margins of New Schools increased to 14.9% in 1995 from 9% in 1994 mainly due to the significant improvement of the four 1994 New Schools which generated operating margins of 24.5% in 1995. Overall, in 1995, the Company's total revenues increased $9,782,866, operating profits increased $2,034,919 and operating profit margins increased to 18.7% from 1994 as explained above. General and administrative expenses decreased as a percent of revenues from 7.84% in 1994 to 7.7% in 1995. The percentage decrease is due to efficiencies resulting from growing the base of the Company. General and administrative expense increased $699,864 or 26%. This increase was related primarily to the increase in staff as a result of the acquisitions. During the twelve months ended December 31, 1995, the Company recorded a $500,000 litigation expense which was the result of the outcome of the lawsuit by former management. The United States Court of Appeals for the Third Circuit ruled in favor of Julie Sell and Michael Bright and against the Company. The Company paid the judgment plus attorney fees and interest in September 1995, totaling $580,000. In March 1996, the Company settled certain other proceedings against the Company brought by Douglas Carneal, its former Chairman, and made a payment of $170,000 to Mr. Carneal in connection with such settlement. The Company had sufficient reserves for the settlement, thus additional expense was not recorded. Operating income increased $1,035,055 or 31% from $3,314,888 for the year ended December 31, 1994 to $4,349,943 for the year ended December 31, 1995. The increase is a result primarily of increased school operating profit as detailed above. 17 Net cash provided by operating activities increased to $4,037,239 in 1996 compared to $2,897,905 in 1994 which was a 39% increase. The Company's EBITDA (earnings before interest, taxes, depreciation and amortization expenses) increased to $5,902,000 in 1995 from $4,188,000 in 1994 which was a 41% increase. EBITDA is not a measure of performance, under generally accepted accounting principles, however the Company and the investment community consider it a key indicator. Interest expense increased $616,592 or 50% from $1,222,971 for the year ended December 31, 1994 to $1,839,563 for the year ended December 31, 1995. The increase in interest is due to higher debt levels associated with the acquisitions which include $6,000,000 of subordinated debt at 14% and 8.5% mortgage loans on the Carefree properties. Other income and expense showed income of $125,724 for the year ended December 31, 1995 compared to expense of $106,960 for the year ended December 31, 1994, an increase of $232,694. The increase was related to (1) increased interest income on cash balances, (2) adjustments of rent accruals related to the cancellation of several leases in the Southeast and (3) decreased costs of Southeast centers which were divested. Pretax income increased $648,830 or 34% from $1,901,466 for the twelve months ended December 31, 1994 to $2,550,296 for the same period in 1995. The increase was due primarily to an increase in schools' operating profit as a result of the growth of the Company. In 1992, the Company changed its method of accounting for income taxes through the adoption of SFAS 109. In 1992 and 1993, a valuation allowance of $3,700,000 had been recorded relating to the net operating loss. In 1994, the Company reduced the valuation allowance and recognized $510,300 of the deferred tax asset. The 1994 estimate recorded was based on the analysis of the positive operating performance of the prior two years and projected taxable income of 1994 and 1995. In 1995, based on three years of positive net income and the analysis of projections for the years 1996 though 1999, the Company removed the remaining valuation allowance. Accordingly, such amounts were recorded as a credit to income tax expense. On August 31, 1995, the Company completed the refinancing of its existing principal debt facilities as described in Footnote 6 to the Company's Consolidated Financial Statements. As a result of the refinancing, the Company expensed the remaining unamortized loan origination fees related to the prior debt facilities as an extraordinary item, totaling $62,000 after the tax effect. Net income before preferred dividends increased $1,504,110 or 64% from $2,339,776 for the year ended December 31, 1994 to $3,843,886 for the year ended December 31, 1995. Dividends totaling $184,114 and $198,555 were paid on the Company's Series A Preferred Stock for the twelve months ended December 31, 1995 and 1994, respectively. During 1995, 543,000 shares of the Series A Preferred Stock were converted to 638,568 shares of common stock. Fully diluted earnings per share increased from $.46 per share (adjusted for the 1:4 reverse stock split) for the year ended December 31, 1994 to $.63 for the year ended December 31, 1995. Common shares and shares equivalents on a fully diluted base increased 1,092,119 or 22% from 18 5,037,002 for the year ended December 31, 1994 to 6,129,121 for the year ended December 31, 1995, as a result of raising equity capital and issuing stock in connection with acquisitions. LIQUIDITY AND CAPITAL RESOURCES Management is currently pursuing a three-pronged growth strategy to expand the Company which includes (1) internal growth of existing schools through the expansion of certain facilities, (2) new school development in both existing and new markets and (3) strategic acquisitions. During 1997, the Company intends to fund its growth strategy and its cash needs through (1) the $10,000,000 available balance of its revolving line of credit, (2) the use of site developers to build schools and lease them to the Company, (3) the $15,000,000 commitment from AEI, and (4) issuance of subordinated indebtedness or shares of common stock to sellers in acquisition transactions. If the need arises, the Company may also effect additional debt or equity financings. The Company anticipates that its existing available principal credit facilities, cash generated from operations, continued support of site developers to build and lease schools and funds from AEI will be sufficient to satisfy the working capital needs of the Company and the building of new schools in the near term future. The Company is continuing to look for quality acquisition candidates. Depending on the size of future acquisitions, the Company may need to seek funds from additional debt or equity placements. The Company has historically funded its growth and cash needs through bank borrowings, cash flow from operations and the proceeds of equity private placements. On March 5, 1996, the Company raised net proceeds of $11.6 million through the private placement of 1,000,000 shares of its Common Stock. The Company has used and is using such proceeds (1) to build new schools, (2) to make strategic acquisitions and (3) for general working capital purposes. In December 1996, the Company entered into a Multi-Site Sale Leaseback Agreement with AEI Fund Management, Inc. Under that agreement, AEI agreed to purchase from Nobel in sale/leaseback transactions up to $15,000,000 worth of parcels through the end of 1999 (subject in each case to AEI's standard credit, site and other due diligence review). The agreement also provides that AEI will provide Nobel with land acquisition and construction loan financing for each project. In November 1996, the Company entered into the Fourth Amendment of its Loan and Security Agreement with its senior lender, which increased the Company's line of credit from $7,500,000 to $10,000,000. In addition, the bank extended the maturity of the revolving line of credit one year to 1999 and both term loans to 2001. The bank also increased the flexibility of the Company's ability to open new schools and complete acquisitions without bank consent. At December 31, 1996, the Company's loans from its senior lender consisted of: a $7,500,000 term loan ("Term Loan I"), of which $6,450,000 was outstanding; a $6,000,000 term loan ("Term Loan I"), of which $5,320,000 was outstanding; and, a $10,000,000 line of credit, none of which was outstanding. The Term Loan I bears interest at 8-1/2% and requires quarterly principal payments as follows: $200,000 each quarter from December 1, 1995 through September 1, 1996; $250,000 each quarter from December 1, 1996 through September 1, 1999; and $300,000 each quarter from December 1, 1999 through September 1, 2001. The Term Loan II, which was extended on April 6, 1996, bears interest at 8% and requires quarterly principal payments as follows: $200,000 each 19 quarter through September 1, 1996; $280,000 each quarter from December 1, 1996 through September 1, 1999; $350,000 each quarter through June 1, 2001, with the remaining balance due on September 1, 2001. The revolving line of credit bears interest at a LIBOR based performance rate and matures September 1, 1999. As of December 30, 1996, $10.0 million was available to the Company under this line of credit. On March 20, 1997, the Company entered into the Fifth Amendment of its Loan and Security Agreement with its primary lender which, among other changes, increased the permitted number of new school construction projects on the Company's balance sheet to ten annually, and permitted the Company to own at any time seven tracts of land being held for school development with an aggregate $3,500,000 purchase price. This amendment gives the Company greater flexibility to pursue its growth strategy. The Company generally seeks to accomplish development of new schools without significant expenditures of cash by entering into arrangements with real estate developers to build new schools. The Company commits to enter into a long-term lease for a new school from the third party owner. The Company also has available $15,000,000 from AEI to build new schools through sale/leaseback transactions. In 1997, the Company plans to convert approximately six of its child care centers to Chesterbrook Academy schools. When a conversion takes place, the Company upgrades the curriculum and equipment, retrains the teachers and changes signage. The Company estimates the capitalized cost of a conversion to be $30,000 to $40,000 per location. The Company anticipates that cash generated from operations and its line of credit will be sufficient to fund the cost of the conversions. Additionally in 1997, the Company will begin to upgrade its management information system to link the schools to the corporate office as well as to other schools. Management anticipates that the process will take several years and has projected that it may spend approximately $750,000 on this project in 1997. Total cash and cash equivalents increased $1,536,995 from $3,714,560 at December 31, 1995 to $5,251,555 at December 31, 1996. The net increase was due primarily to (1) the raising of $11,600,000 through a private placement of equity and (2) cash flow from operations totaling $4,700,000. Cash used in Investing Activities is as follows: (1) acquisitions of various schools totaling $5,400,000, (2) approximately $8,000,000 for building new schools and acquisition of land parcels for future development, (3) $1,400,000 for the purchase of land and buildings related to school acquisitions, (4) $460,000 for conversion of centers to Chesterbrook Academy schools, and (5) $2,800,000 for capital expenditures. These were offset by proceeds from the sale of property and equipment of approximately $8,700,000. In addition, the Company's cash provided by Financing Activities was offset by scheduled principal payments of approximately $2,000,000 and the prepayment of approximately $3,500,000 of mortgages on sale of property. Net cash flow from operations increased $737,820 or 18% from $4,037,239 as of December 31, 1995 to $4,775,059 as of December 31, 1996. The increase is primarily the result of a decrease in net income of $1,380,994 offset by an increase in depreciation and amortization of $698,293 and the use of the deferred tax asset of $1,206,894. 20 The working capital deficit increased $519,943 from $831,042 at December 31, 1995 to $1,350,985 at December 31, 1996. The increase is a result of an increase in the Company's current portion of long term debt of $1,760,899 of which $500,000 is related to an acquisition and $1,260,899 is related to the Company refinancing the $6,000,000 14% subordinated debt with a second term loan with scheduled principal payments. The increase in debt was offset by an increase of current assets totaling $1,166,092. TRENDS Looking forward into 1997, the Company sees a major reform taking place in the education market. The Company plans to capitalize on the growing need for improved quality education. In 1996 and 1997, the Company built new elementary and middle schools which incur larger initial losses in the first year as compared to a preschool but offers higher margins in the later years. The Company plans to open five to six elementary schools in 1997, and continue such development on an accelerated pace. A significant portion of the Company's 1995 and 1996 growth was through acquisitions. In one of the acquisitions, located in Indianapolis, several of the schools are performing under expectations, which is creating losses in that region, and it is taking longer than anticipated to improve several of the schools. Management is evaluating several alternatives to return those schools to acceptable operating levels. In California, the Company has felt competitive pressures for teachers. The state has committed to lowering the student/teacher ratio in kindergarten, first, and second grades of its public schools. This commitment has created a higher demand for teachers as school districts seek to fill new positions. While several of the Company's teachers left the Company to work for public schools, the Company is taking aggressive steps to attract and maintain quality teachers. Enrollment was negatively impacted by these developments. INFLATION The Company has not been significantly affected by inflation. INSURANCE Companies involved in the education and care of children may not be able to obtain insurance for the total risks inherent in their operations. In particular, general liability coverage can have sublimits per claim for child abuse. Since 1995, the Company has been able to increase significantly the sublimit applicable to such coverage. There can be no assurance that in future years the Company will not again become subject to lower limits. CAPITAL EXPENDITURES In 1997, the Company plans to convert six of its existing Rocking Horse Child Care Centers to Chesterbrook Academy schools. Capital expenditure requirements for each conversion are estimated to be $30,000 to $35,000 per school, with total costs projected to be $210,000. Cash flows from operations and the line of credit are anticipated to be sufficient to cover the costs. In addition, the Company plans to spend approximately $3,500,000 on capital expenditures in the remaining schools. 21 The Company is continuously maintaining and upgrading the property and equipment of each school. During 1996, the Company spent $2,800,000 on capital expenditures which included upgrading playgrounds, purchasing new equipment and technology and books, making purchases relating to new school startup and improving the equipment and facilities of some of the acquisitions. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1997 the FASB issued SFAS No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997 (earlier application is not permitted). This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. 22 ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION TABLES The following tables contain compensation data for the Chief Executive Officer and each other executive officer of the Company whose salary and bonus in 1996 aggregated to at least $100,000.
SUMMARY COMPENSATION TABLE ----------------------------------------------------------------------------------- LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS ----------------------------------------------------------------------------------- OTHER SECURITIES ALL ANNUAL RESTRICTED UNDERLYING OTHER NAME AND COMPENS STOCK OPTIONS/ COMPENS PRINCIPAL POSITION YEAR SALARY BONUS/1/ ATION/2/ AWARDS SARS/3/ ATION/4/ - --------------------------------------------------------------------------------------------------------------------- A.J. CLEGG 1996 $201,465 $ 0 0 0 $3,332 Chairman, President and 1995 160,014 $96,000 0 45,000 2,052 Chief Executive Officer /5, 6/ 1994 57,851 39,978 0 0 0 JOHN R. FROCK 1996 $112,119 $ 0 $13,840 0 0 $1,587 Executive Vice President /7/ 1995 98,082 $33,750 13,549 /8/ /8/ 746 1994 32,539 14,055 14,950 0 0 0 D. SCOTT CLEGG 1996 $102,816 $ 0 0 30,000 $1,245 Executive Vice President 1995 82,087 $29,400 0 5,000 127 - Operations 1994 73,238 13,320 0 0 127 B. ROBIN EGLIN 1996 $101,018 $ 0 $13,841 0 0 $1,086 Vice President - Real 1995 72,322 $19,500 $10,380 0 3,000 $ 756 Estate Development /9/
(1) Bonuses are reported with respect to the fiscal year earned, although paid in the following year. No bonuses were paid to the named executives for 1996; however, in January 1997, these executives received additional stock option grants. (2) The amounts reported for John R. Frock consisted of (i) $7,800, $7,800 and $3,082 for automobile expenses in 1996, 1995 and 1994, respectively, and (ii) $5,760, $5,511 and $895 for health insurance in 1996, 1995 and 1994, respectively. The amounts reported for B. Robin Eglin consisted of (i) $7,800 and $5,850, for automobile expenses in 1996 and 1995, respectively, and (ii) $6,041 and $4,530 for health insurance in 1996 and 1995, respectively. While other named executives enjoy certain similar perquisites, for fiscal year 1996, perquisites and other personal benefits for such executive officers did not exceed the lesser of $50,000 or 10% of any such executive officer's salary and bonus and accordingly have been omitted from the table as permitted by the rules of the Securities and Exchange Commission. (3) Options granted to A.J. Clegg were granted on December 18, 1995; options granted to D. Scott Clegg were granted on November 18, 1995 and June 21, 1996, respectively; options granted to B. Robin Eglin were granted on December 18, 1995. All such options 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. 26 (4) Other compensation in 1996: for A.J. Clegg consisted of $2,290 for life insurance and $1,042 for employer matching 401(k) plan contributions; for John R. Frock consisted of $984 for life insurance and $603 for employer matching 401(k) plan contributions; for D. Scott Clegg consisted $365 for life insurance and $880 for employer matching 401(k) plan contributions; and for B. Robin Eglin consisted of $540 for life insurance and $546 for employer matching 401(k) plan contributions. (5) In August 1994, A.J. Clegg was hired as an employee of the Company in the position of Chairman and Chief Executive Officer. Prior to this time, Mr. Clegg was the Chairman and Chief Executive Officer of JBS Investment Banking, Ltd. ("JBS"). On May 29, 1992, pursuant to a private placement offering, the Company entered into a three year Administrative Services Agreement with JBS, pursuant to which JBS provided management and advisory services to the Company and received certain management fees. The fixed fee portion of this agreement was terminated in August 1994 when Mr. Clegg joined the Company as a full time employee. During 1995 and 1994, respectively, the Company paid fees to JBS approved by the Board totaling $8,289 and $200,374 for the services of JBS personnel, which included A.J. Clegg, John R. Frock and four other persons. Mr. Clegg joined the Company as a full time employee on August 1, 1994. (6) On March 1, 1995, the Board of Directors approved an increase in Mr. Clegg's base salary of $20,000, from $160,014 to $180,014. Mr. Clegg voluntarily declined taking such increase in 1995. (7) John R. Frock joined the Company as a full time employee on August 1, 1994. (8) The Company made a Restricted Stock Award to Mr. Frock under the 1995 Stock Incentive Plan of 25,000 shares of Common Stock on March 19, 1996. However, these shares were never issued, and the Company and Mr. Frock subsequently agreed to the cancellation of such award. Further, on December 18, 1995, the Company granted Mr. Frock an option to purchase 25,000 shares of common stock, which option was canceled in March 1996. (9) B. Robin Eglin joined the Company in April 1995. 27 OPTIONS/STOCK APPRECIATION RIGHTS GRANTED IN 1996
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM INDIVIDUAL GRANTS (10 YRS.)/1/ ---------------------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/ UNDERLYING SARS GRANTED EXERCISE AT 0% AT 5% AT 10% OPTION/ TO ALL OR BASE ANNUAL ANNUAL ANNUAL NAME OF SARS EMPLOYEES IN PRICE PER EXPIRATION GROWTH GROWTH GROWTH EXECUTIVE GRANTED/ 2/ 1996 /3/ SHARE DATE RATE RATE RATE - -------------------------------------------------------------------------------------------------------------- A. J. Clegg 0 0.00% n/a n/a $0 $ 0 $ 0 John R. Frock 0 0.00% n/a n/a $0 $ 0 $ 0 D. Scott Clegg 30,000 51.72% $14.25 6/21/06 $0 $268,853 $681,325 B. Robin Eglin 0 0.00% n/a n/a $0 $ 0 $ 0
- --------- (1) 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 amounts required to be paid as income taxes under the Internal Revenue Code of 1986, as amended, and any applicable state laws, or option provisions providing for termination of an option following termination of employment, nontransferability, or vesting over periods of up to three years. These amounts are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth of the shares of the Company's Common Stock. (2) Options granted D. Scott Clegg were granted on June 21, 1996 upon his promotion to Executive Vice President - Operations and 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. (3) During 1996, the Company granted to employees options to purchase an aggregate of 58,000 shares of Common Stock.
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS EXERCISED IN 1996 AND VALUE OF OPTIONS AT DECEMBER 31, 1996 NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT EXERCISED IN 1996 1996 DECEMBER 31, 1996 -------------------------------------------------------------------------------------- NAME OF EXECUTIVE SHARES ACQUIRED ON VALUE EXERCISE REALIZED EXERCISABLE UNEXERCISEABLE EXERCISABLE UNEXERCISEABLE - ------------------------------------------------------------------------------------------------------------------ A. J. Clegg 0 0 15,000 30,000 $ 0 $0 John R. Frock 0 0 0 0 $ 0 $0 D. Scott Clegg 0 0 7,917 33,333 $39,075 $0 B. Robin Eglin 0 0 1,000 2,000 $ 0 $0 ---------------------------------------------------------------------------------------
None of the above named executive officers held any stock appreciation rights at December 31, 1996. 28 COMPENSATION OF DIRECTORS The Company pays director (other than A. J. Clegg) an annual retainer of $6,000 which is paid quarterly and pays members of committees of the Board (other than A. J. Clegg) $750 per meeting for each committee meeting attended. (John Frock's compensation reported in the Summary Compensation Table does not include such fees.) The Company's 1995 Stock Incentive Plan provides that as of March 31, 1996 and each subsequent March 31 that the Plan is in effect, each individual serving as a director of the Company, who is not an officer or employee thereof, will be granted a nonqualified stock option to purchase 500 shares of Common Stock if the individual served as a director for the entire previous fiscal year and the Company's pre-tax income for such fiscal year increased at least 20% from the prior fiscal year. Pursuant to the Plan, each of Messrs. Chambers, Havens, Jones and Martinson and Ms. Katz received an option to purchase 500 shares of Common Stock on March 31, 1996, and each of Messrs. Chambers, Havens, Jones, Martinson and Monaco and Ms. Katz received an option to purchase 500 shares of Common Stock on March 31, 1997. EXECUTIVE SEVERANCE PLAN In March 1997, the Company adopted an Executive Severance Pay Plan (the "Plan"). The Plan covers each of the four executive officers named in the table on page 26, as well as four other officers and key executives of the Company, and persons who succeed to the positions held by such executives 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 Plan, if the employment of an Eligible Executive with the Company terminates following a Change of Control (as defined in the Plan) of the Company, under specified circumstances, the Eligible Executive will be entitled to receive the severance benefit specified in the 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. AGREEMENTS WITH EXECUTIVE OFFICER The Company and John R. Frock are parties to a Noncompete Agreement which provides that the Company will make a payment to Mr. Frock 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 amount of such payment will equal $85,000 if the termination date is prior to December 1, 1997, $170,000 if the termination date is on or after December 1, 1997 and on or before November 30, 1998, and $255,000 if the termination date is after November 30, 1998. 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 of Control (as defined in the agreement), within 20 days following the date of termination, the Company must make a severance payment to Mr. Frock. The amount of such payment would be calculated in the same manner as a payment under the Noncompete Agreement. 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. 29 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 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. On January 21, 1997, the Company filed a Report on Form 8-K reporting the closing of its acquisition of all of the outstanding common stock of five corporations under common control which owned six preschools operating under the name Another Generation. (C) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K. Exhibit Number Description of Exhibit 2.1 Asset Purchase Agreement dated as of February 2, 1996 by and among Stony Point Learning Center, Inc., School's Out, Inc., Cascades Childcare, Inc. and Pump Road Child Care, Inc. and Linda Nash and Stephen Nash and the Registrant. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated February 16, 1996, date of earliest event reported February 2, 1996, and incorporated herein by reference.) 2.2 Asset Purchase Agreement dated as of February 2, 1996 by and among Loudoun Children's Center, Inc. and Linda Nash and Stephen Nash and the Registrant. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated February 16, 1996, date of earliest event reported February 2, 1996, and incorporated herein by reference.) 3.1 Registrant's Certificate of Incorporation, as amended and restated. (Filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 34 3.2 Registrant's Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the Registrant's Current Report on Form 8-K filed on June 14, 1993 and incorporated herein by reference.) 3.3 Registrant's Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 3.4 Registrant's Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security Agreement") among the Registrant, certain subsidiaries of the Registrant and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment and Modification dated July 2, 1996 to the Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference.) 4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and Security Agreement. 4.5 Term Note dated August 30, 1995 in the principal sum of $7,500,000 payable to the order of Summit Bank. (Filed as Exhibit 4G to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.6 Line Note dated August 30, 1995 in the principal sum of $7,500,000 payable to the order of Summit Bank. (Filed as Exhibit 4H to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.7 New Term Note dated November 1, 1996 in the principal sum of $6,000,000 payable to the order of Summit Bank. 35 The Registrant has omitted certain instruments defining the rights of holders of long-term debt in cases where the indebtedness evidenced by such instruments does not exceed 10% of the Registrant's total assets. The Registrant agrees to furnish a copy of each of such instruments to the Securities and Exchange Commission upon request. 10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended. (Filed as Exhibit 10(1) to the Registrant's Registration Statement on Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987 (the "Form S-1") and incorporated herein by reference.) 10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March 31, 1988 and incorporated herein by reference.) 10.3 1995 Stock Incentive Plan of the Registrant. (Filed as Exhibit 4.6 to the Registrant's Registration Statement on Form S-8 (Registration Statement No. 33-64701) filed on December 1, 1995 and incorporated herein by reference.) 10.4 Stock Purchase Agreement between the Registrant and various investors dated April 2, 1990. (Filed as Exhibit 10(q) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.) 10.5 Stock and Warrant Purchase Agreement between the Registrant and various investors, dated April 13, 1992. (Filed as Exhibit 10(r) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.) 10.6 Registration Rights Agreement dated May 28, 1992 among the Registrant, JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd. (Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.7 Saltzman Partners' Agreement dated May 28, 1992 among the Registrant, JBS Investment Banking, Ltd., and Saltzman Partners. (Filed as Exhibit 4(b) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.8 Warrant Subscription Agreement dated May 28, 1992 between Registrant and Pennsylvania Merchant Group Ltd. (Filed as Exhibit 4(c) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.9 Stock Purchase Agreement dated May 28, 1992 between Registrant and a limited number of accredited investors at $0.50 per share totaling 3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 36 10.10 Shareholder's Agreement dated May 28, 1992 between Registrant and JBS Investment Banking, Ltd. (Filed as Exhibit 2(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.) 10.11 Amendment No. 1 to Shareholders' Agreement dated May 28, 1992 by and among JBS Investment Banking, Ltd., Nobel and Saltzman Partners. (Filed as Exhibit 4(ag) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 10.12 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.) 10.13 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.) 10.14 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.) 10.15 Investment Agreement dated as of August 30, 1995 by and among the Registrant, certain subsidiaries of the Registrant and Allied Capital Corporation and its affiliated funds. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 10.16 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied Capital Corporation to purchase up to 92,173 shares (pre-reverse stock split) of the Common Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) Exhibit 10.16 is one in a series of four Common Stock Purchase Warrants issued pursuant to the Investment Agreement dated as of August 30, 1995 that are identical except for the Warrant No., the original holder thereof and the number of shares of Common Stock of the Registrant for which the Warrant may be exercised, which are as follows: Number of Shares (pre-reverse stock split) of Common Stock Warrant No. Holder (subject to adjustment) - ------------- -------------------------------- ----------------------- 2 Allied Capital Corporation II 142,932 3 Allied Investment Corporation 92,713 37 4 Allied Investment Corporation II 50,220 10.17 Registration Rights Agreement dated August 30, 1995 by and among the Registrant and Allied Capital and its affiliated funds, and amendment thereto dated February 23, 1996. (Filed as Exhibit 4D to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 10.18 Amendment dated February 23, 1996 to Registration Rights Agreement dated August 30, 1995 by and among the Registrant and Allied Capital and its affiliated funds. (Filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.) 10.19 Form of subscription agreement entered into between Registrant and certain customers of Gilder, Gagnon, Howe & Co. relating to the offer and sale by the Company of 1,000,000 shares of its common stock. (Filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.) 10.20 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan Description, Issued February, 1997. 10.21 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z. Presseisen. 10.22 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. 10.23 Contingent Severance Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. 11 Statement re-computation of per share earnings dated year ended December 31, 1996, and made a part hereof. 21 List of subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule Certain schedules (and similar attachments) to Exhibits 2.1, 2.2, 4.1 and 4.2 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request. (d) FINANCIAL STATEMENT SCHEDULES. None. 38 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. 39 SIGNATURES Pursuant to the requirements of Section 13 or Amendment to 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to the report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 10, 1997 NOBEL EDUCATION DYNAMICS, INC. By: /s/ A. J. Clegg -------------------- A. J. Clegg Chairman of the Board, President and Chief Executive Officer 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors of Nobel Education Dynamics, Inc.: We have audited the accompanying consolidated financial statements of Nobel Education Dynamics, Inc. and subsidiaries as listed in Item 14 (a) of this Form 10-K. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nobel Education Dynamics, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 10, 1997, except for Note 16 as to which the date is March 20, 1997 F-1 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, ASSETS 1996 1995 - ------ ------------- ------------- Cash and cash equivalents $ 5,251,555 $ 3,714,560 Accounts receivable, less allowance for doubtful accounts of $103,009 in 1996 and 1995 779,075 727,097 Other accounts receivable - 573,237 Prepaid rent 734,463 609,401 Prepaid insurance and other 622,106 613,784 Deferred taxes 890,934 873,962 ----------- ----------- Total Current Assets 8,278,133 7,112,041 ----------- ----------- Property and equipment, at cost 26,166,293 21,220,004 Accumulated depreciation (6,843,183) (5,355,699) ----------- ----------- 19,323,110 15,864,305 Property and equipment held for sale (Southeast) 1,111,412 1,307,497 Note receivable 425,000 425,000 Cost in excess of net assets acquired 25,601,028 17,273,626 Deposits and other assets 1,977,951 1,837,871 Deferred taxes 116,854 1,117,000 ----------- ----------- Total Assets $56,833,488 $44,937,340 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current portion of long-term obligations $ 2,847,308 $ 1,086,409 Current portion of subordinated debt 529,348 285,253 Current portion of capital lease obligations 71,456 49,897 Accounts payable and other current liabilities 4,464,957 4,608,549 Unearned income 1,716,049 1,709,670 Escrow Payable - 203,305 ----------- ----------- Total Current Liabilities 9,629,118 7,943,083 ----------- ----------- Revolving Line of Credit (unused portion $10,000,000) - - Long-term obligations 10,807,498 11,392,590 Capital lease obligations 290,095 323,199 Deferred gain on sale/leaseback 47,322 55,312 Minority interest in consolidated subsidiary 318,359 223,881 Long-term subordinated debt 3,417,656 8,878,605 ----------- ----------- Total Liabilities 24,510,048 28,816,670 ----------- ----------- Commitments and Contingencies (Notes 2, 5, 8, and 15) Stockholders' Equity: Preferred stock, $.001 par value; 10,000,000 shares authorized, issued and outstanding 4,697,542 in 1996 and 5,505,150 in 1995 ($5,633,712 and $6,441,320 aggregate liquidation preference at December 31, 1996 and 1995, respectively) 4,697 5,505 Common stock, $.001 par value, 50,000,000 shares authorized, issued and outstanding 5,831,055 in 1996 and 4,095,094 in 1995 5,831 4,095 Additional paid-in capital 37,665,713 21,818,344 Common Stock issuable (Educo), 312,500 shares - 2,000,000 Accumulated deficit (5,352,801) (7,707,274) ----------- ----------- Total Stockholders' Equity 32,323,440 16,120,670 ----------- ----------- Total Liabilities and Stockholders' Equity $56,833,488 $44,937,340 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-2 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Revenues $58,909,388 $44,154,367 $34,371,501 ----------- ----------- ----------- Operating expenses: Personnel costs 26,777,022 19,664,455 15,285,330 Center operating costs 8,755,337 6,640,288 5,482,016 Insurance, taxes, rent and other 11,335,866 8,091,531 6,329,865 Depreciation and amortization 2,210,504 1,512,210 1,063,326 ----------- ----------- ----------- 49,078,729 35,908,484 28,160,537 ----------- ----------- ----------- School operating profit 9,830,659 8,245,883 6,210,964 ----------- ----------- ----------- General and administrative expenses 4,189,750 3,395,940 2,696,076 Litigation claim - 500,000 200,000 ----------- ----------- ----------- Operating income 5,640,909 4,349,943 3,314,888 ----------- ----------- ----------- Interest expense 2,004,392 1,839,563 1,222,971 Other (income) expense (482,647) (125,724) 106,960 Minority interest in income of consolidated subsidiary 94,479 85,808 83,491 ----------- ----------- ----------- Income before income taxes 4,024,685 2,550,296 1,901,466 Income tax (benefit) expense 1,561,793 (1,355,590) (438,300) ----------- ----------- ----------- Net income before extraordinary item 2,462,892 3,905,886 2,339,766 ----------- ----------- ----------- Extraordinary loss on early extinguishment of debt, net of income tax benefit - 62,000 - ----------- ----------- ----------- Net income 2,462,892 3,843,886 2,339,766 Preferred stock dividends 108,419 184,114 198,555 ----------- ----------- ----------- Net income available to common stockholders $ 2,354,473 $ 3,659,772 $ 2,141,211 =========== =========== =========== Primary earnings per share Net income before extraordinary item $ 0 .34 $ 0.69 $ 0.53 Extraordinary item - (0.01) - ----------- ----------- ----------- Net income $ 0.34 $ 0.68 $ 0.53 =========== =========== =========== Fully diluted earnings per share Net income before extraordinary item $ 0.34 $ 0.64 $ 0.46 Extraordinary item - (0.01) - ----------- ----------- ----------- Net income $ 0.34 $ 0.63 $ 0.46 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Additional Common Preferred Stock Common Stock Paid-In Stock Accumulated Shares Amount Shares Amount Capital Issuable Deficit Total ---------- ------------ ------------ ---------- ------------ ------------ ------------- ------------ Balance as of January 1, 1994 2,484,320 $ 2,484 15,418,063 $ 15,418 $17,222,137 - $(13,508,257) $ 3,731,782 ========= =========== =========== ======== =========== =========== ============ =========== Stock Options Exercised - - 27,000 27 25,285 - - 25,312 Issuance of Preferred Stock less transaction costs 2,500,000 2,500 - - 2,397,500 - - 2,400,000 Preferred Dividends - - - - - - (198,555) (198,555) Net Income - - - - - - 2,339,766 2,339,766 --------- ----------- ----------- -------- ----------- ----------- ------------ ----------- December 31, 1994 4,984,320 $ 4,984 15,445,063 $ 15,445 $19,644,922 $ - $(11,367,046) $ 8,298,305 ========= =========== =========== ======== =========== =========== ============ =========== Stock Options Exercised - - 150,000 150 112,443 - - 112,593 Warrants exercised - - 100,000 100 49,900 - - 50,000 Common shares issuable - - - - - $ 2,000,000 - 2,000,000 Issuance of Preferred Stock 1,063,830 1,064 - - $ 1,998,936 - - 2,000,000 Conversion of Preferred Stock (543,000) (543) 638,568 639 (96) - - - One-for-four reverse stock split - - (12,238,537) (12,239) 12,239 - - - Preferred Dividends - - - - - - (184,114) (184,114) Net Income - - - - - - 3,843,886 3,843,886 --------- ----------- ----------- -------- ----------- ----------- ------------- ----------- December 31, 1995 5,505,150 $ 5,505 4,095,094 $ 4,095 $21,818,344 $ 2,000,000 $ (7,707,274) $16,120,670 ========= =========== =========== ======== =========== =========== ============ =========== Stock Options and Warrants Exercised and - - 63,750 64 500,325 - - 500,389 related tax benefit Common Shares Issuable - - 312,500 313 1,999,687 (2,000,000) - - Common Shares Issued - - 122,270 122 1,739,878 - - 1,740,000 Private Placement of Common Stock, net of transaction costs - - 1,000,000 1,000 11,606,908 - - 11,607,908 Conversion of Preferred Stock (807,608) (808) 237,441 237 571 - - - Preferred Dividend - - - - - - (108,419) (108,419) Net Income - - - - - - 2,462,892 2,462,892 --------- ----------- ----------- -------- ----------- ----------- ------------ ----------- December 31, 1996 4,697,542 $ 4,697 5,831,055 $ 5,831 $37,665,713 - ($5,352,801) $32,323,440 ========= =========== =========== ======== =========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------------- 1996 1995 1994 ---- ---- ---- Cash Flows from Operating Activities: Net Income $ 2,462,892 $ 3,843,886 $ 2,339,766 ------------ ------------ ----------- Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 2,137,110 1,512,210 1,063,326 Depreciation related to non-operating centers 73,394 82,007 90,646 Provision for losses on accounts receivable 87,306 96,867 119,212 Provision for deferred taxes 1,206,894 - - Minority interest in income 94,479 85,808 83,491 Early extinguishment of debt - 88,571 - Reversal of tax valuation allowance - (1,480,672) (510,300) Deferred gain amortization (7,990) (7,991) (7,991) Changes in Assets and Liabilities Net of Acquisitions (increase) decrease in: Accounts receivable (139,286) (128,245) (331,452) Prepaid assets (74,206) (187,848) 12,817 Other assets and liabilities (243,385) (175,813) (69,585) Unearned income (133,129) 46,329 (19,040) Accounts payable and accrued expenses (689,020) 262,130 127,015 ------------ ------------ ----------- Total Adjustments 2,312,167 193,353 558,139 Net Cash Provided by Operating Activities 4,775,059 4,037,239 2,897,905 ------------ ------------ ----------- Cash Flows from Investing Activities: Capital expenditures (12,775,541) (2,051,664) (1,372,384) Proceeds from sale of property and equipment 8,636,151 251,225 463,760 Payment for acquisitions net of cash acquired (4,968,528) (9,101,443) (210,161) Other - (146,315) - ------------ ------------ ------------ Net Cash Used in Investing Activities (9,107,918) (11,048,197) (1,118,785) ------------ ------------ ----------- Cash Flows from Financing Activities: Proceeds from term loan 6,000,000 7,500,000 - Proceeds from subordinated debt - 6,000,000 - Proceeds from real estate mortgage - 3,567,300 - Proceeds from other debt 1,500,000 3,671,697 - Transaction costs related to issuance of debt and stock - (1,090,771) (100,000) Proceeds from issuance of common stock 11,607,908 162,593 25,312 Dividends paid to minority stockholders - - (230,726) Repayment of long-term debt (7,022,874) (11,699,432) (4,025,322) Repayment of capital lease obligation (49,897) (55,641) (62,484) Proceeds from issuance of preferred stock - 2,000,000 2,500,000 Dividends paid to preferred stockholders (108,419) (184,114) (198,555) Repayment of subordinated debt (6,333,533) - - Proceeds from exercise of stock options 276,669 - - ------------ ------------ ----------- Net Cash Provided by (Used in) Financing Activities 5,869,854 9,871,632 (2,091,775) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,536,995 2,860,674 (312,655) Cash and cash equivalents at beginning of year 3,714,560 853,886 1,166,541 ------------ ------------ ----------- Cash and cash $5,251,555 $ 3,714,560 $ 853,886 equivalents at ========== =========== =========== end of year
The accompanying notes are an integral part of these consolidated financial statements. F-5 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES SUPPLEMENTAL SCHEDULES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------- 1996 1995 1994 ------------ ------------ ---------- Supplemental Disclosures of Cash Flow Information Cash paid during year for: Interest $ 1,973,531 $1,823,882 $1,228,431 ----------- ---------- ----------- Income taxes 434,498 137,423 64,721 ----------- ----------- ---------- Noncash financing and investing activities Tax benefit related to exercise of stock options and warrants 223,720 - - Acquisitions Fair value of tangible assets acquired 842,016 6,847,961 190,000 Cost in excess of net assets acquired 8,978,398 8,727,293 - Cash acquired (573,237) (29,630) - Liabilities assumed (684,936) (934,181) - Notes issued (1,853,713) (3,310,000) - Escrow held - (200,000) - Common shares issued (1,740,000) (2,000,000) - ----------- ----------- ---------- Total cash paid $ 4,968,528 $ 9,101,443 $ 190,000 =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies and Company Background: ----------------------------------------------------------------- Nobel Education Dynamics, Inc. (the "Company") was founded in 1982 and commenced operations in 1984. The Company operates private pre-schools, elementary schools and middle schools located primarily in California, the Mid-Atlantic states, Illinois, Indiana, Maine, Washington and Florida. Principles of Consolidation and Basis of Presentation: - ----------------------------------------------------- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and majority-owned subsidiary. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year: - ----------- The Company's fiscal year ends the last Friday in December. There were 52 weeks in fiscal 1996 and 1995 and 53 weeks in fiscal 1994. Recognition of Revenues and Preopening Expenses: - ----------------------------------------------- Revenue is recognized as the services are performed. Expenses associated with opening new centers are charged to expense as incurred. 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. At December 31, 1996, $250,000 in cash was restricted (held in escrow) relating to the Company's January 1997 acquisition. 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. Cost in Excess of Net Assets Acquired: - ------------------------------------- In 1996 the Company adopted a policy to amortize goodwill related to acquisitions over 30 years for preschools and 40 years for elementary schools. Prior to June 1996, all acquisition-related goodwill was amortized over 40 years. Management has evaluated the life cycles of similar schools and determined that these lives are consistent with an historical range for private elementary education, including schools of the Company's subsidiaries Merryhill Schools, Inc. and Educo, Inc., both of which have been operating over 30 years. In evaluating potential acquisitions of child care centers, management considers not only the current child care operations but also the outlook for these centers as elementary schools. The excess of purchase price over net assets acquired is amortized on a straight-line basis. Amortization expense amounted to $650,996, $341,662 and $253,514 for the years ended December 31, 1996, 1995 and 1994, respectively. Accumulated amortization at December 31, 1996 and 1995 was $2,289,599 and $1,638,603, respectively. Effective January 1, 1996, the Company adopted the Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of." The provisions of SFAS No. 121 require the Company to review its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss is recognized in the income statement and certain disclosures regarding the impairment are made in the financial statements. The adoption of SFAS No. 121 had no material effect on the Company's 1996 consolidated financial statements. (See Note 5 related to Property and Equipment Held for Sale.) Income Taxes: - ------------ The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A F-8 valuation allowance is recorded based on the uncertainty regarding the ultimate realizability of deferred tax assets. Reverse Stock Split: - -------------------- On September 22, 1995, the stockholders approved a one-for-four reverse stock split of the Company's common stock. The Company effected the reverse split on September 28, 1995. For every four shares of common stock, each stockholder received one share of common stock. All historical share and per share amounts have been restated to reflect retroactively the reverse stock split (except for the consolidated statement of stockholders' equity). Earnings Per Share: - ------------------ Earnings per share are based on the weighted average number of shares outstanding and common stock equivalents during the period. On a primary and fully-diluted basis, shares outstanding are adjusted to assume conversion of the non-interest bearing convertible preferred stock from the date of issue. The number of shares used for computing primary and fully diluted earnings per share after the impact of the 4:1 reverse split was as follows:
1996 1995 1994 --------- --------- --------- Primary 6,961,079 5,398,731 4,019,675 Fully diluted 7,262,783 6,129,121 5,037,002
Stock-Based Compensation - ------------------------ Compensation costs attributable to stock option and similar plans are recognized based on any difference between the quoted market price of the stock on the date of the grant over the amount the employee is required to pay to acquire the stock (the intrinsic value method under Accounting Principles Board Opinion 25). Such amount, if any, is accrued over the related vesting period, as appropriate. In October 1995, the FASB (Financial Accounting Standards Board) issued SFAS No. 123, "Accounting for Stock-Based Compensation," effective for fiscal years beginning after December 15, 1995. The Statement encourages employers to account for stock compensation awards based on their fair value on their date of grant. Entities may choose not to apply the new accounting method but, instead, disclose in the notes to the financial statements the pro forma effects on net income and earnings per share as if the new method had been applied. The Company adopted the disclosure-only approach of the Standard effective January 1, 1996. F-9 Concentrations of Credit Risk - ----------------------------- The Company provides its services to the parents and guardians of the children attending the schools. The Company does not extend credit for an extended period of time, nor does it require collateral. Exposure to losses on receivables is principally dependent on each person's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Recently Issued Accounting Standard - ----------------------------------- In March 1997 the FASB issued SFAS No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997 (earlier application is not permitted). This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. Reclassifications: - ----------------- Certain prior year amounts have been reclassified in the current year for comparative purposes. (2) Acquisitions: ------------ During the twelve months ended December 31, 1996 and 1995 the Company completed various acquisitions, all of which are accounted for using the purchase method, which are described below. The results of operations for all acquisitions are included in in the Consolidated Statement of Income beginning in the year acquired. 1996 Acquisitions: - ----------------- Acquisition of Virginia Preschools: - ---------------------------------- Pursuant to an acquisition agreement dated February 2, 1996, the Company acquired all the assets of four Virginia corporations, each of which operates a preschool in Virginia. The purchase price consisted of (i) $3,200,000 in cash, (ii) a five-year note in the principal amount of $336,680 bearing interest at the rate of 7% per annum and (iii) a cash earn-out payment of $25,000 paid in October 1996. The Company also entered into a five year non-compete agreement that requires monthly payments of $1,667 through February 2001. Also on February 2, 1996, the Company acquired the assets of a fifth Virginia preschool for 96,192 shares of the Company's common stock (valued at $1,500,000 for financial statement purposes), and a cash earn-out payment of $12,500 paid in October 1996. As a result of the combined transactions, the Company recorded goodwill in the amount of approximately $5,108,000, which will be amortized over forty years. Acquisition of MacGregor Creative Schools, Oak Ridge Private School and - ----------------------------------------------------------------------- Evergreen Academy: - ----------------- In the fourth quarter of 1996, the Company completed the acquisition of stock or assets of three companies. On November 11, 1996, the Company acquired the assets of MacGregor Creative Schools located in Cary, North Carolina. MacGregor Creative Schools consist of two preschools with F-10 aggregate revenues of $2.6 million and capacity of 408 children. The Company recorded goodwill of approximately $2,459,000 as a result of this transaction, to be amortized over thirty years. On December 27, 1996 the Company acquired the assets of Oak Ridge Private School, an elementary school located in Coto de Caza, California. Oak Ridge Private School has revenues of approximately $500,000 and potential licensed capacity of 198 children. The Company recorded goodwill of approximately $280,000 as a result of this transaction, to be amortized over 35 years. On December 23, 1996, the Company acquired the stock of Montessori House, Inc., which owns Evergreen Academy located in Seattle, Washington. Evergreen Academy consists of one elementary/middle school and one preschool with aggregate revenues of $2.3 million and licensed capacity of 400 children. A portion of the purchase price for this transaction was paid on January 2, 1997. The Company recorded goodwill of approximately $950,000 as a result of this transaction, to be amortized over 35 years. The purchase prices of these three transactions totaled approximately $2.560 million in cash, $780,000 in subordinated notes, $240,000 in stock (26,078 shares) and approximately $300,000 in assumed liabilities. 1995 Acquisitions: - ----------------- Acquisition of Educo, Inc.: - -------------------------- On September 1, 1995 the Company acquired all of the outstanding shares of common stock of Educo, Inc. Educo, Inc. is an operation of 10 schools and preschools located in Maryland, Virginia, North Carolina and South Carolina. The purchase price for the stock consisted of (i) $2,000,000 in cash and (ii) an agreement to issue and deliver to the former stockholders of Educo, Inc. ("Educo Stockholders") an aggregate of 312,500 shares of the Company's Common Stock on or after January 15, 1996. In connection with the acquisition of Educo, Inc., the Company guaranteed the value of the 312,500 shares issued to the Educo Stockholders at the fair market value of the shares ($6.40 per share) as of the date of execution of the purchase agreement provided certain conditions are met. Specifically, if an Educo Stockholder sells shares in a bona fide brokers' transaction during the period (18 months) that the Company keeps effective a registration statement with respect to such shares, the Company would pay the difference between guaranteed value and, if less, the actual sales prices (excluding commissions and fees); provided that the Educo Stockholders do not sell in the aggregate more than 17,500 shares during any 30 days period during such period. In conjunction with the acquisition, the Company entered into an agreement with the former manager of Educo (one of the Educo stockholders) to provide consulting services over a period of 10 years. Under the agreement, the Company will pay annual fees in the amount of $58,224. Acquisition of Corydon Schools: - ------------------------------ On August 25, 1995, the Company acquired from Corydon Day Care Center, Inc. ("Corydon"), nine of its preschools located in the Indianapolis, Indiana area (the "Centers") and substantially all of the assets (other than real estate) used by Corydon in the business of operating the Centers. The Company also acquired a leasehold interest in the buildings and the land upon which the Centers are located. The purchase price for the business and assets acquired from Corydon consisted of (i) $1,050,000 in cash and (ii) a subordinated promissory note in the principal amount of $1,125,000 collateralized by a security interest in certain assets located at the centers. F-11 Acquisition of Carefree Learning Centers: - ---------------------------------------- On March 10, 1995, the Company acquired from Carefree Learning Centers, Inc. ("Carefree"), a subsidiary of Medical Service Association of Pennsylvania, doing business as Pennsylvania Blue Shield ("Pennsylvania Blue Shield"), Carefree's child day care business and operations and substantially all of its other assets, other than real estate, used in the operation of Carefree's business. The child care business purchased from Carefree consists of eight preschools in operation at the time of closing, and three preschools under construction or in the pre-development stage at such time, all of which are located in Pennsylvania. The purchase price for the business and assets acquired from Carefree consisted of (i) $500,000 in cash, (ii) a subordinated promissory note of the Company in the principal amount of approximately $1,585,000 and (iii) the assumption of certain other liabilities of Carefree in the amount of approximately $365,000. Concurrently with the acquisition of Carefree's business, the Company entered into an agreement of sale with Pennsylvania Blue Shield, pursuant to which the Company acquired in May 1995 (i) the land and buildings on which four of the learning centers currently in operation and acquired from Carefree are located, and (ii) the land and buildings at which one of the child day care centers acquired from Carefree was at the time under construction. At the closing, the purchase price paid for this real estate consisted of (i) approximately $1,500,000 in cash, (ii) subordinated promissory notes of the Company in the aggregate principal amount of approximately $600,000 and (iii) the assumption by the Company of certain other liabilities. The real estate was subsequently sold in March 1996 for approximately book value. In connection with this sale, the Company is leasing those properties back from the various buyers. No gain or loss was recognized on this sale/leaseback transaction. All future commitments have been included in Note 8. 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 1996 and 1995 all occurred at the beginning of 1995. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of 1995, 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.
(Unaudited) 1996 1995 ------------ ----------- Revenues $64,293,108 $59,196,547 Net Income 2,770,635 $ 3,867,574 Earning per share Primary $ 0.38 $ 0.64 Fully Diluted $ 0.38 $ 0.60
F-12 1995 proforma results include the $2,105,400 tax benefit from the reversal of the valuation allowance in accordance FAS 109. (3) Cash Equivalents: ---------------- The Company has an agreement with its primary bank that allows the bank to act as the Company's principal in making daily investments with available funds in excess of a selected minimum account balance. This investment amounted to $3,040,405 and $3,470,873 at December 31, 1996 and 1995, respectively. In 1996 and 1995, the Company's funds were invested in money market accounts which exceed federally insured limits. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents as such deposits are maintained in high quality financial institutions. (4) Property and Equipment: ---------------------- The balances of major property and equipment classes, excluding property and equipment held for sale in conjunction with the Southeast restructuring, were as follows:
December 31, -------------------------- 1996 1995 ------------ ------------ Land $ 4,105,494 $ 2,675,423 Buildings 8,935,791 8,986,500 Assets under capital lease obligations 912,781 912,781 Leasehold improvements 4,477,198 2,382,420 Furniture and equipment 7,722,898 5,769,390 Construction in progress 12,131 493,490 ----------- ----------- 26,166,293 21,220,004 Accumulated depreciation (6,843,183) (5,355,699) ----------- ----------- $19,323,110 $15,864,305 =========== ===========
Depreciation expense was $1,559,507, $1,150,087 and $809,818 for the years 1996, 1995 and 1994, respectively. Amortization of capital leases included in depreciation expense amounted to $14,640 in each of the years 1996, 1995, and 1994. Accumulated amortization of capital leases amounted to $446,295, $431,655, and $417,015 for the years ended 1996, 1995 and 1994, respectively. (5) Property and Equipment Held for Sale (Southeast): ------------------------------------------------ In 1990 management initiated a restructuring plan which consisted of selling operations which did not fit with its long term strategic goals and emphasizing new center development in the Mid-Atlantic region (Delaware, New Jersey, North Carolina, Pennsylvania and Virginia) and California. As a result, the Company recorded a $4.9 million restructuring charge in 1990 and an additional $4.8 million in 1991. F-13 The restructuring plan initiated in 1990 resulted thus far in the disposition of 48 centers located in Florida, Georgia and South Carolina, and divestiture of seven centers in Georgia and Florida developed for the Company but not operated. Remaining Property and Equipment Held for Sale: - ---------------------------------------------- Management has estimated the market price of its remaining six properties being held for sale based on recent center sales, investment banker analysis, and the Company's current marketing strategy. Below is a schedule of activity of property and equipment held for sale and related depreciation for the years ended 1996 and 1995: Property and Equipment at Cost: - ------------------------------
Beginning Ending Balances Balances 12/31/95 Additions Disposals 12/31/96 ----------- --------- --------- ---------- Land $ 562,531 - (50,000) $ 512,531 Buildings 2,106,489 15,304 (358,030) 1,763,763 FFE 550,723 1,109 (177,414) 374,418 ----------- --------- --------- ---------- $ 3,219,743 $ 16,413 ($585,444) $2,650,712 Accumulated Depreciation ($865,870) (83,841) 234,575 ($715,136) --------- --------- ---------- Net book value 2,353,873 1,935,576 Reserve (1,046,376) (824,164) ----------- ---------- Estimated net realizable value $ 1,307,497 $1,111,412 =========== ========== Beginning Ending Balances Balances 12/31/94 Additions Disposals 12/31/95 ----------- --------- --------- ---------- Land $ 562,531 - - $ 562,531 Buildings 2,104,094 2,395 - 2,106,489 FFE 626,792 11,871 (87,940) 550,723 ----------- --------- --------- ---------- $ 3,293,417 $ 14,266 ($87,940) $3,219,743 Accumulated Depreciation ($841,373) (102,568) 78,071 ($865,870) ----------- --------- --------- ---------- Net book value $ 2,452,044 $2,353,873 Reserve (1,185,396) (1,046,376) ----------- --------- Estimated net realizable value $ 1,266,648 $1,307,497 =========== ==========
The change in reserve for restructuring includes the loss from disposition of property and equipment as well as other assets and costs associated with maintaining closed centers. F-14 (6) DEBT: ---- Debt consisted of the following: December 31, ------------------------- 1996 1995 ---- ---- Long Term Obligations: - --------------------- Term Loan $ 6,450,000 $ 7,300,000 Term Loan II 5,320,000 - 1st mortgages, due in varying installments over three to twenty years with fixed interest rates ranging from 11% to 12%. 1,002,263 4,943,911 Notes payable to vendors for property and equipment with fixed interest rates varying from 10.0% to 17.5%. 153,859 72,388 Note payable to seller of Montessori House, Inc. 519,458 - Notes payable to sellers from various acquisitions, due in varying installments over three to fifteen years with fixed interest rates varying from 8% to 12%. 124,256 162,700 Other 84,970 - ----------- ----------- Total Long Term Obligations $13,654,806 $12,478,999 Less Current Portion (2,847,308) (1,086,409) ----------- ----------- $10,807,498 $11,392,590 =========== =========== Subordinated Debt: - ------------------------------------------------- 14% Subordinated Debentures - $ 6,000,000 Subordinated Debt Agreements, due in varying installments over five to ten years with fixed interest rates varying from 7% to 8%. $ 3,947,004 3,163,858 ----------- ----------- Total Long Term Subordinated Debt 3,947,004 9,163,858 Less Current Portion (529,348) (285,253) ----------- ----------- $ 3,417,656 $ 8,878,605 =========== =========== F-15 Debt: - ---- On August 31, 1995, the Company completed a $23,000,000 refinancing (the "Refinancing") which consisted of the placement of: (1) a $7,500,000 revolving line of credit and a $7,500,000 term loan (the "Senior Term Loan I"), both financed through Summit Bank (formerly First Valley Bank); (2) $6,000,000 of subordinated debentures with Allied Capital Corporation and affiliated entities (collectively, "Allied"); (3) 1,063,830 shares of Series D Convertible Preferred Stock sold to Allied for a purchase price of $2,000,000; and (4) Warrants sold to Allied to acquire an aggregate of 309,042 shares of the Company's Common Stock, subject to certain adjustments under antidilution provisions, for a purchase price of $100. Proceeds of the Refinancing were used as follows: $11,104,101 to repay the Company's existing principal debt facilities; $2,000,000 for the acquisition of Educo, Inc.; approximately $1,000,000 to pay transaction fees and approximately $1,500,000 to provide additional cash to the Company. The Refinancing resulted in an extraordinary loss of $62,000 related to the write-off of the unamortized loan origination fees in 1995. On April 4, 1996, the Company retired the outstanding $6 million subordinated debentures to Allied described above, which bore interest at 14%, with the proceeds of a second term loan ("Senior Term Loan II") with Summit Bank whose principal amount was originally $6 million. On November 1, 1996, the Company entered into the Fourth Amendment to the Loan Agreement which increased the Company's revolving line of credit from $7,500,000 to $10,000,000 and extended the maturity dates of the Senior Term Loan I for one year to September 2001 and the Company's revolving line of credit to September 1999. In addition, the Fourth Amendment gives the Company greater flexibility as to the number of schools it may build and the criteria of the acquisitions it may complete without bank approval. The $10,000,000 revolving line of credit bears interest at an annual rate which is LIBOR performance based and matures on September 1, 1999. There is also a usage fee at a rate of 1/4 of 1% of the average daily unused portion of the line. The balance of the revolving line of credit at December 31, 1996 was zero with $10,000,000 available. The Senior Term Loan I bears interest at an annual rate of 8.5%. Principal payments are due quarterly, $200,000 each quarter from December 1, 1995 through September 1, 1996, $250,000 each quarter from December 1, 1996 through September 1, 1999 and $300,000 each quarter from December 1, 1999 through September 1, 2001. The Senior Term Loan II bears interest at an annual rate of 8% and requires quarterly principal payments of $200,000 through September 1996. Thereafter, quarterly payments of $280,000 are due through September 1, 1999 at which time the quarterly payments increase to $350,000 through June 1, 2001 with the remaining balance due on September 1, 2001. The revolving line of credit and Senior Term Loans are collateralized by liens in favor of Summit Bank on the Company's real and personal properties and all future assets acquired. All loans to the Company from Summit Bank are cross- collateralized and cross-defaulted. Subordinated debt totaling $3,947,004 at December 31, 1996 includes $975,000 related to the acquisition of the Corydon schools, $1,903,605 related to the acquisition of the Carefree schools, $480,000 related to the F-16 acquisition of the MacGregor Creative Schools, $288,399 related to the acquisition of the Virginia schools and $300,000 related to the acquisition of the Evergreen Academy schools. The Company's debt agreements contain restrictive covenants regarding the payment of common stock dividends and the maintenance of ratios related to debt to earnings before interest, taxes, depreciation and amortization. Maturities of long-term obligations are as follows: $3,376,656 in 1997, $2,912,001 in 1998, $3,044,198 in 1999, $6,228,963 in 2000, $657,644 in 2001 and $1,382,348 in 2002 and thereafter. (7) Accounts Payable and Other Current Liabilities: ---------------------------------------------- Accounts payable and other current liabilities were as follows:
December 31, ---------------------- 1996 1995 ---------- ---------- Accounts payable $ 887,555 $ 853,218 Accrued payroll and related items 1,189,157 859,901 Accrued rent 420,444 444,359 Accrued property taxes 1,065,021 765,625 Other accrued expense 902,780 1,685,446 ---------- ---------- $4,464,957 $4,608,549 ========== ==========
(8) 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 noncancelable operating leases, excluding leases assigned, consisted of the following at December 31, 1996: F-17 Operating Leases ----------------
Centers to be Continuing Divested Centers Total --------- ----------- ----------- 1997 $ 47,380 $ 8,758,353 $ 8,805,733 1998 47,380 8,048,061 8,095,441 1999 47,380 7,126,205 7,173,585 2000 47,380 6,535,804 6,583,184 2001 47,380 6,097,390 6,144,770 2002 and thereafter 343,505 37,428,200 37,771,705 -------- ----------- ----------- Total minimum lease obligations $580,405 $73,994,013 $74,574,418 ======== =========== ===========
Capital Leases --------------
1997 $115,222 1998 115,735 1999 112,777 2000 102,171 2001 25,636 -------- Total minimum lease obligations $471,541 ======== Less amount representing interest 109,990 -------- Present value of capital lease obligations 361,551 -------- Less current portion 71,456 -------- $290,095 ========
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 $8,112,516, $5,828,786 and $4,444,735 in 1996, 1995 and 1994, respectively. These leases are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs. Since the initiation of the Southeast restructuring (see Note 5), the Company entered into agreements to assign or sublease leases for five centers under development and nine centers which were operating. The fourteen assigned leases have remaining terms from four years to fourteen years. Under the agreements, the Company is contingently liable if the assignee is in default under the lease. Contingent future rental payments under the assigned leases are as follows: F-18
1997 $ 724,567 1998 688,125 1999 673,733 2000 656,657 2001 595,023 2002 and thereafter 2,933,535
On December 23, 1996 the Company entered into a multi-site sale leaseback agreement with AEI Fund Management, Inc. (AEI). AEI agreed to purchase from the Company, via sale/leaseback transaction, up to $15 million worth of proposed parcels, following the construction of Company schools, through December 30, 1999. Each parcel is subject to AEI's standard credit, site and due diligence review. The Company is to give AEI no less than sixty days notice and a development package for the decision. The Company has not yet entered into any sale/leaseback agreements under this agreement. (9) Stockholders' Equity: -------------------- Preferred Stock: - --------------- In connection with the Refinancing (see Note 6), on August 31, 1995, the Company issued 1,063,830 shares of the Company's Series D Convertible Preferred Stock for a purchase price of $2,000,000. The Series D Preferred Stock is convertible to Common Stock at a conversion rate, subject to adjustment, of 1/4 share of Common Stock for each share of Series D Convertible Preferred Stock. Holders of Series D are not entitled to dividends, unless dividends are declared on the Company's Common Stock. Upon liquidation, the holders of shares of Series D Convertible Preferred Stock are entitled to receive, before any distribution or payment is made upon any Common Stock, $1.88 per share plus any unpaid dividends. On August 22, 1994, the Company completed a private placement of an aggregate of 2.5 million shares of Series C Convertible Preferred Stock and the Series 1 Warrants and Series 2 Warrants discussed below under "Common Stock Warrants" for an aggregate purchase price of $2,500,000. The Series C Preferred Stock is convertible into Common Stock at 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 D 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. As of December 31, 1996 and 1995, 2,500,000 shares were outstanding. On July 20, 1993, the Company completed a private placement of 2,484,320 shares of its Series A Convertible Preferred Stock at a purchase price of $1.00 per share. The Series A Preferred Stock is convertible into Common Stock at a conversion rate, subject to adjustment, of .2940 shares of Common Stock for each share of Series A Preferred Stock. The Series A Preferred Stock is redeemable by the Company at any time after the fifth anniversary of its issuance at a redemption price of $1.00 per share plus cumulative unpaid dividends. The Preferred Stock is not redeemable at the option of the holders. Upon liquidation, the holders of shares of Series A Preferred Stock are entitled to receive, before any distribution or payment is made upon any Common Stock, $1.00 per share plus all accrued and unpaid dividends. As of December 31, 1996 and 1995, 1,133,712 and 1,941,320 shares were outstanding, respectively. Each share of Series A Preferred Stock entitles the holder to an $.08 per share annual dividend. F-19 Each share of Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock entitles the holder to a number of votes equal to the number of full shares of Common Stock into which such share is convertible. Except as otherwise required by law, holders of Preferred Stock vote together with the Common Stock, and not as a separate class, in the election of directors and on each other matter submitted to a vote of the stockholders. Private Placement of Common Stock: - --------------------------------- On March 5, 1996, the Company raised approximately $11,600,000 through the issuance of 1,000,000 shares of common stock at $12 per share. The Company is using and has used the funds to pay debt, acquire schools and for general corporate purposes. Common Stock Warrants: - --------------------- In connection with the Refinancing (see Note 6) on August 31, 1995, the Company issued to Allied warrants to acquire an aggregate of 309,042 shares of the Company's Common Stock. On August 22, 1994, the Company issued Series 1 Warrants for the purchase of up to 125,000 shares of the Company's Common Stock and Series 2 Warrants for the purchase of up to 125,000 shares of the Company's Common Stock. The Series 1 Warrants are exercisable at $4.00 per share, subject to adjustment. The Series 1 Warrants expire on August 19, 2001. The Series 2 Warrants have terminated pursuant to their terms, because the fair market value of the Company's Common Stock exceeded $12.00 per share for 20 consecutive business days prior to December 31, 1996. In May 1992, the Company raised $2,000,000 before transaction costs from the private sale of 1,000,000 shares of common stock. In connection with the private placement, the Company issued warrants to purchase 275,000 shares of the Company's Common Stock. The warrants are exercisable at $2.00 per share and expire on May 29, 1997. 1995 Stock Incentive Plan - ------------------------- On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan. This plan reserves up to an aggregate of 375,000 shares of common stock of the Company for issuance 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 options granted to date have been non-qualified stock options which vest over three years, except options issued to directors, which fully vest six months following 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 reserves 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, reserves up to an aggregate of 216,750 shares of common stock F-20 of the Company for issuance in connection with stock grants and upon the exercise of incentive stock options and non-qualified stock options. The number of options granted under the Stock Option and Stock Grant Plans is determined from time to time by the Compensation Committee of the Board of Directors. Incentive stock options are granted at market value or above, and non-qualified stock options are granted at a price fixed by the Compensation Committee at the date of grant. Options are exercisable for up to ten years from date of grant. Option activity (adjusted for the 4:1 reverse split) with respect to the 1995, 1988 and 1986 plans was as follows:
Outstanding Options - ---------------------------- Number Range ------- -- Balance, January 1, 1994 86,800 $ 3.00 to $13.00 ------- ------- -- ------ Granted - - - Canceled (275) $ 3.00 to $ 4.00 Exercised (6,750) $ 3.75 ------- ------- Balance, December 31, 1994 79,775 $ 3.00 to $13.00 ------- ------- -- ------ Granted 102,950 $11.625 Canceled - - - Exercised (37,500) $ 3.00 to $ 4.00 ------- ------- -- ------ Balance, December 31, 1995 145,225 $ 3.00 to $13.00 ------- ------- -- ------ Granted 60,500 $ 10.50 to $15.81 Canceled (28,175) $11.625 Exercised (28,750) $ 4.00 to $ 6.00 ------- ------- -- ------ Balance, December 31, 1996 148,800 $ 3.00 to $15.81 ======= ======= == ======
At December 31, 1996, 269,813 shares remain available for options or stock grants under the 1995, 1988 and 1986 plans and 77,483 options were exercisable under such plans. In 1991, the Board of Directors granted 50,000 stock options outside the above plans in connection with a consulting agreement with the Company's former President. In 1986, the Board of Directors granted 18,125 options outside the above plans to a former officer of the Company. At December 31, 1996 and 1995, 55,250 and 65,250 of such options remained outstanding, respectively. 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 Plan. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been decreased to the pro forma amounts indicated below: 1996 1995 ---------- ---------- F-21 Net Income - as reported $2,462,892 $3,843,886 Net Income - pro forma 2,365,038 3,840,839 Net Income per share - as reported $ 0.34 $ 0.68 Net Income per share - pro forma $ 0.34 $ 0.68 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: Expected dividend yield 0% Expected stock price volatility 52.2% Risk-free interest rate 5.49-6.64% Expected life of options 3 years Activity (adjusted for the 4:1 reverse split) with respect to warrants outstanding at December 31, 1996 is as follows:
Number Range -------- ----- Balance, January 1, 1994 305,000 $2.00 ------- ----- Granted 125,000 $4.00 ------- ----- Canceled - - - Exercised - - - Balance, December 31, 1994 430,000 $2.00 to $4.00 ------- ----- -- ----- Granted 309,042 $7.52 Canceled - - - Exercised (25,000) $2.00 ------- ----- Balance, December 31, 1995 714,042 $2.00 to $7.52 ------- ----- -- ----- Granted - - - Canceled - - - Exercised (25,000) $4.13 - ------- ----- Balance, December 31, 1996 689,042 $2.00 to $7.52 ------- ----- -- -----
(10) Other (Income) Expense: ---------------------- Other (income) expense consists of the following:
Year Ended December 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- Interest income $(470,164) $(141,637) $(76,721) Rental income (143,355) (194,312) (70,288) Depreciation related to rental properties 73,394 82,007 93,815
F-22 Other projects - 29,574 15,585 Costs related to centers held for sale 57,478 98,644 144,569 --------- --------- -------- $(482,647) $(125,724) $106,960 ========= ========= ======== (11) Related-Party Transactions: -------------------------- Legal services were rendered to the Company by Drinker Biddle & Reath, of which a director of the Company is a partner. The Company expects this firm to continue to provide such services during 1997. Fees paid to the firm in 1996, 1995 and 1994 totaled $128,015, $703,622 and $129,367, respectively. A. J. Clegg, the Chairman and Chief Executive Officer of the Company, was also the Chairman and Chief Executive Officer of JBS Investment Banking, Ltd. ("JBS"). In August, 1994, Mr. Clegg relinquished his duties at JBS and joined the Company as Chairman and Chief Executive Officer. In the years ended December 31, 1995 and 1994, the Company paid to JBS fees totaling, $11,554 and $200,374, respectively. (12) Income Taxes: ------------- Current tax provision: 1996 1995 1994 ---------- ----------- --------- Federal $ 61,693 $ 33,755 $ 47,000 States 293,206 91,327 25,000 ---------- ----------- --------- $ 354,899 $ 125,082 $ 72,000 Deferred tax provision $1,206,894 (1,480,672) (510,300) ---------- ----------- --------- $1,561,793 $(1,355,590) $(438,300) ========== =========== ========= F-23 The difference between the actual income tax rate and the statutory U.S. federal income tax rate is attributable to the following:
1996 1995 1994 ----- ------ ------ U.S. federal statutory rate 34% 34% 34% State taxes, net of federal tax benefit 3% 5% 1% Benefit from realization of net operating losses - (39%) (38%) Reduction in valuation allowance - (58%) (27%) Goodwill and other 2% 5% 7% ---- ---- ---- 39% (53%) (23%) ==== ==== ====
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:
Year Ended December 31, ------------------------------------------- 1996 1995 1994 ------------- Deferred Deferred Deferred Tax Tax Tax Assets Assets Assets (Liabilities) (Liabilities) (Liabilities) ------------- ------------- ------------- Depreciation $ (383,348) $ (240,639) $ (371,787) Provision for center closings and other restructurings 379,099 1,269,913 1,712,547 Net operating losses 801,424 720,496 1,716,213 General business credits - 27,650 27,650 AMT credit carryforward 89,509 125,816 8,400 Other 121,104 87,726 46,256 ---------- ---------- ----------- Net deferred tax asset 1,007,788 1,990,962 3,139,279 Valuation allowance - - (2,628,979) ---------- ---------- ----------- Total deferred taxes $1,007,788 $1,990,962 $ 510,300 ========== ========== ===========
In 1994, based on the Company's analysis of the last two years of significant positive operating performance and expected future taxable income, the Company reduced the valuation allowance by $510,300. In 1995, based on three years of positive net income and the analysis of projections for the F-24 years 1996 through 1999, the Company removed the remaining valuation allowance. Accordingly, such amounts were recorded as a credit to income tax expense in the respective periods. The net operating loss totaling $2,357,501 begins to expire in the year 2000. (13) Employee Benefit Plans: ---------------------- Effective January 1, 1994, the Company adopted a 401(k) Plan whereby eligible employees may elect to enroll after one year of service. The Company will match 25% of an employee's contribution to the Plan of up to 6% of the employee's salary. This Plan replaced the existing similar 401(k) Plan at Merryhill as of January 31, 1994. Nobel's matching contributions under the Plan and prior Merryhill Plan were $73,958, $60,904 and $60,617 for the years ended December 31, 1996, 1995 and 1994, respectively. (14) Fair Value of Financial Instruments: ----------------------------------- The fair value of financial instruments approximates carrying value. The following methods and assumptions were considered by the Company in determining its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value. Debt: The estimated fair value of the Company's debt as a whole was based on the discounted cash flows of all debt instruments. (15) Commitments and Contingencies: ----------------------------- The Company is currently in dispute with a landlord over the payment of certain taxes related to leases of centers estimated to be approximately $70,000. At this time, the Company believes that no taxes are due. However, there are no certainties regarding the outcome of the dispute. The Company is engaged in other legal actions arising in the ordinary course of its business. The Company believes that the ultimate outcome of all such matters above will not have a material adverse effect on the Company's consolidated financial position. The significance of these matters on the Company's future operating results and cash flows depends on the level of future results of operations and cash flows as well as on the timing and amounts, if any, of the ultimate outcome. The Company carries fire and other casualty insurance on its centers and liability insurance in amounts which management believes is adequate for its operations. As is the case with other entities in the education and preschool industry, the Company cannot effectively insure itself against certain risks inherent in its operations. Some forms of child abuse have sublimits per claim in the general liability coverage. F-25 (16) Subsequent events ----------------- Acquisition of Another Generation Enterprises Inc.: - -------------------------------------------------- On January 7, 1997, the Company purchased the stock of Another Generation Enterprises Inc. and certain related corporations, which own six preschools located in Broward County and Palm Beach County, Florida with a capacity of 1,200 children and annual aggregate revenues of approximately $6 million. The aggregate purchase price for the stock totaled $4,543,000, with $3,643,000 in cash, $750,000 in notes and approximately $150,000 in assumed liabilities. Also on January 7, 1997, the Company purchased a 20% interest in the Sagemont School located in Weston, Florida from the principal owners of Another Generation Enterprises, Inc. The Sagemont School is an elementary school with a capacity of 340 which opened in the Fall of 1997. The Company also formed a joint venture with such persons to develop five additional elementary schools in Florida, each of which the Company will own 80%. Acquisition of Rainbow Bridge: - ----------------------------- On March 5, 1997, the Company executed an agreement to purchase the Rainbow Bridge Schools located in San Jose, California. Rainbow Bridge is a school system consisting of two elementary/middle schools and one preschool. Rainbow Bridge Schools have historically produced revenue of approximately $5.6 million and have a capacity to educate 950 children. The Company anticipates closing the transaction on April 1, 1997, subject to standard closing conditions. Loan Amendment: - -------------- On March 20, 1997, the Company entered into the Fifth Amendment of its Loan and Security Agreement with its primary lender which, among other changes, increased the permitted number of new school construction projects on the Company's balance sheet to ten annually, and permitted the Company to own at any time seven tracts of land with a maximum $3,500,000 purchase price. This amendment gives the Company greater flexibility to pursue its growth strategy. F-26 -----END PRIVACY-ENHANCED MESSAGE-----