-----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, QmwzuREGvLRrkSlB9TtjAN9MYhd2jc/Xthc6gdSTGtOvBhquHwrmDBuEUiGhWzY/ 6nCDGdsZNjraL1u/t4nXyg== 0001036050-97-000034.txt : 19970401 0001036050-97-000034.hdr.sgml : 19970401 ACCESSION NUMBER: 0001036050-97-000034 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12631 FILM NUMBER: 97568530 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-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended 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 TABLE OF CONTENTS Item No. Page PART I 1. Business......................................................... 1 2. Properties....................................................... 9 3. Legal Proceedings................................................ 10 4. Submission of Matters to a Vote of Security Holders.............. 10 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 11 6. Selected Financial Data.......................................... 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13 8. Financial Statements and Supplementary Data...................... 22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 22 PART III 10. Directors and Executive Officers of the Registrant............... 23 11. Executive Compensation........................................... 26 12. Security Ownership of Certain Owners and Management.............. 30 13. Certain Relationships and Related Transactions................... 33 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 34 i PART I "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company's 1997 outlook and all other statements in this report other than historical facts are forward-looking statements that involve risks and uncertainties and are subject to change at any time. The Company derives its forward-looking statements from its operating budgets and forecasts, which are based upon detailed assumptions about many important factors such as market demand, market conditions and competitive activities. While the Company believes that its assumptions are reasonable, it cautions that there are inherent difficulties in predicting the impact of certain factors, especially those affecting the acceptance of the Company's newly developed and converted schools and performance of recently acquired businesses, which could cause actual results to differ materially from predicted results. ITEM 1. BUSINESS. GENERAL Nobel Education Dynamics, Inc.'s business mission is to be the leader in the United States in providing affordable private education from preschool through eighth grade for the children of middle-income working families. The Company has been identified as a market leader "Education Management Organization" (EMO) for preschool through eighth grade. (EMO is a term used in the investment community to describe companies which manage education businesses for profit in multiple sites, similar to the "HMO" label used in the healthcare industry.) The Company's operations include preschools, child care centers, elementary schools and middle schools (through eighth grade) throughout the United States. To attain its objectives, Nobel builds on its experience and expertise both in education and preschool/child care. As an "education company", the Company's strategy is to offer practical solutions to a segment of the education problem in the United States. Nobel operates nationwide, with 118 preschools, schools and centers in 14 states at March 31, 1997. In California, Nobel operates the Merryhill Country Schools, which is a private school system of 32 preschools, elementary schools and middle schools, as well as a recently acquired private school in Orange County, California. Nationwide, Nobel operates preschools, schools and centers under various names, including Chesterbrook Academy, in Pennsylvania, New Jersey, Virginia, Florida, Maryland, North Carolina, South Carolina, Illinois, Washington, Indiana, Delaware, Maine and Louisiana. Nobel also owns a 20% interest in an elementary school in Florida. Management is currently pursuing a three-pronged strategy to take advantage of the significant growth opportunities in the private education market: . internal growth at existing schools, including expansions of campus facilities . new school development in both existing and new markets . strategic acquisitions To facilitate this strategy, Nobel is applying the strengths of its curriculum-based programs to distinguish itself from its competition. The strategy also entails geographical clustering of Nobel's 1 preschools to (i) increase market awareness, (ii) provide a lower risk method for expansion into elementary and middle schools by providing a feeder population and (iii) gain operating efficiencies in both management and costs. In response to market demands for quality schools and preschools, since September 1995, the Company has converted 23 of its child care centers to a curriculum-based program, under the "Chesterbrook Academy" name. Conversions include the adoption of the highly regarded and accredited education curriculums of Nobel's Merryhill schools and an upgrading of the educationally oriented teaching materials and computer technology. Following conversion, a Chesterbrook Academy school typically offers grade levels through kindergarten or first grade; one or more grades are then planned to be added in subsequent years, space permitting, through eighth grade. The Company intends to convert its remaining child care centers to curriculum-based preschools/schools over the next several years. Nobel targets its schools and preschools to meet the needs of middle-income working parents. Most of Nobel's schools, preschools and child care centers are open from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up. In most locations, programs are available for children starting at six weeks of age. For basically the same price as standard child care, parents can leave children of various ages at one Nobel school knowing they will receive a quality education during the greater part of the day and be engaged in well-supervised activities the remainder. To complement its programs, the Company also operates (i) before and after school programs and (ii) summer camps (both sports and educational) at its various school facilities. Nobel also seeks to add other services and products which will add ancillary income and improve overall operating margins. The Company's financial strength has improved dramatically since 1992, when there was a change in management. Strategies of new management have included a change of the Company's focus to education from child care, strengthening of the Company's financial condition, divestiture of centers in mature markets and, after the Company's financial stabilization, expansion into growth areas. With the implementation of these new strategies, the equity of the Company has increased from a negative net worth of $3.8 million on December 31, 1991 to positive net worth of $32.3 million as of December 31, 1996. Net income before taxes for years 1992, 1993, 1994, 1995 and 1996 were the highest in the Company's history, with 1996's being the highest at $4.02 million. Additionally, the Company's EBITDA (earnings before interest, taxes, depreciation and amortization), a measure of the Company's cash generating ability, reached a historical high in 1996 at $8.2 million. The Company's corporate office is located at Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media, PA 19063. Its telephone number is (610) 891-8200; its world wide web address is http://www/nobeleducation.com or http://www/educating.com. EDUCATIONAL PHILOSOPHY AND IMPLEMENTATION The educational philosophy of Merryhill and Chesterbrook Academy is based on a sound research foundation, innovative instructional techniques and quality practice, and proprietary curricula developed by experienced educational personnel. Nobel's programs stress the development of the whole child and are based on concepts of integrated and age-appropriate learning. The curricula 2 recognize that each child develops according to his or her own abilities and timetable, but also seek to prepare every student for achievement in accordance with national content standards and goals. Every child's educational needs are considered upon entrance into a Nobel school, and progress is regularly monitored in terms of both the curriculum's objectives and the learner's cognitive, social, emotional, and physical skill development. The result is the opportunity for every Nobel student to develop a strong foundation in academic learning, positive self-esteem, and emotional and physical well-being. During 1996, the Company adapted the Merryhill curriculum for implementation in its Chesterbrook Academy schools through the conversion of fourteen child- care centers on the East Coast and in the mid-West. Staff training sessions were conducted to prepare teachers to present the curriculum-based program in the pre-school as well as at elementary grade levels. Instructional techniques and assessment practices were also instituted and particular content materials were adopted in the various subject areas. Under the direction of Nobel's Vice President - Education, the Company circulates regular "curriculum updates," a publication to assist staff in planning their daily and weekly programs with current and effective instructional practices and materials. The Company has also established multi- media products for a "Learning Lending Library" collection. The Library, which is managed out of the Company's corporate office, is available to all Nobel schools for student and teacher development and parent interest. Many of these resources support the Company's curriculum. In 1996, the Company launched its National Education Advisory Board. Under the direction of the Vice President - Education, the Board includes five nationally-known educators each of whom will advise Nobel on his or her particular area of expertise: Dr. Zalman Usiskin of the University of Chicago (Mathematics); Dr. Cathy Collins Block of Texas Christian University (Reading and Language Arts); Dr. John N. Mangieri of the Institute for Effective Management (Educational Administration); Dr. Arthur L. Costa of the University of California at Sacramento (Curriculum and Teacher Development); and Dr. Drew H. Gitomer of Educational Testing Service (Testing and Evaluation). The Board will help oversee curriculum development in the Company's schools, advise on the most renowned teaching methods, and assist in finding the best instructional materials and practices to help students learn effectively and efficiently. Board members will also be available to work on special projects and services that enhance the Company's school programs. The Company maintains that small class sizes are a basic ingredient of quality education. Nobel's educational philosophy is based on personalized instruction that leads to a student's active involvement in learning and understanding. The program for the Company's schools is a strong skills-based, comprehensive curriculum that is implemented in ways that attract the learner's curiosity, enhance students' various learning styles, and employ processes that contribute to lifelong achievement. Academic areas addressed include reading readiness and reading, spelling, writing, handwriting, mathematics, science, social studies, visual and graphic arts, music, physical education and health, and foreign language. Computer literacy and study skills are interrelated into the program, as appropriate, in all content areas. The schools employ state-of-the-art technologies, such as interactive CD-ROMs coordinated with classroom content, and networking capacity. Merryhill 3 and Chesterbrook introduce a second language between the ages of two and three, and continue that instruction into the pre-K, kindergarten, and school age programs. The Company offers sports activities and supplemental programs, which include day field trips coordinated with the curriculum to such places as zoos, libraries, museums and theaters, and, at the middle school, overnight trips to such places as Yosemite, California and Washington, D.C. Schools also arrange classroom presentations by parents and other volunteers, as well as organize youngsters as presenters to community groups and organizations. To enhance better the child's physical, social, emotional and intellectual growth, schools are encouraged to provide fee-based experiences specifically tailored to particular families' interest in such ancillary activities as dance, gymnastics, and music lessons. The Company's programs are implemented by experienced principals and directors and their faculties. They foster open communication, teamwork and the attention to detail required to provide a superior service. School directors work closely with regional and corporate management, particularly in the regular assessment of program quality. In 1996, the groundwork was laid for a Company-wide Quality Assurance Program and, early in 1997, a Director of Quality Assurance was appointed to assess systematically each Nobel school and to provide a procedure for internal accreditation. Nobel's Quality Assurance Program will set standards consistent with the external, national accreditation systems in which the Company participates with such organizations as the National Association for the Education of Young Children (NAEYC), the National Independent Private School Association (NIPSA), and the Commission for International and Trans-Regional Accreditation (CITA). The Program also provides a formal means to recognize and reward Company educators for their outstanding performance and achievement. Similarly, the Program also furnishes guidance for the continued training and staff development of teaching personnel, using both internal trainers and external consultants. As of March 15, 1997, the aggregate licensed capacity at the Company's 118 schools and centers exceeded 16,500 children. OPERATIONS / SCHOOL SYSTEMS In order to maintain uniform standards, each school and center shares consistent educational goals and operating procedures. To respond to local demands, principals are encouraged to tailor curriculums, within Nobel's standards, to regional needs. Management visits all schools and centers on a regular basis to review program and facility quality. Each school and center is staffed with a principal or director, teachers and teaching assistants. Principals and directors are supervised by district, regional or area managers. The principal or director is critical to the success of the school and is provided with ongoing training. Principals and directors have responsibility for: (i) maintaining the quality of educational services delivered at their schools, (ii) recommending pricing strategy based upon school location and local area demographics, (iii) personnel management, (iv) sales and marketing strategy for their locations and (v) fiscal management. Principals and directors submit financial reports to the Company's corporate office and to appropriate district and regional managers each week. These reports include data on current 4 enrollment, labor costs and cash receipts. Corporate office personnel then review each report and prepare weekly combined reports by district, region and for the Company in total. Weekly or monthly tuition rates and utilization rates are continually monitored. Each school and center is measured on a monthly basis versus its individual business plan. Nobel is in the process of evaluating several state-of-the-art computer systems which would assist the principals in operating schools and provide management with enhanced operational information. The Company generally hires experienced individuals and attempts to promote from within. Employment applicants are thoroughly reviewed with background checks made to verify accurate employment history and establish background, reputation and character. After hiring, the faculty is reviewed and evaluated annually both through formal evaluation and market surveys. All principals and directors are eligible for incentive compensation based on the profitability of their schools. MARKETING AND CUSTOMERS The Company's management believes that Nobel has a unique position in the marketplace and has implemented a marketing strategy to capitalize on this niche. Nobel strives to differentiate itself from the child care providers. In contrast with mere custodial child care, Nobel's programs stress educational development through proven curriculum programs, beginning at the preschool level and continuing through upper grades. The Company generates the majority of new enrollments from its reputation in the community and word-of-mouth recommendations of parents. Further, the Company is geographically clustering its preschools to increase local market awareness and to provide a feeder population for Nobel elementary and middle schools. The Company also markets its services through display ads, listings in local print and radio media and through distribution of promotional materials in residential areas. Marketing campaigns are conducted in the winter, spring and fall, primarily at the local level by the Company's directors and principals. In addition, the various regional offices conduct marketing programs, such as mass mailings and media advertising. NEW CENTER AND SCHOOL DEVELOPMENT; ACQUISITIONS Management expects a significant portion of Nobel's growth for the next few years to be through the opening of new schools and preschools and strategic acquisitions of existing schools and preschools. New school development offers an attractive growth opportunity for Nobel to expand into both new and existing markets. Proposed development sites are presented to the Company through a network of developers across the United States. After site selection, the Company engages a developer or contractor to build a facility to the Company's specifications. Nobel currently works with several developers who purchase the land, build the facility and enter into a long-term lease with Nobel for the premises. Alternatively, Nobel purchases land itself, constructs the building with its own or borrowed funds and then seeks to enter into a sale and lease back transaction with an investor. In December 1996, the Company entered into a Multi-Site Sale Leaseback Agreement with AEI Fund Management, Inc. ("AEI"). Under that agreement, AEI agreed to purchase from Nobel in sale/leaseback transactions 5 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 1996 and first quarter 1997, Nobel opened nine new schools and preschools. The Company plans to open approximately 12 to 15 new schools in 1997 and 15 to 20 new schools in 1998. The Company's development plans are dependent on the continued availability of such developer and financing arrangements. Typically, new schools are single-story stand alone structures located near residential neighborhoods on sites of acreage appropriate to the nature of the school. The Company carefully evaluates all proposed development sites and makes a selection based on a variety of criteria, including: the number and age of children living in proximity to the site; family income data; incidence of two-wage earner and single parent families; traffic patterns; wage and fixed cost structure; competition; price elasticity; family education data; local licensing requirements; and real estate costs. The Company historically has had significant success in the new centers it has opened. The Company plans to continue to expand the number of grade levels offered by its existing schools. Upon conversion to the Chesterbrook Academy format, current preschools and child care centers initially offer grade levels through kindergarten or first grade, with further expansion planned. The Company also is expanding the grades offered by its other schools. In some locations, this expansion requires the construction of additions to current facilities or development of a replacement facility. Acquisition activity in 1996 and the first quarter of 1997 consisted of the following: . In February 1996, the acquisition of five preschools in northern and central Virginia. . In November 1996, the acquisition of two preschools in North Carolina. . In December 1996, the acquisition of the Oak Ridge School, an elementary school in Coto de Caza (Orange County), California. . In December 1996, the acquisition of the Evergreen Academy elementary school and preschool in the Seattle, Washington area. . In January 1997, the acquisition of six preschools in Florida. . In March 1997, the Company signed an agreement to acquire the two elementary and one preschool of Rainbow Bridge, Inc. located in San Jose, California. The acquisition is expected to close April 1, 1997. At the closing of the Florida acquisition in January 1997, Nobel also purchased a 20% interest in a new elementary school in Florida. Also, Nobel entered into a joint venture agreement with the sellers to build five additional elementary schools in Florida in which Nobel will have an 80% interest. Together with current and planned developmental activity, these acquisitions strengthen Nobel's presence in Virginia and North Carolina, and establish entries into the Florida, Southern California and the Pacific Northwest markets. 6 INDUSTRY AND COMPETITION Annual spending in education is estimated to exceed $630 billion annually in the United States or approximately 10% of gross domestic product. Estimates of spending in education for preprimary grades (preschools and child care) are $30 billion while estimates of spending for kindergarten through eighth grade ("K 8") are $200 billion. Spending is projected to continue to grow through a combination of increasing per pupil expenditures and increasing school enrollments. It is estimated there are 90,000 schools in the $30 billion preschool/child care segment with $25 billion spent in the private sector, of which $10 billion is spent in the for-profit segment. Likewise, it is estimated there are 85,000 schools in the $200 billion K-8 segment with an estimated $15 billion spent in the private sector, of which $650 million is spent in the for-profit segment. The public school market is estimated to be 110,000 schools in total, of which 76,000 are elementary, 23,000 are secondary and 11,000 are combined schools. The private school market is estimated to be 26,000 schools, of which 15,500 are elementary, 2,500 are secondary and 8,800 are combined. Of the 26,000 schools in the private school market, an estimated 20,500 are religiously affiliated and 5,500 are secular. Of the 5,500 secular schools, less than 1,000 are for-profit schools. Between 1985 and 1995, it is estimated that the public school K-8 grade enrollment increased 19.8% from 27.03 million students to 32.38 million students while the private school K-8 grade enrollments increased 5.6% from 4.19 million students to 4.43 million students over the same time period. The U.S. Department of Education projects public school and private school K-8 enrollment growth between 1996 and 2006 to slow to 2%, a 700,000 enrollment increase in public schools and a 100,000 enrollment increase in private schools, respectively. While this increase may not seem large, there is significant concern that the nation's already overcrowded schools are ill-prepared to handle it. It is estimated that in excess of 4,000 new K-8 schools must be built to relieve current overcrowding and handle the growth. Also, this growth will vary significantly in different regions of the United States. States such as California, Florida, Washington, Oregon and Arizona are projected to high growth in the 10% range. These are targeted states in the Company's expansion plans. During the 1996 elections, education was the politically "hot issue" in national and state contests. The broad public debate has shifted from whether our existing K-12 system has failed in terms of performance to which reform movements promise the best and quickest improvements. Taxpayers have experienced high costs in education expenditures without positive results. According to a 1995 Gallup poll, 71% of Americans give the nation's schools a grade of C, D or F generally and 54% give their own schools a low grade as well. Quality is low; yet, the average annual cost of educating a Kindergarten through 12/th/ grade student in the United States has risen to over $6,000 in 1995. Dismal student achievement, a growing minority gap in school completion rates and student misbehavior causing unsafe school environments are three commonly mentioned quality measurements that are lacking. Also, corporate America has become increasingly frustrated by insufficiently equipped students produced by the nation's public school systems. Education reform movements in the United States are posing alternatives to the public schools. These include charter schools, private management of public schools, vouchers, home schooling and private schools. The Company's strategy is to provide parents a quality alternative through Nobel's privately owned and operated schools utilizing a proven curriculum in a safe and challenging environment. 7 For school age children, the Company competes with other for-profit private schools, with non-profit schools and, in a sense, with public school systems. The Company is not aware of any for-profit competitor which currently competes beyond a regional level. However, the Company anticipates that, given the perceived potential of the education market, well-financed competition may emerge, including possible competition from the large for-profit child care companies. The Company believes that the structure of these larger companies may make it difficult for them to implement and develop programs which are based upon curriculum-intensive goals, which would require significant cultural changes. The preschool/child care market is a $30 billion highly fragmented industry, with diverse competition from both public and private sectors. Approximately 8 million children are enrolled in 90,000 centers/schools, of which less than nine percent are managed by for-profit chains. Revenues of the 20 largest child care/preschool providers represent less than five percent of total segment revenues. Also seeking enrollments of pre-school age children are in-home individual child care providers and corporations that provide child care for their employees. Only one out of seven early care/education programs is rated good or excellent by the Carnegie Corporation report; four out of five programs fail quality standards. The Company believes that persons in its target market -- parents seeking curriculum-based programs for their children -- seek services not provided by child care providers without a curriculum base. Nobel believes these parents desire to give their child the best educational advantage available, since, as educators have found, the learning process should start earlier, preferably somewhere between the ages of two and three. The Company offers a national curriculum based program with excellent standards. The demand for quality preschools is increasing. More than 60% of mothers with children under six years of age are in the workplace. Both single parents and dual income families are on the rise. From 1980 to 1990, the percentage of dual income families rose from 50% to 60%. From 1970 to 1992, the percentage of married mothers who worked full time increased 16% to 37%. Combined, approximately 80% of U.S. families are either dual income or single parent households. While price is an important factor in competition in both the school age and preschool markets, the Company believes that other competitive factors also are important, including: professionally developed educational programs, well equipped facilities, trained teachers and a broad range of ancillary services, including transportation and infant care. Particularly in the preschool market, many of these services are not offered by the Company's competition. REGULATION Schools and preschools are subject to a variety of state and local regulations and licensing requirements. These regulations and licensing requirements vary greatly from jurisdiction to jurisdiction. Governmental agencies generally review the safety, fitness and adequacy of the buildings and equipment, the ratio of staff personnel to enrolled children, the dietary program, the daily curriculum, compliance with health standards and the qualifications of the Company's personnel. 8 INSURANCE The Company currently maintains comprehensive general liability, workers' compensation, automobile liability, property, excess umbrella liability and student accident insurance. The policies provide for a variety of coverage and are subject to various limits. Companies involved in the education and care of children, however, may not be able to obtain insurance for the total risks inherent in their operations. In particular, general liability coverage can have sublimits per claim for child abuse. Since 1994, the Company has been able to increase significantly the sublimit applicable to such coverage. There can be no assurance that in future years the Company will not again become subject to lower limits. SERVICE MARKS The Company has registered various service marks, including Chesterbrook Academy(R), Merryhill Country School(R) and The Rocking Horse Child Care Center(R), in the United States Patent and Trademark Office. The Company believes that certain of its service marks have substantial value in its marketing in the respective areas in which its schools operate. SEASONALITY Nobel's elementary and middle schools historically have lower operating revenues in the summer due to lower summer enrollments. Summer revenues of preschools tend to remain more stable or, in some cases, increase. The Company has sought to improve summer results through camps and other programs. EMPLOYEES On March 20, 1996, the Company employed approximately 3,000 persons, approximately 935 of which were employed on a part-time basis. Management believes that its relationship with its employees is satisfactory. ITEM 2. PROPERTIES. At December 31, 1996, the Company operated 108 schools, preschools and child care centers (hereafter, "schools") in 13 states. At March 15, 1997, the number of schools totaled 118, located in 14 states. The Company's schools generally are located in suburban settings. At March 15, 1997, the Company's schools are geographically located as follows: 33 in California, 17 in Pennsylvania, 9 in New Jersey, 12 in Virginia, 7 in Illinois, 9 in Indiana, 17 in North Carolina, 2 in South Carolina, 6 in Florida, 2 in Washington and 1 each in Maryland, Delaware, Maine and Louisiana. The Company owns the land and buildings for 13 of the schools it operates. All such properties are subject to mortgages on the real property. In addition, one school is run by a majority-owned subsidiary and operated jointly with a sponsoring employer. This subsidiary leases the buildings from a third party and operates them under a ground lease from the employer. The remaining 105 schools are leased under long-term leases which are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs. These leases usually contain inflation related rent escalators. 9 The Company owns the land and building of five properties in Florida and Georgia; four of such properties are leased to tenants with an option to purchase and one such property, which the Company intends to sell, is nonoperational. The Company leases 10,786 square feet of space for its corporate offices in Media, Pennsylvania. The lease expires in the year 2001. ITEM 3. LEGAL PROCEEDINGS. The Company is engaged in legal actions arising in the ordinary course of its business. The Company believes that the ultimate outcome of all such matters above will not have a material adverse effect on the Company's consolidated financial position or results of operations. The significance of these matters on the Company's future operating results and cash flows depends on the level of future results of operations and cash flows as well as on the timing and amounts, if any, of the ultimate outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. The table below sets forth the quarterly high and low sales prices for the Company's common stock as reported by The National Association of Securities Dealers (NASD) for each quarter during the period from January 1, 1995 through December 31, 1996 and for the first quarter to date in 1997. Sales prices prior to September 28, 1995 are adjusted to reflect the 1 for 4 reverse stock split of the Company effected on such date. High Low 1995 First Quarter...... $ 7 $ 4 Second Quarter..... 8 1/4 6 Third Quarter...... 15 3/4 7 1/4 Fourth Quarter..... 17 10 3/4 1996 First Quarter...... $17 5/8 13 5/8 Second Quarter..... 18 1/4 13 3/4 Third Quarter...... 15 1/4 9 1/4 Fourth Quarter..... 14 9 1/2 1997 First Quarter (as of 3/26/97) 12 5/8 7 7/8 HOLDERS. At March 15, 1997, there were approximately 650 holders of record of shares of common stock. DIVIDEND POLICY. The Company has never paid a dividend on its common stock and does not expect to do so in the foreseeable future. Although the payment of dividends is at the discretion of the Board of Directors, the Company intends to retain its earnings in order to finance its ongoing operations and to develop and expand its business. The Company's credit facility with its lenders prohibits the Company from paying dividends on its common stock or making other cash distributions without the lenders' consent. Further, in connection with the private placement of the Series C Convertible Preferred Stock to Edison Venture Fund II, L.P., the Company is prohibited from paying cash dividends on its common stock, unless the dividend is permitted under the Company's bank agreement and the amount of the dividend is less than or equal to 50% of operating income less income tax. The Company's Series A Preferred Stock bears a dividend of 8% per annum, payable quarterly. Dividends totaling $108,419 were paid in 1996. 11 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical financial data of the Company. This data should be read in conjunction with the Company's Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year ended December 31, 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (in thousands except per share data) OPERATING DATA: Revenue......................................... $58,909 $44,154 $34,372 $32,594 $33,498 School operating expenses....................... 49,079 35,908 28,161 26,543 27,036 School operating profit......................... 9,831 8,246 6,211 6,051 6,462 General and administrative expenses....................................... 4,190 3,396 2,696 2,555 2,946 Litigation expense.............................. - 500 200 - - Operating income (loss)......................... 5,641 4,350 3,315 3,496 3,516 Interest expense................................ 2,004 1,840 1,223 1,718 1,729 Other (income) expense.......................... (483) (126) 107 (39) (117) Minority interest............................... 95 86 83 88 63 Income before income taxes...................... 4,025 2,550 1,902 1,729 1,841 Income tax (benefit) expense.................... 1,562 (1,356) (438) 21 36 Net income before extraordinary item............ 2,463 3,906 2,340 1,708 1,805 Extraordinary Item.............................. - 62 - - - Net income...................................... 2,463 3,844 2,340 1,708 1,805 Preferred Dividends............................. 109 184 199 107 - Net income available to Common Stockholders............................ 2,354 3,660 2,141 1,601 1,805 EBITDA (earnings before interest, taxes, depreciation and amortization expense)......... $ 8,240 $ 5,902 $ 4,188 $ 4,591 $ 4,811 Primary earnings per share (post split): - --------------------------------------- Net income before extraordinary item............ $0.34 $ 0.69 $0.53 $0.40 $ 0.48 Extraordinary item.............................. - $ (0.01) - - - ------- ------- ------- ------- ------- Net income...................................... $0.34 $ 0.68 $0.53 $0.40 $ 0.48 ======= ======= ======= ======= ======= Fully diluted earnings per share (post split): - --------------------------------------------- Net income before extraordinary item............ $0.34 $ 0.64 $0.46 $0.38 $ 0.48 Extraordinary item.............................. - $ (0.01) - - - ------- ------- ------- ------- ------- Net income...................................... $0.34 $ 0.63 $0.46 $0.38 $ 0.48 ======= ======= ======= ======= ======= Year ended December 31, 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (in thousands) BALANCE SHEET DATA: Working Capital (deficit)....................... $(1,351) $ (831) $(4,197) $(3,114) $(3,996) Goodwill........................................ 25,601 17,274 8,888 8,923 9,278 Total assets.................................... 56,833 44,937 23,234 22,613 24,226 Short-term debt and current portion of long-term debt...................... 3,376 1,371 1,768 905 1,523 Long-term debt.................................. 14,225 20,272 7,846 12,545 17,733 Stockholders' equity (deficit) $32,323 $16,121 $ 8,298 $ 3,732 $ (279)
12 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 108 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 $990,055 or 62%. 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 $ 885,474 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements and supplementary financial information specified by this Item, together with the Reports of the Company's independent accountants thereon, are included in this Annual Report on Form 10-K on pages F-1 through F- 26 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of the Company are as follows:
Name Age Position - --------------------------------------------------------------------------------- A. J. Clegg 57 Chairman of the Board of Directors, President and Chief Executive Officer; Director (since 1992) John R. Frock 53 Executive Vice President-Corporate Development; Assistant Secretary; Director (since 1992) Brian C. Zwaan 38 Executive Vice President and Chief Financial Officer D. Scott Clegg 34 Executive Vice President - Operations Yvonne DeAngelo 39 Vice President - Administration and Finance; Secretary B. Robin Eglin 40 Vice President - Real Estate Development Barbara Z. Presseisen 60 Vice President - Education Edward Chambers 60 Director (since 1988) Peter H. Havens 42 Director (since 1991) Janet L. Katz 50 Director (since 1994) Morgan R. Jones 57 Director (since 1991) John H. Martinson 49 Director (since 1994) Eugene G. Monaco 69 Director (since 1995)
The following description contains certain information concerning the foregoing persons: A.J. Clegg. Mr. Clegg was named Chairman of the Board and Chief Executive Officer of the Company on May 29, 1992. Since 1989, Mr. Clegg has also served on the Advisory Board of Drexel University and, in 1996, was named as a member of the Board of Trustees of Drexel University. Since June 1990, Mr. Clegg has also served as the Chairman and CEO of JBS Investment Banking, Ltd., which provides investment management and consulting services to businesses and formerly provided services to the Company through an Administrative Services Agreement. Mr. Clegg's responsibilities for JBS Investment Banking, Ltd. do not require material amounts of his time. In 1979, he formed Empery Corporation, an operator of businesses in the cable television and printing industries, and held the offices of Chairman, President and CEO during his tenure (1979-1993). In addition, Mr. Clegg served as Chairman and CEO of TVC, Inc. (1983-1993), a distributor of cable 23 television components; and Design Mark Industries (1988-1993), a manufacturer of electronic senswitches. Mr. Clegg has also served on the board of directors of Ferguson International Holdings, PLC, a United Kingdom company, from March 1990 to April 1991; and was Chairman and CEO of Globe Ticket and Label Company from December 1984 to February 1991. John R. Frock. Mr. Frock was named Executive Vice President - Corporate Development on August 1, 1994. Mr. Frock was elected to the Board of Directors of the Company on May 29, 1992. In March 1992, Mr. Frock became the President and Chief Operating Officer of JBS Investment Banking, Ltd., which provided investment management and consulting services to businesses (which included Nobel). During the past five years, Mr. Frock also served as the Chairman and Chief Executive Officer of Avant Guarde Enterprises, Ltd.; President and Chief Operating Officer of SBF Communications Graphics, a business forms printer located in Philadelphia, PA; President of Globe Ticket and Label Company; and President of the Graphics Group of Empery Corporation. Brian C. Zwaan. Mr. Zwaan joined Nobel as Chief Financial Officer in December 1996. Prior to joining Nobel, Mr. Zwaan was Senior Vice President of Summit Bancorp, managing commercial operations in Southeastern Pennsylvania focusing on middle market corporations with revenues between $15 million and $250 million. Mr. Zwaan has over 16 years experience in the finance and accounting industries, including areas of strategic planning, acquisition underwriting and integration, budget management and sales and marketing. He is a licensed CPA in the state of Pennsylvania. D. Scott Clegg. Mr. Clegg was named Vice President - Operations for the Merryhill Country Schools division in June 1993 and Vice President - Operation, with responsibility for nationwide operations in early 1996. He was formerly Vice President of New Business Development at JBS Investment Banking, Ltd. Mr. Clegg also served as General Manager and Chief Operating Officer of Dynasil Corporation of America, a public company, and also served as a member of Dynasil's Board of Directors. Yvonne DeAngelo. Ms. DeAngelo was appointed Vice President - Finance and Administration in December 1995. She had served as Controller since March 1989. Ms. DeAngelo has also served as Secretary since May 1992. Before joining Nobel Education Dynamics, Inc., she served as Senior Auditor for Coopers and Lybrand from 1986 to 1989. B. Robin Eglin. Mr. Eglin was named Vice President - Real Estate Development in April 1995. Mr. Eglin was formerly Vice President of Carefree Learning Centers, Inc. and Keystone Real Estate Development Company, Inc., wholly-owned for-profit subsidiaries of Pennsylvania Blue Shield, where he was in charge of all real estate, finance and accounting activities. Mr. Eglin joined Carefree in 1989. Barbara Z. Presseisen. Dr. Presseisen was named Vice President - Education in June 1996. Dr. Presseisen served in several positions over 24 years at Research for Better Schools, one of the ten regional educational laboratories sponsored by the U.S. Department of Education, located in Philadelphia, Pennsylvania. In her most recent capacity, Director of National Networking, she worked with several major school districts on staff development and program improvement, as well as coordinated training and conferences on curriculum and student achievement with other laboratories and a number of professional associations and universities. Dr. Presseisen has authored a number of books and research reports, and has been an invited lecturer at many national and 24 regional programs. Most recently, prior to joining Nobel, Dr. Presseisen consulted on educational design and product development for the Walt Disney Company from December 1995 to June 1996. Edward H. Chambers. Mr. Chambers has served as Executive Vice President - Finance and Administration of Wawa, Inc. since March 1988. During the period April 1984 through March 1988, he served as President and Chief Executive Officer, and as a director, of Northern Lites, Ltd., an owner and operator of quick-service restaurants operating pursuant to a franchise from D'Lites of America, Inc. From 1982 to July 1984, Mr. Chambers was President - Retail Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service restaurants. He is also a director of Davco, Inc., a franchisee of Wendy's International, Inc. and a director of Riddle Memorial Hospital. Peter H. Havens. Mr. Havens has been Executive Vice President of Bryn Mawr Bank Corporation since May 1995 overseeing the Trust Division. From 1982 through May 1995, Mr. Havens served as manager of Kewanee Enterprises, a private investment firm located in Bryn Mawr, Pennsylvania. He is also Chairman of the Board of Directors of Petroferm, Inc. and a director of Bryn Mawr Bank Corporation, Ursinus College and Independence Seaport Museum. Morgan R. Jones. Mr. Jones has been a partner in the law firm Drinker Biddle & Reath, Philadelphia, Pennsylvania since 1970, and is presently Chairman of the firm. Mr. Jones also serves on the Board of Directors of Mack Printing Companies, Inc. Janet Lea Katz. Ms. Katz has both a Masters and a Doctorate in Education from Columbia University and is currently serving as the building administrator at Bogert School in Upper Saddle River, New Jersey. Ms. Katz has held various positions throughout her career in education, including speech arts teacher, coordinator and therapist for speech and language programs for elementary school and research assistant for the study of learning disabilities at Columbia University, and is presently the curriculum coordinator for Upper Saddle River Schools, Upper Saddle River, New Jersey, as well as the building administrator at Bogert School. John Martinson. Mr. Martinson is Managing Partner of Edison Venture Fund which he founded in 1986. He also serves on the Board of Directors of the National Venture Capital Association, Dendrite International, Inc. and eleven private companies. Eugene G. Monaco. Mr. Monaco has both a J.D. from Temple Law School and M.S. in Mechanical Engineering from the University of Delaware and, from January 1, 1990 until his retirement in late 1995, served as a Judge for the Delaware County District Court. He also served as an Instructor in Kinematics and Dynamics at Drexel University, a Lecturer in child abuse at Penn State University, and was the Chief Negotiator for the Rose Tree Media School Board. He also served as Assistant District Attorney in Media, Pennsylvania and Engineering Negotiator for Westinghouse Electric for 32 years. John Martinson serves on the Board as the designee of Edison Venture Fund II, L.P., the majority holder of the Series C Convertible Preferred Stock, which was issued in August 1994. A. J. Clegg's son, D. Scott Clegg, is the Executive Vice President - Operations of the Company. 25 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 JOHN R. FROCK 1996 $112,119 $ 0 $13,840 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 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 $1,086 Vice President - Real 1995 72,322 $10,380 3,000 Estate Development /9/ $19,500 $ 756
(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 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Common Stock The following table shows information concerning the beneficial ownership of the Company's Common Stock as of February 15, 1997 by each director, by each executive officer named in the Summary Compensation Table appearing elsewhere in this Annual Report, by all directors and executive officers as a group, and by each person who is known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock. The number of shares beneficially owned by each person is determined under the rules of the Securities and Exchange Commission and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power and also any shares which the person has the right to acquire within 60 days of February 15, 1997 through the exercise of any stock option or right or conversion of any convertible security or otherwise. As of February 15, 1997, the Edison Venture Fund II, L.P., Allied Capital Corporation and affiliated funds, and A. J. Clegg were the only persons or group of persons known to the Company as beneficially owning more than 5% of the outstanding Common Stock of the Company. The Edison Venture Fund II, L.P. has its principal executive office at 997 Lenox Drive #3, Lawrenceville, New Jersey 08648. Allied Capital Corporation and affiliated funds have their principal executive offices at 1666 K St., N.W., Suite 901, Washington, DC 20006. A. J. Clegg's address is c/o Nobel Education Dynamics, Inc., Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media, Pennsylvania 19063.
Number of Shares of Percent Common Stock of Name of Beneficial Owner Beneficially Owned Class (1) - ------------------------ ------------------ --------- A. J. Clegg 569,352 (2) 9.04% Edward H. Chambers 22,730 (3) * John R. Frock 27,200 (4) * Peter H. Havens 12,609 (5) * Morgan R. Jones 10,599 (6) * Janet Katz 29,900 (7) * John Martinson 629,532 (8) 9.74% Eugene Monaco 1,000 * D. Scott Clegg 7,917 (9) * B. Robin Eglin 1,000 (10) * Edison Venture Fund II, L.P. 629,032 (11) 9.74% Allied Capital Corporation 575,000 (12) 8.98% All directors and executive 1,314,881 (13) 18.76% officers as a group (13 persons) * Less than 1%. [See notes on following page]
30 (1) The numbers set forth above reflect the percentage of outstanding Common Stock currently owned by each holder listed and the percentage of outstanding Common Stock which would be owned by each such holder giving effect to the conversion of all shares of Preferred Stock and exercise of all options and warrants held by such holder, but not to such conversion or exercise by any other person. (2) Of these shares, 100,806 shares are issuable upon conversion of Series C Preferred Stock of the Company, 20,161 shares are issuable upon the exercise of warrants and 15,000 are issuable upon exercise of currently exercisable stock options. In addition, Mr. Clegg is also the beneficial owner of an additional 430,885 shares owned of record by, or issuable upon the exercise of securities of the Company owned of record by, JBS Investment Banking, Ltd., a privately held corporation of which Mr. Clegg is a director, officer and controlling stockholder, as follows: 103,000 shares of Common Stock owned of record by JBS; 187,500 shares issuable upon the exercise of warrants held by JBS; and 140,385 shares of Common Stock issuable upon the conversion of the Company's Series A Preferred Stock owned of record by JBS. JBS may also be deemed to be the beneficial owner of these 430,885 shares. Mr. Clegg is also the beneficial owner of 2,500 shares of Common Stock owned by his spouse. This does not include shares beneficially owned by Mr. Clegg's adult children (including Scott Clegg, an officer of the Company), as to which he disclaims beneficial ownership. (3) Consists of 14,750 shares of Common Stock which Mr. Chambers has the right to purchase upon the exercise of currently exercisable options, 1,470 shares of Common Stock issuable upon the conversion of the Company's Series A Preferred Stock, and 6,510 shares of Common Stock held by Mr. Chambers. (4) Consists of 14,700 shares of Common Stock issuable upon the conversion of the Company's Series A Preferred Stock and 12,500 shares of Common Stock held by Mr. Frock. (5) Consists of 7,250 shares of Common Stock which Mr. Havens has the right to purchase upon the exercise of currently exercisable options, 3,234 shares of Common Stock issuable upon the conversion of the Company's Series A Preferred Stock held by Mr. Havens, and 2,125 shares of Common Stock held by Mr. Havens. (6) Consists of 10,099 shares of Common Stock held by Mr. Jones and 500 shares of Common Stock which Mr. Jones has the right to purchase upon the exercise of currently exercisable options. Does not include shares owned by Mr. Jones's spouse and adult children as to which he disclaims beneficial ownership. (7) Consists of 29,400 shares of Common Stock issuable upon the conversion of the Company's Series A Preferred Stock held by Ms. Katz and 500 shares of Common Stock which Ms. Katz has the right to purchase upon the exercise of currently exercisable options. (8) Mr. Martinson is a managing partner of Edison Partners II, the general partner of Edison Venture Fund II, L.P.. By virtue of his position as managing partner, Mr. Martinson may under the SEC's rules also be deemed a beneficial owner of the shares owned by Edison Venture Fund II, L.P. (See footnote 11.) Mr. Martinson disclaims beneficial ownership of such shares. Mr. Martinson also holds currently exercisable options to purchase 500 shares of Common Stock. (9) Consists of 7,917 shares of Common Stock which Mr. Clegg has the right to purchase upon the exercise of currently exercisable options. (10) Consists of 1,000 shares of Common Stock which Mr. Eglin has the right to purchase upon the exercise of currently exercisable options. (11) Consists of 524,193 shares of Common Stock issuable upon the conversion of the Company's Series C Preferred Stock held by the Edison Venture Fund II, L.P. and 104,839 shares issuable upon the exercise of warrants held by the Edison Venture Fund II, L.P. By virtue of his position as managing partner of Edison Venture Fund II, L.P., Mr. Martinson may under the SEC's rules also be deemed a beneficial owner of these shares. (12) Consists of an aggregate of 265,958 shares of Common Stock upon the conversion of the Company's Series D Preferred Stock and 309,043 issuable upon the exercise of warrants held by Allied Capital Corporation, Allied Capital Corporation II, Allied Investment Corporation and Allied Investment Corporation II. (13) Consists of shares shown as beneficially held by all natural persons in this table, and an additional 2,792 shares of Common Stock which an executive officer not named in the table has the right to purchase upon the exercise of currently exercisable options and 250 shares owned by such executive officer. 31 Preferred Stock The following table shows information concerning the beneficial ownership of the Company's Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as of February 15, 1997 by each director, by each executive officer named in the Summary Compensation Table appearing elsewhere in this Annual Report, and by all directors and executive officers as a group. Directors and executive officers omitted from a section of the following table do not beneficially own shares of the series of Preferred Stock to which such section relates.
Number of Shares of Percent Name of Common Stock of Security Name of Beneficial Owner Beneficially Owned Class - ---------------------------------------------------------------------------- Series A Edward H. Chambers 5,000 0.44% Preferred A. J. Clegg 477,500 (1) 42.12% Stock John R. Frock 50,000 4.41% Peter H. Havens 11,000 0.97% Janet Katz 100,000 8.82% All directors and executive 643,500 56.76% officers as a group (11 persons) - -------------------------------------------------------------------------------- Series C A. J. Clegg 403,226 16.13% Preferred Edison Venture Fund II, L.P. 2,096,774 83.87% Stock John Martinson 2,096,774 (2) 83.87% All directors and executive 2,500,000 (2) 100.00% officers as a group (11 persons) - -------------------------------------------------------------------------------- Series D Allied Capital Corporation 1,063,830 (3) 100.00% Preferred All directors and executive 0 Stock officers as a group (11 persons) - --------------------------------------------------------------------------------
(1) Mr. Clegg is the beneficial owner of these 477,500 shares of Series A Preferred Stock owned of record by JBS Investment Banking, Ltd., as he is a director, officer and controlling stockholder of JBS Investment Banking, Ltd. (2) John Martinson is a managing partner of Edison Partners II, the general partner of Edison Venture Fund II, L.P. By virtue of his position as managing partner, Mr. Martinson may also under the SEC's rules be deemed a beneficial owner of the 2,096,774 shares of Series C Preferred Stock owned by Edison Venture Fund II, L.P. Mr. Martinson disclaims beneficial ownership of such shares. (3) Shares are owned by Allied Capital Corporation, Allied Capital Corporation II, Allied Investment Corporation and Allied Investment Corporation II. 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During 1996, legal services were rendered to the Company by Drinker Biddle & Reath, of which Morgan R. Jones, a director of the Company, is a partner and Chairman. Fees paid to this firm in 1996 were $128,015. The Company expects this firm to continue to provide such services in 1997. 33 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 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1997 NOBEL EDUCATION DYNAMICS, INC. By: /s/ A. J. Clegg -------------------- A. J. Clegg Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Position Date /s/ A. J. Clegg Chairman of the Board, March 28, 1997 ----------------- President and Chief A. J. Clegg Executive Officer and Director /s/ Brian C. Zwaan Executive Vice President, March 28, 1997 -------------------- Chief Financial Officer Brian C. Zwaan (Principal Financial Officer) /s/ Yvonne DeAngelo Vice President - Finance March 28, 1997 --------------------- and Administration Yvonne DeAngelo (Principal Accounting Officer) --------------------- Director March 28, 1997 Edward H. Chambers /s/ John R. Frock Executive Vice President March 28, 1997 ------------------- and Director John R. Frock ------------------- Director March 28, 1997 Peter H. Havens 40 /s/ Morgan R. Jones Director March 28, 1997 --------------------- Morgan R. Jones /s/ Janet L. Katz Director March 28, 1997 ------------------- Janet L. Katz /s/ John H. Martinson Director March 28, 1997 ----------------------- John H. Martinson /s/ Eugene G. Monaco Director March 28, 1997 ---------------------- Eugene G. Monaco 41 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 1995 1996 - ------ ------------- ------------- 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 EXHIBIT INDEX 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.) 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 F-27 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. 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 F-28 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.) 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.) F-29 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.) 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 F-30 EX-4.4 2 FIFTH AMENDMENT TO LOAN & SECURITY AGREEMENT EXHIBIT 4.4 FIFTH AMENDMENT AND MODIFICATION TO ----------------------------------- LOAN AND SECURITY AGREEMENT --------------------------- THIS FIFTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the "Amendment") is made effective as of the _____ day of March, 1997, by and among NOBEL EDUCATION DYNAMICS, INC. ("Nobel"), BLUEGRASS REAL ESTATE COMPANY, INC. ("Bluegrass"), IMAGINE EDUCATIONAL PRODUCTS, INC. ("Imagine"), MERRYHILL SCHOOLS, INC. ("Merryhill"), EDUCO, INC. ("Educo"), NEDI, INC. ("NEDI"), MONTESSORI HOUSE, INC. ("Montessori"), ANOTHER GENERATION ENTERPRISES, INC. ("Another Generation") (collectively, the "Obligors") and SUMMIT BANK, formerly known as First Valley Bank ("Bank"). BACKGROUND ---------- A. By a Loan and Security Agreement among Obligors, Children's Park, Incorporated, Rocking Horse Management Corporation and Bank dated August 30, 1995 (as amended by those certain amendments dated September 1, 1995, April 4, 1996, July 23, 1996 and November 1, 1996, the "Loan Agreement"), Bank agreed, inter alia, to extend to Obligors a (i) revolving line of credit in the original - ----- ---- principal amount of up to Ten Million Dollars ($10,000,000.00) (the "Line"), (ii) term loan in the original principal amount of Seven Million Five Hundred Thousand Dollars ($7,500,000.00) (the "Term Loan"), and (iii) term loan in the original principal amount of Six Million Dollars ($6,000,000.00) (the "New Term Loan"). Subsequent to the execution of the Loan Agreement, Children's Park, Incorporated and Rocking Horse Management Corporation merged into Nobel with Nobel being the surviving entity. B. Obligors' obligations to repay the sums advanced under the (i) Line is evidenced by that certain Line Note from Obligors to Bank dated November 1, 1996 in the face amount of Ten Million Dollars ($10,000,000.00) (the "Line Note"), (ii) Term Loan is evidenced by that certain Term Note from Obligors to Bank dated August 30, 1995 in the original principal amount of Seven Million Five Hundred Thousand Dollars ( $7,500,000.00) (as amended, the "Term Note"), and (iii) New Term Loan is evidenced by that certain New Term Note from Obligors to Bank dated April 4, 1996 in the original principal amount of Six Million Dollars ($6,000,000.00) (as amended, the "New Term Note"). C. Obligors and Bank desire to further amend the Loan Agreement in accordance with the terms and conditions hereof. D. Capitalized terms not otherwise defined herein will have the meanings set forth therefor in the Loan Agreement. NOW, THEREFORE, intending to be legally bound hereby, the parties hereto agree as follows: 1. PERMITTED INDEBTEDNESS. Section 6.2 of the Loan Agreement is amended ---------------------- ----------- by adding the following subsection (d): -------------- "(d) Indebtedness to AEI Fund Management, Inc. ("AEI") in an amount not to exceed Seven Million Five Hundred Thousand Dollars ($7,500,000.00) in the aggregate to be used to finance the construction of new educational facilities of Obligors, provided that no Event of Default or event which with the giving of notice or the passage of time or both would become an Event of Default shall have occurred and the incurrence of such obligations will not cause an Event of Default. All obligations of Obligors to AEI shall be secured only by mortgage liens and UCC-1 fixture filings against the property and improvements in respect of which AEI is providing construction financing. Prior to each financing with AEI, Obligors shall provide to Bank a description of the properties being financed by AEI, the terms of such financing and copies of all documents in connection therewith." 2. INVESTMENT ACCOUNT. Notwithstanding anything to the contrary ------------------ contained in the Loan Agreement, Bank consents to the transfer by Nobel of an amount not to exceed Nine Million Five Hundred Thousand Dollars ($9,500,000.00) to an account maintained by NEDI with Smith Barney, account number 532-14483-17- 187. NEDI acknowledges and agrees that such account, together with all securities and other assets therein, all substitutions and replacements therefor and all proceeds thereof are part of the Collateral and are subject to the Securities Pledge Agreement from NEDI to Bank and the agreement among Bank, Smith Barney and NEDI regarding such account. 3. FINANCIAL COVENANTS. Section 7 of the Loan Agreement shall be amended ------------------- --------- as follows: (a) Sections 7.1, 7.2 and 7.3 are hereby deleted in their entirety. ------------------------- (b) The following financial covenants are hereby added to Section 7: --------- (i) Total Funded Indebtedness To EBITDA. Obligors shall ----------------------------------- maintain a ratio of Total Funded Indebtedness to EBITDA of not greater than 4.0 to 1.0. as of the end of each fiscal quarter of Obligors, calculated on a rolling four (4) quarter basis. (ii) Total Funded Senior Indebtedness to EBITDA. Obligors shall ------------------------------------------ maintain a ratio of Total Funded Senior Indebtedness to EBITDA of not greater than 3.0 to 1.0. as of the end of each fiscal quarter of Obligors, calculated on a rolling four (4) quarter basis. As used herein, the following terms shall have the following meanings: "Total Funded Senior Indebtedness" shall mean the Total Funded Indebtedness of Obligors minus the Subordinated Indebtedness of Obligors then outstanding. "EBITDA" shall mean the earnings of Obligors for any given period, plus the aggregate amounts deducted in determining such earnings in respect of 2 (i) Interest Expense, (ii) income taxes, (iii) depreciation and (iv) amortization, all as determined in accordance with GAAP. "Total Funded Indebtedness" shall mean the sum of all Bank Indebtedness, Indebtedness owed to AEI, Subordinated Indebtedness and Capitalized Lease Obligations outstanding at any given time. 4. ADDITIONAL OBLIGORS. From and after the date hereof, Montessori and ------------------- Another Generation shall each be an "Obligor" under the Loan Agreement and shall be bound by all of the terms and conditions thereof. Unless otherwise specifically restated for Montessori and Another Generation hereunder, all representations, warranties and covenants under the Loan Agreement shall be deemed to be the representations, warranties and covenants of Montessori and Another Generation as if Montessori and Another Generation were originally named as an "Obligor" under the Loan Agreement. All references to Obligors in the Loan Agreement and the other Loan Documents shall hereafter also be deemed a reference to Montessori and Another Generation. 5. SECURITY. As security for the full and timely payment and performance -------- of all Bank Indebtedness, Montessori and Another Generation hereby grant to Bank a security interest in all of the following: (a) All of such parties' present and future accounts, contract rights, chattel paper, instruments and documents and all other rights to the payment of money whether or not yet earned, for services rendered or goods sold, consigned, leased or furnished by such parties or otherwise, together with (i) all goods (including any returned, rejected, repossessed or consigned goods), the sale, consignment, lease or other furnishings of which shall be given or may give rise to any of the foregoing, (ii) all of such parties' rights as a consignor, consignee, unpaid vendor or other lienor in connection therewith, including stoppage in transit, set-off, detinue, replevin and reclamation, (iii) all general intangibles related thereto, (iv) all guaranties, mortgages, security interests, assignments, and other encumbrances on real or personal property, leases and other agreements or property securing or relating to any accounts, (v) choses-in-action, claims and judgments, (vi) any return or unearned premiums, which may be due upon cancellation of any insurance policies, and (vii) all products and proceeds of any of the foregoing. (b) All of such parties' present and future inventory (including but not limited to goods held for sale or lease or furnished or to be furnished under contracts for service, raw materials, work-in-process, finished goods and goods used or consumed in such parties' business) whether owned, consigned or held on consignment, together with all merchandise, component materials, supplies, packing, packaging and shipping materials, and all returned, rejected or repossessed goods sold, consigned, leased or otherwise furnished by such parties and all products and proceeds of any of the foregoing. (c) All of such parties' present and future general intangibles (including but not limited to tax refunds and rebates, manufacturing and processing rights, designs, patent rights and applications therefor, trademarks and registration or applications therefor, tradenames, brand names, logos, inventions, copyrights and all applications and registrations therefor), licenses, permits, approvals, software and computer programs, license rights, royalties, trade secrets, methods, processes, know-how, formulas, drawings, specifications, descriptions, label designs, plans, 3 blueprints, patterns and all memoranda, notes and records with respect to any research and development, and all product and proceeds of any of the foregoing. (d) All of such parties' present and future machinery, equipment, furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other articles of tangible personal property of every type together with all parts, substitutions, accretions, accessions, attachments, accessories, additions, components and replacements thereof, and all manuals of operation, maintenance or repair, and all products and proceeds of any of the foregoing. (e) All of such parties' present and future general ledger sheets, files, records, customer lists, books of account, invoices, bills, certificates or documents of ownership, bills of sale, business papers, correspondence, credit files, tapes, cards, computer runs and all other data and data storage systems, whether in the possession of such parties or any service bureau. (f) All letters of credit now existing or hereafter issued naming such parties as beneficiaries or assigned to such parties, including the right to receive payment thereunder, and all documents and records associated therewith. (g) All deposits, funds, instruments, documents, policies and evidence and certificates of insurance, securities, chattel paper and other assets of such parties or in which such parties have an interest and all proceeds thereof, now or at any time hereafter on deposit with or in the possession or control of Bank or owing by Bank to such parties or in transit by mail or carrier to Bank or in the possession of any other Person acting on Bank's behalf, without regard to whether Bank received the same in pledge, for safekeeping, as agent for collection or otherwise, or whether Bank has conditionally released the same, and in all assets of such parties in which Bank now has or may at any time hereafter obtain a lien, mortgage or security interest for any reason. (h) All stocks, bonds, treasury securities, commercial paper, mutual funds and other investments or securities of any nature now or hereafter acquired by such parties, and all interest, dividends and other proceeds thereof. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS. Montessori and Another ----------------------------------------- Generation hereby join in and ratify and confirm all of the representations and warranties in the Loan Agreement and agree to be bound by and to comply with all of the covenants set forth herein. 7. NEW FACILITIES. Section 6.27 of the Loan Agreement is hereby amended -------------- ------------ to read, in its entirety, as follows: "6.27 New Facilities. During any fiscal year, Obligors shall not -------------- establish more than ten (10) newly constructed educational facilities which they, or any of them, will own or which will otherwise appear as an asset on any Obligor's balance sheet ("Owned Facilities"). In addition to the foregoing, Obligors may acquire and hold from time to time up to seven (7) parcels of vacant land (the "Vacant Land"), provided, however, the aggregate purchase price of the Vacant Land at any time held by Obligors shall not exceed Three Million Five Hundred Thousand Dollars ($3,500,000.00)." 4 8. FURTHER ASSURANCES. Obligors covenant and agree to execute and deliver ------------------ to Bank or to cause to be executed and delivered at the sole cost and expense of Obligors, from time to time, any and all other documents, agreements, statements, certificates and information as Bank shall reasonably request to evidence or effect the terms hereof, the Loan Agreement, as amended, or any of the other Loan Documents, or to enforce or to protect Bank's interest in the Collateral, including, without limitation, Allonges to each of the promissory notes in connection with the Loan Agreement adding Montessori and Another Generation as Obligors thereunder. All such documents, agreements, statements, etc., shall be in form and content acceptable to Bank in its sole discretion. 9. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors do hereby: -------------------------------------- (a) ratify, confirm and acknowledge that the Loan Agreement, as amended, and the other Loan Documents continue to be and are valid, binding and in full force and effect; (b) covenant and agree to perform all obligations of Obligors contained herein and under the Loan Agreement, as amended, and the other Loan Documents; (c) acknowledge and agree that Obligors have no defense, set-off, counterclaim or challenge against the payment of any sums owing under Loan Documents, the enforcement of any of the terms of the Loan Agreement, as amended, or the other Loan Documents; (d) acknowledge and agree that all representations and warranties of Obligors contained in the Loan Agreement and/or the other Loan Documents, as amended, are true, accurate and correct on and as of the date hereof as if made on and as of the date hereof; (e) represent and warrant that no Event of Default (as defined in the Loan Agreement or any of the other Loan Documents) or event which with the giving of notice or passage of time or both would constitute such an Event of Default exists and all information described in the foregoing Background is true, accurate and complete; (f) acknowledge and agree that nothing contained herein and no actions taken pursuant to the terms hereof is intended to constitute a novation of the Loan Agreement or any of the other Loan Documents, and does not constitute a release, termination or waiver of any of the rights or remedies granted to the Bank therein, which rights and remedies are hereby ratified, confirmed, extended and continued as security for the obligations of Obligors to Bank under the Loan Agreement and the other Loan Documents, including, without limitation, this Amendment; and (g) acknowledge and agree that any Obligor's failure to comply with or perform any of its covenants, agreements or obligations contained in this Amendment shall constitute an Event of Default under the Loan Agreement and each of the Loan Documents. 10. COSTS AND EXPENSES. Upon execution of this Amendment, Obligors shall ------------------ pay to Bank, all costs and expenses incurred by Bank in connection with the review, preparation and negotiation of this Amendment and all documents in connection therewith, including, without limitation, all of Bank's attorneys' fees and costs. 11. INCONSISTENCIES. To the extent of any inconsistency between the --------------- terms, conditions and provisions of this Amendment and the terms, conditions and provisions of the Loan 5 Agreement or the other Loan Documents, the terms, conditions and provisions of this Amendment shall prevail. All terms, conditions and provisions of the Loan Agreement and the other Loan Documents not inconsistent herewith shall remain in full force and effect and are hereby ratified and confirmed by Obligors. 12. CONSTRUCTION. All references to the Loan Agreement therein or in ------------ any other Loan Documents shall be deemed to be a reference to the Loan Agreement as amended hereby. 13. NO WAIVER. Nothing contained herein and no actions taken pursuant to --------- the terms hereof are intended to nor shall they constitute a waiver by the Bank of any rights or remedies available to Bank at law or in equity or as provided in the Loan Agreement or the other Loan Documents. 14. BINDING EFFECT. This Amendment shall be binding upon and inure to the -------------- benefit of the parties hereto and their respective successors and assigns. 15. GOVERNING LAW. This Amendment shall be governed by and construed in ------------- accordance with the laws of the Commonwealth of Pennsylvania. 16. HEADINGS. The headings of the sections of this Amendment are inserted -------- for convenience only and shall not be deemed to constitute a part of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first above written. NOBEL EDUCATION DYNAMICS, INC. By:_____________________________________ Name/Title:_____________________________ Attest:_________________________________ Name/Title:_____________________________ BLUEGRASS REAL ESTATE COMPANY, INC. By:____________________________________ Name/Title:____________________________ Attest:________________________________ Name/Title:____________________________ [SIGNATURES CONTINUED NEXT PAGE] 6 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] IMAGINE EDUCATIONAL PRODUCTS, INC. By:____________________________________ Name/Title:____________________________ Attest:________________________________ Name/Title:____________________________ MERRYHILL SCHOOLS, INC. By:___________________________________ Name/Title:___________________________ Attest:_______________________________ Name/Title:___________________________ EDUCO, INC. By:___________________________________ Name/Title:___________________________ Attest:_______________________________ Name/Title:___________________________ NEDI, INC. By:___________________________________ Name/Title:___________________________ Attest:_______________________________ Name/Title:___________________________ MONTESSORI HOUSE, INC. By:___________________________________ Name/Title:___________________________ Attest:_______________________________ Name/Title:___________________________ [SIGNATURES CONTINUED NEXT PAGE] 7 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] ANOTHER GENERATION ENTERPRISES, INC. By:___________________________________ Name/Title:___________________________ Attest:_______________________________ Name/Title:___________________________ SUMMIT BANK, formerly known as First Valley Bank By:___________________________________ Donald H. McCarty Regional Vice President 8 EX-4.7 3 TERM NOTE EXHIBIT 4.7 TERM NOTE --------- Blue Bell, Pennsylvania Dated: April 4, 1996 $6,000,000.00 FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned ("Borrower") hereby promises to pay to the order of FIRST VALLEY BANK ("Bank"), the principal sum of Six Million Dollars ($6,000,000.00), together with interest thereon upon the following terms: 1. Term Note. This Note is the "New Term Note" as defined in that certain ---------- Second Amendment and Modification to Loan and Security Agreement dated of even date herewith, amending that certain Loan and Security Agreement dated August 30, 1995 between Borrower and Bank (such Loan and Security Agreement, as the same has been and may hereafter be amended, supplemented or restated from time to time, being the "Loan Agreement") and, as such, shall be construed in accordance with all terms and conditions thereof. Capitalized terms not defined herein shall have such meaning as provided in the Loan Agreement. This Note is entitled to all the rights and remedies provided in the Loan Agreement and the Loan Documents and is secured by all collateral as described therein. 2. Interest Rate. Interest on the unpaid principal balance hereof will -------------- accrue from the date of advance until final payment thereof at a fixed, per annum rate equal to eight percent (8%). 3. Default Interest. Upon the occurrence and during the continuance of an ----------------- Event of Default, at the option of Bank after ten (10) days notice to Borrower, interest will accrue on the outstanding principal amount hereof at a per annum rate which is three percent (3%) in excess of the otherwise applicable non- default rate of interest set forth in Section 2 above (the "Default Rate"). --------- 4. Post Judgment Interest. Any judgment obtained for sums due hereunder or ----------------------- under the Loan Documents will accrue interest at the Default Rate until paid. 5. Computation. Interest will be computed on the basis of a year of three ------------ hundred sixty (360) days and paid for the actual number of days elapsed. 6. Principal and Interest Payments. ---------------------------------- (a) Interest. Borrower will pay interest in arrears on the principal balance --------- hereof monthly at the applicable rate set forth in Section 2 above, on the --------- first day of each calendar month commencing on May 1, 1996. (b) Principal. Borrower will pay the outstanding principal balance hereof as ---------- follows: (i) two (2) installments of Two Hundred Thousand Dollars ($200,000.00) each, on June 1, 1996 and September 1, 1996; (ii) twelve (12) equal and consecutive quarterly installments of Two Hundred Eighty Thousand Dollars ($280,000.00) each, on the first day of each calendar quarter commencing on December 1, 1996 and continuing through and ending September 1, 1999; (iii) three (3) equal and consecutive quarterly installments of Three Hundred Fifty Thousand Dollars ($350,000.00) each, on the first day of each calendar quarter commencing on December 1, 1999 and continuing through and ending June 1, 2000; and (iv) one (1) final payment of the remaining principal balance hereof, plus all accrued and unpaid interest thereon and all other sums due and owing in connection therewith on September 1, 2000. 7. Place of Payment. Principal and interest hereunder shall be payable as ----------------- provided in the Loan Agreement, or at such other place as Bank, from time to time, may designate in writing. 8. Default; Remedies. Upon the occurrence of an Event of Default, Bank, at ------------------ its option and without notice to Borrower, may declare immediately due and payable the entire unpaid balance of principal and all other sums due by Borrower hereunder and under the other Loan Documents, together with interest accrued thereon at the applicable rate specified above to the date of the Event of Default and thereafter at the Default Rate. Payment thereof may be enforced and recovered in whole or in part at any time and from time to time by one or more of the remedies provided to Bank in this Note or in the Loan Documents or as otherwise provided at law or in equity, all of which remedies are cumulative and concurrent. 9. Waivers. Borrower and all endorsers, jointly and severally, waive -------- presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, except for notices, if any, as are expressly required to be delivered by Bank to Borrower under the Loan Agreement. 10. Miscellaneous. If any provisions of this Note shall be held invalid or -------------- unenforceable, such invalidity or unenforceability shall not affect any other provision hereof. This Note has been delivered in and shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to the law of conflicts. This Note shall be binding upon 2 Borrower and upon Borrower's successors and assigns and shall benefit Bank and its successors and assigns. The prompt and faithful performance of all of Borrower's obligations hereunder, including without limitation, time of payment, is of the essence of this Note. 11. Joint and Several Liability. All agreements, conditions, covenants and ---------------------------- provisions of this Note shall be the joint and several obligation of each Borrower. 12. CONFESSION OF JUDGMENT. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY ----------------------- ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THE LOAN AGREEMENT IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE OR THE LOAN DOCUMENTS AT THE SUIT OF BANK, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED, WITHOUT STAY OF EXECUTION, AS OF ANY TERM OR TIME, AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST BORROWER FOR THE ENTIRE UNPAID OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AND ALL OTHER SUMS TO BE PAID BY BORROWER TO OR ON BEHALF OF BANK PURSUANT TO THE TERMS HEREOF OR OF THE LOAN DOCUMENTS AND ALL ARREARAGES OF INTEREST THEREON, TOGETHER WITH ALL COSTS AND OTHER EXPENSES AND AN ATTORNEY'S COLLECTION COMMISSION OF FIFTEEN PERCENT (15%) OF THE AGGREGATE AMOUNT OF THE FOREGOING SUMS, BUT IN NO EVENT LESS THAN $5,000.00; AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT. THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE EXECUTION AND DELIVERY OF THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE ENTRY OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL BECOME A LIEN ON ALL REAL PROPERTY OF BORROWER IN THE COUNTY WHERE SUCH JUDGMENT IS ENTERED AND THAT EXECUTION MAY IMMEDIATELY BE ISSUED ON THE JUDGMENT TO GARNISH, LEVY ON OR ATTACH ANY PERSONAL PROPERTY OF BORROWER. 3 IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has caused this Note to be duly executed the day and year first above written. NOBEL EDUCATION DYNAMICS, INC. By:__________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) BLUEGRASS REAL ESTATE COMPANY, INC. By:__________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) IMAGINE EDUCATIONAL PRODUCTS, INC. By:__________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) CHILDREN'S PARK, INCORPORATED By:__________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) [SIGNATURES CONTINUED ON THE FOLLOWING PAGE] 4 [SIGNATURES CONTINUED FROM THE PRECEDING PAGE] MERRYHILL SCHOOLS, INC. By:________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) ROCKING HORSE MANAGEMENT CORPORATION By:________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) EDUCO, INC. By:________________________________ John R. Frock, Executive Vice President (CORPORATE SEAL) 5 EX-10.20 4 EXECUTIVE SEVERANCE PAY PLAN STATEMENT EXHIBIT 10.20 NOBEL EDUCATION DYNAMICS, INC. EXECUTIVE SEVERANCE PAY PLAN STATEMENT AND SUMMARY PLAN DESCRIPTION Issued March, 1997 TABLE OF CONTENTS Page ----
PART 1. DEFINITIONS..................................... 1 (S)1.1 Board.................................. 1 (S)1.2 Change in Control...................... 1 (S)1.3 Company................................ 2 (S)1.4 Eligible Employee...................... 2 (S)1.5 Employer............................... 3 (S)1.6 Monthly Pay............................ 3 (S)1.7 Plan................................... 3 (S)1.8 Plan Administrator..................... 3 (S)1.9 Plan Statement......................... 3 (S)1.10 Plan Year.............................. 4 (S)1.11 Termination Event...................... 4 (S)1.12 Years of Service....................... 4 PART 2. PARTICIPATION................................... 4 (S)2.1 Commencement of Participation.......... 4 (S)2.2 Eligibility for Severance Benefits..... 4 PART 3. SEVERANCE BENEFITS; FUNDING..................... 6 (S)3.1 Severance Benefits..................... 6 (S)3.2 Plan Not Funded........................ 7 (S)3.3 Limitations Concerning Excess Parachute Payments............................... 7 PART 4. FORM AND TIMING OF SEVERANCE PAYMENTS........... 8 (S)4.1 Severance Allowance.................... 8 (S)4.2 Bonus.................................. 8 (S)4.3 Payments After Death................... 8 PART 5. OTHER PLAN FEATURES............................. 8 (S)5.1 Assignment of Benefit Prohibited....... 8 (S)5.2 Claims and Controversies............... 8 (S)5.3 Amendment or Termination of Plan....... 10 PART 6. ADDITIONAL INFORMATION.......................... 10 (S)6.1 Type of Plan........................... 10 (S)6.2 Plan Sponsor........................... 10 (S)6.3 Plan Administrator..................... 10 (S)6.4 Service of Legal Process............... 10 (S)6.5 Governing Law.......................... 11 (S)6.6 Severability........................... 11 (S)6.7 Entire Agreement....................... 11 (S)6.8 Successor Employer..................... 11
-i- NOBEL EDUCATION DYNAMICS, INC. EXECUTIVE SEVERANCE PAY PLAN STATEMENT AND SUMMARY PLAN DESCRIPTION Effective as of January 1, 1997, Nobel Education Dynamics, Inc. (the "Company"), a Delaware corporation, has established the "Nobel Education Dynamics, Inc. Executive Severance Pay Plan" (hereinafter referred to as the "Plan") for the benefit of eligible employees. The terms of the Plan are set forth in this document and they entirely supersede and replace all prior rules and policies regarding severance benefits. This document is intended to give participants an easily understood explanation of the major features of the Plan. The Plan provides severance benefits on account of a termination event with respect to an eligible employee. All payments will be made from the general corporate assets of the Company or an affiliated employer. The payments will not be contingent directly or indirectly upon the retirement of an employee. PART 1. DEFINITIONS When the following terms are used in this document with initial capital letters, they shall have the following meanings: (S)1.1 Board - the Board of Directors of the Company. ----- (S)1.2 Change in Control - a "Change in Control" shall be deemed to ----------------- have taken place if: (a) any person, including a group, becomes the beneficial owner of shares of the Company having 50 percent or more of the total number of votes that may be cast for the election of directors of the Company; (b) any person, including a group, becomes the beneficial owner of shares of the Company having 25 percent or more of the total number of votes that may be cast for the election of directors of the Company, unless such person's acquisition of such percentage of stock has been approved by at least two-thirds of the directors in office on the date immediately preceding the date such percentage ownership is first attained (other than Excluded Members); (c) there occurs any cash tender or exchange offer for shares of the Company, merger or other business combination, or sale of assets, or any combination of the foregoing transactions, and as a result of or in connection with any such event persons who were directors of the Company before the event shall cease to constitute a majority of the Board or of the board of directors of any successor to the Company; or (d) at any date ("Reference Date"), 50 percent or more of the members of the Board consists of persons other than (i) persons who were members of the Board two years prior to the Reference Date (other than Excluded Members) and (ii) Approved Members. For purposes of subsections (b) and (d) above, (i) an "Approved Member" shall mean any director (other than an Excluded Member) whose election by the Board or nomination for election by the stockholders of the Company was approved by a vote of at least two-thirds of the directors in office on the date of approval who either were directors (A) on the date two years prior to the Reference Date or (B) who had previously become Approved Members; and (ii) an "Excluded Member" is any director (A) designated or nominated by, or affiliated with, a person who has entered into an agreement with the Company to effect a transaction described in subsection (c) above, or (B) who initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 under the Securities Exchange Act of 1934 (the "Exchange Act")) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than the Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. As used in this Section 1.2, the terms "person" and "beneficial owner" have the same meanings as such terms under section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. (S)1.3 Company - Nobel Education Dynamics, Inc., a Delaware ------- corporation. (S)1.4 Eligible Employee - the following employees who hold the ----------------- position indicated, or should such employee cease to be employed in such position prior to a Change in Control, the employee who succeeds to such position, as well as such other additional employees or positions as determined by written resolution of the Board from time to time: A.J. Clegg, Chairman, Chief Executive Officer, and President; John R. Frock, Executive Vice President - - Corporate Development; Brian Zwaan, Chief Financial Officer and Executive Vice President; D. Scott Clegg, Executive Vice President - Operations; Yvonne DeAngelo, Vice President - Finance & Administration; Robin Eglin, Vice President - - Real Estate Development; Barry S. Swirsky, General Counsel; and Barbara Presseisen, Vice President - Education. -2- (S)1.5 Employer - the Company and any corporation which is a member -------- of a controlled group (as defined in section 414(c) of the Internal Revenue Code of 1986, as amended (the "Code")) which includes the Company. (S)1.6 Monthly Pay - one-twelfth of your highest base salary rate ----------- (excluding bonus payments, overtime and any other extra payments) from the Employer which is in effect in the calendar year in which a Change in Control occurs (annualized on the basis of a 52-week year). The calculation of your Monthly Pay is made on a pre-tax basis. (S)1.7 Plan - the severance pay plan of the Company established for ---- the benefit of Eligible Employees. (As used herein, "Plan" refers to the program established by the Company and not the document pursuant to which the Plan is maintained. That document is referred to herein as the "Plan Statement.") The Plan shall be referred to as the "Nobel Education Dynamics, Inc. Executive Severance Pay Plan." (S)1.8 Plan Administrator - the Company's Compensation Committee as it ------------------ is constituted on the date preceding the date of a Change in Control; provided, however, that should a majority of the members of such Committee refuse to so serve following a Change in Control, the Plan Administrator shall be a person or committee appointed by the Board and approved by at least 51 percent of the Plan participants; and further provided, that should the Company and 51 percent of the Plan participants fail to agree on such a successor Plan Administrator, the Plan Administrator shall be appointed by the arbitrators acting pursuant to Section 5.2(c). The Plan Administrator shall have the responsibility, power, authority and discretion to supervise and control the operation of the Plan in accordance with the terms of the Plan Statement. The Plan Administrator shall be the "named fiduciary" of the Plan within the meaning of section 402 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). If the Plan Administrator is a committee, a majority of the members of such committee shall constitute a quorum for the transaction of business related to the Plan. All resolutions or other actions taken by such committee at any meeting shall be by vote of the majority of members of such committee. Resolutions may be adopted or other action taken without a meeting upon written consent signed by all members of such committee. (S)1.9 Plan Statement - this document entitled "Nobel Education -------------- Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan Description" as adopted by the Company, effective as of January 1, 1997, as the same may be amended from time to time thereafter. -3- (S)1.10 Plan Year - the 12-consecutive month period beginning on any --------- January 1 and ending on the following December 31. (S)1.11 Termination Event - an event described in Section 2.2(b). ----------------- (S)1.12 Years of Service - the number of 12-month periods ---------------- beginning on your first day of work with the Employer and ending on the date a Termination Event occurs; provided, however, if you incur a break in service of longer than two months in any such 12-month period, such 12-month period shall not count as a Year of Service. If you work at least 10 months in any such 12- month period, you will receive credit for one Year of Service. Partial Years of Service shall be disregarded. PART 2. PARTICIPATION (S)2.1 Commencement of Participation - You become a participant in ----------------------------- the Plan on the date you become an Eligible Employee, or January 1, 1997, whichever is later. (S)2.2 Eligibility for Severance Benefits - ---------------------------------- (a) In General. You are eligible to receive severance benefits under ---------- the Plan if you experience a Termination Event on or after the date you become a participant in the Plan. (b) Termination Event. Except as provided in Section 2.2(c), a ----------------- Termination Event occurs if, prior to the date which is the number of months following the date of a Change in Control equal to six plus the number of months of Monthly Pay you would be entitled to under Section 3.1(a), you cease to be employed by the Employer for any of the reasons set forth in (1), (2) or (3) below: (1) the Employer terminates your employment; or (2) you terminate employment with the Employer as a result of any of the following events occurring after a Change in Control: (A) your position is materially adversely changed from the description of your position in Appendix A attached hereto; (B) you are assigned duties and responsibilities that are -4- inconsistent, in a material respect, with the scope of duties and responsibilities associated with the description of your position in Appendix A attached hereto; (C) your compensation plan is reduced as compared to your compensation plan immediately before the Change in Control; or (D) the Employer requires you to be based at any office which is more than 25 miles further from your residence on the date such requirement is imposed than the Employer's location on the day before a Change in Control (other than travel reasonably required in the performance of your responsibilities); or (3) prior to the date which is one month following the date of a Change in Control, you terminate employment with the Employer for any reason (or give the Employer notice thereof). (c) Terminations Not Qualifying as Termination Events - ------------------------------------------------- Notwithstanding Section 2.2(b), you are not eligible to receive severance benefits under the Plan if one of the following applies: (1) your employment with the Employer is involuntarily terminated due to your act or acts of dishonesty which you intended to result in your personal enrichment; (2) prior to the occurrence of an event described in Sections 2.2(b)(2)(A)-(D), your employment with the Employer is involuntarily terminated due to your documented willful and deliberate insubordination; (3) your employment with the Employer is involuntarily terminated because you have been convicted of a felony; or -5- (4) (A)your employment with the Employer is terminated, but prior to the date which is seven days after such termination, you are offered employment by the buyer of the entire (or substantially all of the) business of the Company following a sale or divestiture by the Company of such business, on terms which if such employment continued with the Employer, would not give you the right to Severance benefits under Section 2.2(b)(2), and you do not accept such employment, and (B) such successor has assumed all Plan liabilities as required by Section 6.8; or (5) any other voluntary or involuntary termination not described in Section 2.2(b). PART 3. SEVERANCE BENEFITS; FUNDING (S)3.1 Severance Benefits - If you experience a Termination Event, ------------------ your severance benefits are as follows, subject to Section 3.3: (a) Severance Allowance. The Employer will pay you a severance ------------------- allowance equal to your Monthly Pay multiplied by six plus: ---- (1) if you have not completed three Years of Service as of the date a Termination Event occurs, your Monthly Pay multiplied by the number of Years of Service you have completed as of the date a Termination Event occurs; or (2) if you have completed at least three Years of Service as of the date a Termination Event occurs, your Monthly Pay multiplied by two times the number of Years of Service you have completed as of the date a Termination Event occurs, up to a maximum of 12 (i.e., an aggregate maximum severance allowance ---- equal to your Monthly Pay multiplied by 18). -6- (b) Bonus. The Employer will pay you the bonus, if any, that you ----- would have received had you been employed by the Employer on the day on which, absent this provision, you would have had to have been employed to receive a bonus for the bonus period in which the Termination Event occurs, prorated for the portion of the bonus period occurring prior to your Termination Event. (c) Vacation Days. The Employer will pay you the cash-value of the ------------- vacation days to which you are entitled, but which you have not used, on the day before the Termination Event occurs. (d) Medical and Group Term Life Insurance. The Employer will provide ------------------------------------- you the medical insurance and group term life insurance that you were entitled to on the day before a Change in Control occurs, for a period beginning with the date a Termination Event occurs and continuing over the number of months of Monthly Pay determined under subsection (a) (i.e., a maximum of 18 months). ---- (S)3.2 Plan Not Funded - The Employer will not make any contributions --------------- to fund this Plan. Any severance payments made pursuant to the Plan will be paid out of the general funds of the Employer, and as a participant, you will not have any secured or preferred interest by way of trust, escrow, lien or otherwise in any specific assets. As a participant, your rights shall be solely those of an unsecured general creditor of the Employer. (S)3.3 Limitations Concerning Excess Parachute Payments. This Section ------------------------------------------------ shall be interpreted and applied to limit amounts otherwise payable to an Eligible Employee under the Plan only to the extent required to avoid any material risk of the imposition of excise taxes on the Eligible Employee under section 4999 of the Code, or the disallowance of a deduction to the Employer under section 280G(a) of the Code. Notwithstanding any other provision of the Plan, severance benefits payable under Section 3.1 of the Plan, to the extent they are parachute payments (as defined in section 280G(b)(2) of the Code), shall be modified to the extent necessary so that the aggregate present value (as defined in section 280G(d)(4) of the Code) of such parachute payments payable under the Plan and any other parachute payments (as defined in section 280G(b)(2) of the Code) payable pursuant to any other plan or agreement between the Eligible Employee and the Employer shall be at least one dollar less than three times the Eligible Employee's base amount (as defined in section 280G(b)(3) of the Code). -7- PART 4. FORM AND TIMING OF SEVERANCE PAYMENTS (S)4.1 Severance Allowance - Your severance allowance under Section ------------------- 3.1(a) will normally be paid to you in a lump sum payment within 30 days following a Termination Event. The Plan Administrator may, however, (i) delay the lump sum payment to a date no more than three months following a Termination Event, or (ii) modify the method of payment to installments coincident with normal payroll cycles, if the Plan Administrator, in its sole discretion, determines that the Company's cash resources are insufficient to make a lump sum payment. In no event, however, shall the Plan Administrator delay payment or modify the method of payment solely on account of your request to do so. (S)4.2 Bonus - Your bonus, if any, under Section 3.1(b) will be paid ----- to you in a lump sum payment on the date the bonus would have been paid to you had you remained employed by the Employer. (S)4.3 Payments After Death - If severance allowance (under Section -------------------- 3.1(a)) and/or bonus (under Section 3.1(b)) remains unpaid at your death, the remaining amount will be paid in a lump sum to the beneficiary you most recently designated with respect to the Plan. In the event no such beneficiary has been designated or survives you, your most recent beneficiary designation with respect to the group term life insurance provided by the Employer shall govern. PART 5. OTHER PLAN FEATURES (S)5.1 Assignment of Benefit Prohibited - No severance benefits under -------------------------------- this Plan shall be subject in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution or other legal or equitable process. (S)5.2 Claims and Controversies - Benefits will be paid from the Plan ------------------------ to you, your personal representative or beneficiary only after a proper written claim for the benefits has been filed with the Plan Administrator. If you believe you may be entitled to benefits, or if you are in disagreement with any determination that has been made, follow the following procedure: (a) Making a Claim. Your claim must be written and must be -------------- delivered to the Plan Administrator. Within 30 days after you deliver your claim, you will receive a decision. If your claim is wholly or partially denied, you will receive a written notice specifying: (i) the reasons for denial; (ii) the Plan provisions on which the denial is based; and (iii) any additional information needed from you in connection with the claim and the reason such information is needed. You also will -8- receive a copy of paragraph (b) below concerning your right to request a review. (b) Requesting Review of a Denied Claim. You may request that a denied ----------------------------------- claim be reviewed. Your request for review must be written and must be delivered to the Plan Administrator within 60 days after you receive the written notice that your claim was denied. Your request for review may (but is not required to) include issues and comments you want considered in the review. You may examine pertinent Plan documents by asking the Plan Administrator. Within 30 days after you deliver your request for review, you will receive a decision. The decision will be in writing and will specify the Plan provisions on which it is based. (c) Arbitration. In the event any controversy or claim arising out of ----------- or relating to the Plan or the breach, termination or validity thereof is not resolved pursuant to subsection (a) or subsection (b), such controversy or claim shall be settled by arbitration by three arbitrators in accordance with the Center for Public Resources, Inc. Non-Administered Arbitration Rules, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. (d) In General. This Section 5.2 shall be the sole method in which ---------- controversies or claims under this Plan shall be determined. All decisions on claims and on review of denied claims under subsections (a) and (b) will be made by the Plan Administrator. The Plan Administrator may, in its discretion, hold one or more hearings. If you do not receive a decision within the specified time, you should assume your claim was denied or re-denied on the date the specified time expired. You may have an attorney or other representative act on your behalf. The Plan Administrator shall have the sole discretion to carry out its duties under the Plan, to construe and interpret the provisions of the Plan, and to determine all questions concerning benefit entitlements, including the power to construe and determine disputed or doubtful terms. To the maximum extent permissible under law, the Plan Administrator's determinations on all such matters shall be final and binding on all persons involved. If your claim is denied under Section 5.2(a), and approved on appeal under Section 5.2(b) or pursuant to arbitration under Section 5.2(c), the Company (i) will pay your legal fees associated with the claim, appeal and arbitration, (ii) will pay you interest on the severance benefits payable under subsections (a), (b) and (c) of Section 3.1, at the prime rate stated in The --- Wall Street Journal on the date of your Termination Event, and over the period - ------------------- ending on the date payment is made and beginning (A) with respect to benefits payable -9- pursuant to Section 3.1(a) and (c), on the date of your Termination Event, and (B) with respect to any bonus payable pursuant to Section 3.1(b), on the date the bonus would have been paid to you had you continued to be employed by the Employer, and (iii) will reimburse you or your beneficiary(ies) for, and pay to your beneficiary(ies) any medical and group term life insurance benefits, respectively, which would have been reimbursed or paid had your medical and group term life insurance benefits been provided in accordance with Section 3.1(d) on and after the date of your Termination Event. (S)5.3 Amendment or Termination of Plan - The Company, by written -------------------------------- action of the Board, reserves the right to amend the Plan and the provisions of the Plan Statement or to terminate the Plan at any time, provided that no such amendment or termination shall impair your rights under the Plan if a Change in Control occurs before the date of such amendment or termination. If either of these actions is taken, you will be notified. PART 6. ADDITIONAL INFORMATION (S)6.1 Type of Plan - The Plan is a severance pay welfare benefit plan ------------ which is intended to be a plan solely covering a select group of management or highly compensated employees within the meaning of section 201(2) of ERISA and the regulations issued thereunder. The Plan is not a pension benefit plan. (S)6.2 Plan Sponsor - The name of the employer sponsoring the Plan and ------------ its federal employer identification number ("EIN") are: Nobel Education Dynamics, Inc. Rose Tree Corporate Center II 1400 North Providence Road Suite 3055 Media, PA 19063 Telephone: (610-691-8200) EIN: 22-2465204 (S)6.3 Plan Administrator - The Plan is administered by the Plan ------------------ Administrator. Communications addressed to the Plan Administrator should be sent to the address listed in Section 6.2. (S)6.4 Service of Legal Process - The General Counsel of the Company, ------------------------ or should there be no General Counsel, the President of the Company, is designated as agent for service of legal process against the Plan. -10- (S)6.5 Governing Law - The law of the Commonwealth of Pennsylvania ------------- shall be the controlling state law in all matters relating to the Plan and shall apply to the extent it is not preempted by the ERISA. (S)6.6 Severability - If any provision of the Plan Statement shall be ------------ held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision, and the Plan Statement shall be construed and enforced as if such provision had not been included. (S)6.7 Entire Agreement - This Plan Statement contains the entire ---------------- agreement by the Employer with respect to the subject matter hereof. No modification or claim of waiver of any of the provisions hereof shall be valid unless in writing and signed by the party against whom such modification or waiver is sought to be enforced. (S)6.8 Successor Employer - In the event of the dissolution, merger, ------------------ consolidation, or reorganization of the Company, or the sale of the entire (or substantially all of the) business of the Company, the Plan shall be continued by the Company's successor. The successor shall assume all Plan liabilities and shall have the powers, duties and responsibilities of the Company under the Plan. IN WITNESS WHEREOF, Nobel Education Dynamics, Inc. has caused this Plan Statement to be duly executed this ____ day of ________________________, 1997. Attest: NOBEL EDUCATION DYNAMICS, INC. _________________________ By:______________________________ Secretary President [Corporate Seal] -11- APPENDIX A Chief Executive Officer Chief executive officer, with final authority in making all decisions regarding the Company and its subsidiaries, subject to any required approval of the Company's board of directors. Executive Vice President; Chief Financial Officer Reports directly to the president, chairman and/or chief executive officer. Manages all financial operations of the Company and subsidiaries, including accounting, treasury, financing, payroll, internal reporting and external reporting. Manages human resource function and MIS department. Manages relations with lenders, investment bankers and stock analysts. Evaluates financial impact of acquisitions and new center development, granting approval where appropriate. Manages annual Five Year Business Plan process/assist in Long Range Strategic Planning. Member of the Company's executive management team. Executive Vice President - Corporate Development Reports directly to the president, chairman and/or chief executive officer and charged with implementation of growth plans of Company through new school development and acquisitions plus appropriate divestitures. Vice President of Real Estate Development and General Counsel report to this position. Member of the Company's executive management team. Executive Vice President - Operations Reports directly to the president, chairman and/or chief executive officer and charged with responsibility for the financial performance and quality of all school operations nationwide. This includes day-to-day operations of all company locations, as well as the successful opening of all new school projects and successful transition of all acquisitions. Coordinates all marketing programs. Bottom-line responsibility for all operations as well as the operations G&A/Budget function. The following positions report directly to the COO/EVP: Vice President of Operations and for each geographic territory Regional Managers, not reporting to an operations Vice President. Member of the Company's executive management team. -12- Vice President - Education Reports directly to the president, chairman and/or chief executive officer and charged with overseeing all matters that pertain to the quality of education programs offered by the Company. Responsible for setting and maintaining standards and policies related to educational issues of both internal and external concern and overseeing such adherence within the schools. Member of the Company's executive management team. Vice President - Real Estate Development Responsible for all activities relating to new school development and the appropriate budgeting commitments. Member of the Company's executive management team. Vice President - Administration and Finance Reports to chief financial officer. Oversees accounting and payroll functions (accounts payable, cash management, accounts receivable, general ledger and payroll). Responsibilities include closing books and records monthly, weekly operations reporting, monthly management report of operations, quarterly and annual external (SEC) reporting (10-K's, 10-Q's and financial portions of 8-K), acquisition analysis, financial due diligence and transition. Additional responsibilities are insurance and tax analysis, assist in formulating and producing annual budgets, quarterly forecasts and Strategic Five Year Plan, oversight of internal audit function, stock transactions and annual meeting vote. Member of the Company's executive management team. General Counsel Responsible for all legal affairs of the Company and its subsidiaries. Participates in business decisions regarding corporate development including new school development, acquisitions and divestitures. Member of the Company's executive management team. -13- EX-10.21 5 EMPLOYMENT AGREEMENT EXHIBIT 10.21 EMPLOYMENT AGREEMENT This Employment Agreement is dated as of June 4, 1996, between Nobel Education Dynamics, Inc., a Delaware corporation ("Employer") and Barbara Z. Presseisen, an individual. residing at 1943 Pine Street, Philadelphia, PA 19103 ("Executive"). Background Executive wishes to be employed as Vice President of Education of Employer, and to be responsible for the functions and duties assigned to this position, and Employer wishes to assure itself of the services of Executive, and, upon the conditions hereinafter provided, Executive and Employer are prepared to enter into this employment agreement. Terms Now, Therefore, in consideration of the premises and mutual covenants and obligations hereinafter set forth, intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment; Scope of Duties. 1.1 Subject to and upon the terms and conditions set forth herein, Employer hereby employs Executive in the capacity of Vice President of Education, and Executive hereby accepts such employment and agrees to render her services exclusively to Employer, its subsidiaries and affiliates, in such capacity or similar capacity, and faithfully, diligently and to the best of her ability. Executive will perform those duties and responsibilities as may from time to time reasonably be specified by Employer. Such duties and responsibilities will initially include, without limitation, those duties set forth in Exhibit A attached hereto. 1.2 Executive will devote her full business and professional time, energy and skill exclusively to the service of Employer, its subsidiaries and affiliates and to the promotion of its interests in accordance with the duties assigned to her by Employer hereunder and will not render services of a business, professional or commercial nature to any other person or firm, whether for compensation or otherwise; provided, however, that the foregoing shall not be construed as preventing Executive from (a) making investments in other businesses or enterprises which do not provide services which are in competition with those provided by Employer, provided such investments do not require the provision of other than incidental services by Executive to the operation or affairs of such businesses or enterprises or (b) serving on the board of community and nonprofit organizations which do not provide services which are in competition with those provided by Employer; provided further that, in the case of both clauses (a) and (b), the provision thereof will not interfere with the performance of Executive's duties hereunder. Executive shall serve, without additional compensation, as an officer of Employer and its subsidiaries or affiliates, if duly elected as such. If Executive is duly elected and she consents to serve as a director of Employer or its subsidiaries or affiliates, she shall not be entitled to any additional compensation. 2. Term. The term of Executive's employment will commence on June 17, 1996 and end on June 18, 1999, unless and until terminated earlier pursuant to the provisions of this Agreement (said period during which Executive is employed full time pursuant to this Agreement is hereinafter referred to as the "Employment Period"). 3. Compensation. As compensation and consideration for Executive's services and responsibilities under this Agreement, Employer will pay Executive, and Executive will accept, the compensation and benefits set forth in this Section 3. 3.1 Base Salary. Employer shall pay to Executive a gross salary at the ----------- annual rate of Eighty-Five Thousand Dollars ($85,000) (hereinafter "Base Salary"), payable at such intervals as Employer pays the salaries of its executive employees generally (currently every two weeks), but not less frequently than monthly. It is understood that nothing contained herein shall prevent Employer from increasing the compensation provided herein to be paid to Executive, either permanently or for a limited period, or of providing additional compensation to Executive based upon the earnings or business successes of Employer if Employer, in its sole discretion, deems it advisable to do so in order to recognize and fairly compensate Executive for the value of her services to Employer; but nothing contained herein shall in any manner obligate Employer to make any such increase or provide any such additional compensation. Executive's salary will be reviewed each year in February and any increase earned will become effective on March 1. 3.2 Bonuses. Executive shall be eligible for an annual bonus according to ------- a bonus plan to be established annually by Employer, in its sole discretion, such plan to incorporate projects determined by Employer's Chief Executive Officer in conjunction with Executive as part of Employer's annual business planning process; provided that each bonus plan shall allow Executive to earn up to 30% of Executive's Base Salary based on achievement of individual objectives and 10% of Executive's Base Salary based on the overall performance of Employer (for a total of up to 40% of Executive's Base Salary). Bonuses shall be calculated on a fiscal year basis, and shall be prorated for partial years. The bonus plan for the 1996 fiscal year is attached hereto as Exhibit B. The bonus with respect to any fiscal year shall be payable within 30 days of the date that Employer receives from its auditors such auditor's report on its financial statements for such fiscal year and shall not be payable to Executive, nor be deemed to have accrued, unless she is employed by Employer on the date of scheduled payment. 3.3 Stock Options. On the first day of the Employment Period, Employer ------------- will grant to Executive the option (the "Option") to purchase 2,000 shares of Employer's Common Stock, such grant to be pursuant to and subject to the terms of Employer's standard form of Non-Qualified Stock Option Agreement ("Stock Option Agreement") attached hereto as Exhibit C. The Option shall be subject to a three-year vesting schedule, with the Option becoming exercisable with respect to one-third of the shares subject to the Option on each of the first, second and third anniversary dates of the first day of the Employment Period if the conditions set forth in the Stock Option Agreement have been satisfied. The exercise price under the Option will equal the mean between the highest and lowest quoted selling price of Employer's common stock on the NASDAQ Small Cap Market on the 2 first day of the Employment Period. In the future, Executive will be eligible for grants of additional stock options based on performance at the sole discretion of Employer's Board of Directors (or the Compensation Committee of the Board of Directors). 3.4 Car Allowance. Executive will be provided a $6,000 per year car ------------- allowance to cover all car expenses, including gasoline (provided that, in the case of trips to a destination which is 100 miles or more from Employer's corporate headquarters, Executive will be reimbursed for the cost of gasoline relating to the trip). Such car allowance shall be paid proportionately in each pay period. 3.5 Vacation. Executive will be entitled to three (3) weeks vacation per -------- year (unless and until Employer's policies specify additional vacation based on longevity of service). All vacation periods requested must be approved by Executive's manager. Vacation is on a "use or lose" basis, which means that carryover from year to year will not be permitted. Vacation balances will be forfeited if not used by the applicable anniversary date of the first day of the Employment Period. 3.6 Sick Leave. Executive will be paid for all reasonable sick days. ---------- 3.7 Other Benefits. Executive shall be entitled to participate in all -------------- group health, group life insurance, disability, hospital, medical plans and retirement plans according to Employer's policies for executive management personnel (or as may be decided by Employer if said items are discretionary with Employer). Such plans currently include: (a) 100% payment by Employer of medical insurance (which currently is provided by US Healthcare's HMO plan) (dental coverage is currently available for an extra premium payable by Executive); (b) the Nobel Education Dynamics 401(k) Savings Plan (in which Executive will become eligible to participate upon the first open enrollment period occurring after one year of service); provided that participation may be limited by Federal laws relating to the participation level of lower wage earners; (c) tuition reimbursement (the current features of which include the requirement that courses be job-related and pre-approved, that reimbursement is limited to a specified maximum amount and that a minimum grade be achieved as a condition to reimbursement); (d) term life insurance equal to $10,000 plus one times Executive's Base Salary; (e) a short-term disability insurance that extends coverage for a period of 26 weeks at a rate of 65% of Executive's Base Salary with a maximum weekly benefit of $325. 4. Reimbursement of Expenses. Executive shall be allowed reasonable business expenses in connection with the performance of her duties hereunder upon submission by Executive of vouchers or itemized statements thereof prepared in compliance with such rules relating thereto as Employer 3 may from time to time adopt (which rules may include the requirement that the Executive receive advance approval of such expenses) and as may be required in order to permit such payments as proper deductions to Employer under the Internal Revenue Code and the rules and regulations adopted pursuant thereto now or hereafter in effect. 5. Facilities. Executive shall be entitled to an office appropriate to her position and such secretarial services as are reasonably necessary to the performance of her duties. 6. Photographs. Employer shall have the right to photograph Executive during the course of Executive's employment or at such other times when not at work, by camera, film, television, tape radio or other yet developed media, or record Executive in formal or informal conversation, interview, training sessions, etc., any of which may be in the format of a pre-planned program or in a spontaneous interview. Such photographs, replicas, tapes, films, etc., maybe used by Employer or its affiliates or its advertising agency for commercial purpose, on labels, training films or other media at Employer's sole discretion. Executive's image, its replica, in whole or portions thereof, may be used. Executive maybe photographed individually or in a group. Executive's compensation fully stated herein, includes full and complete payment for all of the above and Executive hereby waives any further compensation, royalties, etc., and further agrees to forebear from taking any action, legal or otherwise, against Employer or its affiliated companies with respect to the foregoing. 7. Termination. 7.1 Early Termination of Employment Period. Notwithstanding Section 2, -------------------------------------- the Employment Period shall sooner terminate upon the close of business on the earliest to occur of the dates specified below: (a) the date of death of Executive; (b) the date upon which Employer shall have given Executive written notice of the termination of her employment hereunder for "disability" (as defined in Section 7.2); and (c) the date upon which Employer shall have given to Executive written notice of the termination of her employment for "cause" (as defined in Section 7.3). 7.2 Definition of "Disability". For purposes of this Agreement, the term -------------------------- "disability" shall mean that she cannot substantially perform her duties hereunder and either (i) such condition results in her being unable to substantially perform her duties hereunder for a period of 60 days in any 365 day period or (ii) in the opinion of a physician of recognized local standing Executive is so disabled or incapacitated and she is unlikely to recover from such condition in a period of less than 60 days. Determination of disability and the date thereof shall be reasonably made by Employer, relying on certificates of physicians, and Employer's decision shall be conclusive and binding, in the absence of fraud. If the Board of Directors of the Company so requests, Executive will submit to an examination by such a physician to determine whether the criteria set forth in this paragraph are satisfied. If 4 Executive refuses to cooperate in submitting to an examination as requested by Employer, Executive shall immediately be deemed "disabled" for the purposes of this Agreement. 7.3 Definition of "Cause". For purposes of this Agreement, the term --------------------- "cause" shall include, but not be limited to, any one of the following conditions or any one of the following events: (a) Executive's habitual intoxication or drug addiction; (b) violation of Employer's policies with respect to harassment (sexual or otherwise); (c) refusal or failure by Executive to perform such reasonable duties as may reasonably be delegated or assigned to her, consistent with her position, by Employer; (d) failure to devote her entire full week business to the duties of the position as provided herein, except permitted vacation periods and/or sickness leave; (e) continuing inattention or neglect by Executive of her duties hereunder, which inattention is not the result of illness or accident; (f) willful or wanton misconduct or negligence by Executive in connection with the performance of her duties; (g) the material breach of any provisions of this Agreement; (h) the commission by Executive of a felony or participation in any fraud; (i) dishonesty detrimental to the best interest of the Company or any of its affiliates; and (j) involvement in any matter which could, in the Company's sole opinion, cause prejudice or embarrassment to the Company's business. provided, that, in the case of clauses (c), (d), (e) or (g) of this Section 7.3, there shall not be "cause" unless Employer has first given Executive written notice specifying in reasonable detail the circumstances on which Employer believes there is "cause" for termination and Executive has failed to remedy the same with 15 days after the date of such notice or unless the condition or event is not subject to cure. 7.4 Effect of Early Termination on Compensation. If the Employment Period ------------------------------------------- is terminated as provided in Section 7.1 (including by reason of Executive's death), Executive shall be entitled to receive only the compensation set forth in Section 3 accrued but unpaid as of the date of termination and all benefits shall terminate as of such date (except to the extent otherwise provided 5 by law). Under no circumstances shall Executive be entitled to any compensation except as set forth in this Section 7.4, including without limitation any severance pay or termination indemnity. Employer shall pay any funds provided for in this Section 7.4 to Executive, her estate or legal representative, as the case may be. 8. Expiration of Employment Period. On termination of the Employment Period, neither party shall be under any obligation to renew Executive's employment with Employer and, unless otherwise agreed by both parties in writing, any continued employment of Executive by Employer shall be on an "at will" basis. Notwithstanding any of the foregoing to the contrary, Executive's covenants under Section 10 shall continue so long as she is employed by Employer and for any additional periods specified therein. 9. Executive Representations. Executive represents and warrants to Employer that she is not a party to or bound by any agreement, arrangement or understanding, written or otherwise, which prohibits or in any manner restricts her ability to enter into and fulfill her obligations under this Agreement and/or to be employed by and serve Employer in an executive capacity. Executive will indemnify and hold harmless Employer from any claims, liabilities, damages, costs or expenses (including legal fees) resulting from third-party claims of any such conflict or breach. 10. Certain Covenants of Executive. 10.1 Records. All records of the accounts of customers and any other ------- records and books relating in any manner whatsoever to the customers or business of Employer, whether prepared by Executive or otherwise coming into her possession, shall be the exclusive property of Employer regardless of who actually purchased the original book or record. All such books and records shall be immediately returned to Employer by Executive on any termination of her employment for whatever reason. 10.2 Intellectual Property. All rights in and to any and all inventions, --------------------- ideas, techniques, methods, developments, works, improvements and other forms of intellectual property (including, without limitation, all matters relating to curriculum and curriculum techniques) ("Intellectual Property"), whether or not patentable, which Executive (either alone or in conjunction with others) conceives, makes, obtains or reduces to product or commences so to do during her employment with Employer are and shall be the property of Employer. The foregoing shall not apply to Intellectual Property unrelated to any subject matter of actual or potential concern or interest to Employer or any of its affiliates which are not conceived, made, obtained or reduced to product in the course of Executive's employment or with the use of the time, material or facilities of Employer or any of its affiliates. Executive will make full and prompt disclosure to Employer of all Intellectual Property and, at Employer's request and expense but without additional compensation to Executive during her employment hereunder and with reasonable compensation thereafter, will at any time or times execute and deliver such foreign and domestic patent, trademark or copyright applications, assignments and other papers and take such other action (including without limitation testifying in any legal proceedings) as Employer considers necessary to vest, perfect, defend or maintain Employer's rights 6 in and to such Intellectual Property. The provisions of this Section 10.2 shall survive the termination, for any reason, of this Agreement. 10.3 Nondisclosure of Confidential Information. ----------------------------------------- (a) Executive shall not, during the period that Executive is employed by Employer or provides consulting services to Employer or thereafter, unless authorized to do so in writing by Employer, directly or indirectly disclose or permit to be known to, or used for the benefit of, any person, corporation or other entity (outside of the employ of Employer), or herself, any confidential information acquired by her during the course of or as an incident to her employment or association with Employer, whether or not pursuant to this Agreement. For the purposes of this Section 10.3, the term confidential information shall include, but not be limited to, all trade secrets, confidential or proprietary knowledge or information with respect to the conduct or details of Employer's business including, but not limited to, lists of customers or suppliers of Employer's business, pricing strategies, business files and records, trade secrets, curriculum, processes, costs, designs, marketing methods or any other financial, educational, curricular or other information about Employer's business or curriculum not in the public domain. The term "confidential information" shall not include any information which (i) is generally available to the public as of the date hereof, (ii) becomes generally available to the public after the date hereof, provided that such public disclosure did not result, directly or indirectly, from any act, omission or fault of Executive, or (iii) becomes available to Executive after the date of termination of her employment with Employer on a non-confidential basis from a source other than Employer or its agents, provided that such source is not bound to Employer or its representatives by agreement, fiduciary duty or otherwise not to disclose such information. (b) All confidential information described in Section 10.1 shall be the exclusive property of Employer, and Executive shall use her best efforts to prevent any publication or disclosure thereof. Upon termination of Executive's employment with Employer, Executive shall return to Employer all documents, records, reports, writings and other similar documents containing confidential information, including copies thereof, then in her possession or control. (c) All correspondence, memoranda, notes, records, reports, plans and other papers and items delivered to Executive by Employer shall be the property of Employer, and Executive will deliver all copies thereof to Employer on termination of this Agreement or on earlier request. 10.4 Nonsolicitation. Executive will not during the period that Executive --------------- is employed by Employer or provides consulting services to Employer and for an additional period of two years thereafter (a) employ any employee who was on the payroll of Employer as of the date of Employee's separation or within one year prior thereto or (b) cause or solicit, directly or indirectly, the resignation of any person employed by Employer on the date of Employee's separation. 10.5 Restrictive Covenant. During the period that Executive is employed -------------------- by Employer or provides consulting services to Employer and for an additional period of two years thereafter, 7 Executive will not, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any for-profit business or other for-profit operation which owns, manages or provides educationally related services to private schools or preschools or child care centers (other than private schools restricted to post-High School education) located within 25 miles of any private school or preschool or child care center operated or planned by the Company or any of its subsidiaries or affiliates. 10.6 Survival. The provisions of this Section 10 shall survive the -------- termination, for any reason, of the Employment Period and of this Agreement, and shall continue, in the case of Sections 10.2 and 10.3, without termination, and, in the case of Sections 10.4 and 10.5, for the period contemplated therein (including any extended period as provided in Section 10.7). 10.7 Remedies. Executive acknowledges that if she breaches her promises -------- set forth in this Section 10, Employer will suffer irreparable damages, the amount of which will be impossible to ascertain and which cannot be reasonably or adequately compensated in an action of law. Accordingly, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either at law or in equity, to obtain damages for any breach or to enforce specific performance of the provisions or to enjoin Executive from committing any act in breach of this Agreement. The remedies granted to Employer in this Agreement are cumulative and are in addition to remedies otherwise available to Employer at law or in equity. If Employer is obliged to resort to the courts for the enforcement of a covenant of Executive contained in Section 10.3, 10.4 or 10.5 such covenant shall be extended for a period of time equal to the period of such breach, which extended period will commence on the later to occur of (i) the date on which the original (unextended) term of such covenant is scheduled to terminate or (ii) the date of the final court order (without further right of appeal) enforcing such covenant. 11. Arbitration of Certain Disputes. 11.1 In the event of any dispute as to the ability of Employer to terminate Executive's employment pursuant to Section 7.1, the parties shall submit such dispute to be settled by arbitration before a panel of three arbitrators in Philadelphia, Pennsylvania, conducted in accordance with the rules of the American Arbitration Association ("AAA"). A determination by a majority of the panel shall be binding upon and enforceable against each party. Judgment upon an award made as a result of any such arbitration proceeding may be entered in any court having competent jurisdiction. 11.2 Employer and Executive shall each choose one arbitrator and the arbitrators selected by the parties shall then select the third arbitrator. If the arbitrators selected by the parties fail to select the third arbitrator within ten business days of notification of their appointment, the third arbitrator shall be selected by the AAA. The arbitrator designated by the party-appointed arbitrators shall be the Chairman of the arbitration panel. If an arbitrator dies, refuses to act, or becomes incapable, unfit, or incompetent to act before hearings are complete and an award is rendered, a successor arbitrator shall be selected according to the provisions set forth above governing the selection of the arbitrator being replaced. 8 11.3 Except for the obligations to arbitrate disputes relating to the ability of Employer to terminate Executive's employment pursuant to Section 7.1, none of the rights or remedies provided in this Agreement shall be deemed an exclusive remedy or otherwise limit either party's right to pursue any remedy provided by law. 12. Miscellaneous 12.1 Binding Effect. This Agreement shall become effective as of the date -------------- hereof and, from and after that time, shall extend to and be binding upon Executive, her personal representative or representatives and testate or intestate distributees, and upon Employer and its successors and assigns; provided that this Agreement shall be assignable by Employer to an affiliate or any person, firm or corporation which may become a successor in interest to Employer in the business presently operated by it or which may acquire all or substantially all of Employer's assets or a majority of Employer's voting capital stock. The term "affiliate" used in this Agreement shall mean any entity that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with Employer, or is a successor of Employer. This Agreement may not be assigned by Executive. 12.2 Survival of Certain Provisions. It is expressly understood by the ------------------------------ parties to this Agreement that certain provisions, rights, and obligations pursuant to this Agreement, are expressly meant to survive the termination of the Employment Period and the termination of this Agreement and shall be given full effect pursuant to their terms. 12.3 Consent to Jurisdiction; Waiver of Time Restrictions. Each party ---------------------------------------------------- hereto (i) agrees that any and all actions or proceedings hereunder or relating in any way to this Agreement (other than a matter covered by Section 11) shall be brought only in the United States District Court for the Eastern District of Pennsylvania; (ii) consents to in personam jurisdiction and venue in the United States District Court for the Eastern District of Pennsylvania; (iii) waives the right to contest the subject matter and in personam jurisdiction and venue in the United States District Court for the Eastern District of Pennsylvania on any ground; and (iv) agrees that service of process upon it can be made by certified mail, return receipt requested, to his or its address referred to in Section 12.4 and agrees promptly to notify the other party hereto of any change of such address. Notwithstanding the foregoing, in the event it is determined that the United States District Court for the Eastern District of Pennsylvania should lack subject matter jurisdiction for any reason, each party hereto agrees that any and all actions or proceeding hereunder or relating in any way to this Agreement shall be brought only in the Court of Common Pleas of Delaware County, Pennsylvania, and consents to in personam jurisdiction and venue in such court and waives the right to contest the subject matter and in personam jurisdiction and venue in such court on any ground. Further, each party waives all time restrictions on discovery relating to any action to enforce any covenant set forth in Section 10. 12.4 Notices. Any notice required or permitted to be given under this ------- Agreement shall be in writing and shall be delivered by hand or be sent by certified mail or overnight courier addressed 9 to Executive at her address set forth in the first paragraph of this Agreement and to Employer at Nobel Education Dynamics, Inc., Rose Tree Corporate Center II, 1400 North Providence Road, Media, PA 19063, Attn. President, with a copy to ----- Nobel Education Dynamics, at the same address, Attn: General Counsel, or to such other address as either of such parties may designate in a written notice served upon the other party in the manner provided herein. Any such notice shall become effective upon being mailed or, in the case of delivery by hand or overnight courier, upon receipt. 12.5 Governing Law. This Agreement is made and delivered in the ------------- Commonwealth of Pennsylvania and shall be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to principles of conflicts of law. 12.6 Prevailing Party. Should any party default in performance of any of ---------------- the terms and conditions of this Agreement which results in a lawsuit for damages, specific performance or other remedy, the prevailing party in such law suit shall be entitled to its reasonable attorneys' fees and court costs from the nonprevailing party. For the purposes of this Section 12.6, in any action with respect to the enforcement of a covenant set forth in Section 10, Employer shall be deemed to have prevailed if any such covenant is enforced in part, even if the applicable court exercises its discretion to limit or reduce the duration or scope thereof or enforces only certain of such covenants. 12.7 Entire Agreement; Modifications. This instrument contains the entire ------------------------------- agreement of the parties relating to the subject matter hereof, and there are no agreements, representations or warranties not herein set forth. This Agreement supersedes any prior written or oral agreement or understanding relating to the subject matter hereof. No modification of this Agreement shall be valid unless in writing and signed by the parties hereto. A waiver of the breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any subsequent breach of the same or any other term or condition. 12.8 Severability; Savings Clause. If any term or provision of this ---------------------------- Agreement or the application thereof to any person or circumstance shall, to any extent, be held invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement or the application of any such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. If any of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, scope, activity or subject, it shall be construed by limiting and reducing it, so as to be valid and enforceable to the extent compatible with the applicable law or the determination by a court of competent jurisdiction. 12.9 Attorney Review. Executive acknowledges that this Agreement will have ---------------- important legal consequences and imposes significant requirement on Executive, including the obligation to refrain from certain activities after the termination of her employment or consultancy with Employer. Accordingly, Executive acknowledges that Employer has recommended that she retain legal counsel to review this Agreement and that she has been provided with adequate time to obtain such review. 10 IN WITNESS WHEREOF, the undersigned have executed this Agreement the date and year first written above. NOBEL EDUCATION DYNAMICS, INC. By:________________________________________ A. J. Clegg Chairman, President and Chief Executive Officer EXECUTIVE: _____________________________ Barbara Z. Presseisen 11 EXHIBIT A Partial List of Duties and Responsibilities ------------------------------------------- 1) The quality of the education programs at Nobel. 2) Chair the Education Advisory Board and bring to the Board experienced outside educators to collaborate with Nobel's internal educators. 3) Set the standards and policies for the education component of Nobel and managing the adherence to these standards and policies. 4) Manage the curriculum conversions and principal/teacher re-training for Nobel's conversions from childcare centers to preschools. 5) Oversee the implementation of Nobel's education programs and evaluate of the programs via the achievement levels of our students. 6) Determine the appropriate methods and testing programs to determine achievement levels of our students. 7) Be cognizant of the state-of-the-art in education; methods, tools and technologies. 8) Be cognizant of the various education reform movements and methods such as charter schools, vouchers, privatization, management organizations, etc.. 9) Maintain and expand our NIPSA accreditation. Investigate other accreditation agencies. Represent Nobel Education at NIPSA meetings. 10) Promote of Nobel Education's reputation and programs via participation in selected education and financial conferences, guest lecturing and articles in appropriate journals. 11) Coordinate the internship and the Nobel training programs with UOP/Wharton, and possible other universities. 12) Parent and teacher training seminars. 13) Quantify parents and teacher satisfaction via periodic surveys. 14) Track of Nobel student successes post-Nobel. 15) Collaborate with the appropriate experts of companies in establishing and implementing after-school, weekend and summer student tutorial programs. 16) Participate as part of the overall Nobel Education executive team. 17) Prepare each year of an "Educational" department budget, which must be approved by the CEO. EXHIBIT B 1996 BONUS PLAN for Vice President of Education In fiscal year 1996, Executive will be governed by the following bonus plan, which shall be prorated for the portion of the 1996 fiscal year in which employed (June 17, 1996 through December 31, 1996): Executive shall receive 10% of her base salary (pro-rated) if the Company achieves its pretax income plan in 1996, which is $4,587,000 (to be adjusted for acquisitions). Executive shall receive an additional bonus of up to an additional 30% of her base salary (pro-rated) for achieving specific tasks or projects successfully in fiscal year 1996 as defined below: 1. Establish and chair an effective Education Advisory Board of inside and outside educators, whose responsibilities it is to review Nobel's curriculums, educational tools, methods and technologies for adequacy and proper advancement relative to the state-of-the-art. 2. Properly train teachers and principals in the "Merryhill type" curriculums and procedures for each of Nobel's conversions of childcare centers to preschools, and properly integrate teachers and principals of Nobel acquired schools and childcare centers into the Nobel education programs. 3. Become active in NIPSA and maintain and expand Nobel's base of accreditation into eastern schools. 4. Establish an effective internship with UOP/Wharton that will provide meaningful results to both the interns and Nobel; and begin similar programs with other universities. 5. Establish an effective training program (with UOP) to teach selected teachers the requirements of managing a for-profit Nobel school. 6. Establish a student tutorial program to allow Nobel to provide after- school, weekend and summer-time tutoring to Nobel students and also to students outside the Nobel system. Five percent of base salary (pro-rated) will be provided for each project satisfactorily completed, as determined in the sole discretion of the CEO of Nobel, such determination to be reasonable. EX-10.22 6 NONCOMPETE AGREEMENT EXHIBIT 10.22 NONCOMPETE AGREEMENT THIS NONCOMPETE AGREEMENT is dated as of March 11, 1997 by and between John R. Frock, an individual residing in Upper Gwynedd, Pennsylvania ("Executive") and Nobel Education Dynamics, Inc. (the "Company"), a Delaware corporation. Background Executive is currently Executive Vice President of the Company. Executive currently does not have any obligation to refrain from competing with the Company following the termination of his employment with the Company (other than to the extent that any such activities may generally be prohibited by the applicable law (e.g., by laws which would prohibit use of the Company's trade secrets)). By this Agreement, the Company desires to provide incentive to Executive not to engage in any competitive activities with the Company for a period of four years following the termination of his employment with the Company. Now, Therefore, in consideration of the covenants set forth herein, and intending to be legally bound hereby, the parties agree as follows: Terms 1. Payment. (a) Conditions of Payment. The Company will pay to Executive the --------------------- Noncompete Payment (defined below) if, within 30 days following the date of termination of his employment with the Company ("Termination Date") for any reason whatsoever (including, without limitation, termination by the Company with or without cause, resignation or retirement of Executive, or Executive's disability) Executive gives a notice ("Notice Letter") to the Company stating that he agrees to all of the covenants set forth in Exhibit A of this Agreement. Such notice shall be in substantially the form of Exhibit B. Payment of the Noncompete Payment shall be made in cash within 15 days of the date of the Company's receipt of such notice from Executive. Notwithstanding the foregoing, the Company shall not be required to pay the Noncompete Payment if it pays to Executive the Severance Payment (as such term is defined in the Contingent Severance Agreement dated March 11, 1997 between the Company and Executive). (b) Amount of Payment. The Noncompete Payment shall 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. 2. Miscellaneous. 2.1 Remedies. Executive acknowledges that if he delivers a Notice -------- Letter to the Company and subsequently breaches his promises set forth in Exhibit A hereto, Employer will suffer irreparable damages, the amount of which will be impossible to ascertain and which cannot be reasonably or adequately compensated in an action of law. Accordingly, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either at law or in equity, to obtain damages for any breach or to enforce specific performance of the provisions or to enjoin Executive from committing any act in breach of this Agreement. The remedies granted to Employer in this Agreement are cumulative and are in addition to remedies otherwise available to Employer at law or in equity. 2.2 Waiver of Breach. The waiver by the Company of a breach of any ---------------- provision of this Agreement by Executive shall not operate or be construed as a waiver of any other or subsequent breach by Executive of such or any other provision. 2.3 Notices. All notices and other communications required or ------- permitted hereunder shall be in writing and shall be deemed to be properly given if transmitted by messenger, overnight courier service, first class certified mail (return receipt requested) or telecopy (which is confirmed), in each case postage or other charges prepaid, addressed to the other party at the address shown below. Any party may change such address by notice given in such manner. All notices shall be effective (i) if sent by messenger or overnight courier service, when delivered and (ii) if sent by mail, three days after posting. If to the Company: Nobel Education Dynamics, Inc. Rose Tree Corporate Center II 1400 North Providence Road Suite 3055 Attn: Chief Executive Officer If to Executive: Mr. John Frock 216 Stefan Road North Wales, PA 19454 2.4 Severability. If any term or provision of this Agreement or the ------------ application thereof to any person or circumstance shall, to any extent, be held invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement or the application of any such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. If any of the provisions contained in this Agreement shall for any reason be held to be excessively broad, it shall be construed by limiting and reducing it, so as to be valid and enforceable to the extent compatible with the applicable law or the determination by a court of competent jurisdiction. 2 2.5 Governing Law. The implementation and interpretation of this ------------- Agreement shall be governed by and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 2.6 Binding Effect and Assignability. The rights and obligations of -------------------------------- both parties under this Agreement shall inure to the benefit of and shall be binding upon their heirs, successors and assigns, but shall not be assigned without the written consent of both parties. 2.7 Entire Agreement. This instrument constitutes the entire ---------------- agreement with respect to the subject matter hereof between the parties hereto and replaces and supersedes as of the date hereof any and all prior oral or written agreements and understandings between the parties hereto. This Agreement may only be modified by an agreement in writing executed by both Executive and the Company. IN WITNESS WHEREOF, the undersigned have executed this agreement the date and year written above. Nobel Education Dynamics, Inc. By:_________________________ A. J. Clegg Chairman, President and CEO and By:__________________________ Name:_______________________, for Compensation Committee _____________________________ John R. Frock 3 EXHIBIT A Covenants of Executive Effective Upon Giving of a Notice Letter 1. Restrictive Covenant. During the period commencing with the date of -------------------- termination of his employment with the Company and continuing for a period of four years (such four-year period, the "Restrictive Period"), Executive will not, directly or indirectly, be employed by, or perform consulting services in excess of an average of 15 hours per week for, any for-profit business which owns private schools or preschools or child care centers (other than private schools restricted to post-eighth grade education) located within five miles of any private school or preschool or child care center operated by the Company or any of its subsidiaries or affiliates. Executive shall not be deemed to violate the foregoing if he performs services for an entity which owns private schools or preschools or child care centers but is not personally involved in such business. 2. Nonsolicitation. Executive will not during the Restrictive Period --------------- cause or solicit, directly or indirectly, the resignation of any person employed by Employer on the date of Employee's separation. EXHIBIT B [date] Nobel Education Dynamics, Inc. Rose Tree Corporate Center II 1400 North Providence Road Suite 3055 Media, PA 19063 Gentlemen: By this letter, I hereby notify you that I agree to be bound by each of the covenants set forth in Exhibit A of the Noncompete Agreement dated as of March 11, 1997 between you and me. Accordingly, you are obligated to pay to me $_________ on or before the date 15 days following your receipt of this letter. Very truly yours, John R. Frock EX-10.23 7 CONTINGENT SEVERANCE AGREEMENT EXHIBIT 10.23 CONTINGENT SEVERANCE AGREEMENT THIS CONTINGENT SEVERANCE AGREEMENT is dated as of March 11, 1997 by and between John R. Frock, an individual residing in Upper Gwynedd, Pennsylvania ("Executive") and Nobel Education Dynamics, Inc. (the "Company"), a Delaware corporation. Background Executive is currently Executive Vice President of the Company. The Company believes that retention of Executive is important to the continued growth and success of the Company. Accordingly, the Company desires to provide incentive to Executive to continue his employment with the Company and, to such end, desires to enter into this Agreement with Executive providing for payment of severance to Executive under certain circumstances. Now, Therefore, in consideration of the covenants set forth herein, and intending to be legally bound hereby, the parties agree as follows: Terms 1. Severance Payment. 1.1 Conditions of Payment. The Company shall pay to Executive in cash the --------------------- Severance Payment (defined below) on or before the date 20 days following the date of termination of Executive's employment ("Termination Date"), if Executive's employment terminates by reason of (a) the Company's termination of such employment without Cause (defined below) or (b) Executive's resignation from such employment following a Change of Control (defined below). Notwithstanding the foregoing, the Company shall not be required to pay the Severance Payment if it pays to Executive the Noncompete Payment (as such term is defined in the Noncompete Agreement dated March 11, 1997 between the Company and Executive). 1.2 Amount of Payment. The Severance Payment shall 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. 1.3 Definition of "Cause". For purposes of this Agreement, the term --------------------- "Cause" shall mean that any one of the following: (a) Executive's habitual intoxication or drug addiction; or (b) the conviction by Executive of a felony or any crime involving fraud; or (c) habitual gross neglect by Executive of the duties reasonably assigned to him and consistent with his position as Executive Vice President of Corporate Development and the failure of Executive to cure the same within 30 days of receipt of notice from the Company specifying in reasonable detail the nature of Executive's conduct 1.4 Definition of "Change of Control". For the purposes of this --------------------------------- Agreement, the term "Change of Control" shall mean: (a) A. J. Clegg ceases to be both the Chief Executive Officer and a director of the Company; or (b) Executive ceases to be a director of the Company, and such cessation is not voluntary; or (c) any person (as such term is used in Section 13 of the Securities Exchange Act of 1934 ("Exchange Act") and the rules and regulations thereunder and including any "affiliate" or "associate" of such person (as such terms are defined in Rule 12b-2 under the Exchange Act), and any person acting in concert with such person) directly or indirectly acquires or otherwise becomes entitled to vote more than 50 percent of the voting power entitled to be cast at elections for directors of the Company. 2. Arbitration. 2.1 Submission to Arbitration. In the event of any dispute as to the ------------------------- obligation of Employer to pay the Severance Payment, the parties shall submit such dispute to be settled by arbitration before a panel of three arbitrators in Philadelphia, Pennsylvania, conducted in accordance with the rules of the American Arbitration Association ("AAA"). Cost of any arbitration shall be paid by the Company. A determination by a majority of the panel shall be binding upon and enforceable against each party. Judgment upon an award made as a result of any such arbitration proceeding may be entered in any court having competent jurisdiction. 2.2 Selection of Arbitrators. Employer and Executive shall each choose ------------------------ one arbitrator and the arbitrators selected by the parties shall then select the third arbitrator. If the arbitrators selected by the parties fail to select the third arbitrator within ten business days of notification of their appointment, the third arbitrator shall be selected by the AAA. The arbitrator designated by the party-appointed arbitrators shall be the Chairman of the arbitration panel. If an arbitrator dies, refuses to act, or becomes incapable, unfit, or incompetent to act before hearings are complete and an award is rendered, a successor arbitrator shall be selected according to the provisions set forth above governing the selection of the arbitrator being replaced. 3. Miscellaneous. 3.1 Independent of Other Severance. Amounts payable hereunder are ------------------------------ independent of, and shall not be reduced by, amounts payable under any other severance arrangements with the Company, including, without limitation, the Company's Executive Severance Pay Plan. (This Section 3.1 does not affect the effect of the second sentence of Section 1.1.) 2 3.2 Waiver of Breach. The waiver by the Company of a breach of any ---------------- provision of this Agreement by Executive shall not operate or be construed as a waiver of any other or subsequent breach by Executive of such or any other provision. 3.3 Notices. All notices and other communications required or permitted ------- hereunder shall be in writing and shall be deemed to be properly given if transmitted by messenger, overnight courier service, first class certified mail (return receipt requested) or telecopy (which is confirmed), in each case postage or other charges prepaid, addressed to the other party at the address shown below. Any party may change such address by notice given in such manner. All notices shall be effective (i) if sent by messenger or overnight courier service, when delivered and (ii) if sent by mail, three days after posting. If to the Company: Nobel Education Dynamics, Inc. Rose Tree Corporate Center II 1400 North Providence Road Suite 3055 Attn: Chief Executive Officer If to Executive: Mr. John Frock 216 Stefan Road North Wales, PA 19454 3.4 Severability. If any term or provision of this Agreement or the ------------ application thereof to any person or circumstance shall, to any extent, be held invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement or the application of any such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. If any of the provisions contained in this Agreement shall for any reason be held to be excessively broad, it shall be construed by limiting and reducing it, so as to be valid and enforceable to the extent compatible with the applicable law or the determination by a court of competent jurisdiction. 3.5 Governing Law. The implementation and interpretation of this ------------- Agreement shall be governed by and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 3.6 Binding Effect and Assignability. The rights and obligations of both -------------------------------- parties under this Agreement shall inure to the benefit of and shall be binding upon their heirs, successors and assigns, but shall not be assigned without the written consent of both parties. 3 3.7 Entire Agreement. This instrument constitutes the entire agreement ---------------- with respect to the subject matter hereof between the parties hereto and replaces and supersedes as of the date hereof any and all prior oral or written agreements and understandings between the parties hereto. This Agreement may only be modified by an agreement in writing executed by both Executive and the Company. IN WITNESS WHEREOF, the undersigned have executed this agreement the date and year written above. Nobel Education Dynamics, Inc. By:_________________________ A. J. Clegg Chairman, President and CEO and By:__________________________ Name:_______________________, for Compensation Committee _____________________________ John R. Frock 4 EX-11 8 RE-COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Statement Re-computation of Per Share Earnings
December 31, -------------------------- 1996 1995 ---- ---- Net Income per common share, primary: Net Income $2,462,892 $3,843,886 Less: Preferred Dividends 108,419 184,114 ---------- ---------- Net Income Available to Common Shareholders 2,354,473 3,659,772 Average Shares Outstanding 5,545,605 4,688,335 Common stock equivalents-Convertible Preferred 1,415,474 710,396 ---------- ---------- Adjusted Average Shares Outstanding 6,961,079 5,398,731 ========== ========== Net Income per common share $ 0.34 $ 0.68 ========== ========== Net Income per common share, fully diluted: Net Income $2,462,892 $3,843,886 Average Shares Outstanding Outstanding 5,545,605 4,688,335 Shares issuable on conversion of preferred stock 1,717,178 1,440,786 ---------- ---------- Average shares outstanding assuming full dilution 7,262,783 6,129,121 ========== ========== Fully diluted earnings per share $ 0.34 $ 0.63 ========== ==========
EX-21 9 SUBSIDIARIES OF NOBEL EDUCATION DYNAMICS, INC. Exhibit 21 SUBSIDIARIES OF NOBEL EDUCATION DYNAMICS, INC. Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- Bluegrass Real Estate, Inc. Pennsylvania Merryhill Schools, Inc. California Educo, Inc. Maryland Another Generation Enterprises, Inc. Florida EX-23 10 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Nobel Education Dynamics, Inc. (formerly the Rocking Horse Child Care Centers of America, Inc.) and subsidiaries on Form S-3 (File Nos. 333-3793, 333-3797 and 33-73496) and Form S-8 (File Nos. 33-21859, 33-44888 and 33-64701) of our report dated February 10, 1997, except for Note 16, as to which the date is March 20, 1997, on our audits of the consolidated financial statements for Nobel Education Dynamics, Inc. and subsidiaries as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 28, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 5,252 3,714 0 0 779 727 (103) (103) 0 0 8,278 7,112 26,166 21,220 (6,843) (5,356) 56,833 44,937 9,629 7,943 0 0 0 0 5 6 6 4 37,666 23,818 56,833 44,937 58,909 44,154 58,909 44,154 49,079 35,908 53,269 39,804 (483) (126) 0 0 2,004 1,840 4,025 2,550 1,561 (1,356) 2,463 3,906 0 0 0 62 0 0 2,463 3,846 0.34 0.68 0.34 0.63
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