-----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, Wk1O8wa9tgnQBjFTqas9/xOsvas26XtsBMKAb9p0DnhpeDAD/RGpFppAyxNtXtSq iDB7qDucI4Jg7Y74sXsLlg== 0001036050-98-001644.txt : 19980928 0001036050-98-001644.hdr.sgml : 19980928 ACCESSION NUMBER: 0001036050-98-001644 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBEL EDUCATION DYNAMICS INC CENTRAL INDEX KEY: 0000721237 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 222465204 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10031 FILM NUMBER: 98715264 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 NOBEL EDUCATION 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 June 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 [No Fee Required] Commission File Number 1-1003 NOBEL EDUCATION DYNAMICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2465204 (State or other jurisdiction (IRS Employer of incorporation or organization Identification No.) ROSE TREE CORPORATE CENTER II 1400 N. PROVIDENCE ROAD, SUITE 3055 MEDIA, PA 19063 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 891-8200 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.001 PER SHARE (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No_____ ----------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of September 16, 1998, 6,121,365 shares of common stock were outstanding. The aggregate market value of the shares of common stock owned by non-affiliates of the Registrant as of September 16, 1998 was approximately $33,061,000 (based upon the closing sale price of these shares as reported by Nasdaq). Calculation of the number of shares held by non-affiliates is based on the assumption that the affiliates of the Company include the directors, executive officers and stockholders who have filed a Schedule 13D or 13G with the Company which reflects ownership of at least 10% of the outstanding common stock or have the right to designate a member of the board of directors, and no other persons. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is an affiliate or that any person whose holdings are included is not an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes of the Securities and Exchange Commission. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 19, 1998 (the "Proxy Statement") and to be filed within 120 days after the registrant's fiscal year ended June 30, 1998 are incorporated by reference in Part III. TABLE OF CONTENTS
Item No. Page PART I 1. Business........................................................... 1 Executive Officers of the Company.................................. 10 2. Properties......................................................... 12 3. Legal Proceedings.................................................. 12 4. Submission of Matters to a Vote of Security Holders................ 13 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 14 6. Selected Financial Data............................................ 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 17 8. Financial Statements and Supplementary Data........................ 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 23 PART III 10. Directors and Executive Officers of the Registrant................. 24 11. Executive Compensation............................................. 24 12. Security Ownership of Certain Owners and Management................ 24 13. Certain Relationships and Related Transactions..................... 24 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 25
PART I "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company's Fiscal 1999 outlook and all other statements in this report other than historical facts are forward-looking statements that involve risks and uncertainties and are subject to change at any time. The Company derives its forward-looking statements from its operating budgets and forecasts, which are based upon detailed assumptions about many important factors such as market demand, market conditions and competitive activities. While the Company believes that its assumptions are reasonable, it cautions that there are inherent difficulties in predicting the impact of certain factors, especially those affecting the acceptance of the Company's newly developed schools and performance of recently acquired businesses, which could cause actual results to differ materially from predicted results. ITEM 1. BUSINESS. GENERAL Nobel Education Dynamics, Inc.'s business mission is to be the leader in the United States in providing affordable private education from preschool through eighth grade for the children of middle-income working families. The Company has been identified as a market leader "Education Management Organization" (EMO) for preschool through eighth grade. (EMO is a term used in the investment community to describe companies which manage education businesses for profit in multiple sites.) The Company's operations include preschools, elementary schools and middle schools, and several child care centers, throughout the United States, all operating as part of the "Nobel Learning Communities." To attain its objectives, Nobel builds on its experience and expertise both in education and preschool/child care. As an "education company," the Company's strategy is to offer practical solutions to a segment of the education problem in the United States. Nobel operates nationwide, with 138 schools and centers in 13 states as of September 19, 1998. In California, Nobel operates the Merryhill Schools, which is a private school system of 28 preschools, elementary schools and middle schools. Nationwide, Nobel operates preschools, schools and centers under various names in Pennsylvania, New Jersey, Virginia, Florida, Maryland, North Carolina, South Carolina, Illinois, Nevada, Oregon, Washington and Indiana. School names include Chesterbrook Academy, Evergreen Academy and Another Generation. Nobel also owns a 20% interest in an elementary school in Florida. Management is pursuing a three-pronged strategy to take advantage of the significant growth opportunities in the private education market: . internal growth at existing schools, including expansions of campus facilities . new school development in both existing and new markets . strategic acquisitions To facilitate this strategy, Nobel is applying the strengths of its curriculum-based programs to distinguish itself from its competition. The strategy also entails geographical clustering of Nobel's preschools to (i) increase market awareness, (ii) provide a lower risk method for expansion into 1 elementary and middle schools by providing a feeder population and (iii) gain operating efficiencies in both management and costs. Nobel targets its schools and preschools to meet the needs of middle-income working parents. Most of Nobel's schools, preschools and child care centers are open from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up. In most locations, programs are available for children starting at six weeks of age. For basically the same price as standard child care, parents can leave children of various ages at a Nobel school knowing they will receive a quality education during the greater part of the day and be engaged in well-supervised activities the remainder. To complement its programs, the Company also operates (i) before and after school programs and (ii) summer camps (both sports and educational) at its various school facilities. Nobel also seeks to add other services and products which will add ancillary income and improve overall operating margins. The Company's financial strength has improved dramatically since 1992, when there was a change in management. Strategies of new management have included a change of the Company's focus to education from child care, strengthening of the Company's financial condition, divestiture of centers in mature markets and, after the Company's financial stabilization, expansion into growth areas. With the implementation of these new strategies, the equity of the Company has increased from a negative net worth of $3.8 million on December 31, 1991 to positive net worth of $33 million as of June 30, 1998. The Company's corporate office is located at Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media, PA 19063. Its telephone number is (610) 891-8200; its world wide web address is www.nobeleducation.com or www.educating.com. EDUCATIONAL PHILOSOPHY AND IMPLEMENTATION The educational philosophy of the Nobel Learning Communities is based on a sound research foundation, innovative instructional techniques and quality practice, and proprietary curricula developed by experienced educational personnel. Nobel's programs stress the development of the whole child and are based on concepts of integrated and age-appropriate learning. The curricula recognize that each child develops according to his or her own abilities and timetable, but also seek to prepare every student for achievement in accordance with national content standards and goals. Every child's educational needs are considered upon entrance into a Nobel school, and progress is regularly monitored in terms of both the curriculum's objectives and the learner's cognitive, social, emotional, and physical skill development. The result is the opportunity for every Nobel student to develop a strong foundation in academic learning, positive self-esteem, and emotional and physical well-being. Since 1995, the Company has adapted the Merryhill curriculum for implementation in its other schools through the conversion of most of its child- care centers on the East Coast and in the Mid-West. In implementing the conversions, Nobel conducted staff training sessions to prepare teachers to present the curriculum-based program in the pre-school as well as at elementary grade levels. The schools instituted instructional techniques and assessment practices and adopted particular content materials in the various subject areas. Also, at conversion, the schools' computer technology was upgraded. 2 Under the direction of Nobel's Vice President - Education, the Company circulates regular "curriculum updates," a publication to assist staff in planning their daily and weekly programs with current and effective instructional practices and materials. The Company has also established multi- media products for a "Learning Lending Library" collection. The library, which is managed out of the Company's corporate office, is available to all Nobel schools for student and teacher development and parent interest. Many of these resources support the Company's curriculum. In 1996, the Company launched its National Education Advisory Board. Under the direction of the Vice President - Education, the Board includes five nationally-known educators each of whom advises Nobel on his or her particular area of expertise: Dr. Zalman Usiskin of the University of Chicago (Mathematics); Dr. Cathy Collins Block of Texas Christian University (Reading and Language Arts); Dr. John N. Mangieri of the Institute for Effective Management (Educational Administration); Dr. Arthur L. Costa of the University of California at Sacramento (Curriculum and Teacher Development); and Dr. Drew H. Gitomer of Educational Testing Service (Testing and Evaluation). The Advisory Board helps oversee curriculum development in the Company's schools, advise on the most renowned teaching methods, and assist in finding the best instructional materials and practices to help students learn effectively and efficiently. Advisory Board members are also available to work on special projects and services that enhance the Company's school programs. The Company maintains that small class sizes are a basic ingredient of quality education. Nobel's educational philosophy is based on personalized instruction that leads to a student's active involvement in learning and understanding. The program for the Company's schools is a strong skills-based, comprehensive curriculum that is implemented in ways that attract the learner's curiosity, enhance students' various learning styles, and employ processes that contribute to lifelong achievement. Academic areas addressed include reading readiness and reading, spelling, writing, handwriting, mathematics, science, social studies, visual and graphic arts, music, physical education and health, and foreign language. Computer literacy and study skills are interrelated into the program, as appropriate, in all content areas. The schools employ state-of- the-art technologies, such as interactive CD-ROMs coordinated with classroom content and networking capacity. Most schools in the Nobel Learning Communities introduce a second language between the ages of two and three and continue that instruction into the pre-K, kindergarten and school age programs. The Company offers sports activities and supplemental programs, which include day field trips coordinated with the curriculum to such places as zoos, libraries, museums and theaters, and, at the middle schools, overnight trips to such places as Yosemite, California and Washington, D.C. Schools also arrange classroom presentations by parents and other volunteers, as well as organize youngsters as presenters to community groups and organizations. To enhance better the child's physical, social, emotional and intellectual growth, schools are encouraged to provide fee-based experiences specifically tailored to particular families' interest in such ancillary activities as dance, gymnastics, and music lessons. The Company's programs are implemented by experienced principals and directors and their faculties. They foster open communication, teamwork and the attention to detail required to provide a superior service. School principals and directors work closely with regional and corporate management, particularly in the regular assessment of program quality. In 1996, the groundwork was laid for a Company-wide Quality Assurance Program and, early in 1997, a Director of Quality Assurance was appointed to assess systematically each Nobel school and to provide a procedure for 3 internal accreditation. Nobel's Quality Assurance Program sets standards consistent with the external, national accreditation systems in which the Company participates with such organizations as the National Association for the Education of Young Children (NAEYC), the National Independent Private School Association (NIPSA), and the Commission for International and Trans-Regional Accreditation (CITA). The Program also provides a formal means to recognize and reward Nobel Learning Communities educators for their outstanding performance and achievement. Similarly, the Program also furnishes guidance for the continued training and staff development of teaching personnel, using both internal trainers and external consultants. Nobel has begun development of Nobel Learning Advantage, which will consist of comprehensive tutorial and diagnostic programs. The tutoring programs of Nobel Learning Advantage will include adaptive, transitional and enrichment components within two major content areas: reading and mathematics. Each program will have a diagnostic and an instructional component that can be delivered in three grade ranges (K - 2, 3 - 5, and 6 - 8). The Company expects to complete development of the diagnostic and instructional materials in reading in all three ranges in 1998 and to implement pilot tryouts in select schools. The development of the diagnostic and instructional materials in mathematics is expected to be completed in early 1999 in all three grade ranges. Nobel plans to implement further piloting and development of full tutoring services and marketing in 1999. As part of Nobel Learning Advantage, commencing in September 1998, Nobel began to offer an assessment designed to respond to the personal needs of children three to six years old in Nobel schools. As the initial step, a trained Nobel certified diagnostician administers the Kaufman Survey of Early Academic and Language Skills (K-SEALS). This test measures skill development in five key areas critical to academic success. The diagnostician then reviews and interprets the test results with both the child's parent and teacher. Recommendations are made to personalize the child's learning program throughout the school year. The Company also entered another segment of the education industry - the education of learning-challenged children. This entry began in August 1998 with Nobel's acquisition through an 80%-owned joint venture of three Florida schools for learning-challenged children from Developmental Resource Center, Inc. (DRC). Nobel's joint venture partner is DRC's former owner, Dr. Deborah Levy, who joined Nobel as chief education officer for this business - Nobel Learning Solutions. The mission of Nobel Learning Solutions will be to improve the learning process and achievement levels of children having such learning challenges as ADD, ADHD, dyslexia and the developmentally delayed. The Company intends to develop separate schools for these children within the Nobel school clusters across the United States. As of September 19, 1998, the aggregate licensed capacity at the Company's 138 schools and centers was approximately 22,500 children. OPERATIONS / SCHOOL SYSTEMS In order to maintain uniform standards, each school and center shares consistent educational goals and operating procedures. To respond to local demands, principals are encouraged to tailor curriculums, within Nobel's standards, to meet regional needs. Management visits all schools and centers on a regular basis to review program and facility quality. 4 Each school and center is staffed with a principal or director, teachers and teaching assistants. Principals and directors are supervised by executive directors, who report to either the Vice President - Eastern Operations or the Vice President - Western Operations. The principal or director is critical to the success of the school and is provided with ongoing training. Principals and directors have responsibility for: (i) maintaining the quality of educational services delivered at their schools, (ii) recommending pricing strategy based upon school location and local area demographics, (iii) personnel management, (iv) sales and marketing strategy for their locations and (v) fiscal management. Principals and directors submit financial reports to the Company's corporate office and to appropriate district and regional managers each week. These reports include data on current enrollment, labor costs and cash receipts. Corporate office personnel then review each report and prepare weekly combined reports by district, region and for the Company in total. Weekly or monthly tuition rates and utilization rates are continually monitored. Each school and center is measured on a monthly basis versus its individual business plan. Nobel is in the process of evaluating several state-of-the-art computer systems which would assist the principals in operating schools and provide management with enhanced operational information. The Company generally hires experienced individuals and attempts to promote from within. Employment applicants are reviewed with background checks made to verify accurate employment history and establish background, reputation and character. After hiring, the faculty is reviewed and evaluated annually both through formal evaluation and market surveys. All principals and directors are eligible for incentive compensation based on the profitability of their schools. MARKETING AND CUSTOMERS The Company's management believes that Nobel has a unique position in the marketplace and has implemented a marketing strategy to capitalize on this position. Nobel strives to differentiate itself from child care providers. In contrast with mere custodial child care, Nobel's programs stress educational development through proven curriculum programs, beginning at the preschool level and continuing through upper grades. The Company generates the majority of new enrollments from its reputation in the community and word-of-mouth recommendations of parents. Further, the Company is geographically clustering its preschools to increase local market awareness and to provide a feeder population for Nobel elementary and middle schools. The Company also markets its services through display ads, listings in local print and radio media and through distribution of promotional materials in residential areas. Marketing campaigns are conducted throughout the year, primarily at the local level by the Company's school directors and principals. In addition, the various regional offices conduct marketing programs, such as mass mailings and media advertising. NEW CENTER AND SCHOOL DEVELOPMENT; ACQUISITIONS Management expects a significant portion of Nobel's growth for the next few years to continue to be through the opening of new schools and preschools and strategic acquisitions of existing schools and preschools. 5 New school development offers an attractive growth opportunity for Nobel to expand into both new and existing markets. Proposed development sites are presented to the Company through a network of developers across the United States. After site selection, the Company engages a developer or contractor to build a facility to the Company's specifications. Nobel currently works with several developers who purchase the land, build the facility and enter into a long-term lease with Nobel for the premises. Alternatively, Nobel purchases land itself, constructs the building with its own or borrowed funds and then seeks to enter into a sale and lease back transaction with an investor. In 1997 and fiscal 1998, Nobel opened 14 new schools and preschools. The Company plans to open approximately eight to 12 new schools and preschools in fiscal 1999 and 12 to 15 new schools and preschools in fiscal 2000. The Company's development plans are dependent on the continued availability of such developer and financing arrangements. Typically, new schools are single-story stand alone structures located near residential neighborhoods on acreage appropriate to the nature of the school. The Company carefully evaluates all proposed development sites and makes a selection based on a variety of criteria, including: the number and age of children living in proximity to the site; family income data; incidence of two- wage earner and single parent families; traffic patterns; wage and fixed cost structure; competition; price elasticity; family educational data; local licensing requirements; and real estate costs. The Company plans to continue to expand the number of grade levels offered by its existing schools. Upon conversion, current preschools and child care centers initially offer grade levels through kindergarten or first grade, with further expansion planned. The Company also is expanding the grades offered by its other schools. In some locations, this expansion requires the construction of additions to current facilities or development of a replacement facility. Acquisition activity in 1997 and 1998 to date consisted of the following: . In January 1997, the acquisition of six preschools in Florida. . In March 1997, the acquisition of two elementary and one preschool located in San Jose, California. . In September 1997, the acquisition of two preschools and one elementary school in Las Vegas, Nevada. . In March 1998, the acquisitions of one elementary school located in each of Lake Oswego, Oregon; Seattle, Washington and North Lauderdale, Florida. . In August 1998, the acquisition through an 80% joint venture entity of schools located in southern Florida which educate children with learning disabilities (discussed above). At the closing of the January 1997 Florida acquisition, Nobel also purchased a 20% interest in a new elementary school in Florida, and Nobel entered into a joint venture agreement with the sellers to develop five additional elementary schools in Florida in which Nobel will have an 80% interest. 6 INDUSTRY AND COMPETITION Annual spending in education is estimated to exceed $630 billion annually in the United States or approximately 10% of gross domestic product. Estimates of spending in education for preprimary grades (preschools and child care) are $30 billion while estimates of spending for kindergarten through eighth grade ("K -8") are $200 billion. Spending is projected to continue to grow through a combination of increasing per pupil expenditures and increasing school enrollments. It is estimated there are 90,000 schools in the $30 billion preschool/child care segment with $25 billion spent in the private sector, of which $10 billion is spent in the for-profit segment. Likewise, it is estimated there are 85,000 schools in the $200 billion K - 8 segment with an estimated $15 billion spent in the private sector, of which $650 million is spent in the for-profit segment. The public school market is estimated to be 110,000 schools in total, of which 76,000 are elementary, 23,000 are secondary and 11,000 are combined schools. The private school market is estimated to be 26,000 schools, of which 15,500 are elementary, 2,500 are secondary and 8,000 are combined. Of the 26,000 schools in the private school market, an estimated 20,500 are religiously affiliated and 5,500 are secular. Of the 5,500 secular schools, less than 1,000 are for-profit schools. Between 1985 and 1995, it is estimated that the public school K - 8 grade enrollment increased 19.8% from 27.03 million students to 32.38 million students while the private school K - 8 grade enrollments increased 5.6% from 4.19 million students to 4.43 million students over the same time period. The U.S. Department of Education projects public school and private school K - 8 enrollment growth between 1996 and 2006 to slow to 2%, a 700,000 enrollment increase in public schools and a 100,000 enrollment increase in private schools, respectively. While this increase may not seem large, there is significant concern that the nation's already overcrowded schools are ill-prepared to handle it. It is estimated that in excess of 4,000 new K - 8 schools must be built to relieve current overcrowding and handle the growth. Also, this growth will vary significantly in different regions of the United States. States such as California, Florida, Washington and Oregon are projected to experience high growth. These states are targeted in the Company's expansion plans. During the 1996 elections, education was the politically "hot issue" in national and state contests. The broad public debate has shifted from whether our existing K - 12 system has failed in terms of performance to which reform movements promise the best and quickest improvements. Taxpayers have experienced high costs in education expenditures without positive results. According to a 1995 Gallup poll, 71% of Americans give the nation's schools a grade of C, D or F generally and 54% give their own schools a low grade as well. Quality is low; yet, the average annual cost of educating a Kindergarten through 12/th/ grade student in the United States has risen to over $6,000 in 1995. Dismal student achievement, a growing minority gap in school completion rates and student misbehavior causing unsafe school environments are three commonly mentioned quality measurements that are lacking. Also, corporate America has become increasingly frustrated by insufficiently equipped students produced by the nation's public school systems. Education reform movements in the United States are posing alternatives to the public schools. These include charter schools, private management of public schools, vouchers, home schooling and private schools. The Company's strategy is to provide parents a quality alternative through Nobel's 7 privately owned and operated schools utilizing a proven curriculum in a safe and challenging environment. For school age children, the Company competes with other for-profit private schools, with non-profit schools and, in a sense, with public school systems. The Company anticipates that, given the perceived potential of the education market, well-financed competition may emerge, including possible competition from the large for-profit child care companies. Currently, the only for-profit competitor of which Nobel is aware that competes beyond a regional level is Children's World, a subsidiary of Aramark Corporation. The Company believes that the structure of the large for-profit child care companies may make it difficult for them to implement and develop programs which are based upon curriculum-intensive goals, which would require significant cultural changes. The preschool/child care market is a $30 billion highly fragmented industry, with diverse competition from both public and private sectors. Approximately eight million children are enrolled in 90,000 centers/schools, of which less than nine percent are managed by for-profit chains. Revenues of the 20 largest child care/preschool providers represent less than five percent of total segment revenues. Also seeking enrollments of pre-school age children are in-home individual child care providers and corporations that provide child care for their employees. Only one out of seven early care/education programs is rated good or excellent by the Carnegie Corporation report; four out of five programs fail quality standards. The Company believes that persons in its target market -- parents seeking curriculum-based programs for their children -- seek services not provided by child care providers without a curriculum base. Nobel believes these parents desire to give their child the best educational advantage available, since, as educators have found, the learning process should start earlier, preferably somewhere between the ages of two and three. The Company offers a national curriculum based program with excellent standards. The demand for quality preschools is increasing. More than 60% of mothers with children under six years of age are in the workplace. Both single parents and dual income families are on the rise. From 1980 to 1990, the percentage of dual income families rose from 50% to 60%. From 1970 to 1992, the percentage of married mothers who worked full time increased 16% to 37%. Combined, approximately 80% of U.S. families are either dual income or single parent households. While price is an important factor in competition in both the school age and preschool markets, the Company believes that other competitive factors also are important, including: professionally developed educational programs, well equipped facilities, trained teachers and a broad range of ancillary services, including transportation and infant care. Particularly in the preschool market, many of these services are not offered by the Company's competition. REGULATION Schools and preschools are subject to a variety of state and local regulations and licensing requirements. These regulations and licensing requirements vary greatly from jurisdiction to jurisdiction. Governmental agencies generally review the safety, fitness and adequacy of the buildings and equipment, the ratio of staff personnel to enrolled children, the dietary program, the daily curriculum, compliance with health standards and the qualifications of the Company's personnel. 8 INSURANCE The Company currently maintains comprehensive general liability, workers' compensation, automobile liability, property, excess umbrella liability and student accident insurance. The policies provide for a variety of coverage and are subject to various limits. Companies involved in the education and care of children, however, may not be able to obtain insurance for the total risks inherent in their operations. In particular, general liability coverage can have sublimits per claim for child abuse. Since 1994, the Company has been able to increase significantly the sublimit applicable to such coverage. There can be no assurance that in future years the Company will not again become subject to lower limits. SERVICE MARKS The Company has registered various service marks, including Chesterbrook Academy(R), Merryhill Country School(R) and The Rocking Horse Child Care Center(R), in the United States Patent and Trademark Office. The Company believes that certain of its service marks have substantial value in its marketing in the respective areas in which its schools operate. SEASONALITY Nobel's elementary and middle schools historically have lower operating revenues in the summer due to lower summer enrollments. Summer revenues of preschools tend to remain more stable or, in some cases, increase. The Company is seeking to improve summer results through camps and other programs. EMPLOYEES On September 19, 1998, the Company employed approximately 5,200 persons, approximately 1,700 of which were employed on a part-time basis. Management believes that its relationship with its employees is satisfactory. 9 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: Name Age Position - ----------------------------------------------------------------------------- A. J. Clegg 59 Chairman of the Board of Directors, President and Chief Executive Officer; Director John R. Frock 55 Executive Vice President - Corporate Development; Assistant Secretary; Director B. Robin Eglin 42 Executive Vice President - Real Estate Development William E. Bailey 39 Vice President and Chief Financial Officer Yvonne DeAngelo 40 Vice President - Administration and Finance; Secretary Emily Louviere 54 Vice President - Western Operations Barbara Z. Presseisen 62 Vice President - Education Barbara Sell 48 Vice President - Eastern Operations Barry S. Swirsky 42 General Counsel The following description contains certain information concerning the foregoing persons: A.J. Clegg. Mr. Clegg was named Chairman of the Board and Chief Executive Officer of the Company on May 29, 1992. Since 1989, Mr. Clegg has also served on the Advisory Board of Drexel University and, in 1996, was named as a member of the Board of Trustees of Drexel University. From June 1990 to December 1997 (but involving immaterial amounts of time since 1994), Mr. Clegg also served as the Chairman and CEO of JBS Investment Banking, Ltd., which provides investment management and consulting services to businesses and formerly provided services to the Company through an Administrative Services Agreement. In 1979, he formed Empery Corporation, an operator of businesses in the cable television and printing industries, and held the offices of Chairman, President and CEO during his tenure (1979-1993). In addition, Mr. Clegg served as Chairman and CEO of TVC, Inc. (1983-1993), a distributor of cable television components; and Design Mark Industries (1988-1993), a manufacturer of electronic senswitches. Mr. Clegg has also served on the board of directors of Ferguson International Holdings, PLC, a United Kingdom company, from March 1990 to April 1991; and was Chairman and CEO of Globe Ticket and Label Company from December 1984 to February 1991. John R. Frock. Mr. Frock was named Executive Vice President - Corporate Development on August 1, 1994. Mr. Frock was elected to the Board of Directors of the Company on May 29, 1992. In March 1992, Mr. Frock became the President and Chief Operating Officer of JBS Investment Banking, Ltd., which provided investment management and consulting services to businesses (which 10 included Nobel). During the past five years, Mr. Frock also served as the Chairman and Chief Executive Officer of Avant Garde Enterprises, Ltd.; President and Chief Operating Officer of SBF Communications Graphics, a business forms printer located in Philadelphia, Pennsylvania; President of Globe Ticket and Label Company; and President of the Graphics Group of Empery Corporation. B. Robin Eglin. Mr. Eglin joined the Company as Vice President - Real Estate Development in April 1995 and was named Executive Vice President in September 1998. Mr. Eglin was formerly Vice President of Carefree Learning Centers, Inc. and Keystone Real Estate Development Company, Inc., wholly-owned for-profit subsidiaries of Pennsylvania Blue Shield, where he was in charge of all real estate, finance and accounting activities. Mr. Eglin joined Carefree in 1989. William E. Bailey. Mr. Bailey joined the Company as Vice President and Chief Financial Officer in January 1998. Prior to joining the Company, Mr. Bailey was Vice President / Controller for KinderCare Learning Centers, Inc. (a national child care company) from 1993 to 1997, Corporate Controller from 1991 to 1993, and Director of Planning and Analysis from June 1989 to October 1991. Yvonne DeAngelo. Ms. DeAngelo was appointed Vice President - Finance and Administration in December 1995. She had served as Controller since March 1989. Ms. DeAngelo has also served as Secretary since May 1992. Before joining Nobel Education Dynamics, Inc., she served as Senior Auditor for Coopers and Lybrand from 1986 to 1989. Emily Louviere. Ms. Louviere joined the Company as Vice President - Western Operations in November 1997. Ms. Louviere has over fourteen years of experience in the education industry, including managing multi-site educational operations, both preschool and elementary schools. Immediately prior to joining Nobel, from November 1996 to November 1997, Ms. Louviere served as Regional Vice President of Operations of Children's World. From October 1982 to March 1995, Ms. Louviere held various positions, including District Manager, Region Manager and Western Divisional Vice President at KinderCare, where she managed up to 400 schools with over $185 million in aggregate revenue. Barbara Z. Presseisen. Dr. Presseisen was named Vice President - Education in June 1996. Dr. Presseisen served in several positions over 24 years at Research for Better Schools, one of the ten regional educational laboratories sponsored by the U.S. Department of Education, located in Philadelphia, Pennsylvania. In her most recent capacity, Director of National Networking, she worked with several major school districts on staff development and program improvement, as well as coordinated training and conferences on curriculum and student achievement with other laboratories and a number of professional associations and universities. Dr. Presseisen has authored a number of books and research reports, and has been an invited lecturer at many national and regional programs. Most recently, prior to joining Nobel, Dr. Presseisen consulted on educational design and product development for the Walt Disney Company from December 1995 to June 1996. Barbara Sell. Ms. Sell joined the Company in March 1997 as Vice President - Eastern Operations. Ms. Sell has 23 years of experience in the early childhood education field. Seventeen years of her career have been spent in operational management, accomplishing such goals as development and operation of a corporate child care division and managing an international child care division. Prior to joining Nobel, Ms. Sell was employed by KinderCare Learning Centers, with whom she was 11 employed from 1979 through April 1996. Ms. Sell joined KinderCare in 1979 and held various positions, including District Manager, Region Manager and Vice President of Operations for over 300 schools. Barry S. Swirsky. Mr. Swirsky has been the General Counsel of the Company since September 1995 (serving as an officer since September 1997). Mr. Swirsky was previously engaged in private legal practice advising corporations and other business entities, primarily in corporate and securities matters. Mr. Swirsky commenced his legal career as an associate with Reavis & McGrath in New York, New York (since merged with Fulbright & Jaworski) (1981 to 1984), then was an associate with Dechert Price & Rhoads in Philadelphia, Pennsylvania (1984 to 1992), and then counsel to Bray Berry Martin & Reardon and a shareholder of Berry & Martin, P.C in Philadelphia, Pennsylvania (1992 to 1995). Mr. Swirsky received his J.D. from Harvard Law School in 1981. ITEM 2. PROPERTIES. At June 30, 1998, the Company operated 132 schools, preschools and child care centers (hereafter, "schools") in 13 states. At September 18, 1998, the number of schools totaled 138, located in 13 states. The Company's schools generally are located in suburban settings. At September 18, 1998, the Company's schools are geographically located as follows: 37 in California, 19 in North Carolina, 17 in Pennsylvania, 13 in Virginia, 9 each in Indiana and New Jersey, 7 in Illinois, 6 in Florida, 5 in Nevada, 3 in Washington, 2 each in South Carolina and Oregon and 1 in Maryland. The Company owns the land and buildings for eight of the schools it operates. All such properties are subject to mortgages on the real property. In addition, one school is run by a majority-owned subsidiary and operated jointly with a sponsoring employer. This subsidiary leases the buildings from a third party and operates them under a ground lease from the employer. The remaining schools are leased under long-term leases which are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs. These leases usually contain inflation related rent escalators. The Company owns the land and building of three properties in Florida and Maine, two of which are leased. The Company also from time to time purchases undeveloped land for future development. At June 30, 1998, the Company owned one such property in North Carolina and one property in Northern Virginia. The Company leases 13,837 square feet of space for its corporate offices in Media, Pennsylvania. ITEM 3. LEGAL PROCEEDINGS. The Company is engaged in legal actions arising in the ordinary course of its business. The Company believes that the ultimate outcome of all such matters above will not have a material adverse effect on the Company's consolidated financial position or results of operations. The significance of these matters on the Company's future operating results and cash flows depends on the level of future results of operations and cash flows as well as on the timing and amounts, if any, of the ultimate outcome. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's common stock trades on The Nasdaq Stock Market under the symbol NEDI. "The Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic securities market comprised of competing market makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and order execution systems. This market also provides specialized automation services for screen-based negotiations of transactions, on-line comparison of transactions, and a range of information services tailored to the needs of the securities industry, investors and issuers. The Nasdaq Stock Market consists of two distinct market tiers: the Nasdaq National Market/(R)/ (on which the Company's common stock trades) and the Nasdaq SmallCap Market/SM/. The Nasdaq Stock market is operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the National Association of Securities Dealers, Inc. The table below sets forth the quarterly high and low sales prices for the Company's common stock as reported by Nasdaq for each quarter during the period from January 1, 1996 through June 30, 1998 and for the first quarter to date in Fiscal 1999.
High Low 1996 First Quarter............................. $17 5/8 $13 5/8 Second Quarter............................ 18 1/4 13 3/4 Third Quarter............................. 15 1/4 9 1/4 Fourth Quarter............................ 14 9 1/2 1997 First Quarter............................. 12 5/8 7 7/8 Second Quarter............................ 10 3/8 7 1/2 Third Quarter............................. 9 3/4 8 1/4 Fourth Quarter............................ 9 7/16 4 1/2 Fiscal 1998 First Quarter............................. 9 3/8 4 7/8 Second Quarter............................ 9 3/8 7 7/8 Fiscal 1999 First Quarter (as of September 17, 1998).. 9 3/4 5 7/8
HOLDERS At September 7, 1998, there were approximately 580 holders of record of shares of common stock. 14 DIVIDEND POLICY The Company has never paid a dividend on its common stock and does not expect to do so in the foreseeable future. Although the payment of dividends is at the discretion of the Board of Directors, the Company intends to retain its earnings in order to finance its ongoing operations and to develop and expand its business. The Company's credit facility with its lenders prohibits the Company from paying dividends on its common stock or making other cash distributions without the lenders' consent. Further, the Company's financing documents relating to its private placement of its $10,000,000 Subordinated Note with Allied Capital Corporation prohibit the Company from paying cash dividends on its common stock without Allied's approval, and the Company's financing documents relating to its private placement of the Series C Convertible Preferred Stock to Edison Venture Fund II, L.P. prohibit the Company from paying cash dividends on its common stock, unless the dividend is permitted under the Company's bank agreement and the amount of the dividend is less than or equal to 50% of operating income less income tax. 15 ITEM 6. SELECTED FINANCIAL DATA (in thousands except per share data) The following table sets forth selected historical financial data of the Company. This data should be read in conjunction with the Company's Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------- OPERATING DATA JUNE 30, 1998 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Revenue $ 48,995 $80,980 $58,909 $44,154 $34,372 $32,594 School operating expenses 42,142 69,858 48,871 35,762 28,032 26,514 - -------------------------------------------------------------------------------------------------------------------------------- School operating profit 6,853 11,122 10,038 8,392 6,340 6,080 New school development 501 400 207 146 129 29 General and administrative expenses 3,391 5,973 4,190 3,396 2,696 2,555 Restructuring expense - 2,960 - - - - Litigation expense - - - 500 200 - - -------------------------------------------------------------------------------------------------------------------------------- Operating income 2,961 1,789 5,641 4,350 3,315 3,496 Interest expense 1,044 2,047 2,004 1,840 1,223 1,718 Other (income) expense (102) (158) (482) (126) 107 (39) Minority interest 35 86 94 86 83 88 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,984 (186) 4,025 2,550 1,902 1,729 Income tax (benefit) expense 833 250 1,562 (1,356) (438) 21 - -------------------------------------------------------------------------------------------------------------------------------- Net income before extraordinary item 1,151 (436) 2,463 3,906 2,340 1,708 Extraordinary item - 449 - 62 - - - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,151 (885) 2,463 3,844 2,340 1,708 Preferred dividends 51 102 109 184 199 107 - -------------------------------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 1,100 $ (987) $ 2,354 $ 3,660 $ 2,141 $ 1,601 ================================================================================================================================ EBITDA (earnings before interest, taxes, depreciation and amortization expense) $ 5,118 $ 5,099 $ 8,240 $ 5,902 $ 4,188 $ 4,591 - -------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE (POST SPLIT): Net income (loss) before extraordinary item $ 0.18 $ (0.09) $0.42 $ 0.79 $0.57 $0.41 Extraordinary item - (0.07) - (0.01) - - Net income (loss) $ 0.18 $ (0.16) $0.42 $ 0.78 $0.57 $0.41 DILUTIVE EARNINGS PER SHARE (POST SPLIT): Net income (loss) before extraordinary item $ 0.15 $ (0.09) $0.34 $ 0.64 $0.46 $0.38 Extraordinary item - (0.07) - (0.01) - - - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.15 $ (0.16) $0.34 $ 0.63 $0.46 $0.38 ================================================================================================================================ BALANCE SHEET DATA: Working Capital (deficit) $(10,221) $(7,946) $(1,351) $ (831) $(4,197) $(3,114) Cost in excess of net assets acquired 41,753 37,439 25,601 17,274 8,888 8,923 Total assets 73,623 74,398 56,833 44,937 23,234 22,613 Short-term debt and Current portion of long-term debt 2,031 2,793 3,448 1,371 1,768 905 Long-term debt 26,477 28,470 14,226 20,272 7,846 12,545 Stockholders' equity (deficit) 32,736 31,636 32,323 16,121 8,298 3,732
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Six months ended June 30, 1998 ("1998 period") compared to the six months ended June 30, 1997 ("1997 period") On December 19, 1997, the Company changed its fiscal year end to the end of June. Accordingly, the Company's transition period, which ended June 30, 1998, includes the six months from January 1 to June 30, 1998. To facilitate a discussion of the Company's operating performance for the 1998 period, the corresponding period in 1997 is presented. During the twelve months subsequent to June 30, 1997, the Company acquired the assets or stock of companies owning eight schools. These acquisitions included: two preschools and one elementary school in Las Vegas, Nevada; two elementary and one preschool located in Seattle, Washington; one elementary school in Portland, Oregon and one elementary school in North Lauderdale, Florida. In addition, the Company opened 12 new schools, of which six were preschools and six were elementary schools. The Company also closed nine schools whose leases expired. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for the 1998 and 1997 periods into three categories: Baseline Schools, Schools Acquired Within the Year and New School Development (dollars in thousands).
SIX MONTHS % OF SIX MONTHS % OF 1998-1997 JUNE 30, 1998 REVENUE JUNE 30,1997 REVENUE VARIANCE ($) ================================================================================================ BASELINE SCHOOLS (1) Revenues $41,113 100.0% $28,517 100.0% $ 12,596 Operating Profit $ 7,534 18.3% $ 5,491 19.3% $ 2,043 - ------------------------------------------------------------------------------------------------ SCHOOLS ACQUIRED WITHIN THE YEAR (2) Revenue 3,263 100.0% 7,491 100.0% (4,228) Operating Profit 460 14.1% 1,551 20.7% ( 1,091) - ------------------------------------------------------------------------------------------------ NEW SCHOOL DEVELOPMENT (3) Revenues 4,619 100.0% 3,656 100.0% 963 Operating Profit (Loss) (396) (8.6)% 261 7.1% (657) - ------------------------------------------------------------------------------------------------ Total Revenues $48,995 100.0% $39,664 100.0% $ 9,331 ================================================================================================ School Operating Profit Before Amortization of Goodwill 7,598 15.5% 7,303 18.4% 295 ================================================================================================ Less Amortization of Goodwill 745 1.5% 517 1.3% 228 School Operating Profit $ 6,853 14.0% $ 6,786 17.1% $ 67 ================================================================================================
(1) Baseline Schools is defined as all schools, except schools included for the year in Schools Acquired Within the Year or New School Development (see footnotes (2) and (3). (Schools which were acquired in 1997 are included in "Baseline Schools" for 1998 period results and "Schools Acquired Within the Year" for 1997period results. Schools which were first opened in 1996 are included in "Baseline Schools" for 1998 period results and "New Development" for 1997 period results.) (2) Schools Acquired Within the Year is defined as (i) schools acquired during the 12 months ended June 30, 1997 for 1997 period results and (ii) schools acquired during the 12 months ended June 30, 1998 for 1998 period results. (3) New School Development is defined as schools which have not been opened for two full fiscal years (i.e., schools opened between July 1, 1995 and June 30, 1997 for 1997 period results and schools opened between July 1, 1996 and June 30, 1998 for 1998 period results). Revenues in the Baseline Schools increased $12,596,000 or 44.2% from the 1997 to the 1998 period. The increase is a result of the combination of several factors, including (1) an increase in revenues of $9,440,000 related to acquisitions completed in fiscal 1997, (2) a $2,803,000 increase related to New Schools opened in fiscal 1996, and (3) an increase of revenues of $353,000 in all other schools. Operating profit of the Baseline Schools increased $2,043,000 as a result of (1) a $1,994,000 increase in operating profit related to the schools acquired in fiscal 1997, (2) a $213,000 increase related to the operating profit of the fiscal 1996 New Schools offset by (3) a $164,000 decrease related to the decrease in all other schools. The Company acquired eight schools during the 12 months ended June 30, 1998 with total revenues and school operating profits of $3,263,000 and $460,000 respectively for the 1998 period. The Company acquired thirteen schools during the 12 months ended June 30, 1997 with total revenues of $7,491,000 and operating profit of $1,551,000 during the 1997 period. The operating profit margins of schools included in the 1998 period was 14.1% or 6.6% below the schools included in the 1997 period. One of the eight schools included in the 1998 period was a new school that opened subsequent to the acquisition. The start-up losses associated with opening new schools contributed to this decline in operating margin. Revenues related to the New Schools opened during the period between July 1, 1996 and June 30, 1998 totaled $4,619,000 in the 1998 period or an increase of $963,000 or 26.3% compared to the schools opened during the period between July 1, 1995 and June 30, 1997 in the 1997 period. During the 12 months ended June 30, 1998, the Company opened 12 schools, five of which were elementary schools, and during the 12 months ended June 30, 1997, the Company opened eight schools, three of which were elementary schools. Operating losses totaled $396,000 in the 1998 period compared to operating income of $261,000 in the 1997 period. The increase in the losses is a result of the mix in the type of schools opened and the timing of the openings. Elementary and middle schools take longer to become profitable compared to preschools. Elementary schools typically take 24 to 36 months to become profitable compared to 18 to 24 months in a preschool. Overall, in the 1998 period, the Company's total revenues increased $9,331,000 or 23.5% and school operating profits increased $67,000, compared to the 1997 period. Meanwhile, school profit margins (after goodwill) decreased from 17.1% in 1996 to 14.0% in the 1997 period as explained above. New school development costs increased $403,000 in the 1998 period primarily because of the increase in the number of schools opened. During the 1998 period, the Company opened four elementary and one preschool as compared to two preschools in the 1997 period. Elementary schools typically have higher start- up costs than preschools. start-up costs average $225,000 for an elementary school and $125,000 for a preschool. start-up and development costs include personnel, marketing and supplies. General and administrative expenses increased $574,000 or 20.4% to $3,391,000 in the 1998 period. The increase is attributable to the increase in the Company's infrastructure to support its revenue growth. 17 During 1997 and 1998, the Company added a Vice President of Marketing, a Human Resources Manager, a Vice President of Eastern Operations, a Vice President of Western Operations, a Summer Camp Manager, a Training Manager, several Executive Directors and other support staff. As a percentage of revenue, general and administrative expenses decreased from 7.1% of revenues in the 1997 period to 6.9% of revenues in the 1998 period. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. As a result of the factors mentioned above, operating income decreased $910,000 or 23.5% to $2,961,000 for the 1998 period as compared to the 1997 period. EBITDA (defined as earnings before interest, income taxes, depreciation and amortization), totaled $5,118,000 for the 1998 period which was $434,000 or 8.2% below the 1997 period. As a percentage of revenue, EBITDA for the 1998 period equaled 10.4% versus 13.3% for the 1997 period. EBITDA is not a measure of performance under generally accepted accounting principals, however the Company and the investment community consider it an important indicator. Interest expense increased by $200,000 or 23.4% for the 1998 period compared to the 1997 period. The increase in interest expense is a result of increased borrowings under the Company's senior debt facility and subordinated debt issued in connection with the Company's acquisitions. The provision for income taxes of $833,000 for the 1998 period was in excess of amounts computed by applying statutory federal income tax rates to income before income taxes due primarily to non-deductible goodwill incurred with acquisitions for stock and state income taxes. For acquisitions of stock of a company, purchase accounting applies for accounting purposes; but, for tax purposes, the Company inherits the historic basis of the purchased company in its assets, without any goodwill. The fiscal year ended December 31, 1997 ("1997") compared to the fiscal year ended December 31, 1996 ("1996") As of December 31, 1996, the Company operated 107 elementary schools, preschools and child care centers (sometimes collectively referred to herein as "schools"). At December 31, 1997, the Company operated 129 schools and owned a 20% interest in one elementary school. During 1997, the Company acquired the assets or stock of companies owning 17 schools. These acquisitions include: six preschools in Florida and a 20% interest in an elementary school; two preschools and one elementary school in Las Vegas, Nevada and two elementary and three preschools located in San Jose, California. Also considered for the purposes hereof as being acquired in 1997 are one elementary school in Southern California and a preschool and elementary school in Seattle, Washington acquired at the end of December 1996. In addition, the Company opened 12 new schools in 1997 of which eight were preschools and four were elementary schools (two of which were replacement schools). During 1997, the Company closed seven schools whose leases expired. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for the years ended 1997 and 1996 into three categories: Baseline Schools, Schools Acquired Within the Year and New School Development (dollars in thousands).
12 MONTHS % OF 12 MONTHS % OF 1997-1996 1997 REVENUE 1996 REVENUE VARIANCE ($) ========================================================================================================= BASELINE SCHOOLS (1) Revenues $59,567 100.0% $49,977 100.0% $ 9,590 Operating Profit $10,176 17.1% $ 9,312 18.6% $ 864 - --------------------------------------------------------------------------------------------------------- SCHOOLS ACQUIRED WITHIN THE YEAR (2) Revenue 14,232 100.0% 3,437 100.0% 10,795 Operating Profit 2,345 16.5% 775 22.6% 1,570 - --------------------------------------------------------------------------------------------------------- NEW SCHOOL DEVELOPMENT (3) Revenues 7,181 100.0% 5,495 100.0% 1,686 Operating Profit (Loss) (410) (5.7)% 586 10.7% (996) - --------------------------------------------------------------------------------------------------------- Total Revenues $80,980 100.0% $58,909 100.0% $ 22,071 ========================================================================================================= School Operating Profit Before Amortization of Goodwill 12,111 15.0% 10,673 18.1% 1,438 ========================================================================================================= Less Amortization of Goodwill (989) 1.2% (635) 1.1% (354) School Operating Profit $11,122 13.7% $10,038 17.0% $ 1,084 =========================================================================================================
(1) Baseline Schools is defined as all schools, except schools included for the year in Schools Acquired Within the Year or New School Development (see footnotes (2) and (3). (Schools which were acquired in 1996 are included in "Baseline Schools" for 1997 results and "Schools Acquired Within the Year" for 1996 results. Schools which were first opened in 1995 are included in "Baseline Schools" for 1997 results and "New Development" for 1996 results.) (2) Schools Acquired Within the Year is defined as (i) schools acquired in 1996 for 1996 results and (ii) schools acquired in 1997 for 1997 results. (3) New School Development is defined as schools which have not been opened for two full fiscal years (i.e., schools opened in 1995 or 1996 for 1996 results and schools opened in 1996 or 1997 for 1997 results.) Revenues in the Baseline Schools increased $9,590,000 or 19.2% from 1996 to 1997. The increase is a result of the combination of several factors, including (1) an increase in revenues of $6,173,000 related to acquisitions completed in 1996, (2) a $4,636,000 increase related to New Schools opened in 1995, (3) an increase of revenues of $643,000 in schools other than Merryhill and South Carolina, offset by (4) a decrease in Merryhill enrollment resulting in a $1,003,000 decrease in revenues and (5) a decrease of $859,000 related to the revenues of six schools closed in South Carolina in 1996. Operating profit of the Baseline Schools increased $864,000 or 9.3% as a result of (1) a $1,383,000 increase in operating profit related to the schools acquired in 1996, (2) a $850,000 increase related to the operating profit of the 1995 New Schools offset by (3) a $949,000 decrease related to the decrease in the Merryhill schools and by (4) a $420,000 decrease in the remaining schools. The Company experienced both a decline in enrollment and operating profit of the Merryhill Schools located in California. The Company believes that the decrease is primarily due to the effect of the California public school initiative to decrease student/teacher class size ratios in Kindergarten to third grade classes and a weak summer program. The public school initiative affected Merryhill in several ways: (1) teacher turnover increased, (2) enrollment decreased and (3) with efforts to attract replacement teachers and retain existing teachers, average teacher salary increased. In addition to the effect of the initiative, rent expense in some of the Merryhill Schools is increasing because of recently built replacement schools, which expanded capacity. The Company has taken several steps to improve the situation. In the fourth quarter of 1997, the Company hired a Vice President of Western Operations and a Summer Camp Manager. The Company restructured operations management by adding experienced Executive Directors and other management personnel and reducing responsibility of each Executive Director to a maximum of ten schools. In 1997, the Company acquired seventeen schools with total revenues and school operating profits of $14,232,000 and $2,345,000, respectively. 18 This is an increase in acquisition activity totaling $10,795,000 in revenues and $1,570,000 in operating profit compared to schools acquired in 1996. In 1996, the Company acquired seven schools with revenue of $3,437,000 and operating profit of $775,000. The operating profit margins of schools acquired decreased 6.1% from 22.6% in 1996 to 16.5% in 1997. The decrease in the margins of the schools acquired is related primarily to the lack of summer programs at some of these elementary schools. The elementary schools acquired in 1997 did not typically have strong summer programs. The Company initiated summer programs, but it takes time for enrollment to build. Revenues related to the New Schools built in 1996 and 1997 totaled $7,181,000 in 1997 or an increase of $1,686,000 or 30.7% compared to 1995 and 1996. In 1997, the Company built 12 schools and in 1996 the Company built seven schools. Operating loss totaled $410,000 in 1997 compared to operating income of $586,000 in 1996. The increase in the loss is a result of the mix in the type of schools opened and the timing of the openings. Elementary and middle schools take longer to become profitable compared to preschools. In 1997, the Company opened four elementary/middle schools as compared to three in 1996. Elementary schools typically take 24 to 36 months to become profitable compared to 18 to 24 months in a preschool. Overall, in 1997 the Company's total revenues increased $22,071,000 or 37.5% and school operating profits increased $1,084,000 compared to 1996. Meanwhile, school operating profit margins (after goodwill) decreased from 17.0% in 1996 to 13.7% in 1997 as explained above. New School development costs nearly doubled, increasing $193,000 or 93% to $401,000 in 1997, primarily because of the increase in the number of schools opened. The Company opened eight preschools and four elementary/middle schools for a total of twelve schools as compared to four preschools and three elementary/middle schools for a total of seven in 1996. Additionally, elementary/middle schools typically have higher start-up costs than preschools. start-up costs average $225,000 for an elementary school and $125,000 for a preschool. start-up and development costs include personnel, marketing and supplies. General and administrative expenses increased $1,783,000 or 42.6% to $5,973,000 in 1997. The increase is attributable to the increase in the Company's infrastructure to support its revenue growth. In 1997, the Company added a Chief Financial Officer, a Vice President of Marketing, a Human Resources Manager, a Vice President of Eastern Operations, a Vice President of Western Operations, a Summer Camp Manager, a Training Manager, several Executive Directors and other support staff. In addition, the Company selected and launched an Education Advisory board to oversee and assist in curriculum development. As a percentage of revenue, general and administrative expenses increased only slightly from 7.1% of revenues in 1996 to 7.4% of revenues in 1997. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. In 1997, the Company recorded a restructuring charge totaling $2,960,000 related to a combination of factors. Of the $2,960,000, $2,000,000 was related to the write-off of the goodwill recorded in connection with the acquisition of the nine schools located in Indianapolis, $789,000 was related to the write down of the book value and an accrual for lease obligations of several non-performing schools held for sale or that are scheduled to close when their leases expire, and $171,000 is related to the restructuring of management that took place in 1997 and early 1998. The schools in Indianapolis are currently for sale. As a result of the factors mentioned above, operating income decreased $3,852,000 or 68% to $1,789,000 in 1997 compared to the same period in 1996. Adjusted operating income, defined as operating income before the restructuring charge, totaled $4,749,000 in 1997, which represents a decrease of $892,000 or 15.8% compared to the prior year. In 1997 EBITDA (defined as earnings before interest, income taxes, depreciation and amortization), totaled $5,099,000 which was $3,140,000 or 38% below the prior year. As a percentage of revenue, EBITDA for 1997 equaled 6.3% versus 14.0% for 1996. Adjusted EBITDA (defined as EBITDA before the restructuring charge) equaled $8,059,000 which was $180,000 or 2% below $8,239,000 for 1996. As a percentage of revenues, adjusted EBITDA equaled 10.0% for 1997 as compared to 13.9% for the prior year. The decrease as a percentage of revenues is a result of lower operating margins and higher general and administrative expense. EBITDA is not a measure of performance under generally accepted accounting principles, however the Company and the investment community consider it an important indicator. Interest expense increased slightly by $42,000 or 2.1% for 1997 compared to 1996. While the principal amount of indebtedness outstanding under the Company's senior loan facilities increased in the fourth quarter, this increase was offset by a decrease in the interest rate, as a result of amendments to the loan documents governing the Company's principal debt facilities. Debt increased as a result of the acquisition of the Las Vegas schools and new school development which occurred during 1997. Cash raised through the private placement of common stock was used in the first half of 1997 to complete the acquisitions of Another Generation and Rainbow Bridge schools. Other income decreased $324,000 or 67% for 1997 totaling $158,000 compared to 1996 of $483,000. The decrease is primarily related to the decrease in interest income. During 1996, the Company raised $11,600,000 of net proceeds through a private issuance of common stock. The Company earned interest on these funds during the second half of 1996. The cash was used for acquisitions and the building of new schools during the later part of 1996 and early 1997. The provision for income taxes totaled $250,000 for 1997. The Company was in a pretax loss position. However, the Company recorded income taxes, primarily relating to non-deductible goodwill amortization and state and local taxes. (In the acquisition of the stock of a company, purchase accounting applies for accounting purposes; but, for tax purposes, the Company inherits the historic basis of the purchased company in its assets, without any good will.) The adjusted income tax provision (income tax before the restructuring charge) equaled $1,165,000 which represents a 42% tax rate. This represented a decrease of $397,000 or 25% compared to $1,562,000 for 1996. The tax rate in 1996 was 39%. In 1997, the Company recorded a $449,000 extraordinary expense. In December 1997, the Company refinanced its principal debt facility which combined the Term Loans with scheduled principal payments and the existing Revolving Line of Credit into Revolving Credit and Term Facilities which extends principal payment to begin in the year 2001. The change in the terms enables the Company to use cash from operations and the unused portion of the line for growth through acquisitions and New School development. Because the new loan facility terms vary significantly from the existing credit facility, the Company was required to write off the deferred financing costs which were being amortized over the term of the original loan. In the fourth quarter of 1997, the Company adopted FAS No. 128 "Earnings Per Share" which changed the earnings per share calculation. The 19 Company restated the prior year calculation as required. Basic Earnings Per Share before the Extraordinary Item equaled ($0.09) for 1997 as compared to $0.42 for 1996, which resulted in a $0.51 decrease per share. Basic Earnings (Loss) per Share equaled ($0.16) for 1997 as compared to $0.42 for 1996 or a $0.58 decline. Adjusted Basic Earnings per Share (before the restructuring charge and extraordinary item) equaled $0.25 for 1997 as compared to $0.42 for 1996 which represents a $0.17 decrease. Dilutive Earnings (Loss) per Share before the Extraordinary Item equaled ($0.09) for 1997 as compared to $0.34 for 1996, or a $0.43 decrease. Adjusted Dilutive Earnings per Share equaled $0.22 in 1997 as compared to $0.34 in 1996 or a $0.12 per share decrease. The fiscal year ended December 31, 1996 ("1996") compared to December 31, 1995 ("1995") As of December 31, 1995 the Company operated 101 schools. At December 31, 1996, the Company operated 107 schools. During 1996, the Company acquired the assets or stock of companies owning seven schools. These acquisitions included: five preschools in Virginia and two preschools in North Carolina. (In late December 1996, the Company also acquired two schools located in Seattle, Washington and one school in Coto de Caza, California; however, for purposes hereof, these are treated as being acquired in 1997.) In addition, during 1996, the Company opened seven new schools, two of which were replacement schools. Leases of six non-core schools located in South Carolina expired and were not renewed, as planned in the 1992 restructuring of the Company. Following is a chart which breaks down revenues, school operating profit and school operating profit margins for 1996 and 1995 into three categories, Baseline Schools, Schools Acquired Within the Year and New School Development (dollars in thousands).
12 MONTHS % OF 12 MONTHS % OF 1996-1995 ENDED 1996 REVENUE ENDED 1995 REVENUE VARIANCE ($) ============================================================================================= BASELINE SCHOOLS (1) Revenues $49,977 100.0% $32,383 100.0% $ 17,594 Operating Profit $ 9,312 18.6% $ 7,010 21.6% 2,302 - --------------------------------------------------------------------------------------------- SCHOOLS ACQUIRED WITHIN THE YEAR (2) Revenue 3,437 100.0% 7,102 100.0% (3,665) Operating Profit 775 22.6% 855 12.1% (80) - --------------------------------------------------------------------------------------------- NEW SCHOOL DEVELOPMENT (3) Revenues 5,495 100.0% 4,672 100.0% 823 Operating Profit 586 10.7% 859 18.4% (273) - --------------------------------------------------------------------------------------------- Total Revenues $58,909 100.0% $44,157 100.0% $ 14,752 ============================================================================================= School Operating Profit Before Amortization of Goodwill 10,673 18.1% 8,724 19.8% 1,949 ============================================================================================= Less Amortization of Goodwill (635) (1.1)% (332) (0.8)% (303) School Operating Profit $10,038 17.0% $ 8,392 19.0% $ 1,646 =============================================================================================
(1) Baseline Schools is defined as all schools, except schools included for the year in Schools Acquired Within the Year or New School Development (see footnotes (2) and (3). (Schools which were acquired in 1995 are included in "Baseline Schools" for 1996 results and "Schools Acquired Within the Year" for 1995 results. Schools which were first opened in 1994 are included in "Baseline Schools" for 1996 results and "New Development" for 1995 results.) (2) Schools Acquired Within the Year is defined as (i) schools acquired in 1995 for 1995 results and (ii) schools acquired in 1996 for 1996 results. (3) New School Development is defined as schools which have not been opened for two full fiscal years (i.e., schools opened in 1995 or 1996, for 1996 results and (ii) schools opened in 1994 or 1995, for 1995 results). Revenues of the Baseline Schools increased $17,594,000 or 54.3% from 1995 to 1996. The increase is a result of several factors including (1) revenues related to the 1995 acquisition totaling $14,400,000, (2) revenues related to the 1994 New Schools totaling $3,142,000 and (3) a slight increase in the remaining schools of $52,000. The increase in the remaining schools was the result of a combination of the divestiture of six South Carolina schools in 1996 and one Florida school in 1995 creating a $712,000 revenue decrease offset by a $725,000 increase in the remaining schools which was a result of enrollment and tuition increases. The operating profit of the Baseline Schools increased $2,302,000 or 32.8% for the year ended December 31, 1996 compared to 1995. The increase is a result of (1) $1,635,000 related to the acquisitions which occurred in 1995, (2) $707,000 is related to the operating profit of the New Schools opened in 1994 and (3) offset by a slight decrease of $40,000 which was related to the remaining schools. The decrease in the remaining schools operating profit is a result of an increase in personnel costs. The operating profit margin of the Baseline Schools decreased 3.0% from 21.6% for 1995 to 18.6% for 1996. The decrease in the operating margins is the result of losses associated with the 1995 acquisition of certain schools in the Indianapolis area, and lower margins of schools acquired in the 1995 acquisition of Educo, Inc. The lower margins in the acquisitions is a result primarily of lower than expected summer performance in the Educo schools and a slower than anticipated turnaround of the Indianapolis schools. In 1996, the Company acquired seven schools with total revenues of $3,437,000 and operating profit of $775,000 for 1996. Five of the seven schools (the Virginia acquisition) were acquired in February 1996 and two of the schools located in North Carolina were acquired in November of 1996. In 1995, the Company acquired 25 schools with revenues of $7,102,000 and operating profit of $855,000 for 1995. The Company acquired six Pennsylvania schools in March 1995 and acquired the ten Educo schools and nine Indianapolis schools in September 1995. The operating margin of the schools acquired in 1996 equaled 22.6% as compared to the operating margins of the schools acquired in 1995 which equaled 12.1%. The 1995 acquisitions include the Indianapolis area schools which operated at a loss and the Educo schools which operated at a 12% operating margin. When making acquisitions, the Company takes steps to increase operating margins of Acquired Schools over a 12 to 36 month period as it implements cost controls, systems and marketing strategies. In 1996 and 1995, the Company opened 14 new schools with revenues of $5,495,000 and operating profit of $586,000 for 1996. In 1994 and 1995, the Company opened 11 new schools with revenues of $4,672,000 and operating profit of $859,000 for 1995. The operating margins in 1996 of the schools opened in 1996 and 1995 equaled 10.7%. The operating margins in 1995 of the schools opened in 1995 and 1994 schools equaled 18.4%. The variance in the margins is a result of the mix and timing of schools opened. In 1996, the Company opened three elementary/middle schools and four preschools. In 1995 the Company opened seven preschools, and in 1994 the Company opened four preschools. Generally, the Company experiences smaller losses in opening preschools as compared to elementary/middle schools and is able to reach profitability in the preschool in six to nine months as compared to elementary/middle schools which can take 12 to 36 months to become profitable. Overall, in 1996 the Company's total revenues increased $14,752,000 and operating profits increased $1,646,000, compared to 1995. Meanwhile, school operating profit margins decreased from 19.0% in 1995 to 17.0% in 1996, as explained above. 20 General and administrative expenses increased $794,000 or 23% to $4,190,000 for 1996; however, as a percentage of revenue, general and administrative expenses decreased from 7.7% of revenues in 1995 to 7.1% of revenues in 1996. The Company enjoyed efficiencies from its growth through acquisitions. Management is continuing to build the foundation needed for growth of the Company and anticipates maintaining the current level of such general and administrative expenses as a percent of revenues. Operating income increased $1,291,000 or 29% to $5,641,000 for 1996. The increase is a result primarily of the increase in school operating profit. In 1995, the Company recorded $500,000 in litigation expense related to a claim by former officers of the Company which was settled. As a percent of revenue, operating income decreased slightly from 9.8% for 1995 to 9.6% for 1996, which is a result of the decrease in school operating profit margins described above. Another key measure of the Company's cash generating ability is its EBITDA (earnings before interest, taxes, depreciation and amortization expenses). EBITDA increased to $8,239,000 in 1996 from $5,902,000 in 1995 which was a 40% increase. EBITDA is not a measure of performance, under generally accepted accounting principles, however the Company and the investment community consider it an important indicator. Interest expense increased $165,000 or 9% to $2,004,000 for 1996, which was due to increased debt relating to the acquisitions and new school development. Other income increased $357,000 or more than 250% to $483,000, which was due to interest income earned on the proceeds of the private placement of approximately $11,600,000 in March 1996. Income tax expense increased $2,917,000 to $1,562,000 for 1996. The increase in taxes was due to the Company being fully taxed in 1996 as compared to recording a tax benefit in 1995 of $2,105,000. This credit was based upon the adoption of SFAS 109 "Accounting for Income Taxes" in 1992 and the subsequent reduction of the Company's valuation allowance due to its more recent historical profitable operating performance and its projections for the future. Consequently, 1996 was the first year the Company was fully taxable. The Company anticipates this trend to continue. Net income decreased $1,381,000 or 36% to $2,463,000 for 1996 as a result of the Company reversing the valuation allowance in 1995 and recording taxes in 1996 at a 38.8% rate as described above. If pretax net income in 1995 were taxed at an effective rate of 38.8%, on a pro forma basis, net income would have increased $964,000 or 64%. LIQUIDITY AND CAPITAL RESOURCES Management is continuing to pursue a three-pronged growth strategy for the Company, which includes (1) internal growth of existing schools through the expansion of certain facilities, (2) new school development in both existing and new markets and (3) strategic acquisitions. The Company's principal sources of liquidity are (1) cash flow generated from operations, (2) future borrowings under the Company's $25,000,000 revolving line of credit, (3) the use of site developers to build schools and lease them to the Company, and (4) issuance of subordinated indebtedness or shares of common stock to sellers in acquisition transactions. The Company anticipates that its existing available principal credit facilities, cash generated from operations, and continued support of site developers to build and lease schools will be sufficient to satisfy working capital needs, capital expenditures and renovations and the building of new schools in the near term future. The Company continues to look for quality acquisition candidates. The Company identifies growth markets through both extensive demographic studies and an analysis of the existing educational systems in the area. The Company seeks to grow through a cluster approach whereby several preschools feed into an elementary school. In order for the Company to continue its acquisition strategy, the Company will seek additional funds through debt or equity financing. In 1997, the Company amended its credit agreement three times, the most significant of which occurred in December with the execution of the Seventh Amendment and Modification to the Loan and Security Agreement. These amendments: (1) increased the Company's borrowing capacity to $25,000,000, (2) changed the prior fixed interest rates (applicable to term loans) to variable rates, (3) provided that all revolving debt will convert to a term loan in January 2001, (4) extended terms for an additional five years for the prior term loan and six years for the prior revolving line of credit and (5) increased the number of permitted new school construction projects. Two facilities are established under the Seventh Amendment: a $3,000,000 facility (Revolving and Term Facility A) and a $22,000,000 facility (Revolving and Term Facility B). Amounts outstanding under term loans at the time of the restructuring were treated as initial outstanding balances under the new Revolving and Term Facilities. Under the new arrangements, no principal payments are required until January 1, 2001. Commencing on January 1, 2001, the Company must pay outstanding principal balance of the Revolving and Term Facilities in 60 equal monthly installments. The Company may elect to convert to a term loan portions of the Revolving and Term Facility B in increments of $2,500,000. Such term loans would be payable over sixty months. By postponing the dates of required principal payments under the Company's loans, the Seventh Amendment significantly improved the Company's cash flow requirements under these loans. The restructuring allows the Company greater flexibility in managing its cash flow and allows greater ability to use available funds to grow the Company. At June 30, 1998 and December 31, 1997, the principal amounts outstanding under the Revolving and Term Facility B were $19,426,000 and $21,576,000, and no amounts were outstanding under the Revolving and Term Facility A. In July 1998, the Company issued a $10,000,000 senior subordinated note to Allied Capital Corporation ("Note"). The net proceeds were used to reduce the Company's Revolving and Term Facility A outstanding balance. The Note bears interest at 10%. The Note matures in two installments of principal: $5,000,000 in 2004 and $5,000,000 in 2005. In connection with the financing transaction, the Company also issued to Allied Capital Corporation warrants to acquire 531,255 shares of the Company's common stock at $8.5625 per share. The Company recorded a debt discount and allocated $900,000 of the proceeds of the transaction to the value of the warrants. This debt discount is being amortized to interest expense over the term of the Note. Total cash and cash equivalents decreased $2,197,000 from $2,605,000 at December 31, 1997 to $408,000 at June 30, 1998. The net decrease was due primarily to (1) cash used for acquisitions totaling approximately $3,457,000, (2) approximately $3,498,000 used for the building of New Schools and acquisition of land parcels and (3) repayment of long term debt of $14,474,000. These decreases were offset by (1) cash flow from operations of $3,299,000, (2) proceeds from the sale of property totaling 21 $6,948,000 and (3) proceeds from borrowings under the principal credit facility of $12,526,000. The working capital deficit increased $2,275,000 from $7,946,000 at December 31, 1997 to $10,221,000 at June 30, 1998. The increase is primarily the result of the decrease in cash and cash equivalents of $2,197,000 as discussed above. CAPITAL EXPENDITURES The Company is continuously maintaining and upgrading the property and equipment of each school. During the six months ended June 30, 1998, the Company spent $4,952,000 on capital expenditures, which included $3,498,000 for new school development and $1,454,000 on upgrading existing facilities. During 1997, the Company spent approximately $15,221,000 on capital expenditures, which included $11,137,000 on new school development and $4,184,000 on upgrading existing facilities. During the six months ended June 30, 1998 and 1997, the Company received $6,948,000 and $7,451,000, respectively, from sale and leaseback transactions of new schools. TRENDS During the twelve months ended December 31, 1997, the Company experienced a decrease in enrollment at its Merryhill schools, located in California, coupled with a weaker summer program in several elementary schools. As discussed herein, the Company believes that this decrease is primarily due to the effect of California public schools' initiative to decrease student/teacher class size ratios in Kindergarten to third grade classes. This initiative affected Merryhill in several ways: (1) teacher turnover increased, (2) enrollment decreased, and (3) with efforts to attract replacement teachers and retain existing teachers, average teacher salaries increased. In addition to the effect of the public school initiative, rent expense in some of the Merryhill schools increased because of recently built replacement schools, which expanded capacity. Fall enrollment for the 1997-1998 school year were down from the previous year. This negatively affected the Company's near term earnings. In an effort to improve the performance in Merryhill schools and improve the summer programs, as well as Company-wide performance, the Company has taken several key steps. The structure of operations management has changed, with the Executive Director position replacing the Regional Manager and District Manager positions. The number of schools reporting to each Executive Director has been reduced so that each manager can spend more time in the schools. In addition, the Company has hired a Vice President of Western Operations. The Company is also searching for a President and Chief Operating Officer. In the near term, additional overhead from this management structure will have a negative impact on earnings; however, over the long term, the Company believes this strategy will prove warranted. The Company plans to respond to the growing need for improved quality education. In 1996 and 1997, the Company built new elementary and middle schools, which incur higher initial losses in the first year as compared to newly constructed preschools. The Company opened four newly constructed elementary schools in 1998, and plans to continue to development elementary schools in 1999. INFLATION The Company has not been significantly affected by inflation. INSURANCE Companies involved in the education and care of children may not be able to obtain insurance for the total risks inherent in their operations. In particular, general liability coverage can have sublimits per claim for child abuse. Since 1995, the Company has been able to increase significantly the sublimit applicable to such coverage. The Company believes it has adequate insurance coverage at this time. There can be no assurance that in future years the Company will not again become subject to lower limits. YEAR 2000 COMPLIANCE Management has implemented measures to ensure that the Company's information systems and applications will recognize and process information pertaining to the Year 2000. The measures being conducted utilize both internal and external resources and are directed at risk assessments, remediation, acquisition of new systems and applications, and testing of the systems and application for Year 2000 compliance. The Company believes that the only computer systems that are critical to its operations are certain accounting and payroll software. The Company licenses such software from two outside vendors. Both of these vendors have publicized reports giving assurances that the software used by the Company is Year 2000 compliant. The Company will be testing the software to assure compliance and will complete the testing by March 1999. The Company has completed an inventory of all hardware, primarily personal computers and corporate network equipment. All non-compliant hardware will be replaced by March 1999. Concurrent with the Company's Year 2000 compliance efforts, the Company is upgrading its management information system to link the schools to the home office as well as to other schools. This process includes purchasing new and replacing old equipment and software to improve management efficiencies as well as ensure Year 2000 compliance. Management anticipates that the process will be complete by December 1999 and projects spending between $1,500,000 and $2,000,000 on this project. Although the Company could be affected by the systems of other companies with which it does business, management does not believe that the Company's business will be materially adversely affected by the failure of third parties to be Year 2000 compliant. Because of the geographical distribution of the Company's schools, the Company is not dependent on any one or a small group of vendors and the needs of the Company's customers for its services should not be adversely affected by Year 2000 issues. Management expects that the Company will be Year 2000 compliant by the end of 1999. A failure to meet this deadline should not disrupt the Company's delivery of its services to customers. However, a failure of the Company's system could indirectly significantly impact operations, as for example, by an inability to pay employees and vendors in a timely manner. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company believes it is a one segment company. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements and supplementary financial information specified by this Item, together with the Reports of the Company's independent accountants thereon, are included in this Annual Report on Form 10-K on pages F-1 through F- 14 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item with respect to the directors of the Company is incorporated herein by reference to the information set forth in the Proxy Statement. The information required by this Item with respect to executive officers of the Company is furnished in a separate item captioned "Executive Officers of the Company" and included in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS A PART OF THIS REPORT:
Page ---- (1) Financial Statements. Report of Independent Accountants............................. F-1 Consolidated Balance Sheets................................... F-2 Consolidated Statements of Income............................. F-3 Consolidated Statements of Stockholders' Equity............... F-4 Consolidated Statements of Cash Flows......................... F-5 Supplemental Schedules for Consolidated Statements of Cash Flow.......................................................... F-6 Notes to Consolidated Financial Statements.................... F-7 (2) Financial Statement Schedules.
Financial Statement Schedules have been omitted as not applicable or not required under the instructions contained in Regulation S-X or the information is included elsewhere in the financial statements or notes thereto. (B) REPORTS ON FORM 8-K. None. (C) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K. Exhibit Number Description of Exhibit 3.1 Registrant's Certificate of Incorporation, as amended and restated. (Filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference.) 3.2 Registrant's Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the Registrant's Current Report on Form 8-K filed on June 14, 1993 and incorporated herein by reference.) 3.3 Registrant's Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 3.4 Registrant's Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 25 3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security Agreement") among the Registrant, certain subsidiaries of the Registrant and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment and Modification dated July 2, 1996 to the Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference.) 4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.5 Sixth Amendment and Modification dated May 5, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.) 4.6 Seventh Amendment and Modification dated December 22, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.7 Eighth Amendment and Modification dated April __, 1998 to Loan and Security Agreement. 4.8 Ninth Amendment and Modification dated as of June 30, 1998 to Loan and Security Agreement. 4.9 Revolving and Term Facility Note A dated December 22, 1997 in the principal sum of $22,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.10 Revolving and Term Facility Note B dated December 22, 1997 in the principal sum of $3,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.11 Investment Agreement dated as of June 30, 1998 between Registrant and its subsidiaries and Allied Capital Corporation 4.12 Senior Subordinated Note dated as of June 30, 1998 in the principal amount of $10,000,000 payable to the order of Allied Capital Corporation. The Registrant has omitted certain instruments defining the rights of holders of long-term debt in cases where the indebtedness evidenced by such instruments does not exceed 26 10% of the Registrant's total assets. The Registrant agrees to furnish a copy of each of such instruments to the Securities and Exchange Commission upon request. 10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended. (Filed as Exhibit 10(1) to the Registrant's Registration Statement on Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987 (the "Form S-1") and incorporated herein by reference.) 10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March 31, 1988 and incorporated herein by reference.) 10.3 1995 Stock Incentive Plan of the Registrant, as amended. 10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. 10.5 Stock and Warrant Purchase Agreement between the Registrant and various investors, dated April 14, 1992. (Filed as Exhibit 10(r) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.) 10.6 Registration Rights Agreement dated May 28, 1992 among the Registrant, JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd. (Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.7 Stock Purchase Agreement dated May 28, 1992 between Registrant and a limited number of accredited investors at $0.50 per share totaling 3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.8 Series 1 Warrants for shares of Common Stock issued to Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(ad) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 10.9 Registration Rights Agreement between Registrant and Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(af) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 10.10 Amendment dated February 23, 1996 to Registration Rights Agreement between Registrant and Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.) 10.11 Investment Agreement dated as of August 30, 1995 by and among the Registrant, certain subsidiaries of the Registrant and Allied Capital Corporation and its affiliated funds. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 10.12 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied Capital Corporation to purchase up to 92,172.25 shares (subject to adjustment) of the Common 27 Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) Exhibit 10.12 is one in a series of four Common Stock Purchase Warrants issued pursuant to the Investment Agreement dated as of August 30, 1995 that are identical except for the Warrant No., the original holder thereof and the number of shares of Common Stock of the Registrant for which the Warrant may be exercised, which are as follows:
Number of Shares of Common Stock Warrant No. Holder (subject to adjustment) ----------- ------ ----------------------- 2 Allied Capital Corporation II 142,932.25 3 Allied Investment Corporation 92,713 4 Allied Investment Corporation II 50,219.5
10.13 Common Stock Purchase Warrant dated as of June 30, 1998 entitling Allied Capital Corporation to purchase up to 531,255 shares (subject to adjustment) of the Common Stock of the Registrant. 10.14 First Amended and Restated Registration Rights Agreement dated as of June 30, 1998 by and between the Registrant and Allied Capital Corporation. 10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan Description, Issued February, 1997, as amended on June 11, 1998. 10.16 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z. Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 10.17 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. (Filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 10.18 Contingent Severance Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. (Filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 21 List of subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule Certain schedules (and similar attachments) to Exhibits 4.1 through 4.8 and Exhibits 4.11 and 10.11 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request. (D) FINANCIAL STATEMENT SCHEDULES. None. 28 QUALIFICATION BY REFERENCE Information contained in this Annual Report on Form 10-K as to a contract or other document referred to or evidencing a transaction referred to is necessarily not complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to this Annual Report or incorporated herein by reference, all such information being qualified in its entirety by such reference. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 25, 1998 NOBEL EDUCATION DYNAMICS, INC. By: /s/ A. J. Clegg ---------------------------------- A. J. Clegg Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Position Date Chairman of the Board, September 25, 1998 /s/ A. J. Clegg - ----------------------- A. J. Clegg President and Chief Executive Officer and Director /s/ William Bailey Vice President, September 25, 1998 - ----------------------- William Bailey Chief Financial Officer (Principal Financial Officer) /s/ Yvonne DeAngelo Vice President - Finance September 25, 1998 - ----------------------- Yvonne DeAngelo and Administration (Principal Accounting Officer) /s/ Edward H. Chambers Director September 25, 1998 - ----------------------- Edward H. Chambers /s/ John R. Frock Executive Vice President September 25, 1998 - ----------------------- John R. Frock and Director /s/ Morgan R. Jones Director September 25, 1998 - ----------------------- Morgan R. Jones 30 Director September 25, 1998 _______________________ Peter H. Havens /s/ John H. Martinson Director September 25, 1998 - ----------------------- John H. Martinson /s/ Eugene G. Monaco Director September 25, 1998 - ----------------------- Eugene G. Monaco Director September 25, 1998 - ----------------------- Robert Zobel 31 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors of Nobel Education Dynamics, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the consolidated financial position of Nobel Education Dynamics, Inc. and its subsidiaries at June 30, 1998 and December 31, 1997 and 1996, and the results of their operations and their cash flows for the six months ended June 30, 1998 and each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania August 7, 1998, except for Note 17 as to which the date is August 17, 1998 F-1 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
ASSETS JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 408 $ 2,605 $ 5,252 Accounts receivable, less allowance for doubtful accounts of $133 in 1998 and 1997 and $103 in 1996 1,130 1,091 779 Prepaid rent 1,276 1,046 734 Prepaid insurance and other 738 952 622 Deferred taxes -- -- 891 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 3,552 5,694 8,278 - ----------------------------------------------------------------------------------------------------------------------------------- Property and equipment, at cost 31,601 33,030 26,166 Accumulated depreciation (9,226) (7,856) (6,843) - ----------------------------------------------------------------------------------------------------------------------------------- 22,375 25,174 19,323 Property and equipment held for sale 1,371 1,495 1,111 Note receivable -- -- 425 Cost in excess of net assets acquired 41,753 37,439 25,601 Deposits and other assets 3,541 3,288 1,978 Deferred taxes 1,031 1,308 117 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 73,623 $ 74,398 $ 56,833 =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- Current portion of long-term obligations $ 2,031 $ 2,793 $ 3,448 Accounts payable and other current liabilities 8,147 7,981 4,465 Unearned income 3,595 2,866 1,716 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 13,773 13,640 9,629 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term obligations 20,311 22,497 10,808 Long-term subordinated debt 6,166 5,973 3,418 Capital lease obligations 162 208 290 Deferred gain on sale/leaseback 35 39 47 Minority interest in consolidated subsidiary 440 405 318 Total Liabilities 40,887 42,762 24,510 Commitments and Contingencies (Notes 3, 6, 9, and 16) Stockholders' Equity: Preferred stock, $.001 par value; 10,000,000 shares authorized, issued and outstanding 4,593,542 in 1998 and in 1997 and 4,697,542 in 1996 $5,530 aggregate liquidation preference at June 30, 1998 and December 31, 1997 and $5,634 in 1996 5 5 5 Common stock, $.001 par value, 20,000,000 shares authorized, issued and outstanding 6,121,365 in 1998 and in 1997 and 5,831,055 in 1996 6 6 6 Treasury Stock, cost; 36,810 shares (375) (375) -- Additional paid-in capital 38,340 38,340 37,665 Accumulated deficit (5,240) (6,340) (5,353) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 32,736 31,636 32,323 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 73,623 $ 74,398 $ 56,833 ===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-2 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data)
For the Six Months For the Year Ended December 31, ---------------------------------------------- Ended June 30, 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Revenues $ 48,995 $ 80,980 $ 58,909 $ 44,154 - --------------------------------------------------------------------------------------------------------------------------- Operating expenses: Personnel costs 23,368 38,557 26,777 19,664 Center operating costs 7,023 11,932 8,755 6,640 Insurance, taxes, rent and other 9,661 16,131 11,128 7,946 Depreciation and amortization 2,090 3,238 2,211 1,512 - --------------------------------------------------------------------------------------------------------------------------- 42,142 69,858 48,871 35,762 - --------------------------------------------------------------------------------------------------------------------------- School operating profit 6,853 11,122 10,038 8,392 - --------------------------------------------------------------------------------------------------------------------------- New school development 501 400 207 146 General and administrative expenses 3,391 5,973 4,190 3,396 Litigation claim -- -- -- 500 Restructuring expense -- 2,960 -- -- - --------------------------------------------------------------------------------------------------------------------------- Operating income 2,961 1,789 5,641 4,350 - --------------------------------------------------------------------------------------------------------------------------- Interest expense 1,044 2,047 2,004 1,840 Other (income) expense (102) (158) (482) (126) Minority interest in income of consolidated subsidiary 35 86 94 86 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,984 (186) 4,025 2,550 Income tax (benefit) expense 833 250 1,562 (1,356) - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) before extraordinary item 1,151 (436) 2,463 3,906 - --------------------------------------------------------------------------------------------------------------------------- Extraordinary loss on early extinguishment of debt, (net of income tax benefit of $330 and $27 in 1997 and 1995, respectively) -- 449 -- 62 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,151 (885) 2,463 3,844 Preferred stock dividends 51 102 109 184 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common stockholders $ 1,100 $ (987) $ 2,354 $ 3,660 =========================================================================================================================== Basic earnings (loss) per share Net income (loss) before extraordinary item $ 0.18 $ (0.09) $ 0.42 $ 0.79 Extraordinary item -- (0.07) -- (0.01) - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.18 $ (0.16) $ 0.42 $ 0.78 =========================================================================================================================== Dilutive earnings (loss) per share Net income (loss) before extraordinary item $ 0.15 $ (0.09) $ 0.34 $ 0.64 Extraordinary item -- (0.07) -- (0.01) - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.15 $ (0.16) $ 0.34 $ 0.63 ===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-3 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands except share data)
TREASURY AND ADDITIONAL COMMON PREFERRED STOCK COMMON STOCK PAID-IN STOCK -------------------- --------------------- SHARES AMOUNT SHARES AMOUNT CAPITAL ISSUABLE - ------------------------------------------------------------------------------------------------------------------------------------ Balance as of January 1, 1995 4,984,320 $ 5 15,445,063 $ 15 $ 19,645 $ -- Stock options exercised -- -- 150,000 -- 113 -- Warrants exercised -- -- 100,000 -- 50 -- Common shares issuable -- -- -- -- -- 2,000 Issuance of preferred stock 1,063,830 1 -- -- 1,999 -- Conversion of preferred stock (543,000) 638,568 1 (1) -- One-for-four reverse stock split -- -- (12,238,537) (12) 12 -- Preferred dividends -- -- -- -- -- -- Net income - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995 5,505,150 $ 6 4,095,094 $ 4 $ 21,818 $ 2,000 ==================================================================================================================================== Stock options and warrants exercised and -- -- 63,750 -- 500 -- related tax benefit Common shares issuable -- -- 312,500 1 1,999 (2,000) Common shares issued -- -- 122,270 -- 1,740 -- Private placement of common stock, net of transaction costs -- -- 1,000,000 1 11,607 -- Conversion of preferred stock (807,608) (1) 237,441 -- 1 -- Preferred dividends -- -- -- -- -- -- Net income -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1996 4,697,542 $ 5 5,831,055 $ 6 $ 37,665 -- ==================================================================================================================================== Stock options and warrants exercised and -- -- 256,750 -- 682 -- related tax benefit Conversion of preferred stock (104,000) -- 33,560 -- -- -- Other -- -- -- (7) -- Treasury stock Preferred dividends -- -- -- -- -- -- Net loss -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 4,593,542 $ 5 6,121,365 $ 6 $ 38,340 $(375) ==================================================================================================================================== Preferred dividends -- -- -- -- -- -- Net income -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1998 4,593,542 $ 5 6,121,365 $ 6 $ 38,340 $(375) ==================================================================================================================================== ACCUMULATED DEFICIT TOTAL - --------------------------------------------------------------------------------------------------- Balance as of January 1, 1995 $ (11,367) $ 8,298 Stock options exercised -- 113 Warrants exercised -- 50 Common shares issuable -- 2,000 Issuance of preferred stock -- 2,000 Conversion of preferred stock -- -- One-for-four reverse stock split -- -- Preferred dividends (184) (184) Net income 3,844 3,844 - --------------------------------------------------------------------------------------------------- December 31, 1995 $ (7,707) $ 16,121 =================================================================================================== Stock options and warrants exercised and -- 500 related tax benefit -- -- Common shares issuable -- -- Common shares issued -- 1,740 Private placement of common stock, net of transaction costs -- 11,608 Conversion of preferred stock -- -- Preferred dividends (109) (109) Net income 2,463 2,463 - --------------------------------------------------------------------------------------------------- December 31, 1996 $ (5,353) $ 32,323 =================================================================================================== Stock options and warrants exercised and -- 682 related tax benefit Conversion of preferred stock -- -- Other -- 7 Treasury stock -- (375) Preferred dividends (102) (102) Net loss (885) (885) - --------------------------------------------------------------------------------------------------- December 31, 1997 $ (6,340) $ 31,636 =================================================================================================== Preferred dividends (51) (51) Net income 1,151 1,151 - --------------------------------------------------------------------------------------------------- June 30, 1998 $ (5,240) $ 32,736 ===================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-4 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flow (Dollars in thousands)
For the Six Months For the Year Ended December 31, --------------------------------------- Ended June 30, 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income (Loss) $ 1,151 $ (885) $ 2,463 $ 3,844 - ------------------------------------------------------------------------------------------------------------------------------- Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 1,964 3,230 2,202 1,586 Provision for losses on accounts receivable 96 345 87 97 Provision for restructuring 0 2,960 0 0 Provision for deferred taxes 277 (300) 1,207 0 Minority interest in income 35 86 94 86 Early extinguishment of debt 0 779 0 89 Reversal of tax valuation allowance 0 0 0 (1,481) Changes in Assets and Liabilities Net of Acquisitions: Accounts receivable (134) (612) (139) (128) Prepaid assets (17) (641) (74) (188) Other assets and liabilities 1,088 (228) (243) (176) Unearned income (562) 213 (133) 46 Accounts payable and accrued expenses (599) 2,400 (689) 262 - ------------------------------------------------------------------------------------------------------------------------------- Total Adjustments 2,148 8,232 2,312 193 - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 3,299 7,347 4,775 4,037 - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (4,952) (15,221) (12,776) (2,052) Proceeds from sale of property and equipment 6,948 7,451 8,636 251 Payment for acquisitions net of cash acquired (3,457) (10,145) (4,968) (9,101) Payment of earn out related to acquisition (1,500) 0 0 0 Other 0 0 0 (146) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (2,961) (17,915) (9,108) (11,048) - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from term loan and revolving line of credit 12,526 18,641 6,000 7,500 Proceeds from subordinated debt 0 0 0 6,000 Proceeds from real estate mortgage 0 0 0 3,567 Proceeds from other debt 0 0 1,500 3,672 Transaction costs related to issuance of debt and stock 0 0 0 (1,091) Proceeds from issuance of common stock 0 0 11,608 163 Repayment of long term debt (14,474) (9,682) (7,023) (11,699) Repayment of subordinated debt (497) (1,164) (6,334) 0 Repayment of capital lease obligation (39) (71) (50) (56) Proceeds from issuance of preferred stock 0 0 0 2,000 Dividends paid to preferred stockholders (51) (102) (108) (184) Proceeds from exercise of stock options 0 299 277 0 - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities (2,535) 7,921 5,870 9,872 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,197) (2,647) 1,537 2,861 Cash and cash equivalents at beginning of year 2,605 5,252 3,715 854 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 408 $ 2,605 $ 5,252 $ 3,715 ===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-5 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES SUPPLEMENTAL SCHEDULES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
For the Six Months For the Year Ended December 31, ------------------------------------------------ Ended June 30, 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during year for: Interest $ 992 $ 2,005 $ 1,973 $ 1,824 Income taxes 157 728 434 137 Noncash financing and investing activities Tax benefit related to exercise of stock options and warrants -- -- 224 -- Acquisitions Fair value of tangible assets acquired 1,432 2,404 841 6,848 Cost in excess of net assets acquired 4,876 14,844 8,979 8,727 Cash acquired -- -- (573) (30) Liabilities assumed (1,291) (1,352) (685) (934) Notes issued (1,560) (5,751) (1,854) (3,310) Escrow held -- -- -- (200) Common shares issued -- -- (1,740) (2,000) - ----------------------------------------------------------------------------------------------------------------- Total cash paid for acquisitions $ 3,457 $ 10,145 $ 4,968 $ 9,101 =================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-6 NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY BACKGROUND: Nobel Education Dynamics, Inc. (the "Company") was founded in 1982 and commenced operations in 1984. The Company operates private pre-schools, elementary schools and middle schools located in California, the Mid- Atlantic states, North Carolina, South Carolina, Virginia, Illinois, Indiana, Washington, Florida, Oregon and Nevada. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and majority-owned subsidiary. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECOGNITION OF REVENUES: Revenue is recognized as the services are performed. CASH AND CASH EQUIVALENTS The Company considers cash on hand, cash in banks, and cash investments with maturities of three months or less when purchased as cash and cash equivalents. The Company maintains funds in accounts in excess of FDIC insurance limits; however, the Company minimizes the risk by maintaining deposits in high quality financial institutions. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets as follows: Buildings 40 years Leasehold improvements The shorter of the leasehold period or useful life Furniture and equipment 3 to 10 years Maintenance, repairs and minor renewals are expensed as incurred. Upon retirement or other disposition of buildings and furniture and equipment, the cost of the items, and the related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. COST IN EXCESS OF NET ASSETS ACQUIRED: The Company's policy is to amortize cost in excess of net assets acquired related to acquisitions over 30 years for preschools and 40 years for elementary schools. Management has evaluated the life cycles of similar schools and determined that these lives are consistent with a historical range for private elementary education. In evaluating potential acquisitions of child care centers, management considers not only the current child care operations but also the outlook for these centers as elementary schools. The excess of purchase price over net assets acquired is amortized on a straight-line basis. Amortization expense amounted to $591,000, $1,005,000, $651,000, and $342,000 for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996, and 1995, respectively. Accumulated amortization at June 30, 1998, December 31, 1997 and 1996 was $3,745,691, $3,170,262 and $2,289,599, respectively. The Company reviews its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows in accordance with FAS 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of". If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss is recognized in the income statement and certain disclosures regarding the impairment are made in the financial statements. INCOME TAXES: The Company accounts for income taxes using the asset and liability method, in accordance with FAS 109, "Accounting for Income Taxes". Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A valuation allowance is recorded based on the uncertainty regarding the ultimate realizability of deferred tax assets. REVERSE STOCK SPLIT: On September 22, 1995, the stockholders approved a one-for-four reverse stock split of the Company's common stock. The Company effected the reverse split on September 28, 1995. For every four shares of common stock, each stockholder received one share of common stock. All historical share and per share amounts reflect the reverse stock split (except for the consolidated statement of stockholders' equity). EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share", which established new standards for computations for earnings per share. The Company adopted the new standard effective December 31, 1997 and restated the prior years calculation accordingly. The restatement did not result in a material change from amounts previously reported. Earnings per share are based on the weighted average number of shares outstanding and common stock equivalents during the period. In the calculation of dilutive earnings per share, shares outstanding are adjusted to assume conversion of the Company's non-dividend bearing convertible preferred stock if they are dilutive. In the calculation of basic earnings per share, weighted average number of shares outstanding are used as the denominator. F-7 Earnings per share are computed as follows (dollars in thousands except per share data):
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 ---------------------------------------------------------------------------------------------------- Basic (loss) earnings per share: Net (loss) income $ 1,151 $ (885) $ 2,463 $ 3,844 Less preferred stock dividends 51 102 109 184 ---------------------------------------------------------------------------------------------------- Net income available for common stock 1,100 (987) 2,354 3,660 Average common stock outstanding 6,121,365 6,052,625 5,545,605 4,688,355 Basic earnings (loss) per share $ 0.18 $ (0.16) $ 0.42 $ 0.78 Diluted earnings (loss) per share: Net (loss) income available for common stock and dilutive securities $ 1,151 $ (987) $ 2,463 $ 3,844 Average common stock outstanding 6,121,365 6,052,625 5,545,605 4,688,355 Additional common shares resulting from dilutive securities: Options, warrants and convertible preferred stock 1,395,686 N/A 1,717,178 1,440,786 ---------------------------------------------------------------------------------------------------- Average common stock and dilutive securities outstanding 7,517,051 6,052,625 7,262,783 6,129,141 Diluted earnings (loss) per share $ 0.15 $ (0.16) $ 0.34 $ 0.63
CONCENTRATIONS OF CREDIT RISK The Company provides its services to the parents and guardians of the children attending the schools. The Company does not extend credit for an extended period of time, nor does it require collateral. Exposure to losses on receivables is principally dependent on each person's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. RECLASSIFICATIONS Certain prior year amounts have been reclassified in the current year for comparative purposes. (2) CHANGE IN FISCAL YEAR In the last quarter of 1997, the Company changed its fiscal year end to the end of June. Accordingly, the Company's transition period, which ended June 30, 1998 includes the six months from January 1 to June 30, 1998. There were 52 weeks in each of fiscal 1997, 1996 and 1995 and 26 weeks in fiscal 1998. The following unaudited results of operations for the six months ending June 30, 1997 are presented for comparative purposes and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for that period (dollars in thousands, except per share data).
SIX MONTHS ENDED JUNE 30, 1997 (unaudited) -------------------------------------------------------------------------------------------- Revenues $39,664 Operating expenses 32,878 -------------------------------------------------------------------------------------------- School operating profit 6,786 New school development 98 General and administrative expenses $ 2,817 -------------------------------------------------------------------------------------------- Operating income 3,871 -------------------------------------------------------------------------------------------- Interest expense 854 Other income (5) Minority interest in earnings of consolidated subsidiary 49 -------------------------------------------------------------------------------------------- Income before income taxes 2,973 Income tax expense 1,249 -------------------------------------------------------------------------------------------- Net income 1,724 -------------------------------------------------------------------------------------------- Preferred stock dividends 51 -------------------------------------------------------------------------------------------- Net income available to common stockholders $ 1,673 ============================================================================================ Basic earnings per share $0.28 ============================================================================================ Dilutive earnings per share $0.23 ============================================================================================
(3) ACQUISITIONS: During the six months ended June 30, 1998 and the years ended December 31, 1997 and 1996, the Company completed various acquisitions, all of which are accounted for using the purchase method, which are described below. The results of operations for all acquisitions are included in the Consolidated Statement of Income from the date of acquisition. 1998 ACQUISITIONS In March and May 1998, the Company completed the acquisition of four elementary schools and one preschool. The Company acquired the assets of Touchstone Elementary School in Lake Oswego, Oregon, which has a capacity for 150 students. The Company acquired the stock of Lake Forest Park Montessori School, Inc., owner of Lake Forest Park Montessori School, in Seattle, Washington, which has a capacity of 250 students. The Company acquired the assets of the Western School, located in North Lauderdale, Florida, which has a capacity for 350 children. Lastly, the Company acquired the Brighton Schools in Seattle, Washington. The Brighton Schools consist of an elementary school and a preschool with a combined capacity of 319 students. The aggregate purchase price for the four acquisitions equaled $3,457,000 in cash, $1,560,000 in subordinated notes payable over five years and approximately $1,291,000 in assumed liabilities. 1997 ACQUISITIONS: ACQUISITION OF ANOTHER GENERATION ENTERPRISES INC. In January 1997, the Company purchased Another Generation Enterprises Inc. and certain related corporations, which owned six preschools located in Broward County and Palm Beach County, Florida with a capacity of 1,200 children. The aggregate purchase price for the stock totaled $4,543,000, with $3,643,000 in cash, $750,000 in notes and approximately $150,000 in assumed liabilities. Also in January 1997, the Company purchased a 19.99% interest in the Sagemont School located in Weston, Florida from the principal owners of Another Generation Enterprises Inc. The Sagemont F-8 School is an elementary school with a capacity of 340 students which opened in the Fall of 1996. The Company also formed a joint venture with such persons to develop five additional elementary schools in Florida, each of which the Company will own 80%. ACQUISITION OF RAINBOW BRIDGE SCHOOLS In April 1997, the Company acquired the Rainbow Bridge schools located in San Jose, California. Rainbow Bridge schools include two private elementary and middle schools and three preschools, with combined licensed capacity of 950. The purchase price of the acquisitions totaled $7,508,000, $5,140,000 paid in cash and $2,368,000 paid in notes (including amounts paid on an "earn out" based on achievement of certain earnings targets). ACQUISITION OF LAS VEGAS SCHOOLS In September 1997, the Company purchased three schools located in Las Vegas, Nevada, formerly operating as Hillpointe Elementary School and Warren Walker Preschools, with current combined licensed capacity of 670. The Hillpointe Elementary School is a new school which opened in September 1997. The purchase price of the acquisition totaled approximately $3,800,000, $2,300,000 paid in cash, $700,000 paid in notes and $800,000 in assumed liabilities. 1996 ACQUISITIONS: ACQUISITION OF VIRGINIA PRESCHOOLS: Pursuant to an acquisition agreement in February 1996, the Company acquired all the assets of four Virginia corporations, each of which operates a preschool in Virginia. The purchase price consisted of (i) $3,200,000 in cash, (ii) a five-year note in the principal amount of $337,000 bearing interest at the rate of 7% per annum and (iii) a cash earn-out payment of $25,000 paid in October 1996. The Company also entered into a five year non-compete agreement that requires monthly payments of $1,667 through February 2001. Also in February 1996, the Company acquired the assets of a fifth Virginia preschool for 96,192 shares of the Company's common stock (valued at $1,500,000 for financial statement purposes), and a cash earn- out payment of $12,500 paid in October 1996. ACQUISITION OF MACGREGOR CREATIVE SCHOOLS, OAK RIDGE PRIVATE SCHOOL AND EVERGREEN ACADEMY: In November 1996, the Company acquired the assets of MacGregor Creative Schools located in Cary, North Carolina. MacGregor Creative Schools consisted of two preschools with aggregate capacity of 408 children. In December 1996, the Company acquired the assets of Oak Ridge Private School, an elementary school located in Coto de Caza, California. Oak Ridge Private School has potential licensed capacity of 198 children. In December 1996, the Company acquired the stock of Montessori House, Inc., which owned Evergreen Academy located in Seattle, Washington. Evergreen Academy consists of one elementary/middle school and one preschool with aggregate licensed capacity of 400 children. A portion of the purchase price for this transaction was paid on January 2, 1997. The purchase prices of these three transactions totaled approximately $2,560,000 in cash, $780,000 in subordinated notes, $240,000 in stock (26,078 shares) and approximately $300,000 in assumed liabilities. UNAUDITED PRO FORMA INFORMATION: The operating results of all acquisitions are included in the Company's consolidated results of operations from the date of acquisition. The following pro forma financial information assumes the acquisitions which closed during 1998, 1997 and 1996 all occurred at the beginning of 1996. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of 1996, or of the results which may occur in the future. Further, the information gathered from some acquired companies are estimates since some acquirees did not maintain information on a period comparable with the Company's fiscal year-end (dollars in thousands).
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 (UNAUDITED) (UNAUDITED) ---------------------------------------------------------------------------------------------------- Revenues $50,747 $90,283 $81,700 Net income before extraordinary item 1,279 252 3,242 Earning per share Basic $ 0.21 $ 0.04 $ 0.58 Diluted $ 0.17 $ 0.03 $ 0.44
(4) CASH EQUIVALENTS: The Company has an agreement with its primary bank that allows the bank to act as the Company's principal in making daily investments with available funds in excess of a selected minimum account balance. This investment amounted to $2,364,000, $6,000,000 and $3,040,000 at June 30, 1998, December 31, 1997 and 1996, respectively. The Company's funds were invested in money market accounts which exceed federally insured limits. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents as such deposits are maintained in high quality financial institutions. (5) PROPERTY AND EQUIPMENT: The balances of major property and equipment classes, excluding property and equipment held for sale, were as follows (dollars in thousands):
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------------------------------------------------------------------- Land $ 3,147 $ 3,461 $ 4,105 Buildings 6,154 6,685 8,936 Assets under capital lease obligations 913 913 913 Leasehold improvements 5,947 5,358 4,477 Furniture and equipment 12,573 10,593 7,723 Construction in progress 2,867 6,020 12 ---------------------------------------------------------------------------------------- 31,601 33,030 26,166 Accumulated depreciation (9,226) (7,856) (6,843) ---------------------------------------------------------------------------------------- $22,375 $25,174 $19,323 ========================================================================================
Depreciation expense was $1,325,000, $2,096,000, $1,560,000, and $1,150,000 for the six months ended June 30, 1998 and for the years 1997, 1996 and 1995, respectively. Amortization of capital leases included in depreciation expense amounted to $7,320 in the six months ended June 30, 1998, and $14,640 in each of the years 1997, 1996, and 1995. Accumulated amortization of capital leases F-9 amounted to $468,000, $461,000, and $446,000 as of June 30, 1998, December 31, 1997, and 1996, respectively. (6) RESTRUCTURING AND PROPERTY AND EQUIPMENT HELD FOR SALE In the fourth quarter of 1997 the Company approved a restructuring plan which included (1) reorganization of the geographic school districts, (2) reorganization of the structure of operations management, (3) the decision to close several schools and to write down the book value of the assets of schools which are non-performing, (4) placing non-performing schools for sale and (5) hiring of a Chief Operating Officer (President). In an effort to improve Company performance, the Company restructured its existing operations management. The Executive Director position replaced both the Regional Manager and the District Manager positions. The number of schools for which each manager is responsible has been reduced so that each can spend more time in the schools. In conjunction with the restructuring, the Company recorded a $2,960,000 charge in December 1997. The restructuring charge included (1) a $2,000,000 write down of the cost in excess of net assets acquired related to schools located in Indianapolis, (2) $789,000 related to the closing of non- performing schools, and (3) $171,000 related to the costs associated with the restructuring of the management team. The write down of fixed assets and cost in excess of net assets acquired was determined based on the estimated selling prices of these assets based on prior experience from comparable situations and information provided by outside brokers. Non cash charges included in the $2,960,000 charge were $2,269,019. During the six months ended June 30, 1998, cash payments related to the closing of non-performing schools and cost associated with the restructuring of the management team were $144,897 and $129,837, respectively. The amounts reflected in the table below for 1996 reflect certain properties located in the Southeast related to a prior restructuring. The balances of major property and equipment held for sale were as follows (dollars in thousands):
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------------------------------------------------------------- Land $ 219 $ 219 $ 512 Buildings 741 741 940 Leasehold improvements 936 623 - Furniture and equipment 629 1,030 374 Accumulated depreciation (1,154) (1,118) (715) -------------------------------------------------------------------------------- $ 1,371 $ 1,495 $ 1,111 ================================================================================
(7) DEBT: Debt consisted of the following (dollars in thousands):
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------------------------------------------------------------------------- LONG TERM OBLIGATIONS: Revolving and Term Credit Facility $19,427 $21,574 $11,770 1st mortgages, due in varying installments over three to twenty years with fixed interest rates ranging from 11% to 12%. 281 301 1,002 Notes payable to sellers from various acquisitions, due in varying installments over three to fifteen years with fixed interest rates varying from 8% to 12%. 257 288 644 Other 758 484 239 ------------------------------------------------------------------------------------------------- Total long term obligations $20,723 $22,647 $13,655 Less current portion (412) (150) (2,847) ------------------------------------------------------------------------------------------------- $20,311 $22,497 $10,808 ================================================================================================= SUBORDINATED DEBT: Subordinated debt agreements, due in varying installments over five to ten years with fixed interest rates varying from 7% to 8%. $ 7,697 $ 8,534 $ 3,947 ------------------------------------------------------------------------------------------------- Less current portion (1,531) (2,561) (529) ------------------------------------------------------------------------------------------------- $ 6,166 $ 5,973 $ 3,418 =================================================================================================
DEBT: On August 31, 1995, the Company completed a $23,000,000 refinancing (the "Refinancing") which consisted of the placement of: (1) a $7,500,000 revolving line of credit and a $7,500,000 term loan, both financed through Summit Bank (the "Credit Agreement"); (2) $6,000,000 of subordinated debentures with Allied Capital Corporation and affiliated entities (collectively, "Allied"); (3) 1,063,830 shares of Series D Convertible Preferred Stock sold to Allied for a purchase price of $2,000,000; and (4) warrants sold to Allied to acquire an aggregate of 309,042 shares of the Company's Common Stock, subject to certain adjustments under anti-dilution provisions, for a purchase price of $100. The Refinancing resulted in an extraordinary loss of $62,000 related to the write-off of the unamortized loan origination fees in 1995. On November 1, 1996, the Company amended the Credit Agreement which increased the Company's revolving line of credit from $7,500,000 to $10,000,000 and extended the maturity dates of the loans. F-10 In 1997, the Company amended its credit agreement three times, the most significant of which occurred in December with the execution of the Seventh Amendment and Modification to the Credit Agreement. These amendments: (1) increased the Company's borrowing capacity to $25,000,000, (2) changed the prior fixed interest rates (applicable to term loans) to variable rates, (3) provided that all revolving debt will convert to a term loan in January 2001, (4) extended terms for an additional five years for the prior term loan and six years for the prior revolving line of credit and (5) increased the number of permitted new school construction projects. Two facilities are established under the Seventh Amendment: a $3,000,000 facility (Revolving and Term Facility A) and a $22,000,000 facility (Revolving and Term Facility B). Amounts outstanding under term loans at the time of the restructuring were treated as initial outstanding balances under the new Revolving and Term Facilities. Under the new arrangements, no principal payments are required until January 1, 2001. Commencing on January 1, 2001, the Company must pay outstanding principal balance of the Revolving and Term Facilities in 60 equal monthly installments. Interest on the unpaid principal balance of Revolving and Term Facility A accrues at a variable interest rate ("Floating Rate") equal to the base rate of Summit Bank plus 25 basis points (subject to reduction, based on performance). Interest on the unpaid principal balance of Revolving and Term Facility B accrues at a variable interest rate equal to the Floating Rate or a LIBOR-based rate (at the Company's option, chosen at the beginning of any interest rate period). Interest rates on the outstanding borrowings as of June 30, 1998 ranged from 8.0% to 8.5% with an effective weighted average rate of 8.5%. The Company may elect to convert to a term loan portions of the Revolving and Term Facility B in increments of $2,500,000. Such term loans would be payable over sixty months. By postponing the dates of required principal payments under the Company's loans, the Seventh Amendment significantly improved the Company's cash flow requirements under these loans. The restructuring allows the Company greater flexibility in managing its cash flow and allows greater ability to use available funds to grow the Company. Because of the significant change in the repayment terms of the senior loan, in accordance with Emerging Issue Task Force Issue 96-19 "Debtors Accounting for Modification of Debt Instrument", the Company wrote off the financing fees related to the prior financing totaling $779,000 on a pretax basis. The charge was recorded as an extraordinary item and accordingly shown tax effected. At June 30, 1998 and December 31, 1997, the principal amounts outstanding under the Revolving and Term Facility B were $19,427,000 and $21,574,000, and no amounts were outstanding under the Revolving and Term Facility A. The Company's debt agreements contain restrictive covenants regarding the payment of common stock dividends and the maintenance of ratios related to debt to earnings before interest, taxes, depreciation and amortization. Maturities of long-term obligations are as follows: $1,943,000 in 1999, $2,000,000 in 2000, $1,978,000 in 2001, $1,792,000 in 2002, $878,000 in 2003, and $401,000 in 2004 and thereafter. The terms of the Company's credit facility with Summit Bank, as amended, require principal payments commencing January 1, 2001. The Company borrows and repays on the facilities from time to time, as cash becomes available or is needed. Therefore, the maturities of the Revolving and Term Credit Facilities have not been included in the above figures. 8) ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES: Accounts payable and other current liabilities were as follows (dollars in thousands):
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------------------------------------------------------------------------------- Accounts payable $1,029 $1,508 $ 788 Reserve for closed centers 644 832 100 Accrued payroll and related items 1,791 1,673 1,189 Accrued rent 600 563 420 Accrued property taxes 1,514 1,063 1,065 Other accrued expense 2,569 2,342 903 -------------------------------------------------------------------------------------------------- $8,147 $7,981 $4,465 ==================================================================================================
(9) LEASE OBLIGATIONS: Future minimum rentals, for the real properties utilized by the Company and its subsidiaries, by year and in the aggregate, under the Company's capital leases and noncancellable operating leases, excluding leases assigned, consisted of the following at June 30, 1998 (dollars in thousands): OPERATING LEASES
SCHOOLS CLOSED TO BE CONTINUING SCHOOLS DIVESTED SCHOOLS TOTAL ------------------------------------------------------------------------- 1999 $ 253 $ 591 $ 15,072 $ 15,916 2000 200 591 14,319 15,110 2001 176 590 13,940 14,706 2002 172 573 13,180 13,925 2003 132 485 12,490 13,107 2004 and thereafter 224 3,477 89,870 93,571 ------------------------------------------------------------------------- Total minimum lease obligations $1,157 $6,307 $158,871 $166,335 ========================================================================= CAPITAL LEASES 1999 $ 116 2000 105 2001 77 2002 0 ------------------------------------------------------------------------- Total minimum lease obligations $ 298 ------------------------------------------------------------------------- Less amount representing interest 48 ------------------------------------------------------------------------- Present value of capital lease obligations 250 ------------------------------------------------------------------------- Less current portion 88 ------------------------------------------------------------------------- $ 162 =========================================================================
Most of the above leases contain annual rental increases based on changes in consumer price indexes, which are not reflected in the above schedule. Rental expense for all operating leases was $7,103,000, $11,157,000, $8,113,000, and $5,829,000 for the six months ended June 30, 1998 and the years ended December 31, 1997, F-11 1996 and 1995, respectively. These leases are typically triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses and insurance costs. The Company entered into agreements to assign or sublease leases for five centers under development and nine centers which were operating. The 14 assigned leases have remaining terms from four years to 14 years. Under the agreements, the Company is contingently liable if the assignee is in default under the lease. Contingent future rental payments under the assigned leases are as follows (dollars in thousands): 1999 $ 674 2000 $ 657 2001 $ 595 2002 $ 589 2003 and thereafter $1,798 (10) STOCKHOLDERS' EQUITY: PREFERRED STOCK: In connection with the Refinancing (see Note 7), on August 31, 1995, the Company issued 1,063,830 shares of the Company's Series D Convertible Preferred Stock for a purchase price of $2,000,000. The Series D Preferred Stock is convertible to Common Stock at a conversion rate, subject to adjustment, of 1/4 share of Common Stock for each share of Series D Convertible Preferred Stock. Holders of Series D are not entitled to dividends, unless dividends are declared on the Company's Common Stock. Upon liquidation, the holders of shares of Series D Convertible Preferred Stock are entitled to receive, before any distribution or payment is made upon any Common Stock, $1.88 per share plus any unpaid dividends. At June 30, 1998, December 31, 1997 and 1996, 1,063,830 shares were outstanding. On August 22, 1994, the Company completed a private placement of an aggregate of 2,500,000 shares of Series C Convertible Preferred Stock and the Series 1 Warrants and Series 2 Warrants discussed below under "Common Stock Warrants" for an aggregate purchase price of $2,500,000. The Series C Preferred Stock is convertible into Common Stock at a conversion rate, subject to adjustment, of 1/4 share of Common Stock for each share of Series C Convertible Preferred Stock. Holders of shares of Series C Convertible Preferred Stock are not entitled to dividends unless dividends are declared on the Company's Common Stock. Upon liquidation, the holders of shares of Series C Convertible Preferred Stock are entitled to receive, before any distribution or payment is made upon Common Stock, $1.00 per share plus any unpaid dividends. At June 30, 1998, December 31, 1997 and 1996, 2,500,000 shares were outstanding. On July 20, 1993, the Company completed a private placement of 2,484,320 shares of its Series A Convertible Preferred Stock at a purchase price of $1.00 per share. The Series A Preferred Stock is convertible into Common Stock at a conversion rate, subject to adjustment, of .2940 shares of Common Stock for each share of Series A Preferred Stock. The Series A Preferred Stock is redeemable by the Company at any time after the fifth anniversary of its issuance at a redemption price of $1.00 per share plus cumulative unpaid dividends. The Preferred Stock is not redeemable at the option of the holders. Upon liquidation, the holders of shares of Series A Preferred Stock are entitled to receive, before any distribution or payment is made upon any Common Stock, $1.00 per share plus all accrued and unpaid dividends. At June 30, 1998, December 31, 1997 and 1996, 1,029,712, 1,029,712 and 1,133,712 shares were outstanding, respectively. Each share of Series A Preferred Stock entitles the holder to an $.08 per share annual dividend. Each share of Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock entitles the holder to a number of votes equal to the number of full shares of Common Stock into which such share is convertible. Except as otherwise required by law, holders of Preferred Stock vote together with the Common Stock, and not as a separate class, in the election of directors and on each other matter submitted to a vote of the stockholders. PRIVATE PLACEMENT OF COMMON STOCK: On March 5, 1996, the Company raised approximately $11,600,000 net proceeds through the issuance of 1,000,000 shares of common stock at $12 per share. COMMON STOCK WARRANTS: In connection with the Refinancing (see Note 7) on August 31, 1995, the Company issued to Allied warrants to acquire an aggregate of 309,042 shares of the Company's Common Stock. On May 28, 1997, Mr. Clegg exercised a warrant to purchase 187,500 shares at a purchase price of $2.00 per share. Mr. Clegg paid the exercise price of the warrant by delivery of 36,810 shares of Common Stock valued at $10.19 per share, which was the fair market value of the Common Stock on the date of the exercise. Accordingly, the Company recorded the shares acquired from Mr. Clegg as treasury stock on the balance sheet. 1995 STOCK INCENTIVE PLAN On September 22, 1995, the stockholders approved the 1995 Stock Incentive Plan. On September 19, 1997, the stockholders approved amendments to the 1995 Stock Incentive Plan, including an increase in the number of shares of common stock available for issuance under the Plan to 750,000. Under the Plan, common stock may be issued in connection with stock grants, incentive stock options and non-qualified stock options. The purpose of the Plan is to attract and retain quality employees. All grants to date under the Plan (other than a certain stock grant which was terminated) have been non- qualified stock options which vest over three years (except that options issued to directors vest in full six months following the date of grant). 1988 STOCK OPTION AND STOCK GRANT PLAN: During 1988, the Company established the 1988 stock option and stock grant plan. This plan reserved up to an aggregate of 125,000 shares of common stock of the Company for issuance in connection with stock grants, incentive stock options and non-qualified stock options. 1986 STOCK OPTION AND STOCK GRANT PLAN: During 1986, the Company established a stock option and stock grant plan, which was amended in 1987. The 1986 Plan, as amended, reserved up to an aggregate of 216,750 shares of common stock of the Company for issuance in connection with stock grants, incentive stock options and non-qualified stock options. The number of options granted under the 1995 Stock Incentive Plan is determined from time to time by the Compensation Committee of the Board of Directors, except for options granted to non-employee directors, which is determined by a formula set forth in the Plan. Incentive stock options are granted at market value or F-12 above, and non-qualified stock options are granted at a price fixed by the Compensation Committee at the date of grant. Options are exercisable for up to ten years from date of grant. Option activity (adjusted for the 4:1 reverse split) with respect to the Company's stock incentive plans and other employee options was as follows: OUTSTANDING OPTIONS WEIGHTED AVERAGE NUMBER RANGE EXERCISE PRICE ------------------------------------------------------------------- Balance, January 1, 1995 79,775 $ 3.00 to $ 13.00 $ 4.57 ------------------------------------------------------------------- Granted 102,950 $11.625 $11.625 Canceled - - - - Exercised (37,500) $ 3.00 to $ 4.00 $ 3.75 ------------------------------------------------------------------- Balance, December 31, 1995 145,225 $ 3.00 to $ 13.00 $ 9.78 =================================================================== Granted 60,500 $ 10.50 to $ 15.81 $ 11.52 Canceled (28,175) $11.625 $11.625 Exercised (28,750) $ 4.00 to $ 6.00 $ 3.75 ------------------------------------------------------------------- Balance, December 31, 1996 148,800 $ 3.00 to $ 15.81 $ 12.67 =================================================================== Granted 183,200 $ 7.88 to $ 10.50 $ 9.48 Canceled (54,575) $ 3.00 to $ 13.00 $ 11.50 Exercised ( 6,250) $ 3.50 to $ 13.50 $ 11.50 ------------------------------------------------------------------- Balance, December 31, 1997 271,175 $ 3.00 to $ 16.50 $ 10.75 =================================================================== Granted 156,507 $ 5.06 to $ 9.250 $ 5.90 Canceled (13,250) $ 7.87 to $11.625 $ 10.02 Exercised 0 $ - to $ - $ - ------------------------------------------------------------------- Balance, June 30, 1998 414,432 $ 3.00 to $ 16.50 $ 8.15 =================================================================== At June 30, 1998, December 31, 1997 and 1996, 417,943, 545,940 and 269,813 shares, respectively, remained available for options or stock grants under the 1995 Stock Incentive Plan and 77,191 options were exercisable under such Plan and earlier stock option plans. The Company has adopted the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Company's stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been decreased to the pro forma amounts indicated below (dollars in thousands except per share data): JUNE 30, YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 ----------------------------------------------------------------------- Net (loss) income - as reported 1,151 $ (885) $2,463 $3,844 Net (loss) income - pro forma 863 (1,222) 2,365 3,841 Net (loss) income per share - as reported $ .018 $ (0.16) $ 0.42 $ 0.78 Net (loss) income per share - pro forma $ 0.14 $ (0.20) $ 0.41 $ 0.78 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: Expected dividend yield 0% Expected stock price volatility 39.23% Risk-free interest rate 5.42 - 5.80% Expected life of options 3 years Activity (adjusted for the 4:1 reverse split) with respect to warrants outstanding at June 30, 1998 is as follows:
NUMBER RANGE ------------------------------------------------------------------------------------------------ Balance, January 1, 1995 430,000 $2.00 to $4.00 Granted 309,042 $7.52 Canceled - - - Exercised (25,000) $2.00 ------------------------------------------------------------------------------------------------ Balance, December 31, 1995 714,042 $2.00 to $7.52 ------------------------------------------------------------------------------------------------ Granted - - - Canceled - - - Exercised (25,000) $4.13 - ------------------------------------------------------------------------------------------------ Balance, December 31, 1996 689,042 $2.00 to $7.52 ------------------------------------------------------------------------------------------------ Granted - - - Canceled (5,000) $2.00 to $7.52 Exercised (250,000) $2.00 ------------------------------------------------------------------------------------------------ Balance, December 31, 1997 434,042 $4.00 to $7.52 ------------------------------------------------------------------------------------------------ Granted - Canceled - Exercised - ------------------------------------------------------------------------------------------------ Balance, June 30, 1998 434,042 $4.00 to $7.52 ------------------------------------------------------------------------------------------------
(11) OTHER (INCOME) EXPENSE: Other (income) expense consists of the following (dollars in thousands):
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------- Interest income $ (95) $(179) $(470) $(142) Rental income (17) (77) (143) (194) Depreciation related to rental properties 9 33 73 82 Other projects - (2) - 29 Costs related to centers held for sale 1 67 58 99 --------------------------------------------------------------------------------------------------- $ (102) $(158) $(482) $(126) ===================================================================================================
(12) RELATED-PARTY TRANSACTIONS: Legal services were rendered to the Company by Drinker Biddle & Reath, of which a director of the Company is a partner. The Company expects this firm to continue to provide such services during 1998. Fees paid to the firm for the six months ended June 30, 1998 and for the years 1997, 1996 and 1995 totaled $2,028, $36,000, $128,000, and $704,000, respectively. F-13 (13) INCOME TAXES: Current tax provision (dollars in thousands):
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------- Federal $467 $ 26 $ 62 $ 34 States 89 194 293 91 ----------------------------------------------------------------------------------------------- $556 $ 220 $ 355 $ 125 Deferred tax provision 277 30 $ 1,207 (1,481) ----------------------------------------------------------------------------------------------- $833 $ 250 $ 1,562 $(1,356) ===============================================================================================
The difference between the actual income tax rate and the statutory U.S. federal income tax rate is attributable to the following (dollars in thousands):
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, 1998 1997 1996 1995 ------------------------------------------------------------------------------------------- U.S. federal statutory rate $674 ($ 63) $ 1,364 $ 867 State taxes, net of federal tax benefit 54 $ 137 $ 119 $ 127 Benefit from realization of net operating losses 0 0 0 ($996) Reduction in valuation allowance 0 0 0 $(1,481) Goodwill and other 105 176 79 127 ------------------------------------------------------------------------------------------- $833 $ 250 $ 1,562 $(1,356) ===========================================================================================
Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carry forwards which give rise to a significant portion of deferred tax assets and liabilities are as follows (dollars in thousands):
FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30, 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------ DEFERRED DEFERRED DEFERRED DEFERRED TAX ASSETS TAX ASSETS TAX ASSETS TAX ASSETS (LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES) ------------------------------------------------------------------------------------------------------------ Depreciation ($725) ($576) $ (383) $ (241) Provision for center closings and other restructurings 1,534 1,635 379 1,270 Net operating losses 0 0 801 720 AMT credit carryforward 95 94 90 126 Other 127 155 121 116 ------------------------------------------------------------------------------------------------------------ Net deferred tax asset $1,031 $1,308 $1,008 $1,991 ============================================================================================================
In 1995, based on three years of positive net income and the analysis of projections for the years 1996 through 1999, the Company removed the remaining valuation allowance. Accordingly, such amounts were recorded as a credit to income tax expense in the respective periods. (14) EMPLOYEE BENEFIT PLANS: The Company has a 401(k) Plan whereby eligible employees may elect to enroll after one year of service. The Company matches 25% of an employee's contribution to the Plan of up to 6% of the employee's salary. Nobel's matching contributions under the Plan were $60,000, $90,000, $74,000 and $61,000 for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995, respectively. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments approximates carrying value. The following methods and assumptions were considered by the Company in determining its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value. Debt: The estimated fair value of the Company's debt as a whole was based on the discounted cash flows of all debt instruments. (16) COMMITMENTS AND CONTINGENCIES: The Company is engaged in other legal actions arising in the ordinary course of its business. The Company believes that the ultimate outcome of all such matters above will not have a material adverse effect on the Company's consolidated financial position. The significance of these matters on the Company's future operating results and cash flows depends on the level of future results of operations and cash flows as well as on the timing and amounts, if any, of the ultimate outcome. The Company carries fire and other casualty insurance on its centers and liability insurance in amounts which management believes is adequate for its operations. As is the case with other entities in the education and preschool industry, the Company cannot effectively insure itself against certain risks inherent in its operations. Some forms of child abuse have sublimits per claim in the general liability coverage. (17) SUBSEQUENT EVENTS DEBT In July 1998, the Company issued a $10,000,000 senior subordinated note to Allied Capital Corporation. The senior subordinated note bears interest at 10.0% and matures in two installments of principal, $5,000,000 in 2004 and $5,000,000 in 2005. Payments on the note are subordinate to the Company's senior bank debt. In connection with the financing transaction, the Company also issued to Allied Capital Corporation warrants to acquire 531,255 shares of the Company's common stock at $8.5625 per share. The Company recorded a debt discount and allocated $900,000 of the proceeds of the transaction to the value of the warrants. This debt discount is being amortized to interest expense over the term of the note. FORMATION OF SUBSIDIARY AND ACQUISITION On August 17, 1998, the Company entered into a joint venture transaction with Developmental Resource Center, Inc. (DRC), which is owned 80% by Nobel Education Dynamics, Inc. and 20% by Dr. Deborah Levy, a recognized leader in the field of special education programs. The joint venture, Nobel Learning Solutions, LLC acquired the assets of DRC. The three schools, located in Florida, specialize in full day programs, summer camps, testing services and clinics for K-8th grade students who have learning challenges such as dyslexia, attention deficit disorder (ADD and ADHD), and other learning disabilities. F-14 EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit 3.1 Registrant's Certificate of Incorporation, as amended and restated. (Filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference.) 3.2 Registrant's Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the Registrant's Current Report on Form 8-K filed on June 14, 1993 and incorporated herein by reference.) 3.3 Registrant's Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 3.4 Registrant's Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 3.5 Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.1 Loan and Security Agreement dated August 30, 1995 (the "Loan and Security Agreement") among the Registrant, certain subsidiaries of the Registrant and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the Registrant's Current Report on Form 8-K filed on September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 4.2 Second Amendment and Modification dated April 4, 1996 and Third Amendment and Modification dated July 2, 1996 to the Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference.) 4.3 Fourth Amendment and Modification dated November 1, 1996 to Loan and Security Agreement. (Filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference.) 4.4 Fifth Amendment and Modification dated March 20, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.5 Sixth Amendment and Modification dated May 5, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.) 4.6 Seventh Amendment and Modification dated December 22, 1997 to Loan and Security Agreement. (Filed as Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.7 Eighth Amendment and Modification dated April __, 1998 to Loan and Security Agreement. 4.8 Ninth Amendment and Modification dated as of June 30, 1998 to Loan and Security Agreement. 4.9 Revolving and Term Facility Note A dated December 22, 1997 in the principal sum of $22,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.10 Revolving and Term Facility Note B dated December 22, 1997 in the principal sum of $3,000,000 payable to the order of Summit Bank. (Filed as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.) 4.11 Investment Agreement dated as of June 30, 1998 between Registrant and its subsidiaries and Allied Capital Corporation 4.12 Senior Subordinated Note dated as of June 30, 1998 in the principal amount of $10,000,000 payable to the order of Allied Capital Corporation. The Registrant has omitted certain instruments defining the rights of holders of long-term debt in cases where the indebtedness evidenced by such instruments does not exceed 10% of the Registrant's total assets. The Registrant agrees to furnish a copy of each of such instruments to the Securities and Exchange Commission upon request. 10.1 1986 Stock Option and Stock Grant Plan of the Registrant, as amended. (Filed as Exhibit 10(1) to the Registrant's Registration Statement on Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987 (the "Form S-1") and incorporated herein by reference.) 10.2 1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March 31, 1988 and incorporated herein by reference.) 10.3 1995 Stock Incentive Plan of the Registrant, as amended. 10.4 Form of Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. 10.5 Stock and Warrant Purchase Agreement between the Registrant and various investors, dated April 14, 1992. (Filed as Exhibit 10(r) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.) 10.6 Registration Rights Agreement dated May 28, 1992 among the Registrant, JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd. (Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.7 Stock Purchase Agreement dated May 28, 1992 between Registrant and a limited number of accredited investors at $0.50 per share totaling 3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the Registrant's Current Report on Form 8-K dated June 11, 1992, date of earliest event reported May 28, 1992, and incorporated herein by reference.) 10.8 Series 1 Warrants for shares of Common Stock issued to Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(ad) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 10.9 Registration Rights Agreement between Registrant and Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(af) to the Registrant's Quarterly Report on Form 10-Q with respect to the quarter ended June 30, 1994 and incorporated herein by reference.) 10.10 Amendment dated February 23, 1996 to Registration Rights Agreement between Registrant and Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.) 10.11 Investment Agreement dated as of August 30, 1995 by and among the Registrant, certain subsidiaries of the Registrant and Allied Capital Corporation and its affiliated funds. (Filed as Exhibit 4A to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) 10.12 Common Stock Purchase Warrant dated August 30, 1995 entitling Allied Capital Corporation to purchase up to 92,172.25 shares (subject to adjustment) of the Common Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's Current Report on Form 8-K dated September 11, 1995, date of earliest event reported August 25, 1995, and incorporated herein by reference.) Exhibit 10.12 is one in a series of four Common Stock Purchase Warrants issued pursuant to the Investment Agreement dated as of August 30, 1995 that are identical except for the Warrant No., the original holder thereof and the number of shares of Common Stock of the Registrant for which the Warrant may be exercised, which are as follows:
Number of Shares of Common Stock Warrant No. Holder (subject to adjustment) ----------- ------ ----------------------- 2 Allied Capital Corporation II 142,932.25 3 Allied Investment Corporation 92,713 4 Allied Investment Corporation II 50,219.5
10.13 Common Stock Purchase Warrant dated as of June 30, 1998 entitling Allied Capital Corporation to purchase up to 531,255 shares (subject to adjustment) of the Common Stock of the Registrant. 10.14 First Amended and Restated Registration Rights Agreement dated as of June 30, 1998 by and between the Registrant and Allied Capital Corporation. 10.15 Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and Summary Plan Description, Issued February, 1997, as amended on June 11, 1998. 10.16 Employment Agreement dated June 4, 1996 between Registrant and Barbara Z. Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 10.17 Noncompete Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. (Filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 10.18 Contingent Severance Agreement dated as of March 11, 1997 between John R. Frock and the Registrant. (Filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.) 21 List of subsidiaries of the Registrant. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule Certain schedules (and similar attachments) to Exhibits 4.1 through 4.8 and Exhibits 4.11 and 10.11 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the Commission upon request. EX-4.7 2 EIGHT AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 4.7 EIGHTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT ------------------------------ THIS EIGHTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the "AMENDMENT") is made effective as of the ____ day of April, 1998, by and among NOBEL EDUCATION DYNAMICS, INC. ("NOBEL"), IMAGINE EDUCATIONAL PRODUCTS, INC. ("IMAGINE"), MERRYHILL SCHOOLS, INC. ("MERRYHILL"), NEDI, INC. ("NEDI"), MERRYHILL SCHOOLS NEVADA, INC. ("MERRYHILL NEVADA") and LAKE FOREST PARK MONTESSORI SCHOOL, INC. ("LAKE FOREST") (collectively, the "OBLIGORS") and SUMMIT BANK, formerly known as First Valley Bank ("BANK"). BACKGROUND ---------- A. Nobel, Imagine, Merryhill, NEDI and Bank are parties to that certain Loan and Security Agreement dated August 30, 1995, as amended by amendments dated September 1, 1995, April 4, 1996, July 23, 1996, November 1, 1996, March 20, 1997, May 5, 1997 and December 22, 1997 (as amended, the "LOAN AGREEMENT"). B. EDUCO, Inc., Montessori House, Inc. and Another Generation Enterprises, Inc. were also parties to the Loan Agreement. However, (i) EDUCO, Inc. and Another Generation Enterprises, Inc. have merged into Nobel with Nobel being the surviving entity and (ii) Montessori House, Inc. merged into Merryhill with Merryhill being the surviving entity. C. Obligors and Bank desire to further amend the Loan Agreement in accordance with the terms and conditions hereof. D. Capitalized terms used herein and not otherwise defined shall have the meanings provided for such terms in the Loan Agreement. NOW, THEREFORE, intending to be legally bound hereby, the parties hereto agree as follows: 1. ADDITIONAL OBLIGORS. From and after the date hereof, Merryhill Nevada ------------------- and Lake Forest shall each be an "OBLIGOR" under the Loan Agreement and shall be bound by all the terms and conditions thereof. Unless otherwise specifically restated for Merryhill Nevada and Lake Forest hereunder, all representations, warranties and covenants under the Loan Agreement shall be deemed to be the representations, warranties and covenants of Merryhill Nevada and Lake Forest as if Merryhill Nevada and Lake Forest 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 be deemed to include both Merryhill Nevada and Lake Forest. 2. SECURITY. As security for the full and timely payment and performance -------- of all Bank Indebtedness, Merryhill Nevada and Lake Forest hereby grant to Bank a security interest in all of the following: a. All of such Obligor's 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 Obligor's 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 Obligor's 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 Obligor's 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 Obligor's 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, trade names, 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, blueprints, patterns and all memoranda, notes and records with respect to any research and development, and all products and proceeds of any of the foregoing. d. All of such Obligor's 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 Obligor's 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. 3. ADDITIONAL DOCUMENTS. Merryhill Nevada and Lake Forest covenant and -------------------- agree to execute and deliver or cause to be executed and delivered to Bank any and all documents, agreements, corporate resolutions, certificates and opinions as Bank shall request in connection with the execution and delivery of this Amendment or any other documents in connection herewith, including, without limitation, an Allonge to Revolving and Term Facility Note A and Revolving and Term Facility Note B. 4. FURTHER AGREEMENTS AND REPRESENTATIONS. Obligors do hereby: -------------------------------------- 2 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. represent and warrant that no Event of Default 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; e. 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 f. 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. 5. 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 out-of-pocket expenses. 6. 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 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. 7. 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. 8. 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. 9. BINDING EFFECT. This Amendment shall be binding upon and inure to the -------------- benefit of the parties hereto and their respective successors and assigns. 10. GOVERNING LAW. This Amendment shall be governed by and construed in ------------- accordance with the laws of the Commonwealth of Pennsylvania. 11. 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. 3 IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first above written. NOBEL EDUCATION DYNAMICS, INC. [CORPORATE SEAL] By: __________________ Name/Title: ____________________________ IMAGINE EDUCATIONAL PRODUCTS, INC. [CORPORATE SEAL] By: __________________ Name/Title: ____________________________ MERRYHILL SCHOOLS, INC. [CORPORATE SEAL] By: ___________________________________ Name/Title: ____________________________ NEDI, INC. [CORPORATE SEAL] By: ___________________________________ Name/Title: ____________________________ MERRYHILL SCHOOLS NEVADA, INC. [CORPORATE SEAL] By: ___________________________________ Name/Title: ____________________________ LAKE FOREST PARK MONTESSORI SCHOOLS, INC. [CORPORATE SEAL] By: ___________________________________ Name/Title: _____________________________ SUMMIT BANK By: ___________________________________ Janet L. Helms, Vice-President 4 EX-4.8 3 NINTH AMENDMENT DATED 06/30/98 EXHIBIT 4.8 NINTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT ------------------------------ THIS NINTH AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the "AMENDMENT") is made effective as of the 30th day of June, 1998, by and among NOBEL EDUCATION DYNAMICS, INC. ("NOBEL"), IMAGINE EDUCATIONAL PRODUCTS, INC. ("IMAGINE"), MERRYHILL SCHOOLS, INC. ("MERRYHILL"), NEDI, INC. ("NEDI"), MERRYHILL SCHOOLS NEVADA, INC. ("MERRYHILL NEVADA"), LAKE FOREST PARK MONTESSORI SCHOOL, INC. ("LAKE FOREST"), NOBEL LEARNING SOLUTIONS, L.L.C. ("LEARNING SOLUTIONS") and NOBEL EDUCATION DYNAMICS FLORIDA, INC. ("NOBEL FLORIDA") (collectively, the "OBLIGORS") and SUMMIT BANK, formerly known as First Valley Bank ("BANK"). BACKGROUND ---------- A. Nobel, Imagine, Merryhill, NEDI, Merryhill Nevada, Lake Forest and Bank are parties to that certain Loan and Security Agreement dated August 30, 1995, as amended by amendments dated September 1, 1995, April 4, 1996, July 23, 1996, November 1, 1996, March 20, 1997, May 5, 1997, December 22, 1997 and April ___, 1998 (as amended, the "LOAN AGREEMENT"). B. EDUCO, Inc., Montessori House, Inc. and Another Generation Enterprises, Inc. were also parties to the Loan Agreement. However, (i) EDUCO, Inc. and Another Generation Enterprises, Inc. have merged into Nobel with Nobel being the surviving entity and (ii) Montessori House, Inc. merged into Merryhill with Merryhill being the surviving entity. C. Obligors and Bank desire to further amend the Loan Agreement in accordance with the terms and conditions hereof. D. Capitalized terms used herein and not otherwise defined shall have the meanings provided for such terms in the Loan Agreement. NOW, THEREFORE, intending to be legally bound hereby, the parties hereto agree as follows: 1. CONSENT TO TRANSACTION. ---------------------- a. Nobel (i) has entered into that certain Agreement and Plan of Organization ("AGREEMENT OF ORGANIZATION") with Developmental Resource Center, Inc. ("DRC") and Dr. Deborah Levy dated June 19, 1998, and (ii) intends to enter into that certain Agreement of Operation of Nobel Learning Solutions, L.L.C. ("AGREEMENT OF OPERATION") with DRC subsequent to the date hereof, pursuant to which, inter alia, Nobel and DRC will each acquire a membership interest in Learning Solutions. b. In exchange for its membership interest in Learning Solutions, Nobel intends to contribute to the capital of Learning Solutions an amount equal to Four Million Five Hundred Thousand ($4,500,000.00) as follows: i. Cash in the amount of Three Million Six Hundred Thousand Dollars ($3,600,000.00); and ii. A promissory note payable to Learning Solutions in the original principal amount of Nine Hundred Thousand Dollars ($900,000.00) (the "LEARNING SOLUTIONS NOTE"). c. DRC intends to transfer to Learning Solutions substantially all of DRC's assets in exchange for (i) cash in the amount of Three Million Six Hundred Thousand Dollars ($3,600,000.00), (ii) a promissory note from Learning Solutions payable to DRC in the original principal amount of Nine Hundred Thousand Dollars ($900,000.00) (the "DRC NOTE") and (iii) DRC's membership interest in Learning Solutions. The obligations of Learning Solutions under the DRC Note will be guaranteed by Nobel pursuant to a certain Guaranty of Payment and Performance (the "NOTE GUARANTY"). d. Learning Solutions intends to lease certain property pursuant to a certain Lease between Learning Solutions, as Tenant, and Levy Children's Trust, Joseph Wolfe, Trustee and Elliot G. and Deborah L. Levy, as Landlords (the "LEASE"). The obligations of Learning Solutions under the Lease will be guaranteed by Nobel pursuant to a certain Guaranty of Payment and Performance (the "LEASE GUARANTY"). e. Learning Solutions intends to enter into a certain Employment Agreement with Dr. Deborah Levy (the "EMPLOYMENT AGREEMENT"). The obligations of Learning Solutions under the Employment Agreement will be guaranteed by Nobel pursuant to a certain Guaranty of Payment and Performance (the "EMPLOYMENT AGREEMENT GUARANTY"). f. Nobel has delivered to Bank a fully executed copy of the Agreement of Organization and true and complete copies of drafts of each of the Agreement of Operation, Learning Solutions Note, DRC Note, Note Guaranty, Lease, Lease Guaranty, Employment Agreement and Employment Agreement Guaranty (collectively, the "TRANSACTION DOCUMENTS"). Bank consents to the execution and delivery of the Transaction Documents, in the forms as previously delivered to Bank, by the applicable Obligors and the performance by such Obligors of their respective obligations thereunder, subject to the terms and conditions set forth in such documents. Nobel will not agree to any amendments to the Transaction Documents without first obtaining the prior written consent of Bank. 2. CONSENT TO SUBORDINATED DEBT. ---------------------------- a. Obligors have entered into that certain Investment Agreement with Allied Capital Corporation ("ALLIED") dated June 30, 1998 (the "ALLIED INVESTMENT AGREEMENT") in connection with the extension by Allied to Obligors of a loan in the original principal amount of Ten Million Dollars ($10,000,000.00) (the "ALLIED LOAN"). b. Obligors' obligation to repay the Allied Loan and all interest thereon is evidenced by that certain Senior Subordinated Note dated June 30, 1998 from the Obligors to Allied in the original principal amount of Ten Million Dollars ($10,000,000.00) (the "ALLIED NOTE"). c. Obligors have delivered to Bank true and complete copies of the Allied Investment Agreement and the Allied Note (collectively, the "ALLIED DOCUMENTS"). d. Obligors, Allied and Bank have entered into that certain Subordination Agreement dated June 30, 1998 (the "SUBORDINATION AGREEMENT"). e. Bank consents to the execution and delivery of the Allied Documents by the Obligors and the performance by the Obligors of their obligations thereunder, subject to the terms and conditions set forth in the Subordination Agreement. 3. ADDITIONAL OBLIGORS. From and after the date hereof, Nobel Florida ------------------- and Learning Solutions shall each be an "OBLIGOR" under the Loan Agreement and shall be bound by all the terms and conditions thereof. Unless otherwise specifically restated for Nobel Florida and Learning Solutions hereunder, all representations, warranties and covenants under the Loan Agreement shall be deemed to be the representations, warranties and covenants of Nobel Florida and 2 Learning Solutions as if Nobel Florida and Learning Solutions were originally named as an "OBLIGOR" under the Loan Agreement, with such modifications thereto as may be necessary resulting from Learning Solutions' structure as a limited liability company. All references to Obligors in the Loan Agreement and the other Loan Documents shall hereafter be deemed to include Nobel Florida and Learning Solutions. 4. SECURITY. As security for the full and timely payment and performance -------- of all Bank Indebtedness, Nobel Florida and Learning Solutions hereby grant to Bank a security interest in all of the following: a. All of such Obligor's 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 Obligor's 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 Obligor's 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 Obligor's 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 Obligor's 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, trade names, 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, blueprints, patterns and all memoranda, notes and records with respect to any research and development, and all products and proceeds of any of the foregoing. d. All of such Obligor's 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 Obligor's 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. 3 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. 5. PLEDGE OF MEMBERSHIP INTEREST. As further security for the full and ------------------------------ timely payment of all Bank Indebtedness, Nobel shall grant to Bank a security interest in Nobel's membership interest in Learning Solutions. In connection therewith, Nobel shall execute and deliver to Bank all such documents as Bank may require including, with out limitation, the original of all certificates evidencing such membership interest. The term "COLLATERAL", as used in the Loan Agreement, shall hereafter be deemed to include, without limitation, all of the additional security described in this Amendment. 6. ADDITIONAL DOCUMENTS. Nobel Florida and Learning Solutions covenant -------------------- and agree to execute and deliver or cause to be executed and delivered to Bank any and all documents, agreements, corporate resolutions, certificates and opinions as Bank shall request in connection with the execution and delivery of this Amendment or any other documents in connection herewith, including, without limitation, an Allonge to Revolving and Term Facility Note A and Revolving and Term Facility Note B. 7. 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. represent and warrant that no Event of Default 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; e. 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 f. 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. 8. 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 out-of-pocket expenses. 4 9. 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 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. 10. 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. 11. 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. 12. BINDING EFFECT. This Amendment shall be binding upon and inure to the -------------- benefit of the parties hereto and their respective successors and assigns. 13. GOVERNING LAW. This Amendment shall be governed by and construed in ------------- accordance with the laws of the Commonwealth of Pennsylvania. 14. 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. [CORPORATE SEAL] By:_______________________________________ Name/Title:_______________________________ IMAGINE EDUCATIONAL PRODUCTS, INC. [CORPORATE SEAL] By:_______________________________________ Name/Title:________________________________ MERRYHILL SCHOOLS, INC. [CORPORATE SEAL] By:________________________________________ Name/Title:________________________________ NEDI, INC. [CORPORATE SEAL] By:________________________________________ Name/Tiltle 5 MERRYHILL SCHOOLS NEVADA, INC. [CORPORATE SEAL] By:_______________________________________________ Name/Title:_______________________________________ LAKE FORESTPARK MONTEMERRYHILL SCHOOLS NEVADA, INC. [CORPORATE SEAL] By:_______________________________________________ Name/Title:_______________________________________ NOBEL LEARNING SOLUTIONS, L.L.C. [CORPORATE SEAL] By:_______________________________________________ Name/Title:_______________________________________ NOBEL EDUCATION DYNAMICS FLORIDA, INC. [CORPORATE SEAL] By:_______________________________________________ Name/Title:_______________________________________ SUMMIT BANK By:_______________________________________________ Janet L. Helms, Vice-President 6 EX-4.11 4 INVESTMENT AGREEMENT DATED 06/30/98 EXHIBIT 4.11 _______________________________________ _______________________________________ NOBEL EDUCATION DYNAMICS, INC. INVESTMENT AGREEMENT $10,000,000 SENIOR SUBORDINATED NOTE DATED AS OF JUNE 30, 1998 FUNDS PROVIDED BY ALLIED CAPITAL CORPORATION _______________________________________ _______________________________________ INVESTMENT AGREEMENT THIS INVESTMENT AGREEMENT (this "Agreement") is made as of the 30th day of June, 1998 by and among: (i) Bad News Bears, Inc.Nobel Education Dynamics, Inc., a Delaware a California limited liability company corporation ("Nobel"); (ii) Imagine Educational Products, Inc., a Delaware corporation, Merryhill Schools, Inc., a California corporation, Merryhill Schools Nevada, Inc., a Nevada corporation, NEDI, Inc., a California corporation and Lake Forest Park Montessori School, Inc., a Washington corporation (collectively, the entities listed in this clause (ii) shall be referred to as the "Subsidiaries") (Nobel and the Subsidiaries, on a consolidated basis, being collectively referred to as the "Company"); and (iii) ALLIED CAPITAL CORPORATION and its successors and assigns ("Lender"). RECITALS: A. Lender wishes to invest the aggregate sum of Ten Million Dollars ($10,000,000) in the Company in exchange for a Senior Subordinated Note and certain warrants to purchase shares of Common Stock of the Company. B. The parties desire to set forth herein their understandings and agreements pertaining to this transaction. NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and the Company hereby agree as follows: ARTICLE I: DEFINITIONS 1.01 Definitions. In addition to the terms defined elsewhere herein, ----------- when used herein, the following capitalized terms shall have the meanings indicated: "Act of Bankruptcy," when used in reference to any Person, shall mean the occurrence of any of the following with respect to such Person: (i) such Person shall have made an assignment for the benefit of his or its creditors; (ii) such Person shall have admitted in writing his or its inability to pay his or its debts as they become due; (iii) such Person shall have filed a voluntary petition in bankruptcy; (iv) such Person shall have been adjudicated a bankrupt or insolvent; (v) such Person shall have filed any petition or answer seeking for himself or itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future Applicable Law pertinent to such circumstances; (vi) such Person shall have filed or shall file any answer admitting or not contesting the material allegations of a bankruptcy, insolvency or similar petition filed against such Person; (vii) such Person shall have sought or consented to, or acquiesced in, the appointment of any trustee, receiver, or liquidator of such Person or of all or any substantial part (20% or more) of the properties of such Person; (viii) 60 days shall have elapsed after the commencement of an action against such Person seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future Applicable Law without such action having been dismissed or without all orders or proceedings thereunder affecting the operations or the business of such Person having been stayed, or if a stay of any such order or proceedings shall thereafter be set aside and the action setting it aside shall not be timely appealed; or (ix) 60 days shall have expired after the appointment, without the consent or acquiescence of such Person of any trustee, receiver or liquidator of such Person or of all or any substantial part of the assets and properties of such Person without such appointment having been vacated. "Act of Dissolution," when used in reference to any Person (other than an individual) shall mean the occurrence of any action initiating, or any event that results in, the dissolution, liquidation, winding-up or termination of such Person. "Affiliate," when used in reference to any Person, shall mean any Person that controls, is controlled by, or is under common control of, the Person in question. For purposes of this definition, "control" shall mean the holding of 20% or more of the equity interest of the Person in question or the direct or indirect ability to manage the business and affairs of the Person in question. "Applicable Law(s)," when used in the singular, shall mean any applicable federal, state or local law, ordinance, order, regulation, rule or requirement of any governmental or quasi-governmental agency, instrumentality, board, commission, bureau or other authority having jurisdiction, and, when used in the plural, shall mean all such applicable federal, state and local laws, ordinances, orders, regulations, rules and requirements. "Bank" shall mean Summit Bank. "Bank Loan Agreement" shall mean the Loan and Security Agreement dated as of August 30, 1995, as amended, between Nobel and the Bank in the principal amount of not more than $35,000,000 for the revolving line of credit and in principal amount of not more than $35,000,000 for the term loan, together with interest, fees and expenses not in excess of the limits contained in the subordination agreement related thereto, and any modifications, renewals, extensions and refinancings of any such indebtedness. "Current Portion of Long Term Debt" shall mean the portion of the Company's long term debt that must be discharged within a one year period, determined in accordance with generally accepted accounting principles consistently applied. "Debt for Borrowed Money" shall mean total liabilities for borrowed money including the current and long-term portion of all senior debt, subordinated debt, seller notes arising from the Company's purchase of property or business assets, capital leases and other funded debts of the Company determined in accordance with generally accepted accounting principles consistently applied. -2- "Debt Service Coverage Ratio" shall mean EBITDA divided by Total Debt Service. "EBITDA" shall mean the Company's consolidated earnings before interest expense, tax expense on federal, state and local income taxes, depreciation expense and amortization expense, calculated in accordance with generally accepted accounting principles, consistently applied. "Exercise Price" shall mean the price of the Company's common stock equal to the trailing 30 day average of the high and low price in the Company's common stock on the date of Closing. "Existing Secured Debt" shall mean the secured indebtedness of the Company outstanding on the Closing Date in an aggregate principal amount of $21,504,735, as set forth on Exhibit 1.01A, which exhibit shall describe the ------------- lender, the borrower, the principal amount, the repayment terms and the collateral relating to each debt. "Loan Documents" shall mean, collectively, this Agreement, the Note and all other instruments and documents executed and delivered in connection with the Loan. "Loan Party(ies)" when used in the singular, shall mean the Company and any other party (other than the Lender) to any of the Loan Documents, and when used in the plural, shall mean the Company and all other parties to any of the Loan Documents (other than the Lender). "Net Income" shall mean the excess of revenues and gains of the Company for a period over all expenses and losses for the period of the Company, determined in accordance with generally accepted accounting principles consistently applied. "Net Worth" shall mean the excess of all tangible and intangible assets of the Company for a period over all liabilities of the Company for the period, determined in accordance with generally accepted accounting principles consistently applied. "Non Cash Expense" shall mean the Company's expenses for a period that do not require the expenditure of cash in such period, determined in accordance with generally accepted accounting principles consistently applied. "Obligations" shall mean, collectively, all of the Company's indebtedness, liabilities and obligations arising under this Agreement and each of the other Loan Documents and any renewals, modifications, and extensions thereof, including, but not limited to, the principal, interest, late charges and other sums due and owing under the Note and any other obligations of the Company to the Lender, including such other or additional financing that the Lender may extend to the Company at any time in the Lender's sole discretion. -3- "Permitted Encumbrances" shall mean any lien, mortgage, security interest or other encumbrance that results from any of the following: (i) liens for taxes and assessments not delinquent or actively being contested in good faith by the Company; (ii) deposits or pledges for goods or services made in the ordinary course of the Company's business; (iii) title of a bona fide lessor of tangible personal property to the Company; (iv) customary liens in favor of mechanics and materialmen which arise by operation of law and not by Company's agreement incurred in the ordinary course of Company's business; (v) liens, mortgages or security interests securing purchase money obligations, including Permitted Seller Debt, as defined below; (vi) liens, mortgages or security interests securing the Permitted Senior Debt, as defined below; (vii) liens, mortgages or security interests securing the Existing Secured Debt, as defined above; (viii) encumbrances created or arising pursuant to operating leases entered into in connection with real property constructed to the Company's specifications; and (ix) those liens and encumbrances described on Exhibit 1B ---------- attached hereto. "Permitted Seller Debt" shall mean all indebtedness of the Company to the seller of property to the Company which indebtedness is: (i) evidenced by that certain subordinated promissory note made by Nobel to Corydon Day Care Center, Inc., in the principal amount of $1,125,000 dated August 25, 1995; or (ii) evidenced by those certain subordinated promissory notes made by Nobel to Richard Goldman, Renee Goldman and Libo Fineberg in the aggregate principal amount of $750,000 each dated January 7, 1977. "Permitted Senior Debt" shall mean all indebtedness (as initially incurred or as refinanced) of the Company to a bank or other financial institution (whether funded or available pursuant to a written commitment, loan agreement, or other obligation) which as of the Closing Date is (i) secured by liens on all or a part of the property of the Company, (ii) a full recourse obligation of the Company, (iii) senior in right of repayment and lien priority to the Obligations hereunder and under the Note, pursuant to a subordination agreement executed by Lender, and (iv) in aggregate principal amount as specified in the Subordination Agreement, which principal amount may be increased following the Closing Date subject to the conditions set forth in Section 6.10(a). "Person" shall mean any individual, corporation, partnership, joint venture, limited liability company, unincorporated association, trust, or other legal entity. "Total Debt Service" shall mean the aggregate amount of installment payments of principal and interest paid or payable on Debt for Borrowed Money during the relevant period. "Transfer of Company's Business" shall mean one or more transactions undertaken by the Company resulting in either: (i) the Transfer (as defined below) of all or substantially all of the assets of the Company to any other Person (as defined above), other than a Wholly-Owned Affiliate of the Company existing as of the date hereof; (ii) a merger or consolidation of the Company with another Person where the Company is not the surviving or successor entity (other than a merger or consolidation of the Company into or with a Wholly-Owned Affiliate of the Company existing as of the date hereof) which results in a Person or -4- group of Persons acting in concert (other than any stockholders of the Company that own as of the date hereof in excess of 30% of the issued and outstanding Common Stock of the Company) owning stock in the surviving entity having more than 50% of the voting power in the election of directors; or (iii) 3the Transfer by any of the stockholders of the Company of any of his, its or their ownership interest in the Company, or the issuance or sale by the Company of any capital stock or securities convertible into or exchanged for capital stock, which results in a Person or group of Persons acting in concert (other than any stockholders of the Company that own as of the date hereof in excess of 30% of the issued and outstanding Common Stock of the Company) owning in excess of 50% of the outstanding capital stock of the Company. "Transfer" shall mean the sale, assignment, lease, transfer, mortgaging, encumbering or other disposition, whether voluntary or involuntary, and whether or not consideration is received therefor. "Wholly-Owned Affiliate," when used in reference to a particular Person, shall mean an Affiliate of that Person, where the Person in question holds 100% of the legal and beneficial interests in the Affiliate. ARTICLE II: LOAN TERMS 2.01 Funding. At the closing under this Agreement (the "Closing"), ------- Nobel and the Subsidiaries, jointly and severally, will borrow, and the Lender will lend, in immediately available funds, the aggregate sum of Two Million Six Hundred Fifty-Five Thousand and 00/100 DollarsTWO MILLION SIX HUNDRED FIFTY-FIVE THOUSAND AND 00/100 DOLLARS ($10,000,000) (the "Loan"), such indebtedness to be evidenced by, and to be repaid according to the terms of, a Senior Subordinated Note (the "Note") in the form attached hereto as Exhibit 2.01. The entire ------------ principal sum will be advanced at Closing. 2.02 Permitted Senior Debt; Permitted Seller Debt and Existing --------------------------------------------------------- Secured Debt. The indebtedness under the Note and the Lender's rights herein - ------------ and therein shall be subordinate as to right of payment only to Permitted Senior Debt. In connection therewith, the Bank and the Lender have entered into a Subordination Agreement in the form of Exhibit 2.02 (the "Subordination ------------ Agreement"). 2.03 Prepayment. The Note may be prepaid at any time, in whole or in ---------- part, without premium or penalty. 2.04 Due On Sale or Change in Control. The Company's obligations -------------------------------- under the Note and this Agreement are not assumable, and to the extent provided in the Note, the Note and all of the other Obligations are payable in full in connection with a Transfer of Company's Business. 2.05 Closing. Closing must occur on or before the close of business ------- on the date hereof, unless extended in writing by Lender, in Lender's sole discretion. -5- 2.06 Conditions Precedent to Lender's Obligations. The obligation of -------------------------------------------- Lender to make the Loan is subject to the satisfaction of the following conditions precedent at or prior to Closing (unless waived in writing by Lender prior to Closing): (a) Each of the representations and warranties contained in this Agreement must be true and accurate in all material respects as of the date of Closing, and the Company and all other Loan Parties (if any) must have performed all of their respective obligations hereunder, including execution and delivery of all of the documents, instruments, opinions and certificates required by this Agreement in such forms as are satisfactory to Lender and its counsel; and (b) Lender shall have completed a due diligence report that reflects favorably on the Company and its management. In this regard, the Company covenants and agrees to furnish to Lender such information as Lender may request in order to enable Lender to complete the required due diligence. 2.07 Funding; Remittance to Nobel as Agent. The Loan will be fully ------------------------------------- funded at Closing. All funding of the Loan shall be made by disbursement to Nobel, as agent for all of the Subsidiaries, and each of the Subsidiaries expressly consents to such funding arrangement and appoints Nobel as its attorney-in-fact to receive the proceeds of the Loan on its behalf. 2.08 Representations and Warranties of Lender. Lender represents and ---------------------------------------- warrants to the Company that: (a) it was not organized for the specific purpose of purchasing the Note and Warrants purchased by it hereunder; (b) the address of its principal place of business is 1666 K St., Suite 901, Washington, D.C. 20006; (c) the Note and Warrants to be purchased by it, and any shares of Common Stock (the "Warrant Shares") acquired upon exercise of such Warrants (collectively, the "Securities") are being or will be, as the case may be, acquired by Lender for its own account, not as a nominee or agent, and not with a view to resale or distribution within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder, and Lender will not distribute the Note, Warrants or Warrant Shares in violation of the Securities Act; (d) it understands that (i) the Securities have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act; (ii) the Securities must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; and (iii) the Securities will bear a legend as follows: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR UNDER -6- STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH STATE SECURITIES LAWS COVERING SUCH SECURITIES, OR AN OPINION OF COUNSEL TO THE COMPANY STATING WITHOUT RESERVATION THAT SUCH REGISTRATION IS NOT REQUIRED. (e) it is an "accredited investor" as such term is defined in Rule 501 promulgated under the Securities Act, and an "institutional investor" within the meaning of the Pennsylvania Securities Act of 1972 and the regulations promulgated thereunder; (f) its financial situation is such that it can afford to bear the economic risk of holding the Securities for an indefinite period of time; (g) its knowledge and experience in financial and business matters are such that it is capable of evaluating the merits and risks of its purchase of the Securities as contemplated by this Agreement; and (h) the purchase of the Securities by it has been duly and properly authorized and this Agreement has been duly executed by it or on its behalf. ARTICLE III: EQUITY 3.01 Sale of Warrants. At Closing, Nobel will issue and sell to ---------------- Lender certain Stock Purchase Warrants (the "Warrants") to acquire shares of Nobel's Common Stock, par value $.001 (the "Common Stock"), the form of which is set forth as Exhibit 3.01(b), which will entitle Lender to purchase 531,255 --------------- shares of Nobel's authorized but unissued Common Stock at the Exercise Price at any time after Closing. 3.02 Registration Rights. At Closing, Nobel and Lender will execute ------------------- the First Amended and Restated Registration Rights Agreement, the form of which is set forth as Exhibit 3.02. ------------ 3.03 Put Rights. ---------- (a) Price. At any time after that date which is five years from ----- the date of Closing and prior to the Expiration Date (as defined in the Warrant) if Nobel's Common Stock is not listed on a national stock exchange or included on The Nasdaq Stock Market, Lender may by written demand require Nobel to purchase all or a portion of its Warrants and the shares of stock issued thereunder at the highest of the following prices (the "Put Price") (in each case deducting the Exercise Price of the Warrant to determine the Put Price), determined at the time of the exercise of this right: -7- (i) five times EBITDA for the year just ended, plus cash but less total debt, times the Lender's percentage of equity ownership or potential equity ownership of Nobel's capital stock, as the case may be, as determined on a fully diluted basis and expressed as a decimal fraction; (ii) 15 times the Company's profits after taxes for the year just ended, times the Lender's percentage of equity ownership or potential equity ownership of Nobel's capital stock, as the case may be, as determined on a fully diluted basis and expressed as a decimal fraction; or (iii) The Appraised Value, pursuant to Section 3.03(b) below, of the Lender's equity ownership and potential equity ownership of Nobel's capital stock, as the case may be, which appraisal shall be based on determinations of earnings and book value and other appropriate items. The rights set forth in this Section 3.03 (a) shall not be effective following the occurrence of an event contemplated by Section 4 of the Warrant, unless the property thereupon issuable upon exercise or conversion of the Warrant includes common stock or other securities convertible into or exercisable for common stock. (b) Appraised Value. The "Appraised Value" shall be determined --------------- by the following method: (i) Each of the Company and Lender shall select an appraiser who shall each determine a value; (ii) If the values determined by such two appraisers are the same (or the lower value determined by an appraiser is within one percent of the value determined by the other), then such value (or the average of such two values) shall be the Appraised Value; (iii) If the foregoing two appraisals are not the same and the lower value determined by an appraiser differs by more than one percent of the value determined by the other, then the appraisers shall together select a third appraiser to determine a value; (iv) If the determination of the third appraiser is greater than the largest of the first two appraisals or less than the smallest of the first two appraisals, then the average of the first two appraisals shall be the Appraised Value; and -8- (v) If the determination of the third appraiser is between the first two appraisals, then the average of the third appraisal and the closest of the first two appraisals shall be the Appraised Value. Each party shall pay the fees and costs of the appraiser it selects, and the fees and costs of the third appraiser, if any, shall be paid equally by Company and Lender. (c) Remedies. Failure to comply with the terms of the put right -------- set forth in this Section 3.03 within 30 days of Lender's demand thereunder shall entitle Lender to all of the rights and remedies available to Lender under this Agreement and at law or equity, including, without limitation, the right of specific performance. (d) Financing of Put. Upon the exercise of the put rights ---------------- described in this section, the Company shall pay the Put Price in cash, to the extent the Company (i) has funds legally available, and (ii) has available cash or short term investments which may be liquidated. To the extent the Company is unable to pay the Put Price in cash, Lender will provide financing to the Company to pay the Put Price through subordinated debt without equity at an interest rate of 12% and on other commercially reasonable terms. The Company shall not be required to finance the Put Price by issuing additional equity securities. (e) Limitation on Exercise of Put. In no event may Lender ----------------------------- exercise its rights hereunder if doing so would cause the Company to violate the terms of the Bank Loan Agreement, or any successor document, or any similar agreement entered into by the Company with a lender of Permitted Senior Debt. 3.04 Personal Gain Upon Sale. In the event of a Transfer of ----------------------- Company's Business, then any personal gain relating to such Transfer of Company's Business and flowing to any officer, director or principal shareholder of the Company otherwise than through direct payment for their equity ownership in the Company, or through dividends or return of capital paid in respect thereof or through severance arrangements entered into prior to commencement of negotiations with respect to such Transfer, shall be added to the direct consideration for the sale in calculating the total sale price for purposes of determining any share thereof which the Lender may be entitled to receive. Such personal gain shall include without limitation any salaries or consulting fees in excess of fair market compensation payable in connection with the Company's operations after such sale or any points or fees paid to induce such sale. In the event of any disputes arising hereunder, the parties shall obtain a fairness opinion from an investment banker chosen by the parties. In the event the parties cannot agree on an investment banker, the Company shall select one investment banker, Lender shall select one investment banker and the two investment bankers shall select a third investment banker who shall be retained to render the fairness opinion. The Company and Lender shall equally share the expenses related hereto. -9- ARTICLE IV: REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this transaction, the Company represents and warrants to Lender as follows (which representations and warranties shall survive the execution and delivery of this Agreement): 4.01 Organization. ------------ (a) Nobel and each of the Subsidiaries is a corporation formed, validly existing and in good standing under the laws of the jurisdiction of its formation. Attached hereto as Exhibit 4.01(a) are true, correct and complete --------------- copies of the certificate of incorporation, bylaws, all amendments to the foregoing and all other constituent documents of the Company, and all amendments and supplements to any of the foregoing (collectively, the "Company Constituent Documents"). All of the Company Constituent Documents are in full force and effect as of the date hereof. (b) The authorized capital stock of Nobel (immediately prior to the Closing) consists of 20,000,000 shares of Common Stock, $.001 par value per share of which 6,121,365 shares are issued and outstanding; and 10,000,000 shares of Preferred Stock, $.001 par value per share, of which (i) 2,500,000 shares are classified as Series A Convertible Preferred Stock, 1,028,694.11 of which shares are issued and outstanding; (ii) 2,500,000 shares are classified as Series C Convertible Preferred Stock of which 2,500,000 shares are issued and outstanding; and (iii) 1,063,830 shares are classified as Series D Convertible Preferred Stock, 1,063,830 of which are issued and outstanding. All of the issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in Exhibit 4.01(b) hereto or provided in --------------- this Agreement, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company is authorized or outstanding, (ii) there is no commitment of the Company to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of the Company, and (iii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. Except as provided in this Agreement or as disclosed in the Exhibits hereto, no person or entity is entitled to (x) any preemptive or similar right with respect to the issuance of any capital stock of the Company, or (y) any rights with respect to the registration of any capital stock of the Company under the Securities Act. All of the issued and outstanding shares of Common Stock and Preferred Stock have been offered, issued and sold by the Company in compliance with applicable Federal and state securities laws. 4.02 Qualification. The Company is duly qualified to conduct ------------- business as it is currently being conducted and is in good standing as a foreign corporation in all jurisdictions in which the nature of its business or location of its properties require such qualification, except -10- where failure to be so qualified or in good standing would not have a materially adverse effect on the Company's business or financial condition, and except as set forth on Exhibit 4.02 hereto. ------------ 4.03 Power and Authority. The Company has full corporate power and ------------------- authority to enter into this Agreement and each of the other Loan Documents, to incur the Obligations as contemplated hereby, and to carry out the provisions of this Agreement and each of the other Loan Documents. The Company has taken all corporation action necessary for the execution and delivery of this Agreement and each of the other Loan Documents and for the performance by Company of each of its obligations hereunder and thereunder, as evidenced by the resolution(s) of the Company's Board of Directors or other authorization set forth in Exhibit ------- 4.03 attached hereto. - ---- 4.04 Enforceability. Upon execution and delivery by each of the -------------- parties thereto, this Agreement and each of the other Loan Documents shall be the legal, valid and binding obligations of the Company and each other Loan Party, to the extent the Company or such other Loan Party(ies) is a party thereto and shall be enforceable against the Company and such other Loan Party(ies) in accordance with its respective terms. The Company has caused its counsel to deliver an opinion of counsel in the form attached hereto as Exhibit ------- 4.04. - ---- 4.05 Litigation. The Company has not been made a party to or, to the ---------- best of the Company's knowledge, threatened by any suits, actions, claims, investigations by governmental bodies or legal, administrative, arbitration or mediation proceedings, except as set forth in the schedule of litigation attached hereto as Exhibit 4.05 ("Litigation Schedule"), and except where such ------------ litigation would not have a materially adverse effect on the Company's business or financial condition. The Company does not know of any basis or grounds for any such suit, action, claim, investigation or proceeding. 4.06 Orders; Decrees; Judgments. Except as set forth on Exhibit -------------------------- ------- 4.06, there are no outstanding orders, judgments, writs, injunctions or decrees - ---- of any court, government agency or arbitration or mediation panel or tribunal against or affecting the Company any other Loan Party, or any of the other properties, assets or business of the Company or any other Loan Party. 4.07 Non-Contravention. Except for matters set out in the Litigation ----------------- Schedule, neither the Company nor any other Loan Party is in breach of, default under, or in violation of: (a) any Applicable Law, decree, or order which may materially and adversely affect them; or (b) any deed, lease, loan agreement, commitment, bond, note, deed of trust, restrictive covenant, license, indenture, contract, or other agreement, instrument or obligation to which any of them is a party or by which any of them is bound or to which any of their respective assets are subject, except where such breach, default or violation would not have a material and adverse effect on the Company's business or financial condition. Neither the execution and delivery of this Agreement and the Loan Documents nor the performance by the Company or any other Loan Party of their respective obligations hereunder and thereunder will cause any such breach, default or violation or will require the consent or approval of any court, governmental or regulatory agency or body, except as expressly contemplated by the terms of this Agreement. -11- 4.08 Company's Business. The Company is primarily engaged in the ------------------ business of operating educational institutions and child care facilities. 4.09 Title. The Company has good, complete, indefeasible and ----- marketable title to, and ownership of, all of the real or personal property it purports to own (if any), free and clear of all liens, defects, claims, security interests and encumbrances other than the Permitted Encumbrances. 4.10 Taxes. The Company has filed all federal, state and local tax ----- returns which are required to be filed, and the Company has duly paid or fully reserved for all taxes or installments thereof (including any interest or penalties) as and when due pursuant to the filed returns or pursuant to any levy or assessment received by the Company. The Company has previously delivered to Lender true, correct and complete copies of all tax returns (including all required schedules) for the Company for tax year 1997. 4.11 Financial Condition. ------------------- (a) Attached hereto as Exhibit 4.11(a) is a true and complete --------------- copy of the audited consolidated financial statements summarizing the financial results of operation of the Company for the fiscal year ending December 31, 1997 provided to Lender by the Company (the "Audited Financials"). The Audited Financials were prepared in accordance with generally accepted accounting principles consistently applied, and present fairly, in all material respects, the consolidated financial position of the Company and the results of its operations at such dates and for the periods then ended. The auditors have issued an unqualified statement to the Company concerning the Audited Financials, a copy of which is included with the Audited Financials in Exhibit ------- 4.11(a) attached hereto; and - ------- (b) Attached hereto as Exhibit 4.11(b) is a true and complete copy of --------------- preliminary, unaudited consolidated financial statements summarizing the financial results of operation of the Company for the three-month period ended March 31, 1998 (the "Interim Financials"). The Interim Financials were prepared in accordance with generally accepted accounting principles consistently applied, and present fairly, in all material respects, the consolidated financial position of the Company and the results of its operations at such dates and for the periods then ended, subject to normal year-end adjustments. 4.12 Solvency. As of the date hereof, giving effect to the -------- transactions contemplated by this Agreement, the present fair saleable value of the Company's assets as a going concern is greater than the amount required to pay the Company's total indebtedness (contingent or otherwise), and is greater than the amount that will be required to pay such indebtedness as it matures and as it becomes absolute and matured. The transactions contemplated hereby were effectuated without actual intent to hinder, delay or defraud present or future creditors of the Company; it is the Company's express intention that it will maintain a solvent financial condition, giving effect to the debt incurred hereunder, as long as any of the Obligations remain outstanding or the Company is obligated to the Lender in any other manner -12- whatsoever. The Company has sufficient capital to carry on its business and transactions as now conducted and as planned to be conducted in the future. 4.13 Material Leases. Attached hereto as Exhibit 4.13 is an accurate --------------- ------------ and complete list of all material leases of Real Property to which the Company is a party or by which the Company or any of the Company's assets is bound, together with all amendments or supplements thereto (collectively, the "Leases") which list provides with respect to each lease the landlord, commencement date, rent and termination date. True and complete copies of each of the Leases have been made available to Lender prior to the date hereof. To the best of the Company's knowledge, each of the Leases is valid, binding and enforceable in accordance with its terms and remains in full force and effect. Except as set forth on Exhibit 4.13, the Company is not in default or alleged to be in default ------------ with respect to any of its obligations under any of the Leases (nor would be in default or alleged to be in default with the giving of notice, passage of time, or both), and, to the best of the Company's knowledge, no party other than the Company is in default with respect to such party's obligations under any of the Leases (or would be in default or alleged to be in default with the giving of notice, passage of time, or both). The Company's possession of any property leased by it has not been disturbed, nor has any claim been asserted against the Company that is or could be adverse to the Company's interests under any of the Leases. None of the Leases is subject to any rights of set-off, recoupment or similar deduction or offset. Except as disclosed on Exhibit 4.13, the Company ------------ has not assigned or encumbered any of its rights, title or interest in or under any of the Leases nor agreed to any oral modifications of any of the provisions of any of the Leases. 4.14 Material Contracts. To the Company's knowledge, it is not in ------------------ default with respect to any of its obligations under any material contract. No claim has been asserted against the Company that is or could be adverse to the Company's interest thereunder. The Company has previously delivered to Lender an accurate and complete list of all facilities for borrowed money in existence on the date hereof and not being paid off on or prior to the date of the Closing, including financing arrangements with sellers in connection with acquisitions by the Company. 4.15 [INTENTIONALLY DELETED.] 4.16 [INTENTIONALLY DELETED.] 4.17 No Untrue Statements or Omissions. Neither this Agreement nor --------------------------------- the Exhibits attached hereto contains any untrue statement of material fact or, to the best of the Company's knowledge, omits any statement of material fact necessary to make the statements contained herein or therein not misleading. 4.18 Management History. Except as set forth on Exhibit 4.18, during ------------------ ------------ the past five years (with respect to non-management directors) and during the past ten years (with respect to management directors), no director, officer or member of management of the Company (including, but not limited to, any other Loan Party) has been arrested for, or convicted of, any criminal offense, has been the subject of an Act of Bankruptcy or has served as an officer, director, general partner, member, or manager of any Person that has been or is the subject of an Act of Bankruptcy or an Act of Dissolution. With respect to non- management directors, this -13- representation is made to the extent of the Company's knowledge, and based solely on questionnaires completed in February 1998 by such non-management directors. 4.19 Nobel Affiliates and Subsidiaries. Attached hereto as Exhibit --------------------------------- ------- 4.19 is an accurate and complete list of all Affiliates of Nobel, including all - ---- of its subsidiaries. 4.20 Other Debts. Except for the debts reflected on the balance ----------- sheets included in the Audited Financials and Interim Financials attached hereto as Exhibit 4.11(a) and Exhibit 4.11(b), respectively, the Company has no --------------- --------------- indebtedness, liabilities or obligations of any nature at the dates of the balance sheets included in such Audited Financials and Interim Financials that were required under generally accepted accounting principles to be reflected on such balance sheets on such dates (whether liquidated or unliquidated, mature or not yet mature, absolute or contingent, secured or unsecured). 4.21 Ownership and Control. Attached hereto as Exhibit 4.21 is an --------------------- ------------ accurate and complete list of the following information: a list of all officers, directors and stockholders of the Company that, to the best of the Company's knowledge, hold greater than five percent (5%) of the capital stock of Nobel on a fully-diluted basis. Except as listed in Exhibit 4.01(b) attached --------------- hereto, there are no outstanding options, rights of first refusal or other preemptive rights with respect to equity securities granted or conveyed by the Company to any person as of the date hereof. 4.22 No Material Change. Except as set forth on Exhibit 4.22 ------------------ ------------ attached hereto, or elsewhere in this Agreement or any Exhibit to this Agreement, since the ending date of the Interim Financials, the Company has not: (i) suffered any material change in its condition (financial or otherwise) or its overall business prospects; (ii) entered into any material transactions or incurred any debt for borrowed money other than the Obligations; (iii) sustained any material loss or damage to its real property or personal property, whether or not insured; (iv) suffered any material interference with its business or operations, present or proposed; and (v) made any Transfer, abandonment or other disposition of any of its real property or personal property or any interest therein or relating thereto, that is material to the financial position or prospects of the Company. 4.23 No Side Agreements. Neither the Company nor any director, ------------------ officer nor members of management of the Company (collectively, "Company Management") are party to any material agreement outside the ordinary course of the Company's business with any Person (including Lender) other than pursuant to formal, written contracts executed by the Company. Other than this Agreement, the other Loan Documents, and documents relating to transactions described herein, the Company's SEC filings and in the Exhibits, neither the Company, nor Company Management is a party to any material agreement calling for any action by the Company or such party outside the ordinary course of their respective businesses. To the best of the Company's knowledge, there exists no agreement or understanding calling for any payment or consideration from a customer or supplier of the Company to the Company Management with respect to any transaction between the Company and such supplier or customer. Except for arrangements attached hereto as Exhibit 4.23, no Affiliate of the Company (other ------------ than the -14- subsidiaries (whether or not Subsidiaries) and The Sagemont School, L.L.C.) directly or indirectly, transacts any business with the Company, except for employment arrangements covered by the terms of Section 6.08 below. 4.24 SBA Forms and Representations. Attached hereto as Exhibits ----------------------------- -------- 4.24(a), 4.24(b), 4.24(c) and 4.24(d), respectively, are complete copies of the - ------------------------------------- Size Status Declaration (SBA Form 480), the Assurance of Compliance for Non- Discrimination (SBA Form 652), the Portfolio Financing Report (SBA Form 1031) and the Economic Impact Assessment signed where required by the Company and furnished to Lender (collectively, the "SBA Forms"). 4.25 Investment Company Act Representations. The Company is not and -------------------------------------- does not intend to become, an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "40 Act"), and neither the Company nor any of its officers, directors, partners or controlling persons is an "associate" of any Lender, as such terms are defined in Section 107.3 of the amended Regulations promulgated under the SBA Act, nor an "affiliated person" of any Lender, as such term is defined in Section 2(a)(3) of the 40 Act. 4.26 General Legal Compliance. To the best of the Company's ------------------------ knowledge, the Company is not in violation of any Applicable Law that would apply to it or to its business, the violation of which would have a material adverse effect on the Company, its business, or its prospects. 4.27 Environmental Legal Compliance. Without limiting the generality ------------------------------ of the representation and warranty made in Section 4.26 above, to the best of the Company's knowledge, the Company is not in violation of any applicable Environmental Law, which violation would have a material adverse effect on the Company or its business or prospects, and the Company has not been notified of any action, suit, proceeding or investigation which calls into question compliance by the Company with any Environmental Laws or which seeks to suspend, revoke or terminate any license, permit or approval necessary for the generation, handling, storage, treatment or disposal of any Hazardous Material. As used in this Agreement, the term "Environmental Law" shall mean, collectively, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. (S)9601 et seq. ("CERCLA"); the Solid Waste Disposal Act, as amended, 42 U.S.C. (S)6901 et seq.("SWDA") including the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. (S)6901 et seq. ("RCRA"); the Clean Water Act, as amended, 42 U.S.C. (S)1251 et seq.("CWA"); the Clean Air Act, as amended, 42 U.S.C. (S)7401 et seq.; any "superfund" or "superlien" law; and any other Applicable Law regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, and the term "Hazardous Material" shall mean and include any hazardous, toxic or dangerous waste, substance or material, the generation, handling, storage, disposal, treatment or emission of which is subject to any Environmental Law. 4.28 Employee Benefit Matters. There is no existing single-employer ------------------------ plan defined in Section 4021(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") as to which the Company is, or immediately after the Closing will be, an -15- "employer" or a "substantial employer" as defined in Sections 3(5) and 4001(a)(2) of ERISA, respectively. Attached hereto as Exhibit 4.28 is an ------------ accurate and complete list of each plan described in Section 4021(a) of ERISA, as to which the Company is assuming any liability or will be liable to make contributions or for the payment of benefits. The Company has made available to Lender true and complete copies of each of the plans listed on Exhibit 4.28 ------------ attached hereto. To the best knowledge of the Company, there have been no "reportable events" as set forth in Section 4043(b) of ERISA with respect to any such plan, and no termination of any such plan since the effective date of ERISA which could result in any tax, penalty or liability being imposed upon the Company. The Company has not participated in, and the execution and delivery of this Agreement by the Company will not involve, any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1986, as amended) that could subject the Company to any tax or penalty imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. To the best knowledge of the Company, no predecessor-in-interest to the Company has participated in any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1986, as amended) that could subject the Company to any tax or penalty imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. Since the effective date of ERISA, neither the Company, nor, to the best knowledge of the Company, any predecessor-in-interest to the Company, has incurred any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, to which the Company could be subject or for which it might be liable. The Company is not, and immediately after the Closing will not be, a party to, and none of the operations of the Company is, or after the Closing will be, covered by, a "multiemployer plan", as defined in Section 3(37) of ERISA. 4.29 Collective Bargaining. The Company is not, and after the --------------------- Closing will not be, a party to or subject to any collective bargaining agreements or union contracts. There are no labor disputes pending or threatened against the Company or, to the best knowledge of the Company, between the Company and its employees which have affected, or so far as the Company can reasonably foresee may affect, materially and adversely the business or condition of the Company or the Company's business or prospects. 4.30 Employees. Attached hereto as Exhibit 4.30 is an accurate and --------- ------------ complete list of all employment and compensation contracts, including all retirement benefit agreements not disclosed on Exhibit 4.28, between the Company ------------ and officers and executives of the Company. The Company has made available to the Lender accurate and complete copies of all such contracts. No officer of the Company has advised the Company (orally or in writing) that he or she intends to terminate employment with the Company. 4.31 Brokers. The Company has no knowledge of any brokerage fees due ------- for the transactions contemplated hereby and will indemnify Lender for any claims with respect thereto. -16- ARTICLE V: AFFIRMATIVE COVENANTS Until the Note is repaid in full and each of the other Obligations has been satisfied in full and discharged and as long as Lender holds an equity interest in Nobel, the Company covenants and agrees to do all of the following: 5.01 Monthly Financials. The Company shall forward, or cause to be ------------------ forwarded, to Lender the Company's monthly year-to-date financial statements prepared in accordance with generally accepted accounting principles, consistently applied within 45 days from the end of each month, together with a monthly one-page management summary description of operations. In addition, the Company shall forward, or cause to be forwarded, to Lender any materials distributed to the members of the board of directors. 5.02 Certification of Non-Default. The Company shall provide to ---------------------------- Lender in writing each calendar quarter an officer's certificate, signed by Nobel's President or Chief Financial Officer or Comptroller, certifying that no Event of Default has occurred under this Agreement, or if any such Event of Default exists, stating the nature of such Event of Default. The Company shall provide to Lender in writing at the end of each fiscal year a certificate, signed by the Company's independent auditors, certifying that no Event of Default has occurred under Section 5.07 of this Agreement, or if any such Event of Default exists, stating the nature of such Event of Default. 5.03 Notice of Filings. Except as otherwise provided herein, within ----------------- 30 days of filing, the Company shall provide Lender with copies of all returns and documents (other than federal, state and local tax returns, which shall be provided only upon request) filed by the Company with federal, state or local government agencies, including, without limitation, the U.S. Internal Revenue Service, the U.S. Environmental Protection Agency, the U.S. Occupational Safety & Health Administration, the U.S. Small Business Administration and the U.S. Securities & Exchange Commission (the "SEC"). 5.04 Forms 10-Q and 10-K. The Company shall provide to Lender all ------------------- SEC Form 10-Q's within 50 days after the end of each quarterly period (except the last quarter of each fiscal year) and Form 10-K's within 95 days after the end of each fiscal year; provided, however, that any extension for filing such forms pursuant to SEC and NASDAQ regulations will automatically extend the above time periods for the length of the extension. 5.05 Notice of Litigation. The Company shall notify Lender of any -------------------- material litigation to which the Company is a party by mailing to Lender, by U.S. registered mail, within 30 days of receipt thereof, a copy of the Complaint, Motion for Judgment or other such pleadings served on or by the Company. As to any material litigation to which the Company is not a party but which could substantially affect the operation of the Company, the Company shall notify Lender by mailing to Lender, by U.S. registered mail, a copy of all pleadings obtained by the Company in regard to such litigation, or if no pleadings are obtained, a letter setting out the facts known about the litigation within 30 days of receipt thereof; provided, however, that the -17- Company shall not be obliged by this Section 5.05 to give notice of suits where the Company is a creditor seeking collection of one or more accounts receivable. 5.06 Notice of Defaults or Judgments. The Company shall give the ------------------------------- Lenders notice of any default declared with respect to any material lease or loan of the Company or any judgment entered against the Company, by mailing an accurate and complete copy thereof to Lender within 10 days of receipt thereof by the Company. 5.07 Financial Covenants. The Company shall, at all times, comply ------------------- with and maintain the financial covenants set forth below: (a) Debt for Borrowed Money. The Company will maintain on a ----------------------- consolidated basis a ratio of Debt for Borrowed Money to EBITDA of not more than 4.6 to 1.0 as of the end of each fiscal quarter, calculated on a rolling four quarter basis. (b) Debt Service Coverage Ratio. The Company will maintain on a ---------------------------- consolidated and rolling 12 month basis a Debt Service Coverage Ratio of not less than 1.2 to 1.0 as of the date of Closing and as of the last day of each calendar quarter thereafter. 5.08 Insurance. Attached hereto as Exhibit 5.08 is an accurate and --------- ------------ complete list of all insurance policies and binders presently providing coverage to the Company or any of its assets. The Company has made available to Lender copies of appropriate insurance certificates and accurate and complete copies of the insurance binders or policies for all of the insurance listed in Exhibit ------- 5.08. At all times until all of the Obligations have been satisfied in full, - ---- the Company shall maintain all such insurance or equivalent replacement insurance in full force and effect. 5.09 Use of Proceeds. The Company shall use the proceeds from the --------------- Note to reduce the outstanding balance of senior revolving term debt, for expansion capital and for general corporate purposes. 5.10 Payments and Obligations. The Company shall promptly make all ------------------------ payments of principal, interest and other charges as and when due under the Note, shall timely perform or comply with, as the case may be, all of the other Obligations, and shall comply in all respects with all terms, conditions and covenants of this Agreement and the other Loan Documents. 5.11 Other Debts. The Company shall promptly make all payments of ----------- principal and interest as and when due under any other debt obligations of the Company, but nothing herein shall require the Company to pay any amounts that it in good faith believes is not due and owing or as to which it believes it has adequate defenses; provided, however, that this covenant shall not be construed as permitting any other debt obligations of the Company or as permitting the making of any payments on account of any other debt obligations of the Company that are not otherwise permitted by the terms and conditions of this Agreement. -18- 5.12 Information Requests. The Company shall furnish from time to -------------------- time to Lender all information Lender may reasonably request to enable Lender to prepare and file any form required of Lender by the SEC, or any other regulatory authority. 5.13 Credit Checks; Access to Records. The Company shall permit any -------------------------------- authorized representative(s) of Lender and their attorney(s) and accountant(s) to obtain credit and other background information on the Company, and to inspect, examine and make copies and abstracts of the books of account and records of the Company at reasonable times during normal business hours. The Company shall allow Lender or its agent(s) to conduct reasonable interviews with the Company's outside accountants, who, by this covenant, are hereby irrevocably instructed to respond to such inquiries as fully as if made by the Company itself. Lender shall, and shall cause its authorized representatives, attorneys and accountants to, hold all non-public information furnished to them under this Agreement pertaining to the Company or its directors and officers in confidence and shall not disclose it to any person, other than Lender's counsel, accountants, or financial advisers, or use it for any purpose other than in connection with Lender's investment in the Company. 5.14 Maintain Copies. The Company shall maintain an original or a --------------- true copy of this Agreement and any modifications hereof, which shall be available for inspection as called for herein or in the Note. 5.15 Maintain Existence. The Company shall take or cause to be taken ------------------ all steps and perform or cause to be performed all actions necessary or appropriate to preserve and keep in full force and effect its existence as a corporation and its right to conduct its business in a prudent and lawful manner in all jurisdictions in which it conducts business. Nothing in this Section 5.15 shall prohibit a Subsidiary from merging, consolidating or dissolving with or into (i) Nobel or another Subsidiary, or (ii) any other entity, to the extent necessary to complete an acquisition of such entity or its assets by the Company. 5.16 Board of Directors Meetings. Nobel shall hold meetings of its --------------------------- Board of Directors not less than once per quarter, and shall provide Lender with reasonable notice of such meetings. If requested by Lender, Nobel shall use its best efforts to cause the election to Nobel's Board of Directors one member nominated by Lender. Certain stockholders of Nobel have agreed to vote for one member of Nobel's Board of Directors nominated by Lender. If Lender chooses not to participate on the Board, it shall have the right to have an observer attend each Board meeting. Nobel shall reimburse the Lender Board member or one observer from Lender for his reasonable out-of-pocket travel and lodging expenses. The Lender representative on the Board of Directors or Lender observer at Board meetings shall be either Thomas Westbrook or Cabell Williams, or such other person designated by Lender as may be reasonably satisfactory to the Company. Notwithstanding the foregoing, no provision of this Section 5.16 or this Agreement shall entitle Lender to more than one representative on Nobel's Board of Directors or more than one observer at Board meetings. 5.17 MIS Systems. The Company shall provide to Lender a draft ----------- management information systems ("MIS") implementation plan within six months from Closing for -19- establishing adequate integrated management information systems for the Company, such plan to include specific milestones with reasonable periods of time to achieve such milestones. The Company shall work diligently to finalize and implement such MIS plan. 5.18 Termination of Affirmative Covenants. At such time as the Note ------------------------------------ has been paid in full and the Warrants have not been exercised (each to the extent as provided in the following sentence), the obligations set forth in Sections 5.02, 5.03, 5.04, 5.07, 5.08 and 5.09 shall terminate. Thereafter, at such time as Lender has purchased at least 75% of the shares of Common Stock purchasable under the Warrants, or the Warrants shall have expired, all of the remaining obligations set forth in this Article V shall terminate. ARTICLE VI: NEGATIVE COVENANTS Until the Note is repaid in full and each of the other Obligations has been satisfied in full and discharged and so long as Lender holds an equity interest in the Company, the Company covenants and agrees with Lender not to do --- any of the following, without the prior written consent of Lender (which consent may be withheld by Lender in Lender's discretion for any reason whatsoever, except in the case of the action contemplated by Section 6.01 as to which Lender agrees not to unreasonably withhold its approval): 6.01 Change of Chairman and Chief Executive Officer. Nobel shall not ---------------------------------------------- change its Chairman or Chief Executive Officer, A.J. Clegg (except due to his death or disability) except if the Board of Directors at Nobel replaces A. J. Clegg with a new candidate who is reasonably acceptable to Lender. If Nobel violates this covenant, Lender has the option, within 90 days after notification of such event, to demand that the Company purchase all or a portion of the Note at a price equal to 100% of its par value. 6.02 Dividends. Nobel shall not declare or pay any cash, stock or --------- other dividend or distribution on (i) any common stock without Lender's approval or (ii) on any preferred stock, so long as a material default hereunder, or under the Note, exists. 6.03 Change of Site, Etc. The Company shall not expend or invest any -------------------- funds in any manner not related to the education or child care business. 6.04 Judgments. The Company shall not permit any material judgment --------- obtained against the Company to remain unpaid for over thirty 30 days without obtaining a stay of execution or bond. 6.05 Sale or Disposition. The Company shall not Transfer or in any ------------------- other manner convey or dispose of any equitable, beneficial or legal interest in any of its assets, other than in the ordinary course of business, if the total operating income generated by the Company in the most recently completed 12 months by such assets sold in any 12 month period would exceed 25% of Nobel's operating income for the most recently completed 12 months. -20- 6.06 No Encumbrances. The Company shall not permit to exist against --------------- any of its material assets any lien, mortgage, pledge, security interest, title retention device, or other encumbrance, except for the Permitted Encumbrances. 6.07 Major Expenditures. The Company shall not make expenditures for ------------------ capital improvements, acquisitions or otherwise in any fiscal year in excess of Five Hundred Thousand Dollars ($500,000), unless and to the extent such expenditures are included in an annual budget approved by the Company's Board of Directors each year (the "Annual Budget"), or made in connection with acquisitions that have been approved by the Board of Directors of the Company. 6.08 Employee Compensation. The Company shall not pay wages, --------------------- salaries, loans, advances, or other payments to, or on behalf of, any officer of the Company (any such, "Employee Compensation") which, in total, are in excess of the amounts established by a Compensation Committee, of which a majority of the committee members are non-management directors. 6.09 Inside Transactions; Mergers. ---------------------------- (a) The Company shall not purchase or sell any property or services, nor borrow or lend money or property from or to, or co-invest in, any transaction with any officer, director, or Affiliate (other than the subsidiaries (whether or not Subsidiaries), and The Sagemont School, L.L.C.) of the Company, unless such transaction has been approved by a majority of the directors of the Company who are not parties to the transaction in question, and except for employment compensation arrangements consistent with the requirements imposed pursuant to Section 6.08 above. (b) The Company shall not merge or consolidate with or into any entity unless Nobel is the surviving entity or controls the consolidated entity, remains a U. S. corporation and, after giving effect to such merger or consolidation, no Event of Default exists. 6.10 Additional Senior Debt. ---------------------- (a) From and after the date hereof, the Company may not increase Permitted Senior Debt unless: (i) the Company provides pro forma financial statements to Lender showing the 12-month period ended with the month in which the additional senior debt is to be provided and assuming it was provided to the Company in the first day of such 12-month period; and (ii) Such pro forma financial statements demonstrate that, giving effect to such senior debt financing, the Company would have been in compliance with the applicable financial covenants, set forth in Section 5.07 as of the end of the 12-month period depicted in such pro forma financial statements. -21- (b) In the event the Company incurs Permitted Senior Debt in compliance with this Agreement, Lender hereby agrees to execute a subordination agreement with the lender of the Permitted Senior Debt on terms substantially similar to those of the Subordination Agreement, or otherwise reasonably acceptable to Lender. 6.11 No Adverse Actions. The Company shall not, by amendment to the ------------------ Company Constituent Documents or through any reorganization, reclassification, consolidation, merger, sale of assets, Act of Dissolution, issuance or Transfer of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms, covenants and conditions of this Agreement or any of the other Loan Documents, but shall at all times carry out in good faith all such terms and take all such actions as may be necessary or appropriate to protect the rights of the Lender hereunder and under each of the Loan Documents. 6.12 Termination of Negative Covenants. At such time as the Note has --------------------------------- been paid in full, but the Warrants have not been exercised (to the extent as provided in the following sentence), the obligations set forth in Sections 6.01, 6.02, 6.03, 6.04, 6.05, 6.06, 6.07 and 6.10 shall terminate. Thereafter, at such time as Lender has purchased at least 75% of the shares of Common Stock purchasable under the Warrants, all of the remaining obligations set forth in this Article VI shall terminate. 6.13 Operating Leases. Nothing herein shall prohibit the Company ---------------- from selling its real estate and leasing it back under leases that will be treated as operating leases for financial reporting purposes, or from entering into build-to-suit arrangements with any persons pursuant to which they will build new schools and centers to the Company's specifications and lease them to the Company under leases treated as operating leases for financial reporting purposes. ARTICLE VII: FEES, EXPENSES AND INDEMNIFICATION 7.01 Fees and Expenses. The Company shall pay: ----------------- (a) A commitment fee to Lenders of Eighty Thousand Dollars ($80,000), of which Twenty Thousand Dollars ($20,000) was paid at the time of the execution and delivery of the commitment letter and the balance of Sixty Thousand Dollars ($60,000) is due and payable in full at Closing; (b) All reasonable fees and disbursements for work done for Lender by Lender's attorneys and legal staff (whether by outside counsel or the legal staff of Lender); and (c) A processing fee equal to all reasonable out-of-pocket costs and expenses up to a maximum of $1,000, incurred by Lender in connection with performing a due diligence examination of the Company and the Company's business. All amounts described in this Section 7.01 shall be due and payable in full by the Lenders at the Closing. -22- 7.02 Indemnification. In addition to its indemnification provisions --------------- contained elsewhere herein and in the other Loan Documents, the Company agrees to indemnify, defend and hold harmless Lender and each of its respective officers, directors, partners, employees, agents and controlling persons (collectively, the "Indemnified Parties") from and against any and all losses, claims, damages, liabilities and related expenses, including reasonable attorneys' fees and expenses, incurred by or asserted against any of the Indemnified Parties by any third parties arising out of, in any way in connection with, or as a result of: (i) this Agreement and the other Loan Documents, (ii) the performance by Lender and the Loan Parties of their respective obligations hereunder and thereunder and consummation of the transactions contemplated hereby and thereby; (iii) the occurrence of any Event of Default hereunder or any event that would constitute an Event of Default but for the giving of notice and/or passage of time; (iv) any federal, state or local transfer or recording taxes or filing fees which may become payable in connection with this transaction; (v) the spilling, leaking, pumping, pouring, unsettling, discharging, leaching or releasing of any Hazardous Materials on any of the Real Property or any other property owned by the Company; (vi) any violations by the Company of any other Environmental Law, regulation or ordinance; (vii) any brokerage, finders, or other fees in connection with the transactions contemplated by this Agreement; or (viii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any of the Indemnified Parties is a party thereto; provided, however, any such indemnity shall not apply to any such losses, claims, damages, liabilities or related expenses arising from the gross negligence or willful misconduct of Lender or breach of this Agreement by Lender. 7.03 Survival; Timing of Payments. The provisions of this Article ---------------------------- VII and any other indemnification provisions contained in this Agreement and the other Loan Documents shall survive and remain operative and in full force and effect regardless of the termination of this Agreement or expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of the Note and satisfaction and discharge of the other Obligations, the invalidity or unenforceability of any term or provision of this Agreement or the Note, or any investigation made by or on behalf of Lender. Except as provided to the contrary, all amounts due under this Article VII shall be payable on written demand therefor. ARTICLE VIII: DEFAULT PROVISIONS The occurrence of any of the events specified below in this Article VIII (any such, an "Event of Default") shall constitute an immediate breach of, and default under, this Agreement entitling Lender to exercise all of the rights and remedies specified in this Agreement, in any other Loan Document, and under all Applicable Laws, without the obligation to furnish any further notice or opportunity to cure (beyond that specified in the applicable sections of this Article VIII), all of which are hereby expressly waived by the Company and all other Loan Parties: 8.01 Monetary Defaults. Any installment payment of principal, ----------------- interest or other charge under the Note is not received by Lender within 15 calendar days of the due date thereof, -23- or any other monetary Obligation is not fully paid and discharged within 15 calendar days of the due date thereof. 8.02 Other Breaches. The Company or any other Loan Party shall fail -------------- to comply with their respective affirmative or negative covenants, agreements and undertakings in this Agreement or the Note and such failure shall continue for a period of 15 calendar days from the date of the delivery of written notice thereof from Lender. 8.03 Misrepresentation. Any representation or warranty made by the ----------------- Company in this Agreement or any of the other Loan Documents, shall be untrue in any material respect and shall remain so after ten days' written notice. 8.04 Transfer of Company Business. Any Transfer of Company's ---------------------------- Business shall occur. 8.05 Act of Bankruptcy or Dissolution. Any Act of Bankruptcy or Act -------------------------------- of Dissolution shall have occurred with respect to the Company or any other Loan Party. 8.06 Other Loan Document Defaults. The Company or any other Loan ---------------------------- Party shall be in default under any of the other Loan Documents (after taking into account the giving of any notice and the expiration of the applicable cure period (if any) required pursuant to the applicable terms of such other Loan Document or Loan Documents). 8.07 Other Payment Default. Any payment default shall have occurred --------------------- (after giving effect to any applicable notice and/or grace periods) under any material lease, material contract, or other material obligation of the Company. For purposes of this Section 8.07, "material" shall mean requiring payment during the term of such obligation of an amount equal to or greater than $3,000,000. 8.08 Court Orders. Final judgment(s) or final order(s) of any court ------------ of competent jurisdiction in excess of $1,000,000 which is either (i) uncontested, unappealed, unpaid or uninsured for a period of 45 days or (ii) is unpaid for 45 days after all appeals are exhausted. ARTICLE IX: CERTAIN REMEDIES Upon the occurrence of an Event of Default under this Agreement, subject to the rights of the holders of the Permitted Senior Debt under the Subordination Agreement, Lender shall be entitled to exercise any or all of the following rights and remedies, in addition to such other rights and remedies as may be provided for in the other Loan Documents or as may be available at law or in equity: 9.01 Acceleration. Following the occurrence of an Event of Default, ------------ Lender may, at its option, accelerate the maturity of the Note and all other Obligations and demand immediate payment in full of all amounts payable under the Note and all of the Obligations, without -24- presentment, demand, protest, or further notice by Lender to the Company, all of which are hereby expressly waived by the Company. 9.02 Costs. The Company shall pay all expenses of any nature, ----- whether incurred in or out of court, and whether incurred before or after the Note shall become due at their maturity date or otherwise (including, but not limited to, reasonable attorneys' fees and costs) which Lender may deem necessary or proper in connection with the collection of any of the Obligations. Lender is authorized to pay at any time and from time to time any or all of such expenses, to add the amount of such payment to the amount of principal outstanding under the Note, and to charge interest thereon at the rate specified in the Note. 9.03 Remedies Non-Exclusive. None of the rights, remedies, ---------------------- privileges or powers of Lender expressly provided for herein shall be exclusive, but each of them shall be cumulative with, and in addition to, every other right, remedy, privilege and power now or hereafter existing in favor of Lender, whether pursuant to the other Loan Documents, at law or in equity, by statute or otherwise. ARTICLE X: MISCELLANEOUS 10.01 Non-Waiver. No course of dealing between Lender and any other ---------- party hereto or any failure or delay on the part of Lender in exercising any rights or remedies hereunder shall operate as a waiver of any rights or remedies of Lender under this or any other applicable instrument. No single or partial exercise of any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder. 10.02 Interest Not Impaired. The interest of Lender and its assigns --------------------- shall not be impaired by Lender's sale, hypothecation or re-hypothecation of the Note or by any indulgence, including, but not limited to: (a) Any renewal, extension, or modification which Lender may grant with respect to the Obligations or any part thereof; or (b) Any indulgence granted in respect of any endorser, guarantor or surety. The purchaser, assignee, transferee or pledgee of the Note, any guaranty, or any other Loan Document (or any of them), sold, assigned, transferred, pledged or repledged shall forthwith become vested with, and entitled to exercise, all powers and rights given by this Agreement to Lender, as if said purchaser, assignee, transferee or pledgee were originally named in this Agreement in place of Lender. 10.03 Notices. All notices or communications under this Agreement or ------- the Note shall be mailed, postage prepaid, or delivered or sent by courier to the following addresses (or to such other address as shall at any time be designated by any party in writing to the other parties): -25- To Lender: ERROR! REFERENCE SOURCE NOT FOUND. 1666 K Street, N.W., Ninth Floor Washington, D.C. 20006 Attention: G. Cabell Williams III, President With a copy to: Piper & Marbury L.L.P. 1200 Nineteenth Street, N.W. Washington, D.C. 20036 Attention: Anthony H. Rickert, Esquire To the Company: Nobel Education Dynamics, Inc. Rose Tree Corporate Center II 1400 N. Providence Road Suite 3055 Media, PA 19063 Attention: Chief Executive Officer with copies to: Nobel Education Dynamics, Inc. Rose Tree Corporate Center II 1400 N. Providence Road Suite 3055 Media, PA 19063 Attention: General Counsel Drinker Biddle & Reath LLP 1000 Westlakes Drive, Suite 300 Berwyn, PA 19312-2409 Attention: Robert H. Strouse, Esquire Rejection or other refusal to accept, or the inability to deliver because of a changed address of which no notice was given, shall not affect the effectiveness or the date of delivery for any notice sent in accordance with the foregoing provisions. Each such notice, request or other communication shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, or the affidavit of the messenger being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by addressee upon presentation. 10.04 Binding Agreement Limitation on Transfer. This Agreement shall ---------------------------------------- bind and inure to the benefit of Lender, the Company and the other Loan Parties, and to the extent provided herein, their respective heirs, successors and assigns. Lender shall not transfer or assign the Note or any of the Loan Documents to any third party not affiliated with Lender without the prior written consent of Nobel. 10.05 Entire Agreement; Integration Clause. This Agreement, the ------------------------------------ Exhibits hereto, and the other Loan Documents set forth the entire agreements and understandings of the -26- parties hereto with respect to this transaction, and any prior agreements are hereby merged herein and terminated. 10.06 No Oral Modification or Waivers. The terms herein may not be ------------------------------- modified or waived orally, but only by an instrument in writing signed by the party against which enforcement of the modification or waiver (as the case may be) is sought. 10.07 Relationship of the Parties; Advice of Counsel. This Agreement ---------------------------------------------- provides for the making of an investment in the form of loans made by Lender, in its capacity as lender, to the Company, in its capacity as borrower, and for the payment of interest and repayment of principal by the Company to Lender. The provisions herein for compliance with financial covenants and delivery of financial statements are intended solely for the benefit of Lender to protect its interest as lender in assuring payments of interest and repayment of principal, and nothing contained in this Agreement shall be construed as permitting or obligating Lender to act as financial or business advisor or consultant to the Company, as permitting or obligating Lender to control the Company or to conduct the Company's operations, as creating any fiduciary obligation on the part of Lender to the Company, or as creating any joint venture, agency or other relationship between the parties other than as explicitly and specifically stated in this Agreement. Lender is not (and shall not be construed as) a partner, joint venturer, alter-ego, manager, controlling person, operator or other business participant of any kind of the Company; neither Lender nor the Company intend that Lender assumes such status and, accordingly, Lender shall not be deemed responsible for (or a participant in) any acts or omissions of the Company. The Company and each of the other Loan Parties each represent and warrant to Lender that they have had the advice of experienced counsel of their own choosing in connection with the negotiation and execution of this Agreement and with respect to all matters contained herein. 10.08 Controlling Law. This Agreement and each of the other Loan --------------- Documents shall be governed by, and interpreted and construed in accordance with, the internal laws of the State of Maryland (without regard to its conflicts of law principles). 10.09 Venue; Personal Jurisdiction; Full Faith and Credit; Personal ------------------------------------------------------------- Service. - ------- (a) Venue for the adjudication of any claim or dispute arising out of this Agreement or any of the other Loan Documents shall be proper only in the state or federal courts of the State of Maryland, and all parties to this Agreement and the other Loan Documents hereby consent to such venue and agree that it shall not be not inconvenient and not subject to review by any court other than such courts in Maryland; (b) The Company and each of the other Loan Parties intend and agree that the courts of the jurisdictions in which the Company is formed and in which the Company conducts its business should afford full faith and credit to any judgment rendered by a court of the State of Maryland against the Company or any other Loan Party under this Agreement and the other Loan Documents, and the Company and each other Loan Party under this Agreement and the other Loan Documents each intend and agree that such courts should hold that the Maryland courts have jurisdiction to enter a valid, in persona judgment against the Company or such other Loan Party(ies), as the case may be; -27- (c) The Company and each other Loan Party agree that service of any summons and complaint, and other process which may be served in any suit, action or other proceeding, may be made by mailing via U.S. certified or registered mail or by hand-delivering a copy of such process to the Company or such other Loan Party (as applicable) at its address specified above; and (d) The Company and each other Loan Party all expressly acknowledge and agree that the provisions of this Section 10.09 are reasonable and made for the express benefit of each of the Lenders. 10.10 Waiver of Trial by Jury. Each party to this Agreement agrees ----------------------- that any suit, action or proceeding, whether claim, defense or counterclaim, brought or instituted by any party hereto or any successor or assign of any party on or with respect to this Agreement or any other Loan Document or which in any way relates, directly or indirectly, to the Note or any event, transaction or occurrence arising out of or in any way connected with this Agreement, the other Loan Documents or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING, AND ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT IT MAKES THIS WAIVER VOLUNTARILY AND KNOWINGLY AFTER CONSULTATION WITH, OR THE OPPORTUNITY TO CONSULT WITH, COUNSEL OF ITS CHOICE. 10.11 Costs and Fees Related to Enforcement or a Successful Defense. ------------------------------------------------------------- Without limiting Lender's entitlements under Section 9.02 above, the Company and each other Loan Party, severally and not jointly (each, a "Reimbursing Party"), hereby agrees to reimburse Lender for any and all costs and fees, including reasonable attorneys' fees and expenses, incurred by Lender or its Affiliates in connection with: (i) any suit, action, claim or other activity of Lender to collect the Obligations or any portion thereof or to enforce any of the provisions of this Agreement or any other Loan Document against such Reimbursing Party; and (ii) any suit, action, claim or other liability asserted against Lender or its Affiliates by such Reimbursing Party in any case in which such Reimbursing Party does not prevail with respect to substantially all of its or his claim. 10.12 Independent Covenant to Make Payments. The payment and ------------------------------------- performance by the Company and any other Loan Party of all of the Obligations shall be absolute and unconditional, irrespective of any defense or any rights of set-off, recoupment or counterclaim the Company or any other Loan Party might otherwise have against Lender, and the Company and each other Loan Party shall pay and perform all of the Obligations (to the extent applicable to him or it), free of any deductions and without abatement, diminution, recoupment, counterclaim or set-off. Until payment in full of all of the Obligations, the Company shall: (a) not suspend or discontinue any payments required pursuant to the Notes, this Agreement or any other Loan Documents; and (b) perform and observe all of the other terms and provisions of all of the Loan Documents. -28- 10.13 Headings. The headings of the paragraphs and sub-paragraphs of -------- this Agreement and the other Loan Documents are inserted for convenience only and shall not be deemed to constitute a part of this Agreement or the other Loan Documents. 10.14 Severability. To the extent any provision herein violates any ------------ applicable law, that provision shall be considered void and the balance of this Agreement shall remain unchanged and in full force and effect. 10.15 Counterparts. This Agreement may be executed in as many ------------ counterpart copies as may be required. It shall not be necessary that the signature of, or on behalf of, each party appear on each counterpart, but it shall be sufficient that the signature of, or on behalf of, each party appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all of the parties. 10.16 Deliveries to Lender. To the extent the terms of this -------------------- Agreement or any of the other Loan Documents require the Company to deliver any documents or other materials to Lender, then, until such time as Lender (or one or more of its Affiliates) shall no longer hold complete title to the Note, the Company may fully satisfy and discharge such requirement by delivering a single copy of the document(s) or other material(s) in question to the Lender's notice party identified in Section 10.03 above in lieu of separate deliveries to Lender. Following a complete or partial Transfer by Lender of any its right, title or interest in and to the Note to one or more Persons that is not an Affiliate of Lender, then the Company shall be required to deliver copies of the document(s) or other material(s) in question to Lender separately. 10.17 Consent and Approval of Lender. To the extent the terms of ------------------------------ this Agreement or any of the other Loan Documents require the Company to obtain the consent or approval of each of Lender, then until such time as Lender (or one or more Affiliates of Lender) shall no longer hold complete title to each of the Note, the Company may fully satisfy and discharge such requirement by obtaining the consent or approval (in writing if necessary) of the holder of not less than 55% of the outstanding principal balance of the Note in lieu of the separate consent or approval of Lender. Following a complete or partial Transfer by Lender of any its right, title or interest in and to the Note to one or more Persons that is not an Affiliate of Lender, then the Company shall be required to obtain the consent or approval (in writing if necessary) of Lender holding not less than 75% of the outstanding principal balance of the Note. IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date first above written. WITNESS/ATTEST: "COMPANY": NOBEL EDUCATION DYNAMICS, INC. a Delaware corporation -29- By: ________________________ By:________________________________(SEAL) IMAGINE EDUCATIONAL PRODUCTS, INC. a Delaware corporation By: ________________________ By:________________________________(SEAL) MERRYHILL SCHOOLS, INC. a California corporation By: ________________________ By:________________________________(SEAL) MERRYHILL SCHOOLS NEVADA, INC. a Nevada corporation By: ________________________ By:________________________________(SEAL) Signatures continued on next page. -30- NEDI, INC a California corporation By: ________________________ By:_______________________________(SEAL) LAKE FOREST MONTESSORI SCHOOLS, INC. a Washington corporation By: ________________________ By:_______________________________(SEAL) "LENDER": ALLIED CAPITAL CORPORATION, a Maryland corporation By: ________________________ By:_______________________________(SEAL) -31- EX-4.12 5 SENIOR SUBORDINATED NOTE DATED 06/30/98 EXHIBIT 4.12 THE INDEBTEDNESS EVIDENCED BY THIS NOTE AND ANY RIGHTS OR REMEDIES HEREUNDER SHALL BE SUBORDINATE AND JUNIOR TO SUMMIT BANK AND ITS SUCCESSORS AND ASSIGNS TO THE EXTENT AND IN THE MANNER SET FORTH IN A SUBORDINATION AGREEMENT DATED AS OF JUNE 30, 1998. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OF THE NOTE UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UPON SATISFACTION BY THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. NOBEL EDUCATION DYNAMICS, INC. SENIOR SUBORDINATED NOTE $10,000,000 Dated as of June 30, 1998 FOR VALUE RECEIVED, the undersigned, (i) NOBEL EDUCATION DYNAMICS, INC., a Delaware corporation having an address at Rosetree Corporate Center II, 1400 N. Providence Road, Suite 3055, Media, PA 19063 ("Nobel"), and (ii) Imagine Educational Products, Inc., a Delaware corporation, Merryhill Schools, Inc. a California corporation, Merryhill Schools Nevada, Inc., a Nevada corporation, NEDI, Inc., a California corporation and Lake Forest Park Montessori School, Inc., a Washington corporation (collectively, the entities listed in this clause (ii) shall be referred to as the "Subsidiaries") (collectively, Nobel and the Subsidiaries shall be referred to as the "Borrower"), hereby jointly, severally, and unconditionally promise to pay to the order of ALLIED CAPITAL CORPORATION or its registered assigns (the "Holder"), at its offices located at 1666 K Street, N.W., Suite 901, Washington, D.C. 20006, or such other places the Holder shall from time to time have designated to the Company in writing, the principal amount of TEN MILLION AND 00/100 DOLLARS ($10,000,000), together with interest thereon, at the times and in the manner hereinafter provided. 1. Investment Agreement. This Note is subject to the terms of the -------------------- Investment Agreement, dated as of June 30, 1998, by and among the Borrower and the Holder referenced above (the "Investment Agreement"), a copy of which may be examined during normal business hours at the Company's offices. Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Investment Agreement. 2. Interest. From the date hereof and thereafter until repayment of this -------- Note, interest shall accrue hereunder at the rate of ten percent (10%) per annum, compounded quarterly. Interest shall be calculated on the basis of a 360-day year and shall be computed for each monthly payment period on the basis of 30 days having elapsed. 3. Payments. -------- 3.1 Payment of Interest. Commencing on October 1, 1998 and ------------------- continuing on January 1, April 1, July 1, and October 1 thereafter until the Maturity Date (as defined below), the Borrower shall pay to Holder an amount equal to all interest accruing on the principal balance of this Note from time to time outstanding. 3.2 Principal Payments and Payment at Maturity. The Borrower shall ------------------------------------------ pay to Holder on or before July 1, 2004 the sum of Five Million and 00/100 Dollars ($5,000,000) (i.e., an amount equal to 50% of the original principal amount). On or before July 1, 2005 (the "Maturity Date") or upon the acceleration of this Note, the Borrower will pay to Holder the entire principal amount of this Debenture then outstanding together with all accrued and unpaid interest thereon. 3.3 Other Payment Provisions. All payments of principal and interest ------------------------ hereunder shall be payable to the Holder in lawful money of the United States of America not later than 2 p.m. on the date when due, without any offset or deduction whatsoever. Any payment coming due on a day which is not a business day within the District of Columbia shall be made on the next succeeding such business day, and any such extension of the time of payment shall be included in the computation of interest hereunder. 3.4 Penalty. If any payment of principal or interest due under this ------- Note shall be overdue, such overdue amount shall bear interest from and after the date due, to and including the date when paid in full, at a rate equal to the lesser of (i) the maximum rate allowed by law and (ii) thirteen percent (13%) per annum. 3.5 Prepayments. The unpaid principal amount of this Note and any ----------- accrued and unpaid interest thereon may be prepaid, in whole or in part, at any time upon 10 days prior written notice to Holder, without penalty or premium. Such prepayments shall be credited against principal in inverse order of maturity. Prepayments made without the required notice will not be credited against principal until 10 days after receipt. 3.6 Due on Sale. Notwithstanding anything herein or in the ----------- Investment Agreement to the contrary, the entire indebtedness hereunder shall become due and payable upon the earlier of the Maturity Date or a Transfer of the Company's Business, as defined in Section 1.01 of the Investment Agreement. 4. Subordination. The indebtedness represented by this Note is ------------- subordinate to the Senior Debt of the Borrower in accordance with the terms of the Investment Agreement, and the Subordination Agreement among the Borrower, the Holder, and Summit Bank. -2- 5. No Assignment by Borrower. The Borrower shall not assign any of its ------------------------- rights under this Note nor delegate any of its duties under this Note without the prior written consent of Holder. Holder may freely assign its rights hereunder. 6. Covenants and Agreements. The Borrower covenants and agrees that, so ------------------------ long as any indebtedness is outstanding hereunder, it will, unless the Holder shall otherwise consent prior thereto in writing, comply with and perform each of the covenants and agreements set forth in the Investment Agreement, which provisions are incorporated herein by this reference as if set forth at length herein. 7. Default and Acceleration. ------------------------ 7.1 Events of Default. Upon the occurrence of any Event of Default ----------------- described in Article VIII of the Investment Agreement, then a default may be declared hereunder at the option of the Holder, without presentment, demand, protest or further notice of any kind (all of which are hereby expressly waived). In such event, the Holder shall be entitled to exercise any or all of the rights and remedies described in Article IX of the Investment Agreement, at its option, in addition to such other rights and remedies as may be available at law or in equity. At any time after a declaration of default hereunder, but before a judgment or decree for the payment of money has been obtained, the Holder may, by written notice, rescind the declared default if the Borrower has paid a sum sufficient to pay all overdue interest and overdue principal amounts, all interest on the overdue installments of interest and/or principal at the penalty rate, and the Holder's reasonable costs of enforcing its rights hereunder (including attorneys' fees and disbursements). 7.2 No Waiver. No course of dealing between the Holder and any other --------- party hereto or any failure or delay on the part of the Holder in exercising any rights or remedies hereunder shall operate as a waiver of any rights or remedies of the Holder under this or any other applicable instrument. No single or partial exercise of any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder. 8. Definitions. The term "indebtedness" as used herein shall mean the ----------- indebtedness evidenced by this Note, including principal, interest and expenses whether contingent, now due or hereafter to become due, and whether heretofore or contemporaneously herewith or hereafter contracted. 9. Confession of Judgment. If payment of the indebtedness evidenced by ---------------------- this Note, or any part thereof, shall not be made when due and at maturity, by acceleration or otherwise, the Borrower hereby authorizes and empowers any attorney of any court of record in the United States to appear for all of the undersigned in court, or before any clerk thereof, and confess judgment against the undersigned in favor of the Holder of this Note for the amount due thereon with interest and costs. -3- 10. Waiver of Trial by Jury. The Borrower agrees that any suit, action or ----------------------- proceeding, whether claim or counterclaim, brought or instituted by the Holder on or with respect to this Note or any event, transaction or occurrence arising out of or in any way connected with the Investment Agreement or the dealing of the parties with respect thereto, shall be tried only by a court and not by a jury. THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. The Borrower acknowledges and agrees that the Holder would not extend credit under the Investment Agreement to the Borrower and would not purchase this Note if this waiver of jury trial were not part of the Investment Agreement and this Note. 11. Venue; Service of Process. Venue for any adjudication hereof shall be ------------------------- only in the courts of the State of Maryland or the Federal courts in the State of Maryland, the jurisdiction of which courts all parties hereby consent to as the agreement of the parties, as not inconvenient and as not subject to review by any court other than such courts in Maryland. The Company intends that the courts of the jurisdiction(s) in which the Company is incorporated and conducts business should afford full faith and credit to any judgment rendered by a court of the State of Maryland against the Company hereunder, and should hold that the Maryland courts have jurisdiction to enter a valid, in personam judgment against -- -------- the Company hereunder. The Company agrees that service of any summons or complaint, and other process which may be served in any action, may be made by mailing via registered mail or delivering a copy of such process to the Company, and the Company hereby agrees that this submission to jurisdiction and consent to service of process are reasonable and made for the express benefit of Holder. 12. Controlling Law. This Note and all matters related hereto shall be --------------- governed in accordance with the laws of the State of Maryland, without regard to its principles of conflicts of law. IN WITNESS WHEREOF, the undersigned have duly caused this instrument to be executed and delivered as of the date first above written. WITNESS/ATTEST: "COMPANY": NOBEL EDUCATION DYNAMICS, INC. a Delaware corporation By: ___________________________ By:___________________________(SEAL) {Signatures continued on next page.} -4- IMAGINE EDUCATIONAL PRODUCTS, INC. a Delaware corporation By: ____________________________ By:___________________________(SEAL) MERRYHILL SCHOOLS, INC. a California corporation By: ____________________________ By:___________________________(SEAL) MERRYHILL SCHOOLS NEVADA, INC. a Nevada corporation By: ____________________________ By:___________________________(SEAL) NEDI, INC. a California corporation By: ____________________________ By:___________________________(SEAL) {Signatures continued on next page.} -5- LAKE FOREST PARK MONTESSORI SCHOOL, INC. a Washington corporation By:______________________________ By:___________________________(SEAL) -6- EX-10.3 6 1995 STOCK INCENTIVE PLAN, AS AMENDED EXHIBIT 10.3 NOBEL EDUCATION DYNAMICS, INC. 1995 STOCK INCENTIVE PLAN EFFECTIVE DATE: JUNE 21, 1995 AS AMENDED: JUNE 12, 1997, SEPTEMBER 19, 1997 AND AUGUST 31, 1998 TABLE OF CONTENTS
PAGE ---- SECTION 1 Purpose............................................... 1 SECTION 2 Administration........................................ 1 SECTION 3 Eligibility........................................... 2 SECTION 4 Stock................................................. 3 SECTION 5 Granting of Options to Key Employees.................. 3 SECTION 6 Granting of NQSOs to Outside Directors................ 4 SECTION 7 Annual Limit for ISOs................................. 4 SECTION 8 Options and SARs...................................... 5 SECTION 9 Restricted Stock Awards............................... 10 SECTION 10 Unrestricted Stock Awards............................. 12 SECTION 11 Capital Adjustments................................... 12 SECTION 12 Change in Control..................................... 13 SECTION 13 Amendment or Discontinuance of the Plan............... 13 SECTION 14 Termination of Plan................................... 14 SECTION 15 Shareholder Approval.................................. 14 SECTION 16 Miscellaneous......................................... 15
NOBEL EDUCATION DYNAMICS, INC. 1995 STOCK INCENTIVE PLAN ------------------------- SECTION 1 PURPOSE ------- This NOBEL EDUCATION DYNAMICS, INC. 1995 STOCK INCENTIVE PLAN ("Plan") is intended to provide a means whereby NOBEL EDUCATION DYNAMICS, INC. ("Company") and any Subsidiary of the Company (as hereinafter defined) may, through the grant of incentive stock options and non-qualified stock options (collectively "Options"), stock appreciation rights ("SARs"), stock subject to restrictions ("Restricted Stock") and stock not subject to restrictions ("Unrestricted Stock") to Key Employees and Outside Directors (both as defined in Section 3), attract and retain such Key Employees and Outside Directors and motivate such individuals to exercise their best efforts on behalf of the Company and of any Subsidiary. As used in the Plan, the term "incentive stock option" ("ISO") means an Option which qualifies as an incentive stock option within the meaning of section 422 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), at the time it is granted and which is either designated as an ISO in the Option Agreement (as hereinafter defined) covering such Option or which is designated as an ISO by the Committee (as defined in Section 2 hereof) at the time of grant. The term "non-qualified stock option" ("NQSO") means any other Option granted under the Plan. The term "Subsidiary" means any corporation (whether or not in existence at the time the Plan is adopted) which, at the time an Award is granted, is a subsidiary of the Company under the definition of "subsidiary corporation" contained in section 424(f) of the Code, or any successor thereto. SECTION 2 ADMINISTRATION -------------- The Plan shall be administered by the Company's Compensation Committee (the "Committee"), which shall consist of two or more Outside Directors who shall be appointed by, and shall serve at the pleasure of, the Company's Board of Directors (the "Board"). Each member of the Committee, while serving as such, shall be deemed to be acting in his capacity as a director of the Company. Except as otherwise permitted under Section 6 and under section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and paragraph (c)(2)(i) of Rule 16b-3 thereunder, no member of the Committee shall be granted, nor shall have been granted, Awards (as defined below) pursuant to the Plan or equity securities (within the meaning of 17 C.F.R. (S)240.16a-1(d)) pursuant to any other plan of the Company or of any of its affiliates, as defined in or under the Exchange Act, at any time during the period commencing with the date which is one year prior to the date his service on the Committee began and ending on the date which is one day after the date on which his service on the Committee ceased. Each member of the Committee shall also be an "outside director" within the meaning of Prop. Treas. Reg. (S) 1.162-27(e)(3), or any successor thereto. The Committee shall have full and final authority in its absolute discretion, subject to the terms of the Plan, to select the Key Employees to be granted ISOs, NQSOs, SARs, Restricted Stock and Unrestricted Stock (collectively "Awards") under the Plan, to grant Awards on behalf of the Company, and to set the date of grant and the other terms of such Awards. With respect to the eligibility of Outside Directors, the Plan is intended to comply with Rule 16b-3 and its successors promulgated under the Exchange Act as a "formula award" plan described in Rule 16b-3(c)(2)(ii), and any provision of this Plan applicable to Outside Directors that is to the contrary shall be deemed null and void. Consequently, the award of Options to Outside Directors shall be as set forth in Section 6, and the Committee shall not have any discretionary authority with respect thereto. The Committee may correct any defect, supply any omission and reconcile any inconsistency in the Plan and in any Award granted hereunder in the manner and to the extent it shall deem desirable. The Committee also shall have the authority to establish such rules and regulations, not inconsistent with the provisions of the Plan, for the proper administration of the Plan, and to amend, modify or rescind any such rules and regulations, and to make such determinations and interpretations under, or in connection with, the Plan, as it deems necessary or advisable. All such rules, regulations, determinations and interpretations shall be binding and conclusive upon the Company, its shareholders and all officers and employees and former officers and employees, and upon their respective legal representatives, beneficiaries, successors and assigns and upon all other persons claiming under or through any of them. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted hereunder. SECTION 3 ELIGIBILITY ----------- (a) IN GENERAL. Key Employees and Outside Directors shall be eligible to ---------- receive Awards under the Plan. Key Employees and Outside Directors who have been granted an Award under the Plan shall be referred to as "Grantees." More than one Award may be made to a Grantee under the Plan. (b) KEY EMPLOYEES. Key Employees are (1) officers of the Company or a ------------- Subsidiary, (2) school principals, center directors, and regional managers of the Company or a Subsidiary, and (3) any other employees of the Company or a Subsidiary so designated by the Committee. Key Employees shall be eligible to receive any type of Award available under the Plan. (c) OUTSIDE DIRECTORS. Outside Directors are directors of the Company who are ----------------- not officers or employees thereof. Outside Directors shall only be eligible to receive NQSOs pursuant to Section 6. 2 SECTION 4 STOCK ----- The number of common shares of the Company, par value $.001 per share ("Common Shares"), that may be subject to Awards under the Plan shall be 750,000 shares (such number of shares reflecting adjustment for effectiveness of the Company's Plan of Recapitalization effected on September 28, 1995), subject to adjustment as hereinafter provided; provided that no Key Employee shall receive Options for more than 40,000 Common Shares (such number of shares also reflecting adjustment for effectiveness of the Company's Plan of Recapitalization) during any calendar year (i.e., any period from January 1 through December 31 of the same year). Common Shares issuable under the Plan may be authorized but unissued shares or reacquired shares, as the Company may determine from time to time. Any Common Shares subject to an Option which expires or otherwise terminates for any reason whatever (including, without limitation, the Key Employee's surrender thereof) without having been exercised, and any shares of Restricted Stock which are forfeited, shall continue to be available for the granting of Awards under the Plan; provided, however, that (a) if an Option is cancelled, the Common Shares covered by the cancelled Option shall be counted against the maximum number of shares specified in this Section 4 for which Options may be granted to a single Key Employee, and (b) if the exercise price of an Option is reduced after the date of grant, the transaction shall be treated as a cancellation of the original Option and the grant of a new Option for purposes of counting the maximum number of shares for which Options may be granted to a Key Employee. Common Shares subject to an Option cancelled upon the exercise of a SAR shall not again be available for Awards under the Plan. SECTION 5 GRANTING OF OPTIONS TO KEY EMPLOYEES ------------------------------------ From time to time until the expiration or earlier suspension or discontinuance of the Plan, the Committee may, on behalf of the Company, grant to Key Employees under the Plan such Options as it determines are warranted, subject to the limitations of the Plan; provided, however, that grants of ISOs and NQSOs shall be separate and not in tandem. The granting of an Option under the Plan shall not be deemed either to entitle the Key Employee to, or to disqualify the Key Employee from, any other Awards under the Plan. In making any determination as to whether a Key Employee shall be granted an Option, the type of Option to be granted, and the number of Common Shares to be covered by the Option, the Committee shall take into account the duties of the Key Employee, his present and potential contributions to the success of the Company or a Subsidiary, the tax implications to the Company and the Key Employee of any Options granted, and such other factors as the Committee shall deem relevant in accomplishing the purposes of the Plan. Moreover, the Committee may provide in the Option Agreement that the Option may be exercised only if certain conditions, as determined by the Committee, are fulfilled. 3 SECTION 6 GRANTING OF NQSOS TO OUTSIDE DIRECTORS -------------------------------------- As of the date 90 days following the close of each fiscal year of the Company ("Base Fiscal Year") commencing with the fiscal year ending June 30, 1999, until the expiration or earlier suspension or discontinuance of the Plan, each individual serving as an Outside Director on such date shall be granted a NQSO to purchase 2,000 Common Shares (such number of shares reflecting adjustment for effectiveness of the Company's Plan of Recapitalization) (as adjusted pursuant to section 11, if necessary), provided that (a) the individual served as a director for the entire Base Fiscal Year, and (b) the Company's pre- tax income for the Base Fiscal Year exceeds by at least 20% the Company's pre- tax income for the previous fiscal year, as calculated in accordance with generally accepted accounting principles ("GAAP"). Outside Directors shall also retain NQSOs which have been granted to them under the Plan in 1996 and 1997. SECTION 7 ANNUAL LIMIT FOR ISOS --------------------- (a) ANNUAL LIMIT. The aggregate Fair Market Value (determined as of ------------ the date the ISO is granted) of the Common Shares with respect to which ISOs become exercisable for the first time by a Key Employee during any calendar year (under this Plan and any other ISO plan of the Company or any parent corporation (within the meaning of section 424(e) of the Code ("Parent")) or Subsidiary) shall not exceed $100,000. The term "Fair Market Value" shall mean the value of the Common Shares arrived at by a good faith determination of the Committee and shall be: (1) The mean between the highest and lowest quoted selling price, if there is a market for the Common Shares on a registered securities exchange or in an over the counter market, on the date specified; (2) The weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the specified date, if there are no such sales on the specified date but there are such sales on dates within a reasonable period both before and after the specified date; (3) The mean between the bid and asked prices, as reported by the National Quotation Bureau on the specified date, if actual sales are not available during a reasonable period beginning before and ending after the specified date; or (4) Such other method of determining Fair Market Value as shall be authorized by the Code, or the rules or regulations thereunder, and adopted by the Committee. Where the Fair Market Value of Common Shares is determined under (2) above, the average of the means between the highest and lowest sales on the nearest date before and the nearest date after the specified date shall be weighted inversely by the respective numbers of trading days between the dates of reported sales and the specified date (i.e., the valuation date), ---- in accordance with Treas. Reg. (S) 20.2031-2(b)(1), or any successor thereto. 4 (b) OPTIONS OVER ANNUAL LIMIT. If an Option intended as an ISO is granted ------------------------- to a Key Employee and such Option may not be treated in whole or in part as an ISO pursuant to the limitation in (a) above, such Option shall be treated as an ISO to the extent it may be so treated under such limitation and as a NQSO as to the remainder. For purposes of determining whether an ISO would cause such limitation to be exceeded, ISOs shall be taken into account in the order granted. (c) NQSOS, SARS, RESTRICTED STOCK AND UNRESTRICTED STOCK. The annual limit ---------------------------------------------------- set forth above for ISOs shall not apply to NQSOs, SARs, Restricted Stock and Unrestricted Stock. SECTION 8 OPTIONS AND SARS ---------------- (a) TERMS AND CONDITIONS OF OPTIONS. The Options granted pursuant to the ------------------------------- Plan shall include expressly or by reference the following terms and conditions, as well as such other provisions not inconsistent with the provisions of this Plan as the Committee shall deem desirable, and for ISOs granted under this Plan, the provisions of section 422(b) of the Code: (1) NUMBER OF COMMON SHARES. The Option Agreement shall state the ----------------------- number of Common Shares to which the Option pertains. (2) PRICE. ----- (A) KEY EMPLOYEES. With respect to Options granted to Key ------------- Employees, the Option exercise price shall be determined and fixed by the Committee in its discretion at the time of grant, but shall not be less 100% (110% in the case of an ISO granted to a more than 10% shareholder as provided in Subsection (10) below) of the Fair Market Value of the optioned Common Shares on the date the Option is granted. (B) OUTSIDE DIRECTORS. With respect to Options granted to ----------------- Outside Directors, the Option exercise price shall be the Fair Market Value of the optioned Common Shares on the date the Option is granted. (3) TERM. ---- (A) ISOS. Subject to earlier termination as provided in ---- Subsections (5), (6) and (7) below, the term of each ISO shall be not more than 10 years (5 years in the case of a more than 10% shareholder as provided in Subsection (10) below) from the date of grant. (B) NQSOS GRANTED TO KEY EMPLOYEES. Subject to earlier ------------------------------ termination as provided in Subsections (5), (6) and (7) below, the term of each NQSO granted to a Key Employee shall be not more than 10 years from the date of grant. 5 (C) NQSOS GRANTED TO OUTSIDE DIRECTORS. Subject to earlier ---------------------------------- termination as provided in Subsection (8) below, the term of each NQSO granted to an Outside Director shall be 10 years from the date of grant. (4) EXERCISE. -------- (A) OPTIONS GRANTED TO KEY EMPLOYEES. Options granted to Key -------------------------------- Employees shall be exercisable in such installments and on such dates, commencing not earlier than 6 months from the later of the date of grant or the date the Plan is approved by the Company's shareholders, as the Committee may specify, provided that: (i) In the case of new Options granted to a Key Employee in replacement for options (whether granted under the Plan or otherwise) held by the Key Employee, the new Options may be made exercisable, if so determined by the Committee, in its discretion, at the earliest date the replaced options were exercisable; and (ii) The Committee may accelerate the exercise date of any outstanding Options granted to Key Employees in its discretion, if it deems such acceleration to be desirable. (B) OPTIONS GRANTED TO OUTSIDE DIRECTORS. Options granted to ------------------------------------ Outside Directors shall be exercisable commencing six months after the later of the date of grant or the date the Plan is approved by the Company's shareholders. (C) GENERAL. Any Common Shares, the right to the purchase of ------- which has accrued, under an Option may be purchased at any time up to the expiration or termination of the Option. Exercisable Options may be exercised, in whole or in part, from time to time by giving written notice of exercise to the Company at its principal office, specifying the number of Common Shares to be purchased and accompanied by payment in full of the aggregate Option exercise price for such shares. Only full shares shall be issued under the Plan, and any fractional share which might otherwise be issuable upon the exercise of an Option granted hereunder shall be forfeited. (D) MANNER OF PAYMENT. The Option price of an Option granted to ----------------- an Outside Director shall be payable in cash or its equivalent. The Option price of an Option granted to a Key Employee shall be payable: (i) In cash or its equivalent; (ii) In the case of an ISO, if the Committee, in its discretion, causes the Option Agreement so to provide, and in the case of a NQSO if the 6 Committee, in its discretion, so determines at or prior to the time of exercise, in Common Shares previously acquired by the Grantee, provided that (1) if such shares were acquired through the exercise of an ISO and are used to pay the Option exercise price of an ISO, such shares have been held by the Key Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the date of exercise, or (2) if such shares were acquired through the exercise of a NQSO and are used to pay the Option exercise price of an ISO, or if such shares were acquired through exercise of a NQSO or of an option under a similar plan or through exercise of an ISO and are used to pay the Option exercise price of a NQSO, or if such shares were acquired under a SAR, or through the grant of Restricted or Unrestricted Stock, such shares have been held by the Key Employee for a period of more than 12 months on the date of exercise; or (iii) In the discretion of the Committee, in any combination of (i) and (ii) above. In the event such Option exercise price is paid, in whole or in part, with Common Shares, the portion of the Option exercise price so paid shall equal the Fair Market Value on the date of exercise of the Common Shares surrendered in payment of such Option exercise price. (5) EXERCISE UPON TERMINATION OF KEY EMPLOYEE. If a Key Employee's ----------------------------------------- employment by the Company (and Subsidiaries) is terminated by either party prior to the expiration date fixed for his or her Option for any reason other than death or disability, such Option may be exercised, to the extent of the number of Common Shares with respect to which the Key Employee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Key Employee at any time prior to the earlier of: (A) The expiration date specified in such Option; or (B) Three months after the date of such termination of employment. (6) EXERCISE UPON DISABILITY OF KEY EMPLOYEE. If a Key Employee shall ---------------------------------------- become disabled (within the meaning of section 22(e)(3) of the Code) during his or her employment and, prior to the expiration date fixed for his or her Option, his or her employment is terminated as a consequence of such disability, such Option may be exercised, to the extent of the number of Common Shares with respect to which the Key Employee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Key Employee at any time prior to the earlier of: (A) The expiration date specified in such Option; or (B) One year after the date of such termination of employment. 7 In the event of the Key Employee's legal disability, such Option may be so exercised by the Key Employee's legal representative. (7) EXERCISE UPON DEATH OF KEY EMPLOYEE. If a Key Employee shall die ----------------------------------- during his or her employment and prior to the expiration date fixed for his or her Option, or if a Key Employee whose employment is terminated for any reason shall die following his or her termination of employment but prior to the earliest of: (A) The expiration date fixed for his or her Option; (B) The expiration of the period determined under Subsections (5) and (6) above; or (C) In the case of an ISO, three months following termination of employment, such Option may be exercised, to the extent of the number of Common Shares with respect to which the Key Employee could have exercised it on the date of his or her death, or to any greater extent permitted by the Committee, by the Key Employee's estate, personal representative or beneficiary who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Key Employee, at any time prior to the earlier of: (i) The expiration date specified in such Option; or (ii) One year after the date of death. (8) EXERCISE UPON TERMINATION OF OUTSIDE DIRECTOR'S SERVICE. If an ------------------------------------------------------- Outside Director's service on the Board is terminated prior to the expiration date fixed for his or her Option, such Option may be exercised by the Outside Director at any time prior to the earlier of: (A) The expiration date specified in such Option; or (B) One year after such termination of service. Notwithstanding the above, if an Outside Director dies during this period, such Option may be exercised, to the extent of the number of Common Shares with respect to which the Outside Director could have exercised it on the date of his or her death, by the Outside Director's estate, personal representative or beneficiary who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Outside Director, at any time prior to the earlier of: (i) The expiration date specified in such Option; or (ii) One year after the date of the Outside Director's death. 8 (9) RIGHTS AS A SHAREHOLDER. A Grantee shall have no rights as a ----------------------- shareholder with respect to any Common Shares covered by his or her Option until the issuance of a stock certificate to him or her for such shares. (10) TEN PERCENT SHAREHOLDER. If a Key Employee owns more than 10% of ----------------------- the total combined voting power of all shares of stock of the Company or of a Subsidiary or Parent at the time an ISO is granted to such Key Employee, the Option exercise price for the ISO shall be not less than 110% of the Fair Market Value of the optioned Common Shares on the date the ISO is granted, and such ISO, by its terms, shall not be exercisable after the expiration of five years from the date the ISO is granted. The conditions set forth in this Subsection (10) shall not apply to NQSOs. (11) OPTION AGREEMENTS. Options granted under the Plan shall be ----------------- evidenced by written documents ("Option Agreements") in such form as the Committee shall, from time to time, approve. Option Agreements shall contain such provisions, not inconsistent with the provisions of the Plan for NQSOs granted pursuant to the Plan, and such conditions, not inconsistent with section 422(b) of the Code or the provisions of the Plan, for ISOs granted pursuant to the Plan, as the Committee shall deem advisable. An Option Agreement shall specify whether the Option is an ISO or NQSO; provided, however, if the Option is not designated in the Option Agreement as an ISO or NQSO, the Option shall constitute an ISO if it complies with the terms of section 422 of the Code, and otherwise, it shall constitute a NQSO. Each Grantee who receives an Option shall enter into, and be bound by, the terms of an Option Agreement. (b) SARS. An Option Agreement may, in the discretion of the Committee, ---- include a provision under which a Key Employee shall have the right, in lieu of exercising all or a portion of the Key Employee's Option, to elect instead to receive an amount equal to the difference between the Fair Market Value of all, or a specified number, of the Common Shares subject to such Option on the date such right is exercised and the exercise price under such Option, such amount to be paid in cash or in Common Shares (based on their Fair Market Value on the date such right is exercised), or in a combination of cash and Common Shares, as the Committee shall determine. Such right is referred to in this Plan as a stock appreciation right ("SAR"). Any SAR shall be exercisable only at a time when the Option to which it is related is exercisable; provided, however, that if the Key Employee is a director or officer of the Company within the meaning of Section 16 of the Exchange Act, cash may be paid to the Key Employee upon the exercise of a SAR only if the Key Employee exercises the SAR (by giving the notice described in Section 8(a)(4)(C) hereof) during the period beginning on the third business day following the release for publication of the Company's quarterly and annual summary statements of sales and earnings, and ending on the twelfth business day following such date. A SAR shall be granted in tandem with the related Option, and the Option- SAR shall be considered exercised when, and to the extent that, either the underlying Option or the SAR is exercised. Any SAR shall be subject to the following additional conditions: 9 (1) The SAR will expire no later than the termination of the Option to which it relates; (2) The SAR will be transferable only if and when the underlying Option is transferable, and under the same conditions; and (3) The SAR may be exercised only when there is a positive spread, i.e., when the Fair Market Value of the Common Shares subject to the Option ---- exceeds the exercise price of such Option. SECTION 9 RESTRICTED STOCK AWARDS ----------------------- From time to time until the expiration or earlier termination of the Plan, the Committee may, on behalf of the Company, make such Restricted Stock Awards under the Plan to Key Employees as it determines are warranted. Restricted Stock Awards shall be subject to the following terms and conditions, as well as such other terms and conditions as the Committee may prescribe: (a) VESTING PERIOD; CONDITIONS. At the time of granting a Restricted -------------------------- Stock Award, the Committee may establish one or more vesting periods ("Vesting Periods") with respect to the Common Shares covered by the Award. The length of any such Vesting Period(s) applicable to a Restricted Stock Award shall be within the discretion of the Committee. At the time of grant, the Committee may also establish such additional conditions to the payment of a Restricted Stock Award ("Conditions") as it may deem advisable in its sole discretion, such as the achievement of corporate or individual goals. Subject to the provisions of this Section 9 and any other Conditions prescribed by the Committee, Common Shares subject to a Restricted Stock Award shall vest in the Key Employee upon the expiration of the Vesting Period with respect to such Common Shares. The Committee may accelerate the vesting date of any unvested Common Shares subject to a Restricted Stock Award in its discretion, if it deems such acceleration to be desirable. (b) ISSUANCE AND DELIVERY OF CERTIFICATES. Upon the granting of a ------------------------------------- Restricted Stock Award, the Company may, if so determined by the Committee at the time of the grant, issue certificates representing the Common Shares subject to the Restricted Stock Award in the name of the Key Employee. Any such Common Shares shall bear a legend indicating that they are subject to the terms of the Plan and the Restricted Stock Award Agreement (as hereinafter defined) and that they may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with the terms of the Plan and the Restricted Stock Award Agreement. Upon issuance of such certificates, the Key Employee shall immediately execute a stock power or other instrument of transfer, appropriately endorsed in blank, to be held with the certificates by the Company pursuant to the terms of the Plan and the Restricted Stock Award Agreement. Only full shares shall be issued, and any fractional shares which might otherwise be issuable pursuant to a Restricted Stock Award shall be forfeited. After the Key Employee becomes vested in Common Shares subject to the Restricted Stock Award, the Company shall deliver the vested Common Shares to the Key Employee or his or her beneficiary or estate, as applicable. 10 (c) RIGHTS AS A SHAREHOLDER. If the Company issues certificates ----------------------- representing the Common Shares subject to a Restricted Stock Award prior to the expiration of the Vesting Period for the Common Shares subject to such Award or prior to the satisfaction of the Conditions, if any, pertaining to such Award, the Key Employee shall be entitled to receive dividends paid on such Common Shares, shall have the right to vote such Common Shares, and shall have all other shareholder's rights with respect to such Common Shares, except that (1) the Key Employee will not be entitled to delivery of the stock certificate, (2) the Company will retain custody of the Common Shares, and (3) the Common Shares subject to the Restricted Stock Award will revert to the Company to the extent all Vesting Periods and Conditions applicable to such Award are not satisfied. (d) TERMINATION OF EMPLOYMENT. At the time of granting a Restricted Stock ------------------------- Award, the Committee shall specify in the Restricted Stock Award Agreement, the manner of determining the number, if any, of the unvested Common Shares subject to the Award which shall become vested in the Key Employee, or in his or her beneficiary or estate, if the Key Employee's employment by the Company (and Subsidiaries) is terminated prior to the later of the expiration of the Vesting Period or the satisfaction of all of the Conditions with respect to such Common Shares. Any Restricted Stock Award Agreement may provide different vesting provisions upon a Key Employee's termination due to death or disability. Any remaining unvested Common Shares covered by the Key Employee's Restricted Stock Award shall immediately be forfeited upon termination of employment, except that the Committee, if it determines that the circumstances warrant, may direct that all or a portion of such remaining unvested Common Shares also be vested in the Key Employee, or in his or her beneficiary or estate, subject to such further terms and conditions, if any, as the Committee may determine. (e) PAYMENT FOR RESTRICTED STOCK. The Committee may, on behalf of the ---------------------------- Company, grant Restricted Stock Awards under which the Key Employee shall not be required to make any payment for the Restricted Stock or, in the alternative, under which the Key Employee, as a condition to the Restricted Stock Award, shall pay all (or any lesser amount than all) of the Fair Market Value of the Common Stock, determined as of the date the Restricted Stock Award is granted. If the latter, such purchase price shall be paid as provided in the Restricted Stock Award Agreement. (f) RESTRICTED STOCK AWARD AGREEMENT. Restricted Stock Awards under the -------------------------------- Plan shall be evidenced by written documents ("Restricted Stock Award Agreements") in such form as the Committee shall, from time to time, approve. Restricted Stock Award Agreements shall contain such provisions, not inconsistent with the provisions of the Plan, as the Committee shall deem advisable. Each Key Employee granted a Restricted Stock Award shall enter into, and be bound by the terms of, a Restricted Stock Award Agreement. 11 SECTION 10 UNRESTRICTED STOCK AWARDS ------------------------- (a) AWARDS OF UNRESTRICTED STOCK. From time to time until the expiration ---------------------------- or earlier termination of the Plan, the Committee may, on behalf of the Company, make such Unrestricted Stock Awards under the Plan to Key Employees as it determines are warranted. (b) REGISTRATION. Each certificate for unrestricted Common Shares shall ------------ be registered in the name of the Key Employee and immediately be delivered to him or her. SECTION 11 CAPITAL ADJUSTMENTS ------------------- The number of Common Shares which may be issued under the Plan, the maximum number of Common Shares with respect to which Options may be granted to any Key Employee under the Plan, both as stated in Section 4 hereof, the number of Common Shares per NQSO granted to an Outside Director as stated in Section 6, the number of Common Shares issuable upon the exercise of outstanding Options under the Plan (as well as the Option exercise price per share under such outstanding Options), and the number of Common Shares to be delivered upon the vesting of outstanding Restricted Stock Awards (as well as the purchase price, if any, for such Common Shares) shall, subject to the provisions of section 424(a) of the Code, be adjusted to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of the Company. In the event of a corporate transaction (as that term is described in section 424(a) of the Code and the Treasury Regulations issued thereunder as, for example, a merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation), each outstanding Award shall be assumed by the surviving or successor corporation; provided, however, that, in the event of a proposed corporate transaction, the Committee may terminate all or a portion of the outstanding Options granted to Key Employees effective upon closing of such corporate transaction if it determines that such termination is in the best interests of the Company. If the Committee decides so to terminate outstanding Options, the Committee shall give each Key Employee holding an Option to be terminated not less than seven days' notice prior to any such termination by reason of such a corporate transaction, and, at the closing of such corporate transaction, such Options shall be terminated (unless previously exercised) and the Company shall pay to each Key Employee who holds an Option so terminated (except for any Option which terminated prior to the date of such closing otherwise than by reason of such Committee action) an amount equal to the consideration paid, or to be paid, per share of Common Stock to holders of Common Stock in connection with such corporate transaction (as determined in good faith by the Committee) less the applicable exercise price of the Option. Further, as provided in Section 8(a)(4)(A)(ii) hereof, the Committee, in its discretion, may accelerate, in whole or in part, the date on which any or all Options granted to Key Employees become exercisable. The Committee also may, in its discretion, change the terms of any outstanding Awards granted to Key Employees to reflect any such corporate transaction, provided that, in the case of 12 ISOs, such change is excluded from the definition of a "modification" under section 424(h) of the Code. SECTION 12 CHANGE IN CONTROL ----------------- Upon a Change in Control, the Committee (as it is constituted on the day preceding the date of the Change in Control) may, in its discretion, accelerate the vesting and exercisability of outstanding Options and SARs granted to Key Employees and accelerate the vesting of Restricted Stock Awards granted to Key Employees. "Change in Control" shall mean the point in time when any person (as such term is used in Section 13 of the Exchange Act and the rules and regulations thereunder and including any Affiliate or Associate of such person, as 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. At the discretion of the Committee, an Option Agreement may include a provision that an Option will vest and become exercisable upon a Change of Control and a Restricted Stock Award Agreement may include a provision that the Restricted Stock Award will vest upon a Change of Control. SECTION 13 AMENDMENT OR DISCONTINUANCE OF THE PLAN --------------------------------------- (a) IN GENERAL. The Board from time to time may suspend or discontinue ---------- the Plan or amend it in any respect whatsoever, except that, without the approval of the shareholders (given in the manner set forth in Subsection (b) below): (1) the class of persons eligible to receive Awards shall not be changed nor shall any other requirement as to eligibility for participation in the Plan be materially modified; (2) the maximum number of Common Shares with respect to which Awards may be granted under the Plan shall not be increased except as permitted under Section 11; (3) the benefits accruing to individuals participating in the Plan shall not be materially increased; (4) the duration of the Plan under Section 14 shall not be extended; and (5) no amendment which would require shareholder approval pursuant to Prop. Treas. Reg. (S) 1.162- 27(e)(4)(vi), or any successor thereto, may be made. (b) MANNER OF SHAREHOLDER APPROVAL. ------------------------------ (1) The approval of shareholders must be by a majority of the outstanding Common Shares present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state of Delaware; and (2) The approval of shareholders must occur -- (i) By a method and in a degree that would be treated as adequate under applicable state law in the case of an action requiring shareholder approval (i.e., an 13 action on which shareholders would be entitled to vote if the action were taken at a duly held shareholders' meeting); or (ii) By a majority of the votes cast at a duly held shareholders' meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the Plan. (c) AMENDMENTS AFFECTING OUTSIDE DIRECTORS. Notwithstanding the -------------------------------------- foregoing, no amendment to any provision of the Plan that would affect (1) the amount and price of Common Shares subject to NQSOs to be awarded to Outside Directors, (2) the timing of such grants to Outside Directors, or (3) the formula, if any, that determines the amount, price, and timing of NQSO grants to Outside Directors, shall be made more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules promulgated thereunder. Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall terminate or affect the continued existence of rights created under Awards issued and outstanding or materially impair the rights of any holder of an outstanding Award without the consent of such holder. SECTION 14 TERMINATION OF PLAN ------------------- Unless earlier terminated as provided in the Plan, the Plan and all authority granted hereunder shall terminate absolutely at 12:00 midnight on May 31, 2005, which date is within 10 years after the date the Plan was adopted by the Board, and no Awards hereunder shall be granted thereafter. Nothing contained in this Section 14, however, shall terminate or affect the continued existence of rights created under Awards issued hereunder and outstanding on May 31, 2005 which by their terms extend beyond such date. SECTION 15 SHAREHOLDER APPROVAL -------------------- This Plan shall become effective on June 21, 1995 (the date the Plan was adopted by the Board); provided, however, that if the Plan is not approved by the shareholders, in the manner described in Section 13(b), within 12 months after said date, the Plan and all Awards granted hereunder shall be null and void and no additional Awards shall be granted hereunder. 14 SECTION 16 MISCELLANEOUS ------------- (a) GOVERNING LAW. The Plan, and the Option Agreements and Restricted ------------- Stock Award Agreements (collectively the "Award Agreements") entered into, and the Awards granted thereunder, shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the operation of, and the rights of Grantees under, the Plan, the Award Agreements, and the Awards shall be governed by applicable federal law and otherwise by the laws of the state of Delaware. (b) RIGHTS. Neither the adoption of the Plan nor any action of the Board ------ or the Committee shall be deemed to give any individual any right to be granted an Award, or any other right hereunder, unless and until the Committee shall have granted such individual an Award, and then his or her rights shall be only such as are provided by the Plan and the Award Agreement. Any Option under the Plan shall not entitle the holder thereof to any rights as a shareholder of the Company prior to the exercise of such Option and the issuance of the Common Shares pursuant thereto. Further, notwithstanding any provisions of the Plan or any Award Agreement with a Key Employee, the Company shall have the right, in its discretion, to retire a Key Employee at any time pursuant to its retirement rules or otherwise to terminate his or her employment at any time for any reason whatsoever. (c) NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall -------------------------------- impose no obligation upon a Grantee to exercise such Option. (d) NON-TRANSFERABILITY. Other than Unrestricted Stock Awards, no Award ------------------- shall be assignable or transferable by a Grantee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Grantee, any Options or related SARs shall be exercisable only by the Grantee or by his or her guardian or legal representative. If a Grantee is married at the time of exercise of an Option and if the Grantee so requests at the time of exercise, the certificate or certificates issued shall be registered in the name of the Grantee and the Grantee's spouse, jointly, with right of survivorship. (e) WITHHOLDING AND USE OF COMMON SHARES TO SATISFY TAX OBLIGATIONS. The --------------------------------------------------------------- obligation of the Company to deliver Common Shares or pay cash to a Key Employee pursuant to any Award under the Plan shall be subject to applicable federal, state and local tax withholding requirements. In connection with an Award in the form of Common Shares, subject to the withholding requirements of applicable federal tax laws, the Committee, in its discretion (and subject to such withholding rules ("Withholding Rules") as shall be adopted by the Committee), may permit the Key Employee to satisfy the minimum required federal withholding tax, in whole or in part, by electing to have the Company withhold (or by returning to the Company) Common Shares, which shares shall be valued, for this purpose, at their Fair Market Value on the date of exercise of the Option or the date of vesting in the case of Restricted Stock (or if later, the date on which the Key Employee recognizes ordinary income with respect to such Option or Restricted Stock) (the "Determination 15 Date"); provided, however, that with respect to Key Employees who are subject to section 16 of the Exchange Act, any such amount of minimum federal taxes required to be withheld shall be satisfied by withholding Common Shares. An election to use Common Shares to satisfy federal tax withholding requirements must be made in compliance with and subject to the Withholding Rules. The Company may not withhold Common Shares in excess of the number necessary to satisfy the minimum federal income tax withholding requirements. In the event Common Shares acquired under the exercise of an ISO are used to satisfy such withholding requirement, such Common Shares must have been held by the Key Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the Determination Date, or if such Common Shares were acquired through the exercise of a NQSO or of an option under a similar plan, such option must have been granted to the Key Employee at least six months prior to the Determination Date. (f) LISTING AND REGISTRATION OF COMMON SHARES. Each Award shall be subject ----------------------------------------- to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the Common Shares covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the purchase or vesting of Common Shares thereunder, or that action by the Company or by the Grantee should be taken in order to obtain an exemption from any such requirement, no such Option may be exercised, in whole or in part, and no Common Shares shall be delivered pursuant to a Restricted or Unrestricted Stock Award, unless and until such listing, registration, qualification, consent, approval, or action shall have been effected, obtained, or taken under conditions acceptable to the Committee. Without limiting the generality of the foregoing, each Grantee or his or her legal representative or beneficiary may also be required to give satisfactory assurance that Common Shares purchased upon exercise of an Option or received pursuant to a Restricted or Unrestricted Stock Award are being purchased for investment and not with a view to distribution, and certificates representing such Common Shares may be legended accordingly. 16 EX-10.4 7 FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.4 NOBEL EDUCATION DYNAMICS, INC. Non-qualified Stock Option Agreement ------------------------------------ Non-qualified Stock Option Agreement dated as of ________ ("Agreement") between Nobel Education Dynamics, Inc., a Delaware corporation (the "Company"), and ______________ ("Employee"). 1. Definitions ----------- 1.1. "Change in Control" shall have the meaning set forth in Section 12 of the Plan, as the same may be amended from time to time (except that no such amendment shall have the effect of making this definition more restrictive). 1.2. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.3. "Committee" means the Compensation Committee appointed by the Board of Directors of the Company to administer the Plan. 1.4. "Common Stock" means the Company's Common Stock, par value $0.001 per share. 1.5. "Date of Exercise" means the date on which the notice required by Section 4.1 is received by the Company. 1.6. "Date of Grant" means _____________. 1.7. "Fair Market Value" shall mean the value of the Common Stock arrived at by a good faith determination of the Committee and shall be: (a) The mean between the highest and lowest quoted selling price, if there is a market for the Common Stock on a registered securities exchange or in an over the counter market, on the date specified; (b) The weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the specified date, if there are no such sales on the specified date but there are such sales on dates within a reasonable period both before and after the specified date (determined as set forth in Section 7(a) of the Plan); (c) The mean between the bid and asked prices, as reported by the National Quotation Bureau on the specified date, if actual sales are not available during a reasonable period beginning before and ending after the specified date; or (d) Such other method of determining Fair Market Value as shall be authorized by the Code, or the rules or regulations thereunder, and adopted by the Committee. 1.8. "Option" means the option granted hereunder. The Option hereby granted is a non-qualified stock option (i.e., not an "incentive stock option" within the meaning of section 422 of the Code). 1.9. "Optioned Stock" means the shares of Common Stock that are subject to the Option. 1.10. "Plan" means the Nobel Education Dynamics, Inc. 1995 Stock Incentive Plan attached as Exhibit A and incorporated herein by reference. 1.11. "Subsidiary" means any corporation (whether or not in existence at the time the Plan is adopted) which, at the time an Award is granted, is a subsidiary of the Company under the definition of "subsidiary corporation" contained in section 424(f) of the Code, or any successor. 1.12. "Termination Date" means the earliest to occur of the following: (a) the tenth (10th) anniversary of the Date of Grant; (b) if Employee's employment by the Company (and Subsidiaries) is terminated by either party for any reason other than death or disability, the date three months after the date of such termination of employment; (c) if Employee shall become disabled (within the meaning of section 22(e)(3) of the Code) during Employee's employment and Employee's employment is terminated as a consequence of such disability, the date one year after the date of such termination of employment; or (d) if Employee shall die during Employee's employment, the date one year after the date of death; provided that if Employee's employment is terminated for any reason other than death and Employee shall die following such termination of employment but prior to the expiration of the period determined under clause (b) or (c) above (whichever is applicable), then the Termination Date shall mean the earlier of (i) the tenth (10th) anniversary of the Date of Grant and (ii) the date one year after the date of death; provided, further, that, in any event, the Committee shall have the authority to extend further the Termination Date if permitted to do so by the Plan. 2. Grant of Option. --------------- Subject to the terms and conditions of this Agreement, the Company hereby grants to Employee the option to purchase the number of shares of Common Stock listed on the signature page hereof. The exercise price of the Option in respect of each share of Optioned Stock shall be $_______, subject to adjustment pursuant Section 9 hereof and the Plan. Notwithstanding the 2 foregoing, only full shares shall be issued hereunder, and any fractional share which might otherwise be issuable upon the exercise of the Option shall be forfeited. 3. Time of Exercise. ---------------- The Option shall be exercisable from time to time following the Date of Grant through the Termination Date with respect to all or any portion of the Option which shall have been vested as of the Date of Exercise. The Option shall vest with respect to one-third of the shares of Optioned Stock subject thereto as of the Date of Grant on each of the first, second and third anniversary dates of the Date of Grant; provided however that upon a Change in Control, the Option shall immediately vest with respect to all of the shares of Optioned Stock. The Option shall terminate absolutely at 5:00 p.m. New York Time on the Termination Date. 4. Manner of Exercise; Payment. --------------------------- 4.1. Exercise of the Option shall be effected by giving written notice of exercise to the Company, in care of the Secretary of the Company. Any such notice shall state the number of shares of Optioned Stock for which the Option is being exercised and shall be accompanied by payment in full of the exercise price for such shares of Optioned Stock. Such notice shall be irrevocable once given. 4.2. Employee shall have the right to exercise the Option with respect to all or part of the Optioned Stock. Exercise of the Option with respect to part of the Optioned Stock does not waive or limit Employee's rights with respect to the balance of the Optioned Stock. 4.3. The exercise price for the Optioned Stock upon exercise shall be payable in cash or its equivalent; provided, however, that if the Committee, in its discretion, so determines at or prior to the time of exercise, Employee may pay all or a portion of the exercise price in shares of Common Stock previously acquired by Employee; provided further that if such shares were acquired through exercise of an option or under a stock appreciation right or through the grant by the Company of restricted stock or unrestricted stock, Employee shall have held such shares for a period of more than 12 months on the Date of Exercise; provided further that any right to pay the exercise price by delivery of shares shall be subject to applicable laws. In the event all or a portion of the aggregate exercise price is paid with shares of Common Stock, the shares of Common Stock surrendered in payment of such Option shall be valued at the Fair Market Value of such shares on the Date of Exercise. 5. Nontransferability. ------------------ The Option shall not be assignable or transferable by Employee, otherwise than by will or by the laws of descent and distribution, and the Option shall be exercisable only by the Grantee; provided that in the event of Employee's legal disability, the Option may be so exercised by Employee's guardian or legal representative and in the event of Employee's death, the Option may be so exercised by Employee's estate, personal representative or beneficiary who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of Employee. If 3 Employee is married at the time of exercise of the Option and if Employee so requests at the time of exercise, the certificate or certificates issued shall be registered in the name of Employee and Employee's spouse, jointly, with right of survivorship. 6. Securities Laws --------------- The Company may from time to time impose any conditions on the exercise of the Option as it deems necessary or advisable to ensure that the Option granted hereunder, and the exercise thereof, satisfy the applicable requirements of federal and state securities laws. Such conditions to satisfy applicable federal and state securities laws may include, without limitation, the partial or complete suspension of the right to exercise the Option, the printing of legends on certificates issued pursuant to Section 7 and requiring Employee to deliver to the Company a representation letter as to Employee's investment intent. 7. Issuance of Certificates for Shares ----------------------------------- Subject to the provisions of this Agreement, the certificates for the shares of Common Stock issuable upon exercise of the Option shall be delivered to Employee (or to such person entitled thereto in accordance with Section 5) as promptly after the Date of Exercise as is feasible, provided that the exercise shall not be complete, and the Company shall not be obligated to make such deliveries, until (a) Employee has made payment in full for such shares of Optioned Stock pursuant to Section 4 and (b) Employee and the Company (or such Subsidiary as is the employer of Employee) have arranged for the payment by Employee to the Company (or such Subsidiary), or the withholding from Employee's other compensation, of an amount in cash equal to the amount of any tax required to be withheld by the Company (or such Subsidiary) by any applicable federal or state laws or regulations on account of such exercise. The Company may also condition delivery of shares of Common Stock upon the prior receipt from Employee of any undertakings or representations that it may determine are required to ensure that the certificates are being issued in compliance with federal and state securities laws. 8. Rights Prior to Issuance of Certificates ---------------------------------------- Neither Employee nor the person to whom the rights of Employee shall have passed by will or the laws of descent and distribution shall have any of the rights of a stockholder with respect to any shares of Optioned Stock until the date of the issuance to such person of certificates for such shares of Optioned Stock pursuant thereto. 9. Stock Dividends; Subdivision or Combination of Shares ----------------------------------------------------- The number of shares of Common Stock subject to the Option (as well as the Option exercise price per share), shall, subject to the provisions of section 424(a) of the Code, (a) be adjusted to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of the Company and (b) be adjusted as provided in Section 11 of the Plan upon certain other events. 4 10. Option Not to Affect Employment ------------------------------- The Option granted hereunder shall not confer upon Employee any right to continue in the employment of the Company or any Subsidiary of the Company. 11. Withholding. ----------- Each Employee authorizes the Company to make any required withholding from such Employee's compensation for the payment of any and all income taxes and other sums that may be due any governmental authority (other than taxes imposed directly upon the Company) as a result of the receipt by Employee of compensation income pursuant to the foregoing payments, and agrees, if requested by the Company and if the Company has complied with its obligations hereunder, and in lieu of all or a portion of such withholding, to pay the Company in a lump sum such amounts as the Company may be required to remit to any governmental authority on behalf of Employee in respect of any such taxes and other sums. Subject to applicable law, and to the extent permitted by the Committee in accordance with the Plan, Employee may satisfy the minimum required federal withholding tax, in whole or in part, by electing to have the Company withhold (or by returning to the Company) shares of Common Stock. 12. Status of Option; Interpretation. -------------------------------- The Committee shall have sole power to resolve any dispute or disagreement arising out of this Agreement. The Option is subject to the terms and conditions of the Plan as now in effect and as may be amended, from time to time, in accordance with the Plan (which terms and conditions are and automatically shall be incorporated herein by reference and made a part hereof and shall control in the event of any conflict with any of the terms of this Agreement). 13. Miscellaneous ------------- 13.1 All notices and other communications hereunder shall be in writing and shall be transmitted by messenger, courier service or certified first-class mail (in each case postage or cost of delivery prepaid) and shall be effective when delivered. The address for notices and other communications of (i) the Company is Rose Tree Corporate Center II, 1400 North Providence Road, Suite 3055, Media, PA 19063, Attn: Corporate Secretary, and (ii) Employee is the address set forth below under Employee's signature. Either party may change its address for notice given notice to the other pursuant to this Section 13.1. 13.2. This Agreement may be executed in two or more counterparts all of which taken together will constitute one and the same instrument. 13.3. This Agreement shall be governed by the applicable Code provisions to the maximum extent possible; otherwise, the operation of, and the rights of Employee under this Agreement shall be governed by applicable federal law and otherwise by the laws of the State of Delaware. 5 IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. Nobel Education Dynamics, Inc. By:_______________________________________ EMPLOYEE: __________________________________________ Employee's Address: Number of Shares of Optioned Stock: __________________ 6 EX-10.13 8 COMMON STOCK PURCHASE WARRANT DATED 06/30/98 EXHIBIT 10.13 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. NOBEL EDUCATION DYNAMICS, INC. Common Stock Purchase Warrant Warrant No. 1 June 30, 1998 NOBEL EDUCATION DYNAMICS, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, ALLIED CAPITAL CORPORATION (the "Holder"), or its successors or registered assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time on or after June 30, 1998 and before 5:00 p.m., Washington, D.C. time, on the Expiration Date (as hereinafter defined) up to an aggregate of 531,255 fully paid and nonassessable shares of the Company's common stock $.001 par value per share (the "Common Stock"), representing 6.5% of the Company's fully-diluted Common Stock as of June 30, 1998 ("Ownership Percentage"), at a price per share equal to the Exercise Price (as hereinafter defined) in effect at the time of the exercise of this Warrant. The number of shares of Common Stock issuable upon the exercise of this Warrant and the Exercise Price are subject to adjustment as provided in this Warrant. This Warrant is issued pursuant to a certain Investment Agreement (the "Agreement") dated as of June 30, 1998, by and among the Company and its subsidiaries and the Holder, a copy of which is on file at the principal office of the Company. The holder of this Warrant shall be entitled to the benefits of the Agreement, as provided therein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Nobel Education Dynamics, Inc. and any corporation that shall succeed to or assume the obligations of Nobel Education Dynamics, Inc. hereunder. (b) The term "Exercise Price" shall mean, subject to adjustment pursuant to Section 5 hereof, $8.5625 per share of Common Stock. (c) The term "Expiration Date" refers to 5:00 p.m., Washington, D.C. time, on June 30, 2006. 1. Exercise and Conversion of Warrant. ---------------------------------- 1.1 Exercise. Subject to Section 1.3 hereof, this Warrant may be -------- exercised in full or in part at any time or from time to time until the Expiration Date by the holder either (a) by surrender of this Warrant and the subscription form annexed hereto (duly executed) by such holder, to the Company at its principal office, accompanied by payment, in cash, by the surrender of any promissory note or notes or other instruments evidencing any indebtedness outstanding from the Company to the holder hereof, by cancellation of Warrants previously held by the holder hereof or in Common Stock previously owned or acquired upon exercise of this Warrant or by certified or official bank check payable to the order of the Company in the amount obtained by multiplying (x) the number of shares of Common Stock designated by the holder in the subscription form by (y) the Exercise Price then in effect, or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the subscription form annexed hereto duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Exercise Price per share multiplied by the number of shares of Common Stock then being purchased. On any partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as the holder (upon payment by such holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.2 Conversion. ---------- (a) The holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right"), in whole or in part, at any time prior to the Expiration Date, into shares of Common Stock as provided for in this Section 1.2. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Exercise Price) such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) ------- A where X = the number of shares of Common Stock to be issued to the holder hereof pursuant to this Section 1.2. Y = the number of shares of Common Stock then issuable upon the exercise of this Warrant that the holder hereof is surrendering in connection with the exercise of the Conversion Right. A = the Fair Market Value of one share of Common Stock, at the time the Conversion Right is exercised pursuant to this Section 1.2. -2- B = the Exercise Price in effect under this Warrant at the time the Conversion Right is exercised pursuant to this Section 1.2. (b) The Conversion Right may be exercised by the holder, at any time, or from time to time, prior to the Expiration Date, on any business day by delivering a written notice (the "Conversion Notice") to the Company exercising the Conversion Right and specifying (i) the total number of shares of Common Stock the holder wishes to acquire pursuant to such conversion and (ii) a place and a date not less than one nor more than 20 business days from the date of the Conversion Notice for the closing of such purchase. (c) Upon any exercise of the Conversion Right under Section 1.2(b) hereof, (i) the holder will surrender the Warrant and (ii) the Company will deliver to the holder a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, as provided in Section 2 below. Upon any partial exercise of such Conversion Right, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised or converted after giving effect to the exercise of the Conversion Right. (d) Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock is traded on an exchange or is quoted on The Nasdaq National Market, then the average of the high and low sale price reported for the 30 business days immediately preceding the Determination Date. (ii) If the Company's Common Stock is not traded on an exchange or on The Nasdaq National Market but is traded in the over- the-counter market, then the average of the means of the closing bid and asked prices reported for the 30 business days immediately preceding the Determination Date. (iii) Except as provided in subsections 1.2(d)(iv) below, if the Company's Common Stock is not publicly traded, then the Appraised Fair Market Value, pursuant to Section 1.2(e) below. (iv) If the Determination Date is the date of a liquidation, dissolution or winding up of the Company, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's Certificate of Incorporation, as amended (the "Charter"), then the amount specified in the Charter upon liquidation, dissolution or winding up, assuming for purposes of this subsection 1.2 that all of the shares of Common Stock issuable upon exercise of all of the Warrants are outstanding at the Determination Date. -3- (e) Appraised Fair Market Value. The "Appraised Fair Market --------------------------- Value" shall be determined by the following method: (i) If the Company and the holder of the Warrant agree on the selection of an appraiser, such appraiser shall determine a value, and such value shall be the Appraised Fair Market Value; (ii) If the Company and the holder of the Warrant shall not agree on the selection of an appraiser within 10 days, each of the Company and the Holder, shall select an appraiser who shall each determine a value; (iii) If the values determined by such two appraisers are the same (or the lower value determined by an appraiser is within one percent of the value determined by the other), then such value (or the average of such two values) shall be the Appraised Fair Market Value; (iv) If the foregoing two appraisals are not the same and the lower value determined by an appraiser differs by more than one percent of the value determined by the other, then the appraisers shall together select a third appraiser to determine a value; (v) If the determination of the third appraiser is greater than the largest of the first two appraisals or less than the smallest of the first two appraisals, then the average of the first two appraisals shall be the Appraised Fair Market Value; and (vi) If the determination of the third appraiser is between the first two appraisals, then the average of the third appraisal and the closest of the first two appraisals shall be the Appraised Fair Market Value. Each party shall pay the fees and costs of the appraiser it selects, and the fees and costs of the third appraiser, if any, shall be paid equally by Company and the Holder. 1.3 Trustee for Warrant Holder. In the event that a bank or trust -------------------------- company shall have been appointed as trustee for the holder of the Warrant pursuant to subsection 4.2 hereof, such bank or trust company shall have all the powers and duties of a warrant agent appointed pursuant to Section 15 and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise or conversion of this Warrant pursuant to this Section 1. The Company shall give the holder of the Warrant notice of the appointment of any trustee and any change thereof. 2. Delivery of Stock Certificates. As soon as practicable after the ------------------------------ exercise or conversion of this Warrant, and in any event within 30 days thereafter, the Company at its -4- expense (including the payment by it of any applicable issue or stamp taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such holder shall be entitled on such exercise or conversion, in such denominations as may be requested by such holder, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value (as determined in good faith by the Board of Directors) of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise or conversion pursuant to Section 1 or otherwise. 3. Adjustment for Dividends in Other Stock, Property, etc.; -------------------------------------------------------- Reclassification, etc. In case at any time or from time to time, the holders of - ---------------------- Common Stock shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporation rearrangement, other than additional shares of Common Stock issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 5), then and in each such case the holder of this Warrant, on the exercise or conversion hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) which such holder would hold on the date of such exercise or conversion if on the date hereof he had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise or conversion retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Section 4; provided, however, that such adjustment shall be made only in the event that the Ownership Percentage of the holder of this Warrant is reduced by 10 percent or more. 4. Adjustment for Reorganization, Consolidation, Merger, etc. ---------------------------------------------------------- 4.1 Reorganization; Merger; Sale of Assets. In case at any time or -------------------------------------- from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person -5- under any plan or arrangement contemplating the dissolution of the Company, then in each such case, the holder of this Warrant, on the exercise or conversion hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock issuable on such exercise or conversion prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised or converted this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 3 and 5. 4.2 Dissolution. In the event of any dissolution of the Company ----------- following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holder of this Warrant after the effective date of such dissolution pursuant to this Section 4 to the holder or a bank or trust company having its principal office in Washington, D.C., as trustee for the holder or holders of the Warrants. 4.3 Continuation of Terms. Upon any reorganization, consolidation, --------------------- merger or transfer followed by dissolution referred to in this Section 4 (where, in the case of a transfer followed by a dissolution, the transferee is paying for the Company's assets all or in part with its equity securities), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise or conversion of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be. The Company shall be obligated, prior to and as a condition of such transaction, to enter into an agreement for the benefit of the Warrant holders that is binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, pursuant to which such person shall expressly assume the terms of this Warrant as provided in Section 6. 5. Other Adjustments. ----------------- 5.1 Adjustment for Extraordinary Events. In the event that the ----------------------------------- Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide or reclassify outstanding shares of Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 5. The Holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to -6- receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock issuable upon the exercise of this Warrant immediately prior to such issuance by a fraction of which (i) the numerator is the Exercise Price in effect immediately prior to the issuance resulting in an adjustment to the Exercise Price and (ii) the denominator is the Exercise Price in effect after giving effect to any adjustment resulting from such issuance. 5.2 Adjustment for Issuances Below Exercise Price. If the Company --------------------------------------------- shall at any time or from time to time after June 30, 1998 issue or sell any shares of Common Stock (other than (i) shares issued in transactions to which Section 5.1 of this Warrant applies, (ii) up to 1,091,750 shares of Common Stock (appropriately adjusted for subdivisions, combinations, stock dividends and the like) issued as compensation or pursuant to the exercise of options granted as compensation to employees, officers, directors or consultants of the Company in connection with their service to the Company, (iii) shares of Common Stock issuable upon conversion of the Series A Convertible Preferred Stock, Series C Convertible Preferred Stock, or Series D Convertible Preferred Stock, and (iv) shares of Common Stock issuable pursuant to subscriptions, warrants, options, convertible securities, or other rights outstanding as of June 30, 1998 and not included in clauses (i), (ii) or (iii) above) for a consideration per share less than the Exercise Price in effect for this Warrant immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Exercise Price shall (until another such issue or sale) be reduced to a price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (X) the number of shares of Common Stock outstanding immediately prior to such issue or sale, multiplied by the Exercise Price in effect immediately prior to such event plus (Y) the consideration, if any, received by the Company upon such issue or sale, by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale. Further, the number of shares purchasable thereunder shall be increased to a number determined by dividing (i) the number of shares purchasable hereunder immediately prior to such issue or sale, multiplied by a fraction of which (x) the numerator is the Exercise Price hereunder immediately prior to such event, and (y) the denominator is the Exercise Price in effect immediately after the foregoing adjustment. For the purposes of this Section 5.2, the following provisions shall also be applicable: A. In case the Company shall in any manner offer any rights to subscribe for or to purchase shares of Common Stock, or grant any options for the purchase of shares of Common Stock, at a price less than the Exercise Price in effect immediately prior to the time of the offering of such rights or the granting of such options, as the case may be, all shares of Common Stock which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed to be issued or sold as of the date of the offering of such rights or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the Common Stock covered thereby, plus the consideration received by the Company for such rights or options, shall be deemed to be the consideration actually received by the Company (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issue or sale of such shares. -7- B. In case the Company shall in any manner issue or sell any shares of any class or obligations directly or indirectly convertible into or exchangeable for shares of Common Stock and the price per share for which Common Stock is deliverable upon such conversion or exchange (determined by dividing (i) the total minimum amount received or receivable by the Company in consideration of the issue or sale of such convertible or exchangeable shares or obligations, plus the total minimum amount of premiums, if any, payable to the Company upon conversion or exchange, by (ii) the total number of shares of Common Stock necessary to effect the conversion or exchange of all such convertible or exchangeable shares of obligations) shall be less than the Exercise Price in effect immediately prior to the time of such issue or sale, then such issue or sale shall be deemed to be an issue or sale (as of the date of issue or sale of such convertible or exchangeable shares or obligations) of the total maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such convertible or exchangeable shares or obligations, and the total minimum amount received or receivable by the Company in consideration of the issue or sale of such convertible or exchangeable shares or obligations, plus the total minimum amount of premiums, if any, payable to the Company upon exchange or conversion, shall be deemed to be the consideration actually received (as of the date of the issue or sale of such convertible or obligations) for the issue or sale of Common Stock. C. In determining the amount of consideration received by the Company for Common Stock, securities convertible thereinto or exchangeable therefor, or rights or options for the purchase thereof, expenses or underwriting discounts or commissions paid by the Company shall be excluded. The Board shall determine in good faith the fair value of the amount of consideration other than money received by the Company upon the issue by it of any of its securities. The Board shall also determine in good faith the fair value of any dividend or other distribution made upon Common Stock payable in property, securities of the Company other than Common Stock or securities of a corporation other than the Company. The Board shall, in case any Common Stock, securities convertible thereinto or exchangeable therefor, or rights or options for the purchase thereof are issued with other stock, securities or assets of the Company, determine in good faith what part of the consideration received therefor is applicable to the issue of the Common Stock, securities convertible thereinto or exchangeable therefor, or rights or options for the purchase thereof. D. If there shall be any change in (i) the minimum aggregate consideration named in the rights or options referred to in Subsection A above, (ii) the consideration received by the Company for such rights or option, (iii) the price per share for which Common Stock is deliverable upon the conversion or exchange of the convertible or exchangeable shares or obligations referred to in Subsection B above, (iv) the number of shares which may be subscribed for or purchased pursuant to the rights or options referred to in Subsection A above, or (v) the rate at which the convertible or exchangeable shares or obligations referred to in Subsection B above are convertible into or exchangeable for Common Stock, then the Exercise Price in effect at the time of such event shall be readjusted to the Exercise Price which would have been in effect at such time had such rights, options, or convertible or exchangeable shares or obligations still outstanding provided for such changed consideration, price per share, number of shares, or rate of conversion or exchange, as the case may be, at the time initially offered, granted, issued or sold. -8- E. Upon the expiration of the right to convert or exchange any convertible securities, or upon the expiration of any rights, options or warrants, without conversion, exchange or exercise, the issuance of which convertible securities, rights, options or warrants effected an adjustment in the Exercise Price, the Exercise Price shall forthwith be readjusted and thereafter be the price which it would have been (but reflecting any other adjustments in the Exercise Price made pursuant to the terms hereof after the issuance of such convertible securities, rights, options or warrants) had the adjustment of the Exercise Price made upon the issuance or sale of such convertible securities or issuance of rights, options or warrants been made on the basis of the issuance only of the number of additional shares of Common Stock actually issued upon conversion or exchange of such convertible securities, or upon the exercise of such rights, options or warrants, and thereupon only the number of additional shares of Common Stock actually so issued, if any, shall be deemed to have been issued and only the consideration actually received by the Company (computed as set forth herein) shall be deemed to have been received by the Company. 5.3 Adjustment for Price Decline. If the trailing 30 day average ---------------------------- high and low price for Common Stock on the 31st day of May 2000 ("May 31, 2000 Price") is lower than the Exercise Price, the Exercise Price shall be adjusted to equal the May 31, 2000 Price. 5.4 Adjustment Threshold. No adjustment of the Exercise Price shall -------------------- be made under Sections 5.1, 5.2 or 5.3 unless the aggregate actions thereunder reduce in the aggregate the Ownership Percentage of the holder of this Warrant by 10 percent or more. 6. No Impairment. The Company will not, by amendment of its charter or ------------- through any reorganization, transfer of assets, consolidation, merger, dissolution, or any other similar voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of the Warrant against impairment due to such event. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise or conversion of the Warrant above the amount payable therefor on such exercise or conversion, (b) will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise or conversion of all or any portion of this Warrant from time to time outstanding, and (c) will not consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person) or transfer all or substantially all the assets of the Company to another person, unless such other person shall expressly assume in writing and will be bound by all the terms of this Warrant, including the provisions of Section 4. 7. Certificate as to Adjustments. In each case of any adjustment or ----------------------------- readjustment in the number or type of shares or securities issuable on the exercise or conversion of this Warrant, an officer of the Company will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or -9- readjustment, the Exercise Price resulting therefrom and the increase or decrease, if any, or the number of shares purchasable at such price upon exercise or conversion of the Warrant, and showing in detail the facts and computation upon which such adjustment or readjustment is based. The Company will forthwith mail a copy of each such certificate to each registered holder of this Warrant, and will, on the written request at any time of the holder of this Warrant, furnish to such holder a like certificate setting forth the Exercise Price at the time in effect and showing how such Exercise Price was calculated. 8. Notices of Record Date, Etc. In the event of --------------------------- (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend on, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding- up of the Company, then and in each such event the Company will mail or cause to be mailed to the registered holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or option with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or a favorable vote of stockholders if either is required. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken or the record date, whichever is earlier. 9. Reservation of Stock, etc., Issuable on Exercise of Warrants. The ------------------------------------------------------------ Company will at all times reserve and keep available, solely for issuance and delivery on the exercise or conversion of the Warrant, all shares of Common Stock from time to time issuable on the exercise or conversion of this Warrant. -10- 10. Registration. If the issuance of any shares of Common Stock required ------------ to be reserved for purposes of exercise or conversion of this Warrant or for the conversion of such shares requires registration with, or approval of, any Federal governmental authority under any Federal or state law (other than any registration under the Securities Act) or listing on any national securities exchange, before such shares may be issued upon exercise or conversion of this Warrant or such conversion, the Company will, at its expense, use its best efforts to cause such shares to be duly registered or approved, or listed on the relevant national securities exchange, as the case may be, at such time, so that such shares may be issued in accordance with the terms hereof and so converted. 11. Transfer of Warrant. The transfer of this Warrant and all rights ------------------- hereunder, in whole or in part, is registrable at the office or agency of the authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner and holder hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the registration of transfer hereof on the books of the Company; and until due presentment for registration of transfer on such books the Company may treat the registered holder hereof as the owner and holder for all purposes, and the Company shall not be affected by notice to the contrary. 12. Register of Warrants. The Company shall maintain, at the principal -------------------- office of the Company (or such other office as it may designate by notice to the holder hereof), a register in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of such Warrant. The ownership of the Warrant shall be proved by reference to the register and, prior to due presentation for registration of transfer, the Company may treat the person in whose name the Warrant shall be registered as the absolute owner thereof for all purposes. 13. Exchange of Warrant. Subject to Section 20, this Warrant is ------------------- exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in Section 12, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. 14. Replacement of Warrant. On receipt of evidence reasonably ---------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor; provided, however, if this Warrant of which the original holder of this Warrant, - -------- ------- its nominee, or any of its officers or -11- directors is the registered holder is lost, stolen or destroyed, the affidavit of the President, Vice President, Treasurer, or any General Partner of the registered holder setting forth the circumstances with respect to such loss, theft or destruction shall be accepted as satisfactory evidence thereof, and no indemnity bond or other security shall be required as a condition to the execution and delivery by the Company of a new Warrant in replacement of such lost, stolen or destroyed Warrant other than the registered holder's written agreement to indemnify the Company. 15. Warrant Agent. The Company may, by written notice to the registered ------------- holder of this Warrant, appoint an agent for the purpose of issuing Common Stock on the exercise or conversion of the Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 13, and replacing this Warrant pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 16. Remedies. The Company stipulates that the remedies at law of the -------- holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 17. Closing of Books. The Company will at no time close its transfer ---------------- books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise or conversion of any Warrant in any manner which interferes with the timely exercise or conversion of this Warrant. 18. No Rights or Liabilities as a Stockholder. This Warrant shall not ----------------------------------------- entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Common Stock, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 19. Notice, etc. All notices and other communications from the Company to ----------- the registered holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as shall have been furnished to the Company in writing by such holder. 20. Investment Representations. The holder hereof (and each subsequent -------------------------- holder) represents to the Company that this Warrant is being acquired for the holder's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution thereof, nor with any present intention of distributing or selling the Warrant or the Common Stock issuable upon exercise or conversion of the Warrant. The holder hereof acknowledges and agrees that the Warrant and the Common Stock issuable upon exercise or -12- conversion of the Warrant (if any) have not been (and at the time of acquisition by such holder, will not have been or will not be) registered under the Securities Act or under the securities laws of any state, in reliance upon certain exemptive provisions of such statutes. The holder hereof recognizes and acknowledges that because the Warrant and the Common Stock issuable upon exercise or conversion of the Warrant (if any) are unregistered, they are not presently eligible for resale, and may only be resold in the future pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to a valid exemption from such registration requirements. Each subsequent holder hereof shall be required to make all of the representations which are required by this Section 20 to be made by the initial holder hereof, including without limitation the representations which are contained in the Agreement. The Company shall not be required to register the transfer of the Warrant or any Common Stock into which the Warrant may be converted on the books of the Company unless the Company shall have been provided at the transferor's expense with an opinion of counsel reasonably satisfactory to the Company prior to such transfer to the effect that registration under the Securities Act of 1933, as amended, or any applicable state securities laws is not required in connection with the transaction resulting in such transfer. The Warrant shall bear the restrictive legend set forth at the beginning of this Warrant, and any share certificate issued upon conversion shall bear a comparable legend, except that such restrictive legend shall not be required if the opinion of counsel reasonably satisfactory to the Company referred to above is to the further effect that such legend is not required in order to establish compliance with the provisions of the Securities Act of 1933, as amended, and any applicable state securities laws, or if the transfer is made in accordance with the provisions of Rule 144 under such act. 21. Binding Effect on Successors. This Warrant shall be binding upon any ---------------------------- corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets (to the extent provided in Section 4), and all of the obligations of the Company relating to the Common Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion, and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Registrable Securities) to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the -------- holder hereof to make any such request shall not affect the continuing obligation of the company to the holder hereof in respect of such rights. 22. Miscellaneous. This Warrant and any term hereof may be changed, ------------- waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought, subject to the provisions of the Agreement. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of Delaware. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This -13- Warrant is being executed as an instrument under seal. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -14- IN WITNESS WHEREOF the Company has executed this Warrant on the date set forth below. Dated: June 30, 1998 NOBEL EDUCATION DYNAMICS, INC. By: _______________________________ Title:______________________________ [Corporate Seal] Attest: ___________________________ Secretary -15- FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: NOBEL EDUCATION DYNAMICS, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, ________________________ shares of _________________________ of NOBEL EDUCATION DYNAMICS, INC. and herewith makes payment of $__________________________ therefor in cash, and requests that the certificates for such shares be issued in the name of, and delivered to _________________________________________ whose address is _____________________________________________________________. Dated: ___________________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ____________________________________ ____________________________________ (Address) -16- FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto ______________________________________ the right represented by the within NOBEL EDUCATION DYNAMICS, INC. to which the within Warrant relates, and appoints _____________________________ Attorney to transfer such right on the books of NOBEL EDUCATION DYNAMICS, INC. with full power of substitution in the premises. Dated: ____________________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ____________________________________ ____________________________________ (Address) Signed in the presence of: ________________________________________ -17- EX-10.14 9 FIRST AMENDMENT & RESTATED REGISTRATION RIGHTS EXHIBIT 10.14 FIRST AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT ----------------------------- FIRST AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of June 30, 1998 (the "Agreement"), by and between Nobel Education Dynamics, Inc., a Delaware corporation (the "Company") and Allied Capital Corporation, a Maryland corporation ("Allied"). BACKGROUND: ---------- WHEREAS, the parties hereto are parties to a Registration Rights Agreement dated August 30, 1995 (the "Original Registration Rights Agreement"), which was entered into in connection with the execution by the parties of the Investment Agreement dated as of August 30, 1995 (the "1995 Investment Agreement") pursuant to which Allied purchased an aggregate of 1,063,830 shares (the "Preferred Shares") of the Company's Series D Convertible Preferred Stock, $.001 par value, and warrants (the "1995 Warrants") for the purchase of up to an aggregate of 1,236,171 shares (the "1995 Warrant Shares") of the Company's common stock, $.001 par value (the "Common Stock"). WHEREAS, the parties hereto amended the Original Registration Rights Agreement pursuant to the First Amendment of Registration Rights Agreement dated as of February 23, 1996 (the "First Amendment") in order to eliminate certain conflicts among holders of registration rights relating to the Common Stock. WHEREAS, the Company, certain of its subsidiaries and Allied have entered into an Investment Agreement dated as of the date hereof (the "1998 Investment Agreement," and together with the 1995 Investment Agreement, the "Investment Agreements") pursuant to which Allied has purchased a warrant (the "1998 Warrant," and collectively with the 1995 Warrants, the "Warrants") for the purchase of _________ shares (the "1998 Warrant Shares," and collectively with the 1995 Warrant Shares, the "Warrant Shares") of Common Stock. WHEREAS, the parties hereto wish to amend and restate in its entirety the Original Registration Rights Agreement, as amended by the First Amendment, as provided herein. NOW THEREFORE, in consideration of the mutual promises made herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any ---------- other federal agency at the time administering the Securities Act. "Common Stock" shall mean Common Stock, $.001 par value, of the Company, as ------------ constituted as of the date of this Agreement. "Conversion Shares" shall mean shares of Common Stock issued upon ----------------- conversion of the Preferred Shares. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, ------------ or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Registration Expenses" shall mean the expenses so described in Section 8. --------------------- "Restricted Stock" shall mean the Conversion Shares and Warrant Shares, ---------------- excluding shares which have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them, shares which have been publicly sold pursuant to Rule 144 under the Securities Act, or shares which are eligible to be publicly sold under paragraph (k) of Rule 144. "Securities Act" shall mean the Securities Act of 1933, as amended, or any -------------- similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean the expenses so described in Section 8. ---------------- 2. Restrictive Legend. Each certificate representing Preferred Shares, ------------------ Conversion Shares or Warrant Shares and each Warrant shall, except as otherwise provided in this Section 2 or in Section 3, be stamped or otherwise imprinted with a legend substantially in the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE." A certificate or Warrant shall not bear such legend if in the written opinion of counsel satisfactory to the Company (it being agreed that Piper & Marbury L.L.P. shall be satisfactory) the securities being sold thereby may be publicly sold without registration under the Securities Act. 3. Notice of Proposed Transfer. Prior to any proposed transfer of any --------------------------- Preferred Shares, Conversion Shares, Warrants or Warrant Shares (other than under the circumstances described in Sections 4, 5 or 6), the holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company (it being agreed that Piper & Marbury L.L.P. shall be satisfactory) to the effect that the proposed transfer may be effected without registration under the Securities Act, -2- whereupon the holder thereof shall be entitled to transfer such stock or Warrant in accordance with the terms of its notice. Each certificate for Preferred Shares, Conversion Shares or Warrant Shares and each Warrant transferred as above provided shall bear the legend set forth in Section 2, except that such certificate or Warrant shall not bear such legend if the opinion of counsel referred to above is to the effect that the transferee and any subsequent transferee would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 3 shall not apply to securities which are not required to bear the legend prescribed by Section 2 in accordance with the provisions of that Section. 4. Required Registration. Subject to the limitation expressed in Section --------------------- 5(b), at any time after the date of this Agreement that the Company is ineligible to use a Form S-3 to effect the registrations contemplated by Section 6 below, the holders of Restricted Stock constituting at least 50% of the total shares of Restricted Stock then outstanding may request the Company to register under the Securities Act all or any portion of the shares of Restricted Stock held by such requesting holder or holders for sale in the manner specified in such notice, provided that the shares of Restricted Stock for which registration has been requested shall constitute at least 50% of the total shares of Restricted Stock originally issued if such holder or holders shall request the registration of less than all shares of Restricted Stock then held by such holder or holders. For purposes of this Section 4 and Sections 5, 6, 13(a) and 13(d), the term "Restricted Stock," shall be deemed to include the number of shares of Restricted Stock which would be issuable to a holder of Preferred Shares upon conversion of all Preferred Shares held by such holder at such time and the number of shares of Restricted Stock which would be issuable to a holder of Warrants upon exercise of all Warrants held by such holder at such time, provided, however, that the holder or holders of the 1998 Warrant Shares shall - -------- ------- have no registration rights with respect to such 1998 Warrant Shares pursuant to this Section 4 until June 30, 1999, provided further, however, that the only ---------------- ------- securities which the Company shall be required to register pursuant hereto shall be shares of Common Stock, and provided further, however, that, in any ---------------- ------- underwritten public offering contemplated by this Section 4 or Sections 5 and 6, the holders of Preferred Shares shall be entitled to sell such Preferred Shares to the underwriters for conversion and sale of the shares of Common Stock issued upon conversion thereof. Notwithstanding anything to the contrary contained herein, no request may be made under this Section 4 or under Section 6 within 120 days after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the holders of Restricted Stock shall have been entitled to join pursuant to Sections 5 or 6 and in which there shall have been effectively registered all shares of Restricted Stock as to which registration shall have been requested. (a) Following receipt of any notice under this Section 4, the Company shall immediately notify all holders of Restricted Stock from whom notice has not been received and shall use its best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting holders, the number of shares of Restricted Stock specified in such notice (and in all notices received by the Company from other holders within 30 days after the giving of such notice by the Company). If such method of disposition shall be an underwritten public offering, the holders of a majority of the shares of Restricted Stock to be sold in such offering may designate the managing underwriter of such -3- offering, subject to the approval of the Company, which approval shall not be unreasonably withheld or delayed. The Company shall not be obligated to register the 1998 Warrant Shares pursuant to this Section 4 and pursuant to Section 6 on more than one occasion (for both sections) and shall not be obligated to register Restricted Stock (other than the 1998 Warrant Shares) pursuant to this Section 4 and pursuant to Section 6 on more than two occasions (for both sections), provided, however, that such obligation shall be deemed satisfied -------- ------- only when a registration statement covering all shares of Restricted Stock specified in notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting holders, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, 75% of all such shares shall have been sold pursuant thereto. (c) The Company may not include in any registration statement referred to in this Section 4 any shares of Common Stock to be sold for the account of any person not entitled as of June 30, 1998 to registration rights with respect to such shares except for the shares of Common Stock to be issued to persons purchasing such shares in connection with the Company's private placement of 1,000,000 shares of Common Stock as described in the Company's Private Placement Offering memorandum dated February 15, 1996, all of which persons have brokerage accounts with Gilder, Gagnon, Howe & Co. at the closing of such transaction (collectively, the "Gilder Shares"). The Company may include in any registration statement referred to in this Section 4 Gilder Shares and/or shares of Common Stock to be sold for its own account or for the account of any other holders of Common Stock who as of June 30, 1998 are entitled to "piggyback" or "incidental" rights to be included in the registration statement, in which case such registration statement shall be deemed to be a registration statement initiated by the Company and shall be governed by the provisions of Section 5 below. Except for registration statements on Form S-4, S-8 or any successor thereto, registration statements registering the Gilder Shares and/or securities to be issued by the Company to the seller or sellers in connection with an acquisition by the Company and registration statements required to be filed for holders of Common Stock who as of June 30, 1998 are entitled to "demand" registration rights, the Company will not file with the Commission any other registration statement with respect to its Common Stock, whether for its own account or that of other stockholders, from the date of receipt of a notice from requesting holders pursuant to this Section 4 until the completion of the period of distribution of the registration contemplated thereby, as described in Section 7. 5. Incidental Registration. ----------------------- (a) If the Company at any time (other than pursuant to Section 4 or Section 6) proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Restricted Stock for sale to the public, and the registration statement to be filed by the Company to register the shares of Common Stock to be issued to the stockholders of Educo, Inc.), each such time it will give written notice to all holders of outstanding Restricted Stock of its intention so to do. Upon the written request of any such holder, received by the Company within 30 days after the giving of any such notice by the Company, to register any of its Restricted Stock (which request shall state the intended method of disposition thereof), the Company will use its best -4- efforts to cause the Restricted Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the holder (in accordance with its written request) of such Restricted Stock so registered. In the event that any registration pursuant to this Section 5 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of shares of Restricted Stock to be included in such an underwriting may be reduced (pro rata among the requesting holders based upon the number of shares of Restricted Stock owned by such holders and the shares of Common Stock held by the persons referred to in clauses (ii) and (iii) of the proviso to this sentence) if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein, provided, however, that such number of shares of Restricted Stock shall not be reduced if any shares are to be included in such underwriting for the account of any person other than (i) the Company, (ii) requesting holders of Restricted Stock or (iii) any other holders of Common Stock who as of June 30, 1998 are entitled to contractual "piggyback" or "incidental" rights to be included in the registration statement. Whenever a registration statement is deemed (pursuant to the provisions of Section 4 or Section 6) to be a registration statement initiated by the Company and therefore governed by the provisions of this Section 5, such registration statement shall nevertheless be deemed to count as a registration statement required to be filed by the Company under Section 6 and Section 4 if the registration statement covers all shares of Restricted Stock specified in the notices from the requesting holders thereof for sale in accordance with the method of disposition specified in such notice, becomes effective and, if such method of disposition is a firm commitment underwritten public offering, 75% of all such shares are sold pursuant thereto. (b) Notwithstanding anything herein to the contrary, the Company shall not be required to file any registration statement registering the Restricted Stock upon the demand of the holders of the Restricted Stock made under Section 4 or Section 6 of this Agreement during the period beginning on the date of the Company's receipt of a notice from requesting holders pursuant to Section 4 or Section 6 of the Registration Rights Agreement by and among the Company, Edison Venture Fund II, L.P. and Edison Venture Fund, II-Pa., L.P. and ending on the date on which the distribution of the securities included in such registration has been completed. 6. Registration on Form S-3. Subject to the limitation set forth in ------------------------ Section 5(b) and in the last sentence of Section 4(a), if at any time (i) a holder or holders of Restricted Stock constituting at least 50% of the total shares of Restricted Stock then outstanding request the Company to register under the Securities Act all or any portion of the shares of Restricted Stock held by such requesting holder or holders for sale in the manner specified in such notice (provided that the shares of Restricted Stock for which registration has been requested shall constitute at least 50% of the total shares of Restricted Stock originally issued if such holder or holders shall request the registration of less than all shares of Restricted Stock then held by such holder or holders) on Form S-3 or any successor thereto for a public offering of shares of Restricted Stock held by such requesting holder or holders and (ii) the Company is a registrant entitled to use Form S-3 or any successor thereto to register such shares, then the Company shall use its best efforts to register under the Securities Act on Form S-3 or any successor thereto, for public sale in accordance with the method of disposition specified in such notice, the number of -5- shares of Restricted Stock specified in such request. Whenever the Company is required by this Section 6 to use its best efforts to effect the registration of Restricted Stock, each of the procedures and requirements of Section 4 (including but not limited to the requirement that the Company notify all holders of Restricted Stock from whom notice has not been received and provide them with the opportunity to participate in the offering) shall apply to such registration, provided, however, that the requirements contained in the first sentence of Section 4(a) shall not apply to any registration on Form S-3 which may be requested and obtained under this Section 6. The Company may not include in any registration statement referred to in this Section 6 any shares of Common Stock to be sold for the account of any person not entitled as of June 30, 1998 to registration rights with respect to such shares, except the Gilder Shares. The Company may include in any registration statement referred to in this Section 6 the Gilder Shares and/or shares of Common Stock to be sold for its own account or for the account of any other holders of Common Stock who as of June 30, 1998 are entitled to "piggyback" or "incidental" rights to be included in the registration statement, in which case such registration statement shall be deemed to be a registration-statement initiated by the Company and shall be governed by the provisions of Section 5 above. Except for registration statements on Form S-4, S-8 or any successor thereto, registration statements registering the Gilder Shares and/or securities to be issued by the Company to the seller or sellers in connection with an acquisition by the Company and registration statements required to be filed for holders of Common Stock who as of June 30, 1998 are entitled to "demand" registration rights, the Company will not file with the Commission any other registration statement with respect to its Common Stock, whether for its own account or that of other stockholders, from the date of receipt of a notice from requesting holders pursuant to this Section 6 until the completion of the period of distribution of the registration contemplated thereby, as described in Section 7. 7. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of Sections 4, 5 or 6 to use its best efforts to effect the registration of any shares of Restricted Stock under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (c) furnish to each seller of Restricted Stock and to each underwriter each number of copies of the registration statement and the prospectus included therein (including each -6- preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such registration statement; (d) use its best efforts to register or qualify the Restricted Stock covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the sellers of Restricted Stock or, in the case of an underwritten public offering, the managing underwriter reasonably shall request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) use its best efforts to list the Restricted Stock covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify each seller of Restricted Stock and each underwriter under such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, whereupon each such seller shall refrain from making any sales of Restricted Stock until a prospectus supplement describing such event has been forwarded to such seller by the Company; (g) if the offering is underwritten and at the request of any seller of Restricted Stock, use its best efforts to furnish on the date that Restricted Stock is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements contained therein) and (C) to such other effects as reasonably may be requested by counsel for the underwriters or by such seller or its counsel and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request; and -7- (h) make available for inspection by each seller of Restricted Stock, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. For purposes of Section 7(a) and 7(b) and of Section 4(c), the period of distribution of Restricted Stock in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Restricted Stock in any other registration shall be deemed to extend until the earlier of the sale of all Restricted stock covered thereby and 120 days after the effective date thereof. In connection with each registration hereunder, the sellers of Restricted Stock will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Sections 4, 5 or 6 covering an underwritten public offering, the Company and each seller agree to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. 8. Expenses. All expenses incurred by the Company in complying with -------- Sections 4, 5 and 6, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, and costs of insurance for the sellers of Restricted Stock, but excluding any Selling Expenses, are called "Registration Expenses". All underwriting discounts, selling commissions and fees of counsel to participating sellers applicable to the sale of Restricted Stock are called "Selling Expenses". The Company will pay all Registration Expenses in connection with each registration statement under Sections 4, 5 or 6. All Selling Expenses in connection with each registration statement under Sections 4, 5 or 6 shall be borne by the participating sellers in proportion to the number of shares sold by each, or by such participating sellers other than the Company (except to the extent the Company shall be a seller) as they may agree. 9. Indemnification and Contribution. In the event of a registration of -------------------------------- any of the Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, the Company will indemnify and hold harmless each seller of such Restricted Stock thereunder, each underwriter of such Restricted Stock thereunder and each other person, if any, who controls such seller or -8- underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such Restricted Stock thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of each seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the shares sold by such seller under such registration statement bears to the total public offering price of all securities sold thereunder, but not in any event to -9- exceed the proceeds received by such seller from the sale of Restricted Stock covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 9 and shall only relieve it from any liability which it may have to such indemnified party under this Section 9 if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any holder of Restricted Stock exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Section 9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling holder or any such controlling person in circumstances for which indemnification is provided under this Section 9; then, and in each such case, the Company and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such holder is responsible for the portion represented by the percentage that the public offering price of its Restricted Stock offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is responsible for the remaining portion; provided, however, that, in any such case, (A) no such holder will be required to contribute any amount in excess of the public offering price of all such Restricted Stock offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning -10- of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 10. Changes in Common Stock or Preferred Shares. If, and as often as, ------------------------------------------- there is any change in the Common Stock or the Preferred Shares by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the Common Stock or the Preferred Shares as so changed. 11. Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Stock to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each holder of Restricted Stock forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such holder to sell any Restricted Stock without registration. 12. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to you as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Charter or By-laws of the Company or any provision of any indenture, agreement or other instrument to which it or any or its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. 13. Miscellaneous. ------------- -11- (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, transferees of any Preferred Shares, Warrants or Restricted Stock), whether so expressed or not, provided, however, that registration rights conferred herein on the holders of Preferred Shares, Warrants or Restricted Stock shall only inure to the benefit of a transferee of Preferred Shares, Warrants or Restricted Stock if there is transferred to such transferee at least 10% of the total shares of Restricted Stock originally issued pursuant to the Investment Agreement to the direct or indirect transferor of such transferee or such transferee is a partner, shareholder or affiliate of a party hereto. (b) All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed as follows: if to the Company or any other party hereto, at the address of such party set forth in the applicable Investment Agreement; if to any subsequent holder of Preferred Shares, Warrants or Restricted Stock, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder of Preferred Shares, Warrants or Restricted Stock) or to the holders of Preferred Shares, Warrants or Restricted Stock (in the case of the Company) in accordance with the provisions of this paragraph. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. (d) This Agreement may not be amended or modified, and no provision hereof may be waived, without the written consent of the Company and the holders of at least two-thirds of the outstanding shares of Restricted Stock. (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) The obligations of the Company to register shares of Restricted Stock under Sections 4, 5 or 6 shall terminate on August 19, 2009. (g) If requested in writing by the underwriters for an underwritten public offering of securities of the Company, each holder of Restricted Stock who is a party to this Agreement shall agree not to sell publicly any shares of Restricted Stock or any other shares of Common Stock (other than shares of Restricted Stock or other shares of Common Stock being registered in such offering), without the consent of such underwriters, for a period of not more than 180 days following the effective date of the registration statement relating to such offering; provided, however, that all persons entitled to registration rights with respect to shares of Common Stock who are not parties to this Agreement, all other persons selling shares of Common Stock in such -12- offering, all persons holding in excess of 1% of the capital stock of the Company on a fully diluted basis and all executive officers and directors of the Company shall also have agreed not to sell publicly their Common Stock under the circumstances and pursuant to the terms set forth in this section 13(g). (h) Notwithstanding the provisions of Section 7(a), the Company's obligation to file a registration statement, or cause such registration statement to become and remain effective, shall be suspended for a period not to exceed 90 days in any 12-month period if there exists at the time material non- public information relating to the Company which, in the reasonable opinion of the Company, should not be disclosed, and no sales of Restricted Stock shall be made by the holders during such period. (i) The Company shall not grant to any third party any registration rights more favorable than any of those contained herein, so long as any of the registration rights under this Agreement remains in effect. (j) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -13- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. NOBEL EDUCATION DYNAMICS, INC. By:____________________________ Title: ALLIED CAPITAL CORPORATION By:____________________________ Title: -14- EX-10.15 10 EXECUTIVE SEVERANCEPAY PLAN AS AMENDED 06/11/98 EXHIBIT 10.15 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
-i- (S)6.7 Entire Agreement........................................ 11 (S)6.8 Successor Employer...................................... 11
-ii- 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. If a Change in Control occurs (as defined in any subsection of this Section 1.2), and prior to the date an Eligible Employee experiences a Termination Event, a Change in Control (also as defined in any subsection of this Section 1.2) again occurs, the determination of the entitlement of such Eligible Employee to benefits hereunder shall be made by reference to the Change in Control event that results in the largest benefit hereunder; provided, however, that the Plan Administrator shall be determined by reference to the first Change in Control event which occurs in the two-year period prior to the date of the participant's Termination Event. A Change in Control shall be deemed to occur upon satisfaction of any subsection of this Section 1.2 irrespective of prior events constituting a Change in Control (e.g., if a person becomes the benefi cial 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 without such acquisition being approved by the requisite members of the Board and later the same person 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, and later the same person causes new individuals to be elected to the board so the threshold described in subsection (d) of this Section 1.2 is satisfied, then there shall be deemed to be a Change in Control on the date that each of such three events occurs). (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- -2- 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. (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. (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). -3- (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 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 -4- (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 (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). -5- 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). (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 -6- 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). 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: -7- (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 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 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 -8- 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. (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. -9- (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] -10- 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. -11- 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. -12- EX-21 11 LIST OF SUSIDIARIES OF THE REGISTRANT EXHIBIT 21 LIST OF SUBSIDIARIES Merryhill Schools, Inc. Merryhill Schools Nevada, Inc. Nedi, Inc. The foregoing list omits certain subsidiaries of the Registrants which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of June 30, 1998. EX-23 12 CONSENT OF COOPERS & LYBRAND LLP Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the information 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 Forms S-8 (File Nos. 33-21859, 33-44888 and 33-64701) of our report dated August 7, 1998, except for Note 17, as to which the date is August 17, 1998, on our audits of the consolidated financial statements of Nobel Education Dynamics, Inc. and subsidiaries as of June 30, 1998, December 31, 1997 and 1996, and for the six months ended June 30, 1998 and each of the three years in the period ended December 31, 1997 which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania September 23, 1998 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 12-MOS JUN-30-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 JAN-30-1998 DEC-31-1997 408 2,605 0 0 1,130 1,091 133 133 0 0 3,552 5,694 31,601 33,030 (9,226) (7,856) 73,623 74,398 13,773 13,640 0 0 0 0 5 5 6 6 32,725 31,625 32,736 31,636 48,995 80,980 48,995 80,980 42,142 69,858 46,034 78,918 0 0 0 0 1,044 2,047 1,984 (186) 833 (250) 1,151 (436) 0 0 0 (449) 0 0 1,151 (885) $0.18 $(0.09) $0.15 $(0.16)
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