Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number 1-1003
NOBEL LEARNING COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2465204
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1615 West Chester Pike 19382
West Chester, PA
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (484) 947-2000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities Registered Pursuant to
Section 12(g) of the Act:
Common Stock, par value
$.001 per share
(Title of each class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No_____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 3, 2002, 6,544,953 shares of common stock were outstanding.
The aggregate market value of the shares of common stock owned by non-affiliates
of the Registrant as of September 3, 2002 was approximately $30,256,000 (based
upon the closing sale price of these shares on such date as reported by Nasdaq).
Calculation of the number of shares held by non-affiliates is based on the
assumption that the affiliates of the Company include the directors, executive
officers and stockholders who have filed a Schedule 13D or 13G with the Company
which reflects ownership of at least 10% of the outstanding common stock or have
the right to designate a member of the Board of Directors, and no other persons.
The information provided shall in no way be construed as an admission that any
person whose holdings are excluded from the figure is an affiliate or that any
person whose holdings are included is not an affiliate and any such admission is
hereby disclaimed. The information provided is included solely for record
keeping purposes of the Securities and Exchange Commission.
-ii-
TABLE OF CONTENTS
Item
No. Page
PART I
1. Business ....................................................................... 1
Executive Officers of the Company .............................................. 8
2. Properties ..................................................................... 10
3. Legal Proceedings .............................................................. 10
4. Submission of Matters to a Vote of Security Holders ............................ 10
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters ................................................ 11
6. Selected Financial Data ........................................................ 13
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............................... 14
7A. Quantitative and Qualitative Disclosures About Market Risk ..................... 22
8. Financial Statements and Supplementary Data .................................... 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ......................................... 22
PART III
10. Directors and Executive Officers of the Registrant ............................. 23
11. Executive Compensation ......................................................... 26
12. Security Ownership of Certain Owners and Management ............................ 37
13. Certain Relationships and Related Transactions ................................. 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............... 44
iii
PART I
ITEM 1. BUSINESS.
Recent Developments
Nobel Learning Communities, Inc. ("NLCI" or "the Company") has entered
into an Agreement and Plan of Merger, dated as of August 5, 2002, with Socrates
Acquisition Corporation ("Socrates"), a corporation newly formed by Gryphon
Partners II, L.P. and Cadigan Investment Partners, Inc. (the "Buying Group"),
both of which are engaged principally in the business of investing in companies.
Under the merger agreement, Socrates will be merged into NLCI, with NLCI as the
surviving corporation (the "Merger"). If the Merger is completed, each issued
and outstanding share of NLCI common stock and preferred stock (calculated on an
as-converted basis to the nearest one-hundredth of a share) will be converted
into the right to receive $7.75 in cash, without interest, except for certain
shares and options held by the NLCI directors and executive officers identified
in the merger agreement as a rollover stockholder, which will continue as, or be
converted into, equity interests of the surviving corporation. In addition, if
the Merger is completed, each outstanding option and warrant that is exercisable
as of the effective time of the Merger will be canceled in exchange for (1) the
excess, if any, of $7.75 over the per share exercise price of the option or
warrant multiplied by (2) the number of shares of common stock subject to the
option or warrant exercisable as of the effective time of the merger, net of any
applicable withholding taxes. Following the Merger, NLCI will continue its
operations as a privately held company. The Merger is contingent upon
satisfaction of a number of conditions, including approval of NLCI's
stockholders, the receipt of regulatory and other approvals and consents, the
absence of any pending or threatened actions that would prevent the consummation
of the transactions contemplated by the merger agreement and receipt of
financing. There can be no assurance that these or other conditions to the
Merger will be satisfied or that the Merger will be completed. If the Merger is
not completed for any reason, it is expected that the current management of
NLCI, under the direction of the NLCI Board of Directors, will continue to
manage NLCI as an ongoing business.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
Certain statements set forth in or incorporated by reference in this
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, whether and when the Merger will be consummated, our outlook for
Fiscal 2003, other statements in this report other than historical facts
relating to the financial conditions, results of operations, plans, objectives,
future performance and business of the Company. In addition, words such as
"believes," "anticipates," "expects," "intends," "estimates," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Such statements are based on our
currently available operating budgets and forecasts, which are based upon
detailed assumptions about many important factors such as market demand, market
conditions and competitive activities. While we believe that our assumptions are
reasonable, we caution that there are inherent difficulties in predicting the
impact of certain factors, especially those affecting the acceptance of our
newly developed schools and businesses and performance of recently acquired
businesses, which could cause actual results to differ materially from predicted
results. Readers are cautioned that the forward-looking statements reflect
management's analysis only as of the date hereof, and the Company assumes no
obligation to update these statements. Actual future results, events and trends
may differ materially from those expressed in or implied by such statements
depending on a variety of factors set forth throughout this 10-K. With respect
to any forward-looking statements regarding the Merger, these factors include,
but are not limited to, the risks that stockholder approval, financing and
regulatory and other governmental and third-party clearances and consents may
not be obtained in a timely manner or at all and that other conditions to the
Merger may not be satisfied.
General
The Company is a for-profit provider of education for the pre-elementary
through 12th grade market and school management services. Our programs are
offered through a network of private schools, charter schools, schools for
learning challenged students, and special purpose high schools, under the global
brand name "Nobel Learning Communities." These schools typically provide summer
camps and before-and-after school programs. Our credo is "Quality Education
Maximizing a Child's Life Opportunities."
Our schools are located in Arizona, California, Florida, Georgia, Illinois,
Maryland, Nevada, New Jersey, North Carolina, Oregon, Pennsylvania, South
Carolina, Texas, Virginia and Washington. The schools operate under
1
various names, including Chesterbrook Academy (East, South and Midwest),
Merryhill School (West), Evergreen Academy (Northwest), Paladin Academy
(learning challenged) and Houston Learning Academy and Saber Academy (special
purpose high schools). As of September 3, 2002, we operated 179 schools in 15
states, with an aggregate capacity of approximately 28,000 children.
We are pursuing a four-pronged strategy to take advantage of the
significant growth opportunities in the private education market:
. internal organic growth at existing schools, including expansions
of campus facilities;
. new school development in both existing and new markets;
. strategic acquisitions; and
. development of new businesses.
Our pre-elementary and elementary strategy is based on meeting the
educational needs of children, beginning with infancy. We encourage our children
to stay with our schools as they advance each school year, within our geographic
clusters called "Nobel Learning Communities." Through the use of strategically
designed clusters, we seek to increase market awareness, achieve operating
efficiencies, and provide cross-marketing opportunities, particularly by
providing feeder populations from pre-elementary school to elementary school,
and elementary school to middle school, and to and from our other specialty
programs. Centralized administration provides control of program quality and
development and significant operating efficiencies.
We seek to distinguish our schools from our competition with qualitative
and quantitative program outcomes. At each level, we support a child's
development with age-appropriate curriculum-based programs. We foster a more
individualized approach to learning through our small schools with small
classes, with curricula that integrates community-based learning and that is
supported by technology. Further, in certain locations, we serve those with
special needs through our schools for learning challenged and special purpose
high schools. We believe that the empirical results support the quality of our
programs. Standardized test results have shown that, on average, our students
perform one and one-half to three grade levels above national norms in reading
and mathematics.
Many of our pre-elementary and elementary schools operate from 6:30 a.m. to
6:00 p.m., allowing early drop-off and late pick-up by working parents. In most
locations, programs are available for children starting at six weeks of age. For
a competitive price, parents can feel comfortable leaving their children at one
of our schools knowing the children will receive both a quality education and
engage in well-supervised activities.
Most of our pre-elementary and elementary schools complement their programs
with before and after school programs and summer camps (both sports and
educational). Some of our schools have swimming pools. Our schools also seek to
improve margins by providing ancillary services and products, such as book
sales, uniform sales and portrait services.
We were organized in 1984 as The Rocking Horse Childcare Centers of
America, Inc. In 1985, The Rocking Horse Childcare Centers of America, Inc.
merged into a publicly-traded entity that had been incorporated in 1983. In
1993, new management changed our strategic direction to expand into private
elementary education. This change in direction coincided with the change of our
name to Nobel Education Dynamics, Inc. In 1998, we changed our name to Nobel
Learning Communities, Inc. to reflect the organizational model that we use
today, which supports cross-marketing and operational synergies within the
"Nobel Learning Communities."
Our corporate office is located at 1615 West Chester Pike, West Chester, PA
19382. Our telephone number is (484) 947-2000.
Educational Philosophy and Implementation
Our educational philosophy is based on a foundation of sound research,
innovative instructional techniques and quality practice and proprietary
curricula developed by experienced educators. Our programs stress the
development of the whole child and are based on concepts of integrated and
age-appropriate learning. Our curricula recognize that each child develops
according to his or her own abilities and timetable, but also seek to prepare
every student for achievement in accordance with national content standards and
goals. Each child's individual educational needs and
2
skills are considered upon entrance into one of our schools. Progress is
regularly monitored in terms of both the curriculum's objectives and the child's
cognitive, social, emotional and physical skill development. The result is the
opportunity for each of our students to develop a strong foundation in academic
learning, positive self-esteem and emotional and physical well-being, based on a
personalized approach.
Under the direction of our Chief Education Officer, we have developed
curriculum guidelines for each grade level and content area to assist principals
and teachers in planning their daily and weekly programs. At our educator's Web
site we have linked the curriculum guidelines to the products and services that
are most appropriate for addressing our guidelines. The Web site also provides
our educators with links to our framework and philosophy as well as other
resources that support our educational mission.
We maintain that small schools, small classes, qualified teachers, clearly
articulated curricula guidelines and excellent educational materials are basic
ingredients of quality education. Our philosophy is based on personalized
instruction that leads to a student's active involvement in learning and
understanding. The program for our schools is a skills-based and
developmentally-appropriate comprehensive curriculum. We implement the
curriculum in ways that stimulate the learner's curiosity, enhance students'
various learning styles and employ processes that contribute to lifelong
achievement. Academic areas addressed include reading readiness and reading,
spelling, writing, handwriting, mathematics readiness and mathematics, science,
social studies, visual and graphic arts, music, physical education and health
and foreign language. Computer literacy and study skills are integrated into the
program, as appropriate, in all content areas. Most schools in the Nobel
Learning Communities introduce a second language between the ages of three and
four and continue that instruction into the pre-K, kindergarten and school age
programs.
We offer sports activities and supplemental programs, which include day
field trips coordinated with the curriculum to such places as zoos, libraries,
museums and theaters and, at the middle schools, overnight trips to such places
as Yosemite National Park, California and Washington, D.C. Schools also arrange
classroom presentations by parents, community leaders and other volunteers, as
well as organize youngsters as presenters to community groups and organizations.
To enhance the child's physical, social, emotional and intellectual growth,
schools are encouraged to provide fee-based experiences specifically tailored to
particular families' interests in such ancillary activities as dance, gymnastics
and instrumental music lessons.
We recognize that maintaining the quality of our teachers' capabilities and
professionalism is essential to sustaining our students' high level of academic
achievement and our profitability. We sponsor professional development days
covering various aspects of teaching and education, using both internal trainers
and external consultants. Staff members are recognized for the completion of
continuing education experiences, encouraged to pursue formal advanced learning
and rewarded for outstanding performance and achievement. Our educators serve on
task forces and committees who regularly review and revise guidelines, programs,
tools and current teaching methods.
We seek to assure that our schools meet or exceed the standards of
appropriate licensing and accrediting agencies through an internal quality
assurance program. Many of our schools are accredited, or are currently seeking
accreditation, by the National Association for the Education of Young Children
(NAEYC), the National Independent Private Schools Association (NIPSA), or the
Commission on International and Trans-Regional Accreditation (CITA) and its
regional affiliates.
Operations/School Systems
In order to maintain uniform standards, our schools share consistent
educational goals and operating procedures. To respond to local demands,
principals are encouraged to tailor curricula, within the standards of Nobel
Learning Communities, to meet local needs. Members of our management visit all
schools and centers on a regular basis to review program and facility quality.
Critical to our educational and financial success are our school
principals, who are responsible to manage school personnel and finances, to
ensure teacher adherence to our curriculum guidelines, and to implement local
sales and marketing strategies. We treat each school as a separate cost center,
holding each accountable for its own performance. Each school prepares an annual
budget and submits weekly financial data to the corporate office and to
appropriate district and division managers. Tuition revenue, operating costs and
utilization rates are continually
3
monitored, with each school measured weekly in relation to our business plan and
prior year performance. Executive Directors, another critical component to our
success, oversee the principals in their management responsibilities and report
to regional Vice Presidents of Operations. School principals and Executive
Directors work closely with regional and corporate management, particularly in
the regular assessment of program quality.
Principals and Executive Directors are also responsible to raise additional
revenues through ancillary programs, such as sales of school uniforms,
children's portraits and school stores. Our corporate office undertakes central
management of several significant ancillary programs. This central management
has enabled us to obtain more favorable terms from vendors and to encourage more
active participation from schools.
We hire qualified individuals and prefer to promote from within. Employment
applicants are reviewed with background checks made to verify accurate
employment history and establish understanding of the candidate's background,
reputation and character. After hiring, our faculty is reviewed and evaluated
annually through a formal evaluation Process. All of our principals and
Executive Directors are eligible for incentive compensation based on the
profitability of their schools.
Marketing and Customers
We generate the majority of new enrollments from our reputation in the
community and word-of-mouth recommendations of parents. Further, we group our
pre-elementary schools geographically to increase local market awareness and to
supply a student population for our elementary and middle schools. Our
educational continuum from pre-elementary school through elementary and middle
school also helps demonstrate to parents our educational focus. We market our
services through yellow page advertising, print ads in local publications, radio
and through distribution of promotional materials in residential areas.
Marketing campaigns are conducted throughout the year, primarily at the local
level by our school directors and principals. In addition, the various regional
offices conduct targeted marketing programs, such as mass mailings and media
advertising.
In our marketing, we strive to differentiate ourselves from our competition
through the quality of our programs. We emphasize the features and benefits of
our schools, including a more individualized approach to learning, comprehensive
curricula, small class sizes, accreditation, credentialed teachers, before and
after school programs and summer camps. We promote early age introduction of
foreign language and technology use. We evaluate student progress regularly,
including the administration of standardized tests, which show that, on average,
our school age children perform one and one-half to three grade levels above
national norms.
Corporate Development - Nobel Learning Communities Strategy and Implementation
Our growth has been primarily through the opening of new schools and making
strategic acquisitions of existing schools. Before we enter a new market, we
devote resources to evaluating that market's potential. Evaluation criteria
include the number and age of children living in proximity to the site; family
income data; incidence of two-wage earner and single parent families; traffic
patterns; wage and fixed cost structure; competition; price elasticity; family
educational data; local licensing requirements; and real estate costs.
New School Development
Since June 2001 through June 2002, we opened four pre-elementary schools
and two Paladin Academy schools. From July 1, 2002 through September 3, 2002, we
have opened four pre-elementary schools, two elementary schools and one Saber
Academy special purpose high school. Throughout the remainder of the twelve
months ended June 30, 2003 ("Fiscal 2003") we plan to open approximately, six
Paladin Academy schools.
Proposed development sites are presented to us through a network of
developers and land realtors across the United States. After site selection, we
engage a developer or contractor to build a facility to our specifications. We
currently work with several developers who purchase the land, build the facility
and lease the premises to us under a long-term lease. Alternatively, we purchase
land, construct the building with our own or borrowed funds and then seek to
enter into a sale and lease-back transaction with an investor. Our development
plans are dependent on the continued availability of developer and financing
arrangements.
4
Acquisitions
Since 1994, we have acquired 74 schools: 47 pre-elementary schools, 21
elementary schools and six special purpose high schools. We strive to make only
acquisitions that are strategic in nature: to enhance our presence within an
existing cluster; to establish a base in a new geographic area with growth
potential; or to provide an entry into a new business (e.g., learning challenged
students). Key acquisition criteria are reputation, accretion to earnings,
geographic location in markets with excellent demographics and growth prospects,
ability to integrate into existing, or become the foundation for new, Nobel
Learning Communities and quality of personnel.
We have used strategic acquisitions to expand our market offerings. These
acquisitions not only allow us to enter markets we believe have strong
potential, but also present opportunities for profitable synergies with our
other educational offerings. In August 1998, we commenced our special education
offerings with the acquisition of the Developmental Resource Centers in Southern
Florida. With our September 1999 acquisition of the Houston Learning Academy
schools, we offer special purpose high schools for children who require a more
individualized learning environment. This acquisition also gave us potential to
expand into the summer school market. The acquisition of The Activities Club
facilitated our entry into the summer program and after school program
curriculum-based products for the public, charter and private school markets.
Paladin Academy
Our Paladin Academy schools serve the needs of children with learning
challenges. Through these schools, our mission is to improve the learning
process and achievement levels of children and adults with dyslexia, attention
deficit disorder and other learning difficulties. We offer clinical day schools,
tutoring clinics and summer programs, as well as psycho-educational and
developmental testing and community outreach programs.
Paladin Academy schools offer full day programs serving the special needs
of students from kindergarten through high school. The goal of Paladin Academy
is to enable students to re-enter mainstream school programs after two to three
years. We offer one-on-one tutorial clinics to students in our general education
program, as well as to students from other schools who require a clinical
educational approach.
As of September 3, 2002, we operated 14 Paladin Academy schools. These
include three "stand-alone" private schools in South Florida acquired in our
August 1998 purchase of the assets of Development Resource Centers, one
additional school acquired in February 2000, also in South Florida, one
additional stand-alone school in Seattle, Washington and nine schools located
within our elementary schools. As a part of our combination school strategy,
most of our new Paladin Academy schools are conducted in classrooms of Nobel
Learning Communities elementary schools. Paladin Academy schools are now located
in Florida, Nevada, New Jersey, North Carolina, Virginia and Washington.
We plan to expand Paladin Academy schools within our school clusters across
the United States. Further, as Paladin Academy develops broader market
recognition independent of our private elementary schools, we plan to roll out
the program independently across the United States. Our ultimate goal is to be a
recognized national operator of special education schools.
Expanding our initiatives in special education, since May 2000, under terms
of a credit agreement, we have advanced funds to Total Education Solutions,
which provides special education services to charter schools and public schools
who, because of lack of internal capabilities or other reasons, wish to
out-source their provision of special education programs (which, under federal
law, they are required to provide to select students).
Charter Schools
In July 1999, we began management of our first charter school, The
Philadelphia Academy Charter School in Philadelphia, Pennsylvania, which serves
624 students in kindergarten through eighth grade. Our performance under
management of that contract resulted in the March 2000 award of two additional
contracts to manage new charter schools in Philadelphia (one opened in September
2000 and the other opened in September 2001). Under these management agreements,
we provide services such as, administrative and development/construction
management services to the charter schools pursuant to four or five-year terms,
subject to extension. The actual holders of the charters, non-profit entities
managed by a board of directors or trustees, fund their own operations, through
payments
5
from the School District of Philadelphia. In some cases, as part of the
arrangements with the charter schools, we lease the charter school premises from
a third party and sublease the premises to the non-profit entity.
Further adding to our charter school operations, in May 2000, we acquired
two charter schools in Arizona: the Fletcher Heights Charter Elementary School
in Peoria, Arizona and the Desert Heights Elementary School, which opened in
Glendale, Arizona in August 2000. In contrast to our Philadelphia charter
schools and charters contracts, we hold the charter and own and operate the
Arizona charter schools independently, as Arizona law permits the charter funds
to be paid directly to a for-profit corporation.
We also plan to pursue moderate growth in charter school management by
competing for contracts at existing charter schools. These include both charter
management contracts, which are up for renewal and charters currently being
managed by the local not-for-profit administration.
Since our charter schools operate under a charter granted by a state or
school board authority, we would lose the right to operate a school if the
charter authority were to revoke the charter. Typically, the charter holder is a
community group that engages us to manage the school under a management
agreement, so the charter authority could base such revocation on actions of the
charter holder, which are outside of our control. Also, many state charter
school statutes require periodic reauthorization. If state charter school
legislation in such states were not reauthorized or were substantially altered,
our charter opportunities in the charter school market could be materially
adversely affected.
Houston Learning Academy / Saber Academy
In September 1999, we acquired all the capital stock of Houston Learning
Academy ("HLA"), an operator of five special purpose high schools in the Houston
metropolitan marketplace. HLA schools offer a half-day high school program, as
well as summer school, tutorials and special education classes to residential
hospitals that are fully accredited by the Southern Association of Colleges and
Schools. HLA schools' programs feature small class sizes and individualized
attention. Many students who attend HLA desire to engage in other activities in
the afternoons or are attracted to the flexibility of the schools' curriculum.
We plan to grow the HLA concept by leveraging our existing school model and
accreditation to other Texas metropolitan areas (Dallas, San Antonio) under the
name Saber Academy, followed by introduction into existing and future Nobel
Learning Community markets. We believe HLA / Saber Academy and Paladin Academy
schools will have significant marketing and other synergies. For example, since
HLA / Saber Academy programs run primarily in the morning, we can use the same
facilities to conduct Paladin Academy programs in the afternoons.
Industry and Competition
Education reform movements in the United States are posing alternatives to
the public schools. Among others, these reforms include charter schools, private
management of public schools, home schooling, private schools and, on a limited
basis, voucher programs. Our strategy is to provide parents a quality
alternative through our privately owned and operated schools utilizing a proven
curriculum in a safe and challenging environment.
To attract school age children, we compete with other for-profit private
schools, with non-profit schools and, in a sense, with public school systems. We
anticipate that, given the perceived potential of the education market,
well-financed competition may emerge, including possible competition from the
large for-profit child care companies. The only material for-profit competitor
that integrates elementary and pre-elementary schools of which we are aware
which currently competes beyond a regional level is Children's World, a
subsidiary of Aramark Corporation.
We offer a national curriculum based program with excellent standards. We
believe that persons in our target market - parents seeking curriculum-based
learning programs for their children - seek services beyond those provided by
child care providers without curriculum based learning. We believe these parents
desire to give their children the best educational advantage available, since,
as educators have found, the learning process should start earlier, preferably
somewhere between the ages of two and three.
While price is an important factor in competition in both the school age
and pre-elementary school markets, we believe that other competitive factors
also are important, including: professionally developed educational programs,
6
well-equipped facilities, trained teachers and a broad range of ancillary
services, including transportation and infant care. Particularly in the
pre-elementary school market, many of these services are not offered by many of
our competitors.
Regulation
Schools and pre-elementary schools are subject to a variety of state and
local regulations and licensing requirements. These regulations and licensing
requirements vary greatly from jurisdiction to jurisdiction. Governmental
agencies generally review the safety, fitness and adequacy of the buildings and
equipment, the ratio of staff personnel to enrolled children, the dietary
program, the daily curriculum, compliance with health standards and the
qualifications of our personnel.
Our charter schools are subject to substantial additional federal and state
regulation since they are funded by public monies. Under our charter school
management agreements, the charter entity is ultimately responsible for
compliance with these regulations; we are responsible for such compliance in our
Arizona charter schools. Significant among federal laws is the Individuals with
Disabilities in Education Act. This act requires that students with qualified
disabilities receive an appropriate education through special education and
related services provided in a manner reasonably calculated to enable the child
to receive educational benefits in the least restrictive environment. The
charter school's obligation to provide these potentially extensive services and
the attendant financial exposure, varies depending on state law. Other laws
applicable to our charter schools include the Family Educational Rights and
Privacy Act (which protects the privacy of a student's educational record), the
Gun-Free Schools Act (which requires us to effect certain policies, assurances
and reports at our charter schools regarding the discipline of students who
bring weapons to our schools) and various civil rights laws.
Insurance
We currently maintain comprehensive general liability, workers'
compensation, automobile liability, property, excess umbrella liability and
student accident insurance. The policies provide for a variety of coverage and
are subject to various limits. Companies involved in the education and care of
children, however, may not be able to obtain insurance for the total risks
inherent in their operations. In particular, general liability coverage can have
sublimits per claim for child abuse. We believe we have adequate insurance
coverage at this time. There can be no assurance that in future years we will
not become subject to lower limits or substantial increase in insurance
premiums.
Service Marks
We have registered various service marks in the United States Patent and
Trademark Office, including, among others, Chesterbrook Academy(R), Merryhill
Country School(R), Camp Zone (R) and The Activities Club (R). We believe that
certain of our service marks have substantial value in our marketing in the
respective areas in which our schools operate.
Seasonality
Our elementary and middle schools historically have lower operating
revenues in the summer due to lower summer enrollments. Summer revenues of
pre-elementary schools tend to remain somewhat more stable. We continue to seek
to improve summer results through camps and other programs.
Employees
On September 3, 2002, we employed approximately 3,900 persons,
approximately 1,170 of whom were employed on a part-time or seasonal basis. We
believe that our relationship with our employees is satisfactory.
7
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
Name Age Position
- ---- --- --------
A. J. Clegg 63 Chairman of the Board of Directors and Chief Executive
Officer; Director
John R. Frock 59 Vice Chairman - Corporate Development; Assistant
Secretary; Director
Robert E. Zobel 54 Vice Chairman - Corporate Affairs and Chief Financial
Officer; Director
D. Scott Clegg 39 Vice Chairman - Operations, President and Chief
Operating Officer
Dr. Lynn A. Fontana 54 Executive Vice President - Education and Chief
Education Officer
Gary V. Lea 48 Vice President - Southern Operations
Kimberly D. Pablo 39 Vice President - Western Operations
Kathleen L. Willard 53 Vice President - Northern Operations
The following description contains certain information concerning the
foregoing persons:
A. J. Clegg. Mr. A. J. Clegg was named Chairman of the Board of Directors
and Chief Executive Officer of NLCI in May, 1992. Since 1996, Mr. A. J. Clegg
has also served as a member of the Board of Trustees of Drexel University. From
June 1990 to December 1997 (but involving immaterial amounts of time between
1994 and 1997), Mr. A. J. Clegg also served as the Chairman and CEO of JBS
Investment Banking, Ltd., a provider of investment management and consulting
services to businesses, including NLCI. In 1979, he formed Empery Corporation,
an operator of businesses in the cable television and printing industries, and
held the offices of Chairman, President and CEO during his tenure (1979-1993).
In addition, Mr. A. J. Clegg served as Chairman and CEO of TVC, Inc.
(1983-1993), a distributor of cable television components; and Design Mark
Industries (1988-1993), a manufacturer of electronic senswitches. Mr. A. J.
Clegg served on the board of directors of Ferguson International Holdings, PLC,
a United Kingdom company, from March 1990 to April 1991; and was Chairman and
CEO of Globe Ticket and Label Company from December 1984 to February 1991. In
August 2000, Mr. A. J. Clegg was recognized as "Education Entrepreneur of the
Year" by the Association of Education Practitioners and Providers. Mr. A. J.
Clegg is the father of D. Scott Clegg, NLCI's Vice Chairman - Operations,
President and Chief Operating Officer.
John R. Frock. Mr. Frock was appointed Vice Chairman - Corporate
Development of NLCI in April 2002. Prior to such appointment, Mr. Frock had been
Executive Vice President - Corporate Development since August 1, 1994. Mr. Frock
was elected to the Board of Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief Operating Officer of JBS Investment
Banking, Ltd., a provider of investment management and consulting services to
businesses, including NLCI.
Robert E. Zobel. Mr. Zobel was appointed Vice Chairman - Corporate Affairs
and Chief Financial Officer of NLCI in April 2002. Between February 2001 and
April 2002, Mr. Zobel served as Vice President, Chief Administrative Officer and
Secretary of MARS, Inc., a start up retail organization. Mr. Zobel was Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of MARS,
Inc. from February 1996 until February 2001. From 1974 through February 1996,
Mr. Zobel was associated with Deloitte & Touche LLP (formerly Touche Ross & Co.)
as an employee and since September 1981 as a partner. Mr. Zobel earned a B.A.
degree from Claremont
8
McKenna College, a J.D. degree from Willamette University College of Law and a
LLM degree in tax from Boston University. Mr. Zobel has been a director of NLCI
since 1998.
D. Scott Clegg. Mr. D. Scott Clegg rejoined NLCI as Vice Chairman -
Operations, President and Chief Operating Officer in February 2002. Previously,
Mr. D. Scott Clegg had been with NLCI from 1993 until 1997, commencing with his
appointment as Vice President - Operations for the Merryhill Country Schools
division in June 1993, and culminating with his appointment in early 1996 as
Vice President - Operations, with responsibility for nationwide operations. Mr.
D. Scott Clegg left NLCI in 1997, to become a principal and founder of Pathways
Education Group, L.L.C., a management consulting firm serving the public and
private sectors in education. He was formerly Vice President of New Business
development at JBS Investment Banking, Ltd. Mr. D. Scott Clegg also served as
General Manager and Chief Operating Officer of Dynasil Corporation of America, a
public company, and also served as a member of Dynasil's board of directors. Mr.
D. Scott Clegg is the son of A. J. Clegg, our Chairman and Chief Executive
Officer.
Dr. Lynn A. Fontana. Dr. Fontana joined NLCI August of 1999 as Executive
Vice President - Education and Chief Education Officer. She is responsible for
the educational programs, professional development, technology integration and
quality assurance in NLCI's network of schools. Dr. Fontana has been actively
involved in educational research and development for more than twenty-five
years. As a research associate professor at George Mason University she directed
educational projects funded by public and private foundations including the
National Science Foundation, Bell Atlantic Foundation, Corporation for Public
Broadcasting, the Defense Advanced Research Projects Agency, and the Department
of Defense Education Activity. Prior to joining the research faculty at George
Mason University, Dr. Fontana was Vice President for Educational Activities at
WETA. Dr. Fontana has a B.A. in history and political science from Juniata
College and a Ph.D. in social studies education from Indiana University. She
taught high school history for eight years in public schools in Pennsylvania and
New Jersey. Dr. Fontana has served on the Board of Trustees of National History
Day for 10 years and on the editorial board for World Book Publishing for six of
the last eight years.
Gary V. Lea. Mr. Lea was appointed Vice President - Southern Operations in
June of 2001. Mr. Lea joined NLCI in January of 2000 as Executive Director. Mr.
Lea was formerly with KinderCare Learning Centers, Inc. from July 1988 through
August of 1996, as a Regional Vice President covering 11 states and 150 schools.
He has also had extensive experience in the restaurant and service industry. He
was formerly the Director of Operations with Boston Market for a large southwest
territory. Mr. Lea attended Southwest Missouri State University where he earned
a B.S in Business and Psychology.
Kimberly D. Pablo. Ms. Pablo has been with NLCI since it acquired Merryhill
Schools in 1989. She ran one of NLCI's three largest schools for approximately
four years as a principal, during which time enrollment grew at that school from
150 students to 250 students. In 1997 Ms. Pablo was promoted to one of two
District Managers, and ran a successful district of 13 elementary, middle and
preschools. In 1999, she was promoted to Vice President - Western Operations.
Ms. Pablo graduated with a BA from Humboldt State University in CA and received
her Masters Degree in Organizational Management in 1999.
Kathleen L. Willard. Ms. Willard was named Vice President - Northern
Operations in December of 1999. Between January 1997 and December of 1999, Ms.
Willard was the Executive Director for the Florida district schools of NLCI.
From 1985 to 1997, prior to the acquisition of the schools in Florida by NLCI,
Ms. Willard served as a school administrator with Another Generation Preschools
(a privately held preschool company in the Ft. Lauderdale area).
9
Item 2. Properties.
At September 3, 2002, we operated 179 schools on 10 owned and 169 leased
properties in 15 states. Our schools are geographically distributed as follows:
four in Arizona, 29 in California, 17 in Florida, one in Georgia, 13 in
Illinois, one in Maryland, seven in Nevada, 15 in New Jersey, 24 in North
Carolina, three in Oregon, 23 in Pennsylvania, two in South Carolina, ten in
Texas, 22 in Virginia and eight in Washington. Our schools generally are located
in suburban settings.
The land and buildings which we own are subject to mortgages on the real
property. Our leased properties are leased under long-term leases which are
typically triple-net leases requiring us to pay all applicable real estate
taxes, utility expenses and insurance costs. These leases usually contain
inflation related rent escalators.
From time to time, we purchase undeveloped land for future development;
however, at June 30, 2002, we did not hold any such properties. We also own the
land and building of three properties in Florida and Maine at which we formerly
operated day care centers; two of these properties are leased to third parties.
We lease 22,500 square feet of space for our corporate offices in West
Chester, Pennsylvania.
Item 3. Legal Proceedings.
We are a party in various suits and claims that arise in the ordinary
course of our business. Our management currently believes that the ultimate
disposition of all such matters will not have a material adverse effect on our
consolidated financial position or results of operations. The significance of
these matters on our future operating results and cash flows depends on the
level of future results of operations and cash flows as well as on the timing
and amounts, if any, of the ultimate outcome.
On August 7, 2002, a civil action was commenced in the Court of Chancery in
the State of Delaware in New Castle County. The plaintiff seeks to represent a
putative class consisting of the public stockholders of NLCI. Named as
defendants in the complaint are NLCI, members of the NLCI Board of Directors and
one former member of the NLCI Board of Directors. The plaintiff alleges, among
other things, that the proposed merger is unfair and that the current and former
NLCI directors breached their fiduciary duties by failing to disclose fully
material non-public information related to the value of NLCI and by engaging in
self-dealing. The complaint seeks an injunction, damages and other relief. NLCI
was served with the complaint on August 22, 2002.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
Our common stock trades on The Nasdaq National Market under the symbol
NLCI.
The table below sets forth the quarterly high and low bid prices for our
common stock as reported by Nasdaq for each quarter during the period from July
1, 2000 through June 30, 2002 and for the first quarter to date in Fiscal 2003.
High Low
Fiscal 2001 (July 1, 2000 to June 30, 2001)
First Quarter ........................................ 10.000 7.750
Second Quarter ....................................... 8.875 4.688
Third Quarter ........................................ 10.250 5.516
Fourth Quarter ....................................... 10.000 7.550
Fiscal 2002 (July 1, 2001 to June 30, 2002)
First Quarter ........................................ 9.000 6.250
Second Quarter ....................................... 8.250 4.800
Third Quarter ........................................ 7.480 5.050
Fourth Quarter ....................................... 7.230 5.150
Fiscal 2003
First Quarter (through September 3, 2002 ............. 7.600 5.010
Holders
At September 3, 2002, there were approximately 342 holders of record of
shares of common stock.
Dividend Policy
We have never paid a dividend on our common stock and do not expect to do
so in the foreseeable future. Although the payment of dividends is at the
discretion of the Board of Directors, we intend to retain our earnings in order
to finance our ongoing operations and to develop and expand our business. Our
credit facility with our lenders prohibits us from paying dividends on our
common stock or making other cash distributions without the lenders' consent.
Further, our financing documents relating to our private placement of our
$10,000,000 Subordinated Note with Allied Capital Corporation prohibit us from
paying cash dividends on our common stock without Allied's approval and our
financing documents relating to our private placement of the Series C
Convertible Preferred Stock to Edison Venture Fund II, L.P. prohibit us from
paying cash dividends on our common stock, unless the dividend is permitted
under our bank agreement and the amount of the dividend is less than or equal to
50% of our operating income less income tax.
11
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of June 30,
2002:
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity compensation plans
issued upon exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column (a))
Plan category warrants and rights warrants and rights
-------------
(a) (b) (c)
Equity compensation plans
approved by security holders 728,237 7.228 662,273
Equity compensation plans not
approved by security holders 100,000 8.363 --
------- ----- --
Total: 828,237 7.365 662,273
======= ===== =======
Options issued outside of the stockholder-approved plans have been issued with
features substantially similar to those of the stockholder-approved plans.
Item 6. Selected Financial Data.
Six Months
For the years ending June 30, Ended Year Ended
------------------------------------------- ------------- -------------
Operating Data 2002 2001 2000 1999 June 30, 1998 December 1997
--------- --------- ---------- --------- ------------- -------------
Revenue $ 156,279 $ 147,952 $ 127,407 $ 109,762 $ 48,995 $ 80,980
School operating expenses 136,190 129,786 110,078 96,475 42,643 70,258
--------- --------- ---------- --------- ------------- -------------
School operating profit 20,089 18,166 17,329 13,287 6,352 10,722
General and administrative expenses 11,776 11,004 9,742 7,717 3,391 5,973
Restructuring expense - - - - - 2,960
--------- --------- ---------- --------- ------------- -------------
Operating income 8,313 7,162 7,587 5,570 2,961 1,789
Interest expense 3,637 4,171 3,373 2,998 1,044 2,047
Other income (160) (424) (145) (248) (102) (158)
Minority interest 34 23 88 74 35 86
--------- --------- ---------- --------- ------------- -------------
Income (loss) before income taxes 4,802 3,392 4,271 2,746 1,984 (186)
Income tax expense 1,968 1,596 1,793 1,153 833 250
--------- --------- ---------- --------- ------------- -------------
Net (loss) income before Cumulative effect
of change in accounting principal and
extraordinary item 2,834 1,796 2,478 1,593 1,151 (436)
Cumulative effect of accounting change - 295 - - -
Extraordinary item - - - - - 449
--------- --------- ---------- --------- ------------- -------------
Net income (loss) 2,834 1,501 2,478 1,593 1,151 (885)
Preferred dividends 82 81 82 83 51 102
--------- --------- ---------- --------- ------------- -------------
Net income available to common stockholders' $ 2,752 1,420 2,396 1,510 1,100 (987)
========= ========= ========== ========= ============= =============
Basic earnings per share:
Net income (loss) before Cumulative effect
of change in accounting principle and
extraordinary item $ 0.44 $ 0.29 $ 0.40 $ 0.25 $ 0.18 $ (0.09)
Cumulative effect of accounting change - (0.05) - - - -
Extraordinary item - - - - - (0.07)
--------- --------- ---------- --------- ------------- -------------
Net income (loss) $ 0.44 $ 0.24 $ 0.40 $ 0.25 $ 0.18 $ (0.16)
========= ========= ========== ========= ============= =============
Dilutive earnings per share:
Net income (loss) before Cumulative effect
of change in accounting principle and
extraordinary item $ 0.38 $ 0.24 $ 0.33 $ 0.22 $ 0.15 $ (0.09)
Cumulative effect of accounting change (a) - (0.04) - - - -
Extraordinary item - - - - - (0.07)
--------- --------- ---------- --------- ------------- -------------
Net income (loss) $ 0.38 $ 0.20 $ 0.33 $ 0.22 $ 0.15 $ (0.16)
========= ========= ========== ========= ============= =============
EBITDA (b)
(earnings before interest, taxes,
depreciation and amortization expense) $ 14,514 $ 14,624 $ 13,943 $ 11,123 $ 5,243 $ 4,803
--------- --------- ---------- --------- ------------- -------------
Balance Sheet Data:
Working capital deficit $ (13,325) $ (15,453) $ (16,946) $ (12,087) $ (10,221) $ (7,946)
Goodwill and intangibles, net 49,521 50,012 51,447 47,319 43,754 37,923
Total assets 102,980 101,784 98,618 81,025 75,020 74,398
Short-term debt and
Current portion of long-term debt 4,488 6,414 6,293 2,209 2,031 2,793
Long-term debt 35,729 36,941 36,509 29,147 26,477 28,470
Stockholders' equity 42,487 38,601 36,558 34,145 32,736 31,636
(a) Cumulative effect of accounting change represents the effect of the
adoption of Staff Accounting Bulletin 101, Revenue Recognition.
(b) EBITDA is defined by the Company as its net income before interest expense,
income taxes, depreciation, amortization and cumulative effect of a change
in accounting principle. EBITDA is not intended to indicate that cash flow
is sufficient to fund all of the Company's cash needs or represent cash
flow from operations as defined by accounting principals generally
accepted in the United States of America. EBITDA should not be used as a
tool for comparison as the computation may not be similar for all
companies.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company has entered into an Agreement and Plan of Merger, dated as
of August 5, 2002, with Socrates Acquisition Corporation ("Socrates"), a
corporation newly formed by Gryphon Partners II, L.P. and Cadigan Investment
Partners, Inc. (collectively with Gryphon Partners II-A, L.P., the "Buying
Group"), both of which are engaged principally in the business of investing in
companies. Under the merger agreement, Socrates will be merged into NLCI, with
NLCI as the surviving corporation (the "Merger"). If the Merger is completed,
each issued and outstanding share of NLCI common stock and preferred stock
(calculated on an as-converted basis to the nearest one-hundredth of a share)
will be converted into the right to receive $7.75 in cash, without interest,
except for certain shares and options held by the NLCI directors and executive
officers identified in the merger agreement as a rollover stockholder, which
will continue as, or be converted into, equity interests of the surviving
corporation. In addition, if the Merger is completed, each outstanding option
and warrant that is exercisable as of the effective time of the Merger will be
canceled in exchange for (1) the excess, if any, of $7.75 over the per share
exercise price of the option or warrant multiplied by (2) the number of shares
of common stock subject to the option or warrant exercisable as of the effective
time of the merger, net of any applicable withholding taxes. Following the
Merger, NLCI will continue its operations as a privately held company. The
Merger is contingent upon satisfaction of a number of conditions, including
approval of NLCI's stockholders, the receipt of regulatory and other approvals
and consents, the absence of any pending or threatened actions that would
prevent the consummation of the transactions contemplated by the merger
agreement and receipt of financing. There can be no assurance that these or
other conditions to the Merger will be satisfied or that the Merger will be
completed. If the Merger is not completed for any reason, it is expected that
the current management of NLCI, under the direction of the NLCI Board of
Directors, will continue to manage NLCI as an ongoing business.
It is currently anticipated that the total amount of funds necessary to
complete the Merger and the related transactions is approximately $108,900,000
(assuming that no NLCI stockholders exercise and perfect their appraisal
rights). The Buying Group has received commitments, subject to various
conditions, from financial institutions in an aggregate amount sufficient,
taking into account the amounts to be contributed as equity financing, to fund
these requirements. The receipt of third-party financing is a condition to
completion of the Merger. Of this amount, $47,500,000 is expected to be funded
from a equity investment in the Company by Socrates and stockholders who are
converting their shares into equity interests in the surviving corporation and
an additional $50,000,000 is expected to be funded through new credit
facilities. These funds are expected to be used to pay NLCI's stockholders and
certain option holders and warrant holders, other than stockholders who are
converting their shares into equity interest in the surviving corporation, to
refinance debt, and to pay fees and expenses related to the Merger. Following
completion of the Merger, the senior secured credit facility and the senior
subordinated notes are expected to be repaid through cash flow generated from
operations in the ordinary course of business and/or through refinancing.
The Company anticipates that it will expense in the first and second
quarter of Fiscal 2003 approximately $800,000 of legal, professional and other
registration fees incurred in connection with the Merger.
Results of Operations
Fiscal Year ended June 30, 2002 ("Fiscal 2002") compared to Fiscal Year ended
June 30, 2001("Fiscal 2001")
At June 30, 2002, the Company operated 174 schools. Since June 30, 2001,
the Company has opened six new schools: four preschools and two schools for
learning challenged (the Paladin Academy schools). The Company has also closed
three schools.
Revenues for Fiscal 2002 increased $8,327,000 or 5.6% to $156,279,000 from
$147,952,000 for Fiscal 2001. The increase in revenues is primarily attributable
to tuition increases, the maturing of schools opened in Fiscal 2001 and the
opening of nine new schools.
Same school revenue (schools that were opened in both periods) increased
$6,908,000 or 4.7% in Fiscal 2002 compared to Fiscal 2001. This increase is
related to tuition increases of approximately 5% and the maturing of schools
opened in Fiscal 2001 offset by a decrease in enrollment in many of the
Company's preschools due
14
primarily as a result of the economy which often times results in the loss of
employment by at least one parent with a child in preschool. The increase in
revenues related to the new schools opened totaled $1,766,000. Revenues related
to The Activities Club increased $257,000. These increases were offset by a
decrease in revenues of $604,000 related to school closings.
School operating profit in Fiscal 2002 increased $1,923,000 or 10.6% to
$20,089,000 from $18,166,000 for Fiscal 2001. Total school operating profit
margin increased from 12.3% for Fiscal 2001 to 12.9% for Fiscal 2002. The
results for Fiscal 2002 include the effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
which resulted in a $1,677,000 reduction in goodwill amortization expense. (See
Note 7 to the financial statements.)
Same school operating profit increased $3,324,000 or 17.6% in Fiscal 2002
compared to Fiscal 2001. Same school operating profit margin improved from 12.9%
in Fiscal 2001 to 14.4% in Fiscal 2002. Excluding the effect of the adoption of
SFAS 142, same school operating profit increased $1,695,000 or 9.0%. The
increase in same school operating profit is due to the effect of the adoption of
SFAS 142, the maturing of schools opened in Fiscal 2001 and lower school level
expenses as a percentage of revenue. New schools opened in Fiscal 2002 incurred
a loss of $1,126,000. Pre-opening expense (start-up cost) for schools to open in
Fiscal 2003 was $516,000. The Activities Club ("TAC"), a business purchased in
December 1999, reduced its operating loss for Fiscal 2002 by $294,000 from
$474,000 in Fiscal 2001 to $180,000 in Fiscal 2002. School closings negatively
affected the change in school operating profit by $53,000.
General and administrative expenses increased $772,000 or 7.0% from
$11,004,000 in Fiscal 2001 to $11,776,000 in Fiscal 2002. As a percentage of
revenue, general and administrative expense was 7.5% for Fiscal 2002 and 7.4%
for Fiscal 2001. This increase in general and administrative expenses was
primarily related to additional corporate staffing, increased rent related to
new corporate office location and increased fees for professional and legal
services.
As a result of the factors mentioned above, operating income increased
$1,151,000 from $7,162,000 in Fiscal 2001 to $8,313,000 in Fiscal 2002.
Operating income as a percentage of revenue increased from 4.8% in Fiscal 2001
to 5.3% in Fiscal 2002.
Other income decreased $264,000 during Fiscal 2002 as compared to the
comparable period in the prior year. This decrease was primarily due to a
decrease in interest income from investments and notes receivable. Other income
for Fiscal 2002 also includes the gain recognized on the settlement of a
promissory note of $383,000 and the write-off of expenses related to
unsuccessful transactions of $344,000.
For Fiscal 2002, EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization) totaled $14,514,000. This represents a decrease
of $110,000 over the comparable period. EBITDA is not intended to indicate that
cash flow is sufficient to fund all of the Company's cash needs or represent
cash flow from operations as defined by accounting principles generally accepted
in the United States of America. In addition, EBITDA should not be used as a
tool for comparison as the computation may not be similar for all companies.
Interest expense decreased $534,000 or 12.8% from $4,171,000 for Fiscal
2001 to $3,637,000 for Fiscal 2002. The decrease is due to decreased interest
rates on the Company's senior credit facility and a decrease in interest
associated with subordinated notes due to repayments. The decreases were offset
by an increase in the Company's senior subordinated debt which increased from
10.0% to 12.0% in October 2001.
Income tax expense totaled $1,968,000 for Fiscal 2002, which reflects a 41%
effective tax rate. The reduction in the tax rate from Fiscal 2001 is
principally caused by the implementation of FAS 142, as the Company is no longer
amortizing non-deductible goodwill.
15
Fiscal 2001 compared to the twelve months ended June 30, 2000 ("Fiscal 2000")
The Company's fiscal year ends on June 30. The fiscal year ended June 30,
2001 was a 52-week year and the fiscal year ended June 30, 2000 was a 53-week
year.
At June 30, 2001, the Company operated 171 schools. Since June 2000 through
June 2001, the Company opened 24 schools and acquired two new schools: three
elementary schools, eleven preschools, six schools for learning challenged (the
Paladin Academy schools), one alternative high school (HLA) and three charter
schools (including the two Arizona charter schools purchased in 2000). The
Company also closed three underperforming schools.
Revenues in Fiscal 2001 increased $20,545,000 or 16.1% to $147,952,000 in
Fiscal 2001 from $127,407,000 for Fiscal 2000. After adjusting Fiscal 2000 to a
comparable 52-week basis, revenues would have increased approximately
$22,345,000 or 17.9%. The increase in revenues is primarily attributable to the
increased enrollment, tuition increases and the increase in the number of new
and acquired schools.
Same school revenue (schools that were opened in both periods) increased
$7,974,000 from $124,926,000, in Fiscal 2000 to $132,900,000 in Fiscal 2001 or
6.4%. This increase was related to tuition and enrollment increases and the
maturing of schools opened in Fiscal 1999. The increase in revenues that related
to the 24 new schools totaled $12,503,000. Acquired schools contributed
additional revenues of $1,962,000. The revenues for TAC decreased $238,000 from
$640,000 in Fiscal 2000 to $402,000 in Fiscal 2001. These increases were offset
by a decrease in revenues of $1,656,000 related to closed schools.
School operating profit for Fiscal 2001 increased $837,000 or 4.8% to
$18,166,000 from $17,329,000 in Fiscal 2000. Total school operating profit as a
percentage of revenue decreased from 13.6% to 12.3%.
Same school operating profit increased $1,898,000 from $17,397,000 in
Fiscal 2000 to $19,295,000 in Fiscal 2001 or 10.9%. Same school operating profit
margin improved from 13.9% in Fiscal 2000 to 14.5% in Fiscal 2001. The increase
in same school operating profit was due to the revenue increases and the
maturing of the schools opened in Fiscal 1999. For Fiscal 2001, new schools
incurred losses of $711,000. Included in these losses was $923,000 associated
with the Company's two Arizona based charter schools. The losses associated with
the Arizona schools are attributable to lower than expected enrollment. Acquired
schools increased school operating income by $253,000. In Fiscal 2001, operating
results from TAC were a loss of $474,000 or a decrease of $550,000 as compared
to Fiscal 2000. If TAC is unsuccessful in receiving additional orders or
contracts to purchase its products, the future operations of TAC could continue
to be negatively affected. The net effect of school closings decreased school
operating profit by $53,000.
General and administrative expenses increased $1,262,000 or 13.0% to
$11,004,000 in the Fiscal 2001. As a percentage of revenue, general and
administrative expenses decreased from 7.6% of revenues in Fiscal 2000 to 7.4%
of revenues in Fiscal 2001. The increase in general and administrative expense
related primarily to management additions necessary to support the continued
growth in the Company's private schools and specialty schools. Other increases
in general and administrative expenses include an increase in fees for
professional services and expenses related to new school locations that were
canceled.
As a result of the factors mentioned above, operating income decreased
$425,000 to $7,162,000 for Fiscal 2001 as compared to that for Fiscal 2000.
Operating income as a percentage of revenue increased from 5.9% in Fiscal 2000
to 4.8% in Fiscal 2001.
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization) before the cumulative effect of a change in accounting principles,
totaled $14,624,000 for Fiscal 2001 which was $681,000 above Fiscal 2000. As a
percentage of revenue, EBITDA for Fiscal 2001 equaled 9.9% versus 10.9% in
Fiscal 2000. EBITDA is not intended to indicate that cash flow is sufficient to
fund all of the Company's cash needs or represent cash flow from operations as
defined by accounting principles generally accepted in the United States of
America. In addition, EBITDA should not be used as a tool for comparison as the
computation may not be similar for all companies.
16
Interest expense increased by $798,000 or 23.7% for Fiscal 2001 as compared
to Fiscal 2000. The increase in interest expense was a result of increased
borrowings under the Company's senior debt facility and an increase in interest
rates on the Company's floating rate senior debt.
The provision for income taxes of $1,596,000 for Fiscal 2001 was in excess
of amounts computed by applying statutory federal income tax rates to income
before income taxes due primarily to non-deductible goodwill incurred with
acquisitions for stock and state income taxes. For acquisitions of stock of a
company, purchase accounting applies for accounting purposes; but, for tax
purposes, the Company inherits the historic basis of the purchased company in
its assets, without any goodwill.
Change in Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements,
which provides guidance related to revenue recognition. SAB 101 allows companies
to report any changes in revenue recognition related to adopting its provisions
as an accounting change at the time of implementation in accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes.
Previously, the majority of registration fees were deferred when received
and recorded in September to coincide with fall enrollment. Registration fees
for students enrolled during the school year were recorded when received. Under
the accounting method adopted retroactive to July 1, 2000, the Company
recognizes school registration fees over the typical school year of August to
June. Summer camp registration fees are now recognized during months June, July
and August. The cumulative effect of the change on prior years resulted in a
charge to income (net of taxes) of $295,000 that was recognized during 2001. SAB
101 modifies the recognition of fee income but has no impact on cash flow or the
operations of the Company.
Liquidity and Capital Resources
Fiscal 2002 Cash Flows
Total cash and cash equivalents increased $466,000 from $1,321,000 at June
30, 2001 to $1,787,000 at June 30, 2002. The net increase was primarily related
to cash provided from operations totaling $10,548,000, repayments on notes
receivable of $1,680,000, proceeds from the exercise of stock options and
warrants of $1,510,000 and an increase in borrowings under the Senior Credit
Facility of $819,000. These sources of cash were offset by $8,673,000 in capital
expenditures, a decrease in cash overdraft liability of $1,864,000 and
repayments of subordinated debt of $3,865,000.
The working capital deficit decreased $2,128,000 from $15,453,000 at June
30, 2001 to $13,325,000 at June 30, 2002. The decrease is primarily the result
of a decrease of $1,864,000 in cash overdraft liability and a decrease of
$1,926,000 in current maturities of long-term debt. This decrease was offset by
an increase in unearned income totaling $370,000 and a decrease of $1,585,000 in
notes receivable. The increase in unearned income is related to the prepayment
of annual and semi-annual tuition by parents and by registration fees collected
at the beginning of the school year.
The Company anticipates that its existing available principal credit
facilities, cash generated from operations and continued support of site
developers to build and lease schools will be sufficient to satisfy working
capital needs, capital expenditures and renovations and the building of new
schools during Fiscal 2003, but acquisitions will be limited in number.
In addition, the Company is committed to a plan and is actively marketing
approximately $6,000,000 in real estate for a potential sale leaseback
transaction.
Long-Term Obligations and Commitments
In May 2001, the Company entered into its current Amended and Restated Loan
and Security Agreement, which increased the Company's borrowing capacity to
$40,000,000. Three separate facilities were established under the Amended and
Restated Loan and Security Agreement: (1) $10,000,000 Working Capital Credit
Facility, (2) $15,000,000 Acquisition Credit Facility and (3) $15,000,000 Term
Loan. The Term Loan Facility will mature on
17
April 1, 2006 and provides for $2,143,000 annual interim amortization with the
balance paid at maturity. Under the Acquisition Credit Facility, no principal
payments are required until April 2004. At that time, the outstanding principal
under the Acquisition Credit Facility will be converted into a term loan that
will require principal payments in 16 quarterly installments. The Working
Capital Credit Facility is scheduled to terminate on April 1, 2004. In addition,
the credit facilities provide that NLCI must meet or exceed defined interest
coverage ratios and must not exceed leverage ratios.
At June 30, 2002, the Company was not in compliance with two credit
facility financial covenant ratios. The Company, however, received a waiver for
the breach of the interest coverage ratio and adjusted leverage ratio at June
30, 2002. In addition, the breached ratios were amended and restated to lower
ratio requirements for Fiscal 2003. The Company's interest coverage ratio
increased from a ratio of EBITDA of 3.5 times interest expense or higher to 4.0
times interest expense or higher at June 30, 2002. The Company's ratio was 3.99
times EBITDA at June 30, 2002. The Company's adjusted leverage ratio decreased
from 4.5 times EBITDA or plus rent expenses to 4.25 times EBITDA plus rent
expense at June 30, 2002. The Company's ratio was 4.37 times EBITDA plus rent
expense at June 30, 2002. The Company is in compliance with all other bank
covenant requirements.
At June 30, 2002, a total of $28,217,000 was outstanding and $9,353,000 was
available under the Amended and Restated Loan Agreement. There was $2,084,000
outstanding under the Working Capital Credit Facility, $13,276,000 was
outstanding under the Acquisition Credit Facility, $12,857,000 was outstanding
under the Term Loan and $287,000 in outstanding letters of credit. In addition,
the Company has $12,000,000 outstanding under subordinated debt agreements as
well as significant commitments under operating lease agreements. The following
is a summary of these obligations (dollars in thousands):
Contractual Obligations Less than 2-4 Year 5 and
Total 1 year years after
---------------------------------------------------------
Long-term obligations $40,217 4,488 26,781 8,948
Interest rate swap 376 63 313
Operating leases 228,682 25,127 69,890 133,665
---------------------------------------------------------
Total $269,275 $29,678 $96,984 $142,613
=========================================================
The Company announced on August 6, 2002 that it had entered into a merger
agreement with Socrates under which the Company would be the surviving
corporation. The Company has incurred, and will continue to incur, substantial
fees for services in connection with this transaction that heretofore have been
capitalized. If the transaction is consummated, these fees will be allocated to
the equity and debt financing of the transaction and thereafter treated in
accordance with generally accepted accounting principles. In the event the
transaction is not consummated, these fees will be expensed at that time. The
resulting write off may be material and may be sufficiently large that the
Company will find itself out of compliance with the covenants associated with
its existing senior debt. We cannot determine at this time whether any such
write off would be material or would cause the Company to be in default under
the credit facility with its senior lender.
The Company also has significant commitments with certain of its executives
that would be triggered upon a change in control and certain termination events.
Capital Expenditures
The Company is continuously maintaining and, where necessary, upgrading the
property and equipment of each school. During Fiscal 2002, the Company spent
approximately $8,673,000 on capital expenditures, which included $2,259,000 for
new school development, $5,758,000 on upgrading existing facilities and $656,000
related to new corporate offices. During Fiscal 2001, the Company spent
approximately $15,224,000 on capital expenditures, which included $9,587,000 for
new school development and $5,637,000 on upgrading existing facilities.
During Fiscal 2002, the Company received $390,000 from the sale of 2 closed
schools. During Fiscal 2001, the Company received $8,268,000 from sale and
leaseback transactions of new schools.
Insurance
Companies involved in the education and care of children may not be able to
obtain insurance for the total risks inherent in their operations. In
particular, general liability coverage can have sublimits per claim for child
abuse. The Company believes it has adequate insurance coverage at this time.
There can be no assurance that in future years the Company will not become
subject to lower limits or substantial increases in insurance premiums.
Recently Issued Accounting Standards
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and expands on the guidance provided by
18
SFAS No. 121 with respect to cash flow estimations. SFAS No. 144 becomes
effective for the Company in Fiscal 2003. The Company is evaluating SFAS No. 144
and has not yet determined the full impact of adoption on its financial position
but will reclass property and equipment held for sale as part of total property
and equipment as the assets are still in use.
On April 30, 2002 the Financial Accounting Standards Board ("FASB") issued
Statement 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. FASB 145 rescinds Statement 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. Early application of the provisions of FASB 145 may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which FASB 145 is issued. The Company has elected to adopt FASB 145 as of the
beginning of Fiscal 2002.
The Company had a promissory note obligation related to the purchase of a
school in Arizona of $1,408,000 issued in June 2000. The promissory note was
settled for $1,025,000 on February 14, 2002 resulting in a gain of $383,000. As
a result of the adoption of FASB 145, the Company recorded the gain as other
income during the quarter ended March 31, 2002. The impact on diluted earnings
per share for the quarter and year to date March 31, 2002 was $0.03 per share
(net of tax).
On July 30, 2002, FASB issued Statement 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
FASB 146 is to be applied prospectively to exit or disposal activities initiated
after December 21, 2002.
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Predicting future events is inherently an imprecise activity
and as such requires the use of judgment. Actual results may vary from estimates
in amounts that may be material to the financial statements.
The Company's significant accounting policies are described in note 1 to
the consolidated financial statements. The following accounting policies are
considered critical to the preparation of the Company's financial statements due
to the estimation processes and business judgment involved in their application.
Revenue Recognition
Tuition revenues, net of discounts and other revenues are recognized as
services are performed. Any tuition payments received in advance of the time
period for which service is to be performed is recorded as unearned revenue.
Charter school management fees are recognized based on a contractual
relationship with the charter school and do not include any tuition revenue
received by the charter school. Certain fees may be received in advance of
services being rendered, in which case the fee revenue is deferred and
recognized over the appropriate period of service. The Company's net revenues
meet the criteria of SAB No. 101, including the existence of an arrangement, the
rendering of services, a determinable fee and probable collection.
Accounts Receivable
The Company's accounts receivable are comprised primarily of tuition due
from governmental agencies and parents. Accounts receivable are presented at
estimated net realizable value. The Company uses estimates in determining the
collectibility of its accounts receivable and must rely on its evaluation of
historical trends, governmental funding processes, specific customer issues and
current economic trends to arrive at appropriate reserves. Material differences
may result in the amount and timing of bad debt expense if actual experience
differs significantly from management estimates.
The Company provides its services to the parents and guardians of the
children attending the schools. The Company does not extend credit for an
extended period of time, nor does it require collateral. Exposure to losses on
receivables is principally dependent on each person's financial condition. The
Company also has investments in other entities. The collectibility of such
investments is dependent upon the financial performance of these entities. The
Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
19
Long-lived and Intangible Assets
Under the requirements of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets, the Company assesses the potential impairment of property and
equipment and identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An
asset's value is impaired if management's estimate of the aggregate future cash
flows, undiscounted and without interest charges, to be generated by the asset
are less than the carrying value of the asset. Such cash flows consider factors
such as expected future operating income and historical trends, as well as the
effects of demand and competition. To the extent impairment has occurred, the
loss will be measured as the excess of the carrying amount of the asset over the
fair value of the asset. Such estimates require the use of judgment and numerous
subjective assumptions, which, if actual experience varies, could result in
material differences in the requirements for impairment charges.
Goodwill
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2001. Under SFAS No. 142, goodwill is no longer amortized but
reviewed for impairment annually, or more frequently if certain indicators
arise. As a result, the Company ceased amortization of goodwill, the effect of
which was a reduction of $1,677,000 of amortization expense for the year ended
June 30, 2002.
The net carrying value of goodwill was $48,376,000 as of July 1, 2001 (the
Company's adoption date of SFAS 142). The Company completed the "first step"
impairment test as required under SFAS 142 at December 31, 2001 and determined
that the recognition of an impairment loss was not necessary. The fair value of
the Company's ten reporting units was estimated using the expected present value
of future cash flows. In estimating the present value the company used
assumptions based on the characteristics of the reporting unit including
discount rates (ranging from 13% to 20%). For two of the reporting units fair
value approximated their carrying value while for the remaining eight reporting
units fair value exceeded carrying value. For the two reporting units where fair
value approximated carrying value, goodwill allocated to these reporting units
totaled $7,806,000 and $4,676,000. Accordingly, the Company updated its analysis
at June 30, 2002 and concluded that no impairment was required for these two
reporting units. Goodwill will be assessed for impairment at least annually or
upon an adverse change in operations. The annual impairment testing required by
SFAS No. 142 will require judgments and estimates and could require us to write
down the carrying value of our goodwill and other intangible assets in future
periods.
Long Term Note Receivable
The Company has a $2,600,000 note receivable pursuant to a Credit Agreement
with Total Education Solutions ("TES") due May 2005, of which $2,250,000 is
convertible into 30.0% ownership of TES. TES, established in 1997, provides
special education services to charter schools and public schools which, because
of lack of internal capabilities or other reasons, wish to out-source their
provision of special education programs (which, under federal law, they are
required to provide to select students). The proceeds received by TES have been
used for the expansion of its product throughout California and plans to enter
other states. Although TES's revenues have grown since the origination of the
credit agreement, TES has also incurred losses as a result of building the
infrastructure to service other regions.
As part of our evaluation of the carrying value of TES, we consider a
number of positive and negative factors affecting TES including:
. Operating results and outlook for TES;
. Expected future cash flows;
. Current conditions and trends in the industry;
. Other industry comparables; and
. Our plans and ability to continue to hold this investment.
In evaluating the investment in TES, a discounted cash flow analyses was
prepared for TES based on a recent financing discussion memorandum. The cash
flow analyses indicated that the investment in TES has a value greater than our
current carrying value. In addition, we reviewed other objective evidence
including recent comparable
20
transactions similar to TES, industry publications supporting the market and
growth rates and TES's ongoing discussions with third parties regarding
additional financing.
Income Taxes
The Company accounts for income taxes using the asset and liability method,
in accordance with FAS 109, Accounting for Income Taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. The effect on deferred taxes
of a change in tax rate is recognized as income in the period of enactment. A
valuation allowance is recorded based on the uncertainty regarding the ultimate
realizability of deferred tax assets.
The Company files a U.S. federal income tax return and various state income
tax returns, which are subject to examination by tax authorities. This process
involves estimating the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The Company's estimated tax liability is subject to change
as examinations of specific tax years are completed in the respective
jurisdictions including possible adjustments related to the nature and timing of
deductions and the local attribution of income.
21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and interest
rate swaps agreements.
Interest Rates
The Company's exposure to market risk for changes in interest rates relate
primarily to debt obligations. The Company has no cash flow exposure due to rate
changes on its 12.0%, $10,000,000 senior subordinated debt at June 30, 2002 and
June 30, 2001. The Company also has no cash flow exposure on certain mortgages,
notes payable and subordinate debt agreements aggregating $2,386,000 and
$6,471,000 at June 30, 2002 and June 30, 2001, respectively. However, the
Company does have cash flow exposure on two of its credit facilities under the
Amended and Restated Loan and Security Agreement. The Working Capital and the
Acquisition Credit Facility are subject to variable LIBOR or prime base rate
pricing. Accordingly, a 1.0% change in the LIBOR rate and the prime rate would
have resulted in interest expense changing by approximately $143,000 and
$206,000 in Fiscal 2002 and Fiscal 2001, respectively.
Interest Rate Swap Agreement
In connection with the May 2001 amendment to the Company's Amended and
Restated Loan and Security Agreement, it entered an interest rate swap agreement
on the $15,000,000 Term Loan Facility. The Company uses this derivative
financial instrument to manage its exposure to fluctuations in interest rates.
The instrument involves, to varying degrees, market risk, as the instrument is
subject to rate and price fluctuations and elements of credit risk in the event
the counterparty should default. The Company does not enter into derivative
transactions for trading purposes. At June 30, 2002 the Company's interest rate
swap contract outstanding had a total notional amount of $12,857,000. Under the
interest rate swap contract, the Company agrees to pay a fixed rate of 5.48% and
the counterparty agrees to make payments based on 3-month LIBOR. The market
value of the interest rate swap agreement at June 30, 2002 was a liability of
$376,000, net of taxes and is included as a component of Accumulated Other
Comprehensive Loss, of which a portion is expected to be reclassified to the
consolidated statement of income within one year.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary financial information specified by
this Item, together with the Reports of the Company's independent accountants
thereon, are included in this Annual Report on Form 10-K on pages F-1 through
F-26 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item with respect to the directors of the
Company is listed below. The information required by this Item with respect to
executive officers of the Company is furnished in a separate item captioned
"Executive Officers of the Company" and included in Part I of this Annual Report
on Form 10-K.
The names of the directors and certain information about them, are set
forth below:
Director
Name of Director Age Principal Occupation Since
- --------------------------------------------------------------------------------------------
Continuing Director with a term expiring in 2004 (Class II Directors):
Daniel L. Russell 37 Principal Private Finance Group, Allied 2001
Capital Corporation
Continuing Director with a term expiring in 2002 (Class III Directors):
Edward Chambers 65 Executive Vice President - Finance and 1988
Administration of Wawa, Inc.
A.J. Clegg 63 Chairman of Board of Directors and Chief 1992
Executive Officer of the Company
Peter H. Havens 48 Chairman of Baldwin Management, LLC 1991
Continuing Director with a term expiring in 2003 (Class I Directors):
John R. Frock 59 Vice Chairman - Corporate Development of 1992
the Company
Eugene G. Monaco 74 Judge, Delaware County District Court 1995
(retired)
Robert E. Zobel 54 Vice Chairman - Corporate Affairs and Chief 1998
Financial Officer of the Company
The following description contains certain information concerning the
directors, including current positions and principal occupations during the past
five years.
Edward H. Chambers. Mr. Chambers has served as Executive Vice President
- - Finance and Administration of Wawa, Inc. since March 1988. During the period
April 1984 through March 1988, he served as President and Chief Executive
Officer and as a director, of Northern Lites, Ltd., an owner and operator of
quick-service restaurants operating pursuant to a franchise from D'Lites of
America, Inc. From 1982 to July 1984, Mr. Chambers was President - Retail
Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service
restaurants. He is also a director of Riddle Memorial Hospital.
A. J. Clegg. Mr. A. J. Clegg was named Chairman of the Board and Chief
Executive Officer of NLCI in May 1992. Since 1996, Mr. A. J. Clegg has also
served as a member of the Board of Trustees of Drexel University. From June 1990
to December 1997 (but involving immaterial amounts of time between 1994 and
1997), Mr. A. J. Clegg served as the Chairman and CEO of JBS Investment Banking,
Ltd., a provider of investment management and consulting services to businesses,
including NLCI. In 1979, he formed Empery Corporation, an operator of businesses
in the cable television and printing industries, and held the offices of
Chairman, President and CEO during his tenure (1979-1993). In addition, Mr. A.
J. Clegg served as Chairman and CEO of TVC, Inc. (1983-1993), a distributor of
cable television components; and Design Mark Industries (1988-1993), a
manufacturer of electronic
23
senswitches. Mr. A. J. Clegg served on the board of directors of Ferguson
International Holdings, PLC, a United Kingdom company, from March 1990 to April
1991; and was Chairman and CEO of Globe Ticket and Label Company from December
1984 to February 1991. In August 2000, Mr. A. J. Clegg was recognized as
"Education Entrepreneur of the Year" by the Association of Education
Practitioners and Providers. Mr. A. J. Clegg is the father of Mr. D. Scott
Clegg, NLCI's Vice Chairman - Operations, President and Chief Operating Officer.
John R. Frock. Mr. Frock was appointed Vice Chairman - Corporate
Development of NLCI in April 2002. Prior to such appointment, Mr. Frock had been
Executive Vice President - Corporate Development since August 1, 1994. Mr. Frock
was elected to the Board of Directors of NLCI on May 29, 1992. In March 1992,
Mr. Frock became the President and Chief Operating Officer of JBS Investment
Banking, Ltd., a provider of investment management and consulting services to
businesses, including NLCI.
Peter H. Havens. Mr. Havens is Chairman of Baldwin Management, LLC, an
investment management concern. Previously, he was the Executive Vice President
of Bryn Mawr Bank Corporation overseeing the Investment Management and Trust
Division. From 1982 through May 1995, Mr. Havens served as manager of Kewanee
Enterprises, a private investment firm located in Bryn Mawr, Pennsylvania. He is
also chairman of the board of directors of Petroferm, Inc., a director of
Independence Seaport Museum and Lankenau Hospital Foundation and a Trustee
Emeritus of Ursinus College.
Eugene G. Monaco. Mr. Monaco has both a J.D. from Temple Law School and
M.S. in Mechanical Engineering from the University of Delaware and, from January
1, 1990 until his retirement in late 1995, served as a Judge for the Delaware
County District Court. He also served as an Instructor in Kinematics and
Dynamics at Drexel University, a Lecturer in child abuse at Penn State
University and was the Chief Negotiator for the Rose Tree Media School Board. He
also served as Assistant District Attorney in Media, Pennsylvania and
Engineering Negotiator for Westinghouse Electric for 32 years.
Daniel L. Russell. Mr. Russell is a Principal in the Private Finance
Group at Allied Capital Corporation. Prior to joining Allied Capital in 1998,
Mr. Russell served in the financial services practice of KPMG Peat Marwick LLP
from 1991 to 1998, including serving as a Senior Manager from 1996 to 1998. Mr.
Russell is a director of The Hillman Group, SunSource Technology Services, Inc.
and HealthASPex. Mr. Russell is a Certified Public Accountant.
Robert E. Zobel. Mr. Zobel was appointed Vice Chairman - Corporate
Affairs and Chief Financial Officer of NLCI in April 2002. Between February 2001
and April 2002, Mr. Zobel served as Vice President, Chief Administrative Officer
and Secretary of MARS, Inc., a start up retail organization. Mr. Zobel was Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of MARS,
Inc. from February 1996 until February 2001. From 1974 through February 1996,
Mr. Zobel was associated with Deloitte & Touche LLP (formerly Touche Ross & Co.)
as an employee and since September 1981 as a partner. Mr. Zobel earned a B.A.
degree from Claremont McKenna College, a J.D. degree from Willamette University
College of Law and a LLM degree in tax from Boston University. Mr. Zobel has
served as a director of NLCI since 1998.
During the last five years, no director or executive officer of the Company
has:
(i) filed a petition for bankruptcy;
(ii) been convicted in a criminal proceeding; or
(iii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result
of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or
mandating activities subject to, federal or state securities
laws or finding any violation with respect to such laws.
On March 11, 2002, Pamela Lewis resigned from the NLCI Board of
Directors for personal reasons unrelated to the Company. On April 30, 2002, the
Company's Board of Directors reduced the number of directors on the Company's
Board, from eight to seven.
24
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
Common Stock, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common
Stock. Executive officers, directors and ten percent stockholders are required
by SEC regulations to furnish the Company with a copy of all Section 16(a) forms
("Forms 3, 4, and 5") that they file. To the Company's knowledge, based solely
on a review of copies of the Forms 3, 4 and 5 furnished to the Company and
written representations with respect to all transactions in the Company's
securities effected during the period from July 1, 2001 through June 30, 2002,
all officers, directors and beneficial owners complied with the applicable
Section 16(a) filing requirements except that (i) Mr. A.J. Clegg inadvertently
failed to file a report on Form 4 in connection with the exercise of a warrant
to purchase 20,161 shares of the Company's Common Stock, (ii) Mr. Robert E.
Zobel inadvertently failed to report timely on Form 4 dispositions of Common
Stock beneficially owned by him, and (iii) Messrs. D. Scott Clegg and Robert E.
Zobel each inadvertently failed to report timely a grant of options (made both
under the 1995 Stock Incentive Plan and outside of NLCI's option plans) to
purchase Common Stock in Fiscal 2002. We have been advised by Messrs. A.J.
Clegg, D. Scott Clegg and Robert E. Zobel that they are in the process of
completing their filings.
25
Item 11. Executive Compensation.
The information required by this Item is listed below.
Compensation Tables
The following tables contain compensation data for the Chief Executive
Officer and certain other of the Company's four other most highly compensated
executive officers (based on total annual salary and bonus for Fiscal 2002) (the
"Named Executive Officers").
Summary Compensation Table
-----------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------------------------
Other Securities All
Name and Fiscal Annual Underlying Other
Principal Position Year Salary Bonus Compensation(1) Options/SARs Compensation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
A.J. Clegg 2002 $ 329,648 $ 80,644(3) - - $ 6,752
Chairman, President and 2001 316,154 144,639(4) - - 7,383
Chief Executive Officer 2000 314,007 141,477 - 110,000 6,391
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Frock 2002 $ 180,869 $ - - - $ 2,164
Vice Chairman - 2001 145,846 - $ 14,626 - 2,073
Corporate Development 2000 141,846 66,636 - - 2,676
- -----------------------------------------------------------------------------------------------------------------------------------
Robert E. Zobel(5)
Vice Chairman - 2002 $ 35,385 $ - $ 3,792 65,000 $ -
Corporate Affairs and 2001 - - - - -
Chief Financial Officer 2000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
D. Scott Clegg(5)
Vice Chairman - 2002 $ 126,923 (6)$ - $ 3,000 65,000 $ -
Operations, President and 2001 - - - - -
Chief Operating Officer 2000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Dr. Lynn A. Fontana
Executive Vice President - 2002 $ 126,040 $ - $ 21,389 - $ 1,561
Education and Chief 2001 113,960 - 22,468 - 368
Education Officer 2000 98,526 20,360 0 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Daryl A. Dixon (7) 2002 $ 174,540 (8)$ - $ 97,777 - $ 1,159
Former President and 2001 265,000 - 49,326 - 312
Chief Operating Officer 2000 260,615 117,205 49,858 - 302
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The amounts reported for Mr. Frock consist of $7,800 for automobile
expenses in Fiscal 2001 and $6,826 for health insurance in Fiscal
2001. The amounts reported for Mr. Zobel in Fiscal 2002 consist of
$1,200 for automobile expense and $2,592 for health insurance. The
amounts reported for Mr. D. Scott Clegg in Fiscal 2002 consist of
$3,000 for automobile expense. The amounts reported for Dr. Fontana
consist of $9,362 and $9,362 for loan forgiveness for relocation or
moving expenses in Fiscal 2002 and 2001, respectively, $6,000and
$6,000 for automobile expenses for Fiscal 2002 and 2001 , respectively
and $6,026 and $7,106 for health insurance in Fiscal 2002 and 2001 ,
respectively. The amounts reported for Mr. Dixon consist of $36,750,
$34,100 and $35,303 in respect of loan forgiveness in Fiscal 2002,
2001 and 2000, respectively, $4,200, $8,400 and $8,400 for automobile
expenses in Fiscal 2002, 2001 and 2000, respectively, $6,027, $6,826
and $6,155 for health insurance in Fiscal 2002, 2001 and 2000,
respectively, $7,644 in Fiscal 2002 for unused vacation and $43,156 in
Fiscal 2002 for options exercised. Perquisites and other personal
benefits for Messrs. A. J. Clegg for all years; Mr. Frock in Fiscal
2002 and 2000 and Dr. Fontana in fiscal 2000 did not exceed 10% of
such executive officer's salary and bonus and accordingly have been
omitted from the table as permitted by the rules of the SEC.
26
(2) Other compensation in Fiscal 2002 for Messrs. A. J. Clegg, Frock and Dixon
and Dr. Fontana consisted of payments of (i) $5,848, $2,164, $216, and
$260, respectively, in respect of life insurance, and (ii) $905, $0, $943,
and $1,301, respectively; in respect of Company matching 401(k) plan
contributions.
(3) Payment date for $80,644 of bonus payable under Mr. A. J. Clegg's Special
Incentive Agreement was accelerated by NLCI's compensation committee from
November 20, 2001 to August 19, 2001 in connection with his exercise of
warrants to purchase shares of NLCI's Common Stock. Mr. A. J. Clegg has
voluntarily deferred payment to him of the remaining $56,689 of this bonus.
(4) Includes $7,306 of interest accrued from November 20, 2000, the date bonus
payment was due, until June 22, 2001, the date bonus payment was actually
made.
(5) Mr. Zobel joined the Company in April 2002 and Mr. D. Scott Clegg joined
the Company in February 2002.
(6) Includes $50,000 Mr. D. Scott Clegg received during Fiscal 2002 as a
consultant immediately preceding his employment with the Company.
(7) Mr. Dixon resigned form the Company effective November 30, 2001 and
continued to serve as a consultant through February 18, 2002.
(8) Includes $71,598 Mr. Dixon received during Fiscal 2002 as a consultant
immediately following his resignation.
27
Options/Stock Appreciation Rights Granted in Fiscal 2002
---------------------------------------------------------------------------------------
Potential Realized Value
Individual Grants at Assumed Annual Rates
of Stock Price
------------------------------------------------------------ Appreciation for Option
Term (10 yrs) (3)
---------------------------
% of Total
Number of Options/
Securities SARs
Underlying Granted Exercise At 5% At 10%
Option/ to all or Annual Annual
Name of SARs Employees in Base Price Expiration Growth Growth
Executive Granted (1) Fiscal 2002 (2) per Share Date Rate Rate
- -------------------------------------------------------------------------------------------------------------------------
A.J. Clegg 0 0.00% n/a n/a $ 0 $ 0
John R. Frock 0 0.00% n/a n/a $ 0 $ 0
Robert E. Zobel 65,000 48.15% $5.85 02/21/2012 $239,137 $299,531
D. Scott Clegg 65,000 48.15% $5.85 02/21/2012 $239,137 $299,531
Dr. Lynn A. Fontana 0 0.00% n/a n/a $ 0 $ 0
(1) Options granted vest in increments of one-third of the total number of
options granted on the first, second and third anniversary dates of
the date of grant.
(2) During Fiscal 2002, the Company granted to employees options to
purchase an aggregate of 135,000 shares of Common Stock.
(3) The potential realizable values are based on an assumption that the
stock price of the shares of Common Stock of the Company appreciate at
the annual rate shown (compounded annually) from the date of grant
until the end of the option term. These values do not take into
account contractual provisions of the options which provide for
termination of an option following termination of employment,
nontransferability, or vesting. These amounts are calculated based on
the requirements promulgated by the SEC and do not reflect the
Company's estimate of future stock price growth of the shares of the
Company's Common Stock.
Aggregated Option/Stock Appreciation Rights Exercised in Fiscal 2002
and Value of Options at June 30, 2002
Exercised in Number of Unexercised Value of Unexercised
Fiscal 2002 Options at June 30, 2002 In-the-Money Options at
June 30, 2002
-------------------------------------------------------------------------------------
Shares
Acquired
Name of on Value Un- Un-
Executive Exercise Realized Exercisable exercisable Exercisable exercisable
- -----------------------------------------------------------------------------------------------------------------------