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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: January 1, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from             to            

Commission File Number 1-10031

 

 

NOBEL LEARNING COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-2465204

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

1615 West Chester Pike, Suite 200, West Chester, PA   19382-6223
(Address of principal executive offices)   (Zip Code)

(484) 947-2000

(Registrant’s telephone number, including area code)

 

 

Indicate by check whether the registrant (1) has filed all report(s) 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of the issuer’s common stock outstanding at February 4, 2011 was 10,602,585.

 

 

 


Table of Contents

INDEX TO FORM 10-Q

Nobel Learning Communities, Inc.

 

          Page
    Number    
 

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements      1   
   Consolidated Balance Sheets as of January 1, 2011 (Unaudited) and July 3, 2010      2   
   Consolidated Statements of Operations (Unaudited) for the thirteen and twenty-six weeks ended January 1, 2011 and December 26, 2009      3   
   Consolidated Statement of Changes in Stockholders’ Equity for the twenty-six weeks ended January 1, 2011 (Unaudited)      4   
   Consolidated Statements of Cash Flows (Unaudited) for the twenty-six weeks ended January 1, 2011 and December 26, 2009      5   
   Notes to Consolidated Interim Financial Statements (Unaudited)      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      37   

Item 4.

   Controls and Procedures      37   

PART II. OTHER INFORMATION

  

Item 5.

   Other Information      38   

Item 6.

   Exhibits      39   

 

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Table of Contents

PART I

 

Item 1. Financial Information

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING INFORMATION

Statements included or incorporated herein which are not historical facts are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When the Company uses words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “may,” “intends,” “seeks” or similar expressions, the Company is making forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements.

Forward-looking statements reflect management’s current views with respect to future events and financial performance and are based on currently available competitive, financial and economic data and management’s assumptions regarding future events. While management believes that its assumptions are reasonable, forward-looking statements are subject to various known and unknown risks and uncertainties and actual results may differ materially from those expressed or implied herein. In connection with the “safe harbor provisions” of the Private Securities Litigation Reform Act of 1995, the Company notes that certain factors, among others, which could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein are discussed in greater detail under Part I, Item 2; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part I, Item IA “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2010. Potential risks and uncertainties include, among others, unemployment rates impacting our current or future enrollments; changes in general economic conditions; the implementation and results of our ongoing strategic initiatives; our ability to compete with new or existing competitors; dependence on senior management and other key personnel; and the high concentration of ownership of the Company’s stock among its three largest stockholders. The Company’s results may also be affected by general factors, which include amongst other items, political developments and policy, interest and inflation rates, accounting standards and requirements, taxes, and laws and regulations affecting it in markets where it competes.

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 or revise these statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, whether as a result of new information, future developments or otherwise.

 

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Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

 

       January 1, 2011            July 3, 2010      
     (Unaudited)         

ASSETS

     

Cash and cash equivalents

   $ 296         $ 1,606     

Customer accounts receivable, less allowance for doubtful accounts of $410 at January 1, 2011 and $464 at July 3, 2010

     1,045           957     

Note receivable, current portion

     250           250     

Prepaid income taxes

     584           -     

Deferred tax asset

     765           749     

Prepaid rent

     3,410           3,425     

Prepaid expenses and other current assets

     2,483           2,746     
                 

Total Current Assets

     8,833           9,733     
                 

Property and equipment, at cost

     89,622           86,907     

Accumulated depreciation and amortization

     (60,598)          (57,863)    
                 

Property and equipment, net

     29,024           29,044     
                 

Goodwill

     83,275           83,275     

Intangible assets, net

     6,973           8,062     

Note receivable

     232           473     

Deposits and other assets

     4,341           3,809     
                 

Total Assets

   $ 132,678         $ 134,396     
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Accounts payable and other current liabilities

   $ 17,235         $ 19,534     

Income taxes payable

     -             752     

Current portion of lease obligations

     156           226     

Deferred revenue

     16,464           15,756     
                 

Total Current Liabilities

     33,855           36,268     
                 

Long-term obligations

     21,800           21,500     

Long-term portion of lease obligations

     464           533     

Deferred tax liability

     2,144           2,060     

Other long term liabilities

     2,524           2,055     
                 

Total Liabilities

     60,787           62,416     
                 

Commitments and Contingencies

     

Stockholders’ Equity:

     

Preferred stock, $0.001 par value per share; 10,000,000 shares authorized; 1,063,830 shares issued and outstanding

     1           1     

Common stock, $0.001 par value; 20,000,000 shares authorized; 10,602,585 and 10,550,701 shares issued and outstanding at January 1, 2011 and July 3, 2010, respectively

     10           10     

Additional paid-in capital

     60,933           60,427     

Retained earnings

     11,003           11,601     

Accumulated other comprehensive loss

     (56)          (59)    
                 

Total Stockholders’ Equity

     71,891           71,980     
                 

Total Liabilities and Stockholders’ Equity

   $ 132,678         $ 134,396     
                 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Operations

(Dollars and shares outstanding amounts in thousands; except per share data)

(Unaudited)

 

     For the Thirteen Weeks Ended      For the Twenty-Six Weeks Ended  
       January 1, 2011          December 26, 2009          January 1, 2011          December 26, 2009    

Revenues

   $ 60,552         $ 58,593         $ 112,782         $ 109,216   
                                   

Personnel costs

     27,876           27,553           54,264           52,720     

School operating costs

     7,647           7,874           16,060           15,543     

Rent and other

     14,939           14,749           29,960           29,391     
                                   

Cost of services

     50,462           50,176           100,284           97,654     
                                   

Gross profit

     10,090           8,417           12,498           11,562     

General and administrative expenses

     6,703           5,841           12,666           10,729     
                                   

Operating income (loss)

     3,387           2,576           (168)          833     

Interest expense

     351           315           768           582     

Other income

     (4)          (7)          (9)          (15)    
                                   

Income (loss) from continuing operations before income taxes

     3,040           2,268           (927)           266     

Income tax expense (benefit)

     1,113           873           (489)           102     
                                   

Income (loss) from continuing operations

     1,927           1,395           (438)           164     

Loss from discontinued operations, net of income tax effect

     (74)          (377)          (160)           (577)    
                                   

Net income (loss)

   $ 1,853         $ 1,018         $ (598)         $ (413)    
                                   

Basic income per share:

           

Income (loss) from continuing operations

   $ 0.18         $ 0.13         $ (0.04)         $ 0.02     

Loss from discontinued operations

     (0.01)         (0.04)          (0.02)           (0.05)    
                                   

Net income (loss) per share

   $ 0.18         $ 0.10         $ (0.06)         $ (0.04)    
                                   

Diluted income per share:

           

Income from continuing operations

   $ 0.18         $ 0.13           n.m.           n.m.     

Loss from discontinued operations

     (0.01)          (0.04)          n.m.           n.m.     
                                   

Net income per share

   $ 0.17         $ 0.10           n.m.           n.m.     
                                   

Weighted average of common shares outstanding:

           

Basic

     10,588           10,528           10,570           10,513     

Diluted

     10,616           10,617           n.m.           n.m.     

Net income (loss) per share totals may not sum due to rounding.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the Twenty-Six Weeks Ended January 1, 2011

(Dollars in thousands except share data)

(Unaudited)

 

         Preferred Stock              Common Stock          Additional
Paid-In
     Retained      Accumulated
Other
Comprehensive
        
     Shares      Amount      Shares      Amount      Capital      Earnings      (loss) income              Total          

July 3, 2010

     1,063,830         $ 1           10,550,701         $ 10         $ 60,427         $ 11,601         $ (59)         $ 71,980     

Net loss

     -           -           -           -           -           (598)          -           (598)   

Change in fair value of swap contracts, net of tax

     -           -           -           -           -           -           3           3     
                             

Total comprehensive loss

                          (595)   
                             

Stock option compensation

     -           -           -           -           526           -           -           526     

Issuance and vesting of restricted share awards and related tax impact

     -           -           51,884           -           (20)         -           -           (20)   
                                                                       

January 1, 2011

     1,063,830         $ 1           10,602,585         $ 10         $ 60,933         $ 11,003         $ (56)         $ 71,891     
                                                                       

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

     Twenty-Six Weeks Ended  
         January 1, 2011              December 26, 2009      

Cash flows provided from (used in) operating activities:

     

Net loss

   $ (598)       $ (413)   
                 

Adjustments to reconcile net loss to net cash provide by (used in) operating activities:

     

Depreciation and amortization

     4,738           4,967     

Reserve for lease costs for discontinued operations

     142           95     

Deferred taxes (benefit), net of business combinations

     49           (211)   

Provision for losses on accounts receivable

     344           309     

Stock based compensation

     526           575     

Other

     2           (49)   

Changes in assets and liabilities, net of business combinations:

     

Customer accounts receivable

     (432)          (1,006)   

Prepaid expenses and other current assets

     (306)          309     

Other assets and liabilities

     (62)          (177)   

Tax impact from vesting of restricted stock awards

     (20)          32     

Deferred revenue

     708           (1,896)   

Accounts payable and current liabilities

     (3,441)          (2,700)   
                 

Total adjustments

     2,248           248     
                 

Net cash provided from (used in) operating activities

     1,650           (165)   
                 

Cash flows used in investing activities:

     

Purchases of fixed assets, net of acquired amounts

     (3,521)         (3,750)   

School acquisitions

     -               (11,983)   

Proceeds from payment of note receivable

     241           500     
                 

Net cash used in investing activities

     (3,280)         (15,233)   
                 

Cash flows from financing activities:

     

Borrowings of long term debt

     30,850           58,075     

Repayment of long term debt

     (30,550)         (42,100)   

Proceeds from exercise of stock options

     -               55     

Tax impact from vesting of restricted stock awards

     20           (32)   
                 

Net cash provided by financing activities

     320           15,998     
                 

Net (decrease) increase in cash and cash equivalents

     (1,310)          600     

Cash and cash equivalents at beginning of period

     1,606           786     
                 

Cash and cash equivalents at end of period

   $ 296         $ 1,386     
                 

Supplemental disclosure of cash flow information:

     

Interest paid

   $ 634         $ 451     

Income taxes paid

   $ 691         $ 437     

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES

Notes to Consolidated Interim Financial Statements

for the Thirteen and Twenty-Six Weeks Ended January 1, 2011

(Unaudited)

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

The unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position at January 1, 2011 and results of operations for the thirteen and twenty-six weeks ended January 1, 2011 and December 26, 2009, respectively. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2010.

Due to the inherently seasonal nature of the education and preschool businesses, annualization of amounts in these interim financial statements may not be indicative of the actual operating results for the full year.

Future results of operations of the Company involve a number of risks and uncertainties including those discussed elsewhere in this Quarterly Report on Form 10-Q.

References to Fiscal 2011 refer to the 52 weeks ending July 2, 2011. References to Fiscal 2010 refer to the 53 weeks ended July 3, 2010. The first and second quarters of Fiscal 2011 and Fiscal 2010 are each comprised of thirteen weeks.

The Company’s critical accounting policies are unchanged from those described in the Company’s Annual Report on Form 10-K for Fiscal 2010 for the fiscal year ended July 3, 2010.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different conditions or if assumptions change. The most significant estimates underlying the accompanying consolidated financial statements include long-lived assets and goodwill valuations and any potential impairment, the allowance for doubtful accounts, the valuation of stock compensation expense and estimates of future obligations related to closed facilities, valuations of liabilities for workers’ compensation claim liabilities retained by the Company and realization of our deferred tax assets.

New Accounting Pronouncements:

In July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that requires companies to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators. The guidance is effective for the Company as of December 15, 2010. The Company’s adoption of this guidance has not had a significant effect on its consolidated financial statements.

In January 2010, the FASB issued guidance that requires new disclosures and clarifies some existing disclosure requirements about fair value measurements. The new pronouncement requires a reporting entity: (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, it clarifies the requirements of the following existing disclosures: (1) for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements, which became effective for the Company in Fiscal 2011. Adoption requires additional disclosure to delineate such categories in the notes to the Company’s consolidated financial statements (see Note 8).

 

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In October 2009, the FASB issued new guidance regarding multiple deliverable revenue arrangements. The new guidance revises certain accounting for revenue arrangements with multiple deliverables. In particular when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, the new guidance allows use of a best estimate of the selling price to allocate the arrangement consideration among them. The new guidance is effective for Fiscal 2011. Adoption of this new guidance has not had a material impact on our financial position, results of operations or cash flows.

Note 2. Earnings Per Share

Earnings per share is based on the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of basic earnings per share, weighted average number of shares outstanding is used as the denominator. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume the exercise of options if such option exercises are dilutive. The Company was in a loss position for the twenty-six weeks ended January 1, 2011 and December 26, 2009. The common stock equivalents of stock options during the twenty-six weeks ended January 1, 2011 and December 26, 2009 were not included in the computation of diluted earnings per share as they were anti-dilutive. Earnings per share is computed as follows (dollars and average common stock outstanding in thousands):

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
         January 1, 2011            December 26, 2009            January 1, 2011            December 26, 2009    

Basic income per share:                        

           

Net income (loss)

   $ 1,853         $ 1,018         $ (598)        $ (413)    

Weighted average common shares outstanding

     10,588           10,528           10,570           10,513     
                                   

Basic income (loss) per share

   $ 0.18         $ 0.10         $ (0.06)        $ (0.04)    
                                   

Diluted income per share:                

           

Net income (loss)

   $ 1,853         $ 1,018           n.m.           n.m.     
                                   

Weighted average common shares outstanding

     10,588           10,528           n.m.           n.m.     

Stock options

     28           89           n.m.           n.m.     
                                   

Average common stock and dilutive securities outstanding

     10,616           10,617           n.m.           n.m.     
                                   

Diluted income per share

   $ 0.17         $ 0.10           n.m.           n.m.     
                                   

Anti-dilutive stock options issued and outstanding with exercise prices in excess of average market price

     1,376           986           n.m.           n.m.     

The Company excluded 1,479,000 and 1,327,000 potentially dilutive common shares (stock options) from the computation of diluted net loss per share for the twenty-six weeks ended January 1, 2011 and December 26, 2009, respectively, as their effect would have been anti-dilutive given the net loss incurred in these periods.

Note 3. Acquisitions:

During the first quarter of Fiscal 2010, the Company completed two acquisitions. Both acquisitions are consistent with the Company’s growth strategy in the private pay education market and provide an expansion within an existing market and the expansion of the Company’s learning platform. The acquisitions are summarized as follows:

 

   

During the first quarter of Fiscal 2010, the Company completed the acquisition of all of the stock of Laurel Springs School (“LSS”) and substantially all of the assets of The Learning Springs (“TLS”), both based in Ojai, California. LSS is an online and distance learning school (www.laurelsprings.com). Laurel Springs’ educational program spans the entire K-12 market and has a fully accredited curriculum that includes Honors AP Courses, a Gifted and Talented program, a chapter of the National Honors Society and a strong college preparatory program. Laurel Springs’ student body and alumni include elite athletes, entertainers, and home schooled students and concurrent students from all 50 states and from numerous foreign countries. Laurel Springs extends the Company’s educational programs through high school and provides a fully integrated K-12 platform.

 

   

During the first quarter of Fiscal 2010 the Company completed the acquisition of all of the stock of Gifted Child Studies, Inc. (“GCS”). GCS added one elementary school to the Company’s existing market coverage in the San Diego, California area.

 

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A summary of the purchase price and the allocation of estimated fair value of the net assets and liabilities acquired or assumed, are presented below (dollars in thousands):

 

Acquired

Entity

   Net cash
paid  at
acquisition
     Net  non-cash
working
capital

assets/
(liabilities)
included in

purchase price
     Goodwill     

 

 

 

Acquired Intangible Assets at Fair Value

     Restrictive
Covenants
     Amortizable
Asset Life
(years)
     Other
Long-Term
Assets
(Liabilities)

at Fair
Value
     Total
purchase
price of
acquisition
 
            Trade
Name
     Amortizable
Asset Life
(years)
     Student
Roster
     Amortizable
Asset Life
(years)
             

Fiscal 2010 Acquisitions

                                

Laurel Springs School

   $ 10,444         $ (2,539)       $ 9,088         $ 1,126           5         $ 2,035           10         $ 150           5         $ 585         $ 12,984     

Gifted Child Studies, Inc.

     1,539           (1,611)         2,698           264           20           302           7           -               n/a           (115)         3,149     
                                                                                

Total Fiscal 2010 acquisitions

   $ 11,983         $ (4,150)       $ 11,786         $ 1,390            $ 2,337            $ 150            $ 470         $ 16,133     
                                                                                

Total acquisition costs recognized as general and administrative expense during the thirteen and twenty-six week periods ended December 26, 2009 were $47,000 and $175,000, respectively. Goodwill is not deductible for income tax purposes for either LSS or GCS.

The following unaudited pro forma results of operations assume that acquisitions were completed at the beginning of Fiscal 2010 (dollars in thousands, except per share data):

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
         January 1, 2011            December 26, 2009            January 1, 2011           December 26, 2009    

Revenues

   $ 60,552         $ 58,593         $ 112,782        $ 110,216     

Net income (loss)

     1,853           1,018           (598     (847

Net income (loss) per share - basic

   $ 0.18         $ 0.10         $ (0.06   $ (0.08

Net income (loss) per share - diluted

   $ 0.17         $ 10.00           n.m.          n.m.     

Note 4. Goodwill and Intangible Assets, Net

Intangible assets include a franchise agreement and identifiable intangibles from acquisitions. At January 1, 2011 and July 3, 2010, the Company’s goodwill and intangible assets were as follows (dollars in thousands):

 

     Weighted
Average
Amortization
Period (in
months)
     January 1, 2011      July 3, 2010  
        Gross Carrying
Amount
     Accumulated
    Amortization    
         Net Balance          Gross Carrying
Amount
     Accumulated
    Amortization    
         Net Balance      

Goodwill

     n.a.         $ 83,275         $ -         $ 83,275         $ 83,275         $ -             $ 83,275     
                                                        

Amortized intangible assets:

                    

Franchise agreement

     130         $ 580         $ 293         $ 287         $ 580         $ 260         $ 320     

Trade names

     194           4,317           954           3,363           4,317           743           3,574     

Student rosters

     89           6,755           3,532           3,223           8,485           4,436           4,049     

Restrictive covenants

     60           150           50           100           150           31           119     
                                                        

Total Intangible Assets

      $ 11,802         $ 4,829         $ 6,973         $ 13,532         $ 5,470         $ 8,062     
                                                        

The gross carrying amount of total intangible assets have decreased by $1,730,000 to $11,802,000 at January 1, 2011 from $13,532,000 at July 3, 2010 as some student rosters from prior acquisitions have been fully amortized. Amortization expense related to intangible assets was $519,000 and $788,000 for the thirteen weeks ended January 1, 2011 and December 26, 2009, respectively. Amortization expense related to intangible assets was $1,090,000 and $1,280,000 for the twenty-six weeks ended January 1, 2011 and December 26, 2009, respectively.

Note 5. Credit Agreement

The Company and its lenders entered into a credit agreement during Fiscal 2008, which has subsequently been amended (“2008 Amended Credit Agreement”). The 2008 Amended Credit Agreement provides for a $75,000,000 Revolving Credit Commitment with a $25,000,000 accordion feature permitting the Company to increase the size of the facility under its current terms and conditions. Under the terms of the 2008 Amended Credit Agreement, proceeds may be used to fund permitted acquisitions, capital expenditures and ongoing business operations.

As of January 1, 2011 and July 3, 2010, outstanding borrowings totaled $21,800,000 and $21,500,000, respectively and outstanding letters of credit as of January 1, 2011 and July 3, 2010 were $2,615,000.

 

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The Company’s obligation under its 2008 Amended Credit Agreement bears interest, at the Company’s option, at either:

(1) a selected LIBOR rate plus a margin based on our debt to defined EBITDA leverage ratio; or

(2) a defined base rate plus a margin based on our debt to defined EBITDA leverage ratio.

The applicable margins may be adjusted quarterly based on the leverage ratio and adjusted periodically based on adjustments to the indexed LIBOR rate or defined base rate. The Company also pays a letter of credit fee based on the face amount of each letter of credit calculated at the margin applicable to loans under the 2008 Amended Credit Agreement bearing interest based on the selected LIBOR rate.

The ranges of margins applicable during the twenty-six week periods ended January 1, 2011 and December 26, 2009 were as follows:

 

     Spreads added to LIBOR or Base Rates
         January 1, 2011            December 26, 2009    

LIBOR rate plus debt to defined EBITDA-indexed rate

   2.50% - 3.75%    1.15% - 2.40%

Base rate plus debt to defined EBITDA-indexed rate

   1.50% - 2.75%    0.15% - 0.90%

Letter of Credit fees LIBOR plus defined EBITDA-indexed rate

   2.50% - 3.75%    1.15% - 2.40%

As of January 1, 2011 and July 3, 2010, included in deposits and other assets on the Company’s balance sheet are deferred financing costs of $655,000 and $791,000, respectively. These costs are amortized to interest expense on a straight-line basis over the life of the underlying indebtedness. During the thirteen weeks ended January 1, 2011 and December 26, 2009, the Company recognized interest expense related to the amortization of financing costs of $68,000 and $42,000, respectively. During the twenty-six weeks ended January 1, 2011 and December 26, 2009, the Company recognized interest expense related to the amortization of financing costs of $136,000 and $83,000, respectively.

The 2008 Amended Credit Agreement contains customary covenants and provisions that restrict the Company’s ability to change its business, acquire businesses, declare or pay dividends, grant liens, incur additional indebtedness, make capital expenditures, and to govern the use of proceeds from disposition of assets or equity related transactions and require repayment in certain change of control events. In addition, the 2008 Amended Credit Agreement provides that the Company must meet or exceed amounts for defined EBITDA and fixed charge coverage ratios and must not exceed certain leverage ratios. The Company’s loan covenants under the 2008 Amended Credit Agreement limit the amount of senior debt borrowings and acquisitions that are permitted. The Company’s obligations under the 2008 Amended Credit Agreement are collateralized in part by a pledge of the stock of the Company’s subsidiaries and liens on all real and personal property owned by the Company.

Note 6. Note Receivable

During the fourth quarter of Fiscal 2008, the Company settled a contract dispute with a former sub-lessee. The settlement included the issuance to the Company of a note to be paid to the Company over five years with a face amount of $1,250,000. Consistent with the terms of this agreement, as of January 1, 2011, $750,000 of the note has been collected. The Company has imputed an interest rate of 4.25% in determining the present value of this receivable and this rate is consistent with other published discounts for liabilities the payee has with other creditors. The accretion of the discount related to this note will be recognized as income from discontinued operations during the collection period of the note. At January 1, 2011 and July 3, 2010, the unaccreted discounts related to this note were $18,000 and $27,000, respectively. During the thirteen weeks ended January 1, 2011 and December 26, 2009, $5,000 and $7,000 was recognized as income from discontinued operations, respectively. During the twenty-six weeks ended January 1, 2011 and December 26, 2009, $9,000 and $15,000 was recognized as income from discontinued operations, respectively.

Note 7. Derivative Financial Instruments and Comprehensive Income:

Interest Rate Swap Agreements

The Company uses derivative financial instruments to manage its exposure to fluctuations in interest rates. The instruments are subject to varying degrees of market risk, including rate and price fluctuations and elements of credit risk in the event the counterparty should default. Amounts received or paid with regard to derivative instruments as a part of designated transactions result in the reclassification of amounts previously recognized as other comprehensive income related to the forecasted transaction, which when realized, are netted in interest expense. Amounts reclassified into earnings as additional interest expense related to designated derivative instruments for the thirteen weeks ended January 1, 2011 and December 26, 2009 were $43,000 and $71,000, respectively. Amounts reclassified into earnings as additional interest expense related to designated derivative instruments for the twenty-six weeks ended January 1, 2011 and December 26, 2009 were $83,000 and $146,000, respectively.

 

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At January 1, 2011 and July 3, 2010, the Company had the following interest rate swap contracts outstanding that were designated as cash flow hedges and were determined to be highly-effective:

 

Swap #            

   Notional
    Amount    
     Fixed Rate
Payment
    Obligation    
  Counterparty
payments
    index    
  

    Termination Date    

       $ 3,000         1.15%   LIBOR    February 27, 2012

     5,000         1.48%   LIBOR        March 26, 2012

In addition to the above interest rate swaps, during Fiscal 2010, the Company entered into a “blend and extend” transaction with its bank, whereby the original interest rate swap was terminated and replaced with a new interest rate swap with a notional value of $5,000,000, a termination date of May 28, 2012 and a rate of 1.86%. This swap is not fully effective and changes in value are recognized on the Company’s Consolidated Statements of Operations.

The following tables present the fair value of the Company’s interest rate swaps as well as their classification on the balance sheet as of January 1, 2011 and on the consolidated statement of operations for the period ended January 1, 2011 (dollars in thousands):

 

Fair Value of Interest Rate Swaps as of January 1, 2011  
         Notional Amount         

Balance Sheet Classification

       Fair Value      

Interest rate swap contracts designated as hedging instruments

       $ 8,000       Other long term liabilities        $ (92
      Accumulated other comprehensive loss      56   

Interest rate swap contract not designated as hedging instruments

     5,000       Other long term liabilities      (99

 

The Effect of Interest Rate Swaps on the Statement of Operations for the

Thirteen and Twenty-Six Weeks Ended January 1, 2011

 
              Thirteen Weeks     Twenty-Six Weeks  
        Notional Amount             Statement of Income Classification           Unrealized Gain             Unrealized Gain      

Interest rate swap not designated as a hedging instrument

      $ 5,000        Interest expense       $ 20            $  4     

If the Company were to settle the underlying LIBOR-based debt instruments, any unrealized gains or losses reported in Accumulated Other Comprehensive Income for cash flow hedges would be reclassified into earnings during the period in which the underlying instruments were settled. The Company does not anticipate any of these instruments to settle during the twelve months subsequent to January 1, 2011.

Note 8. Fair Value of Financial Instruments

The Company determines fair value based upon a hierarchy that defines three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3—Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter; and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

 

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The fair value of short-term financial instruments such as cash, accounts receivable and accounts payable and accrued expenses approximates their carrying value on the consolidated balance sheets.

The carrying values for the Company’s long-term debt and note receivable approximate fair value based on current rates that management believes could be obtained for similar debt instrument and note.

The Company receives third-party valuations from financial institutions to assign values to derivative instruments. The Company assessed the institutions’ valuation techniques, noting that the specialists use industry recognized discounted cash flow models that utilize inputs which substantially fall within Level 2 of the fair value hierarchy. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of January 1, 2011 and July 3, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following table presents information about the Company’s assets and liabilities (including derivatives that are presented net, see Note 7) measured at fair value on a recurring basis as of January 1, 2011 and July 3, 2010, aggregated by the level in the fair value hierarchy within which those instruments fall:

 

         Quoted Prices in Active    
Markets
Level 1
     Significant Other
    Observable Inputs    
Level 2
        Significant Unobservable    
Inputs
Level 3
 

Total derivatives, net liability at January 1, 2011

   $ -         $ (191   $ -     

Total derivatives, net liability at July 3, 2010

   $ -         $ (189   $ -     

Note 9. Advertising

General advertising costs, which include yellow pages and mass media advertising, consulting fees for the development and delivery of advertising and marketing strategies and internet-based hosting and search engine fees are expensed as incurred. Media production costs, targeted mailings and other marketing collateral are expensed when distributed to schools or when specific marketing events take place. Advertising and marketing costs during the thirteen weeks ended January 1, 2011 and December 26, 2009 were $867,000 and $873,000, respectively. Advertising and marketing costs during the twenty-six weeks ended January 1, 2011 and December 26, 2009 were $1,881,000 and $1,996,000, respectively. As of January 1, 2011 and July 3, 2010, prepaid advertising expense totaled $277,000 and $324,000, respectively.

Note 10. Cash and Cash Equivalents

The Company has an agreement with its primary bank that allows the bank to act as the Company’s agent in making daily investments with available funds in excess of a selected minimum account balance. This investment amounted to approximately $65,000 and $450,000 at January 1, 2011 and July 3, 2010, respectively. The Company’s funds were invested in money market accounts, which periodically exceed federally insured limits.

Note 11. Lease Reserves

The Company records estimated costs for school closures at the cease-use date. The reserves for closed schools are recorded at their estimated fair value by discounting to present value the net of all future rent payments and known or estimated sublease rentals over the respective lease term for the closed schools. The leases on the closed schools expire through 2017. At January 1, 2011 and July 3, 2010 the lease reserves for closed schools were $620,000 and $759,000, respectively. The following table summarizes activity recorded to the lease reserves (dollars in thousands):

 

Lease reserve at July 3, 2010

   $ 759     

Payments against reserve

     (281)   

Adjustments to reserve

     142     
        

Lease reserve at January 1, 2011

   $ 620     
        

The Company has made guarantees for eleven leases that were assigned to third parties. All of these leases will expire no later than April of 2013. The Company has assessed its exposure regarding the assignment of the Guaranteed Properties and has determined

 

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that the fair value of this exposure is de minimis and therefore has not recorded a liability for this contingency. The maximum potential undiscounted amount of future payments the Company could be required to pay under these guarantees as of January 1, 2011 is $1,284,000.

Note 12. Discontinued Operations

The results of operations for schools that are no longer operating under the Company’s management have been reflected in the consolidated financial statements and notes as discontinued operations for all periods presented. The operating results for discontinued operations in the unaudited statements of operations for all periods presented, net of tax are as follows (dollars in thousands):

 

     For the Thirteen Weeks Ended      For the Twenty-Six Weeks Ended  
         January 1, 2011              December 26, 2009              January 1, 2011              December 26, 2009      

Cost of services

   $ (25)       $ (58)       $ (46)       $ (120)   

Rent and other

     (97)         (555)         (218)         (818)   
                                   

Loss from discontinued operations before income tax benefit

     (122)         (613)         (264)         (938)   

Income tax benefit

     48           236           104           361     
                                   

Loss from discontinued operations

   $ (74)       $ (377)       $ (160)       $ (577)   
                                   

Note 13. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities were as follows (dollars in thousands):

 

         January 1, 2011              July 3, 2010      

Accounts payable

   $ 6,639         $ 8,016     

Accrued payroll and related items

     4,473           4,560     

Accrued property taxes

     1,271           1,401     

Accrued rent

     2,009           1,844     

Other accrued expenses

     2,843           3,713     
                 
   $ 17,235         $ 19,534     
                 

Note 14. Stock Based Compensation

As of January 1, 2011, approximately 1,479,000 stock options were issued and outstanding and 123,000 shares of restricted stock had been granted. As of January 1, 2011, there were 1,534,000 shares of common stock still available for issuance under the Company’s stock compensation plans.

2010 Omnibus Incentive Equity Compensation Plan:

On November 10, 2010, the stockholders approved the 2010 Omnibus Incentive Equity Compensation Plan (the “2010 Plan”). The purpose of the 2010 Plan is to attract and retain quality employees and board members. Under the 2010 Plan a maximum of 1,400,000 new shares of common stock may be issued in connection with stock grants, stock appreciation rights, incentive stock options and non-qualified stock options for key employees and non-employee directors. Vesting periods for shares issued from the 2010 Plan are fixed by the Company’s Board of Directors (“Board”). Option terms are also fixed by the Board and are not to exceed ten years. Through January 1, 2011, 35,000 Restricted Stock Awards (“RSAs”) had been issued to non-employee directors under the Plan. As of January 1, 2011, 1,365,000 shares of common stock were still available for issuance under the 2010 Plan.

2004 Omnibus Incentive Equity Compensation Plan:

On October 6, 2004, the stockholders approved the 2004 Omnibus Incentive Equity Compensation Plan (the “2004 Plan”). Under the 2004 Plan, new shares of common stock may be issued in connection with stock grants, incentive stock options and non-qualified stock options for key employees and outside directors. All stock option grants under the 2004 Plan have been non-qualified stock options vesting over three years (except that stock options issued to directors vest at the end of the fiscal year in which the options were granted and options granted to new directors upon joining the Board vest immediately). Stock option grants under the 2004 Plan have contractual terms between seven and ten years and RSAs issued under the 2004 Plan vest three years after the issuance date. Through January 1, 2011, 1,479,000 non-qualified stock options and 88,000 RSAs had been issued under the 2004 Plan. As of January 1, 2011, there are no shares of common stock available for issuance under the 2004 Plan.

 

 

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2000 Stock Option Plan for Consultants:

In February 2000, the Company established the 2000 Stock Option Plan for Consultants (“2000 Plan”). The 2000 Plan reserved up to an aggregate of 200,000 shares of common stock of the Company for issuance in connection with non-qualified stock options for non-employee consultants. Through January 1, 2011, 11,000 non-qualified stock options have been issued and are outstanding under the 2000 Plan. Stock option grants under the 2000 Plan have a contractual term between seven and ten years. As of January 1, 2011, 169,000 shares of common stock were still available for issuance under the 2000 Plan.

1995 Stock Incentive Plan:

With the approval of the 2004 Omnibus Incentive Equity Compensation Plan, the 1995 Stock Incentive Plan was terminated and the remaining shares reserved for issuance thereunder of 719,000 were cancelled. At January 1, 2011, 213,000 non-qualified stock options have been issued and are outstanding under the 1995 Stock Incentive Plan. Stock option grants under the 1995 Stock Incentive Plan have a contractual term of ten years. As of January 1, 2011, there are no shares of common stock available for issuance under the 1995 Stock Incentive Plan.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

     Twenty-Six Weeks Ended  
         January 1, 2011              December 26, 2009      

Expected dividend yield

     0.0%         0.0%   

Expected stock price volatility

     32.6%         28.2%   

Risk-free interest rate

     1.4%         2.9%   

Weighted average expected life of options

     6 years         6 years   

Expected rate of forfeiture

     2.8%         2.6%   

Stock option awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense included in general and administrative expense in the Consolidated Statements of Operations for the thirteen weeks ended January 1, 2011 and December 26, 2009 was $238,000 and $270,000, respectively. Stock-based compensation expense for the twenty-six weeks ended January 1, 2011 and December 26, 2009 was $526,000 and $575,000, respectively. As of January 1, 2011, there was $1,222,000 of total unrecognized stock-based compensation cost related to options granted under our plans that will be recognized over a weighted average period of 1.3 years. The Company expects to continue its historical practice of issuing stock options and RSAs, which will result in additional stock-based compensation in the future, although amounts may vary.

A summary of option activity under the Company’s stock option plans for the twenty-six weeks ended January 1, 2011 is as follows:

 

     Shares
Available
for Grant
(exclusive of
    Consultant Plan)    
     Stock Options Outstanding      Stock Options Exercisable  
            Shares          Weighted
Average
    Grant & Exercise    
Price
         Shares          Weighted
Average
    Grant & Exercise    
Price
 
                
                
                

Balance at July 3, 2010

     236,000           1,302,000             $ 10.27           915,000             $ 9.25     
                                            

Stock options:

              

Granted at market

     (208,000)         208,000           6.17           -           -     

Cancelled and forfeited

     31,000           (31,000)          9.82           -           -     

Exercised

     -           -           -           -           -     

RSAs Granted at Market

     (17,000)          n.a.           n.a.           n.a.           n.a.     
                                            

Balance at January 1, 2011

     42,000           1,479,000             $ 9.71           1,089,000             $ 9.96     
                                            

Adoption of 2010 Omnibus Equity Compensation Plan

     1,400,000           -           -           -           -     

RSAs Granted at Market

     (35,000)          n.a.           n.a.           n.a.           n.a.     
                                            

Balance at January 1, 2011

     1,365,000           1,479,000             $ 9.71           1,089,000             $ 9.96     
                                            

The aggregate intrinsic value for options outstanding and options exercisable at January 1, 2011, was approximately $762,000 and $510,000, respectively. The weighted average remaining contractual terms for options outstanding and options exercisable at January 1, 2011 were approximately 4.8 years and 4.3 years, respectively. The total fair value of options vested during the twenty-six

 

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weeks ended January 1, 2011 was $796,000. The weighted average fair value of stock options granted during the twenty-six weeks ended January 1, 2011 was $2.02. The total number of options not yet vested as of January 1, 2011 was 390,000 shares with a weighted average exercise price of $8.98.

Note 15. Employee Benefit Plans

The Company has a 401(k) Plan in which eligible employees may elect to enroll after six months of service on scheduled enrollment dates. The Company matches 25% of an employee’s contribution to the Plan, up to 6% of an employee’s salary. The Company’s matching contributions under the Plan were $107,0000 and $94,000 for the thirteen weeks ended January 1, 2011 and December 26, 2009, respectively. The Company’s matching contributions under the Plan were $194,000 and $191,000 for the twenty-six weeks ended January 1, 2011 and December 26, 2009, respectively.

The Company has a deferred compensation plan that permits certain members of management and highly compensated employees to defer up to 100% of their compensation and for identified individuals to receive a contribution from the Company. The Company’s contributions are made at the discretion of the Compensation Committee of the Board and are subject to a five-year vesting period subsequent to the employee’s initial plan participation date. At January 1, 2011 and July 3, 2010, the Company had included $1,746,000 and $1,281,000, respectively in “Other long term liabilities” to reflect its liability under the deferred compensation plan. As of January 1, 2011 and July 3, 2010, there were $159,000 and $174,000 of unvested Company contributions to the deferred compensation plan, respectively.

The Company has established a rabbi trust to finance the obligations under the deferred compensation plan with Company-owned whole life insurance contracts on certain individuals who are participants in the deferred compensation plan. At January 1, 2011 and July 3, 2010, two employees of the Company were participating. At January 1, 2011 and July 3, 2010, the total carrying value of the two policies was $13,400,000. The Company had included $1,848,000 and $1,238,000 in “Deposits and other assets” as of January 1, 2011 and July 3, 2010, respectively, which represent the aggregate cash surrender value of these policies.

During the thirteen weeks ended January 1, 2011 and December 26, 2009, the Company has recognized $167,000 and $57,000 of general and administrative expense reflecting the prorated vesting of employer contributions into the deferred compensation plan and net gains relative the change in value of the company-owned life insurance, respectively. During the twenty-six weeks ended January 1, 2011 and December 26, 2009, the Company has recognized $242,000 and $118,000, respectively of general and administrative expense reflecting the prorated vesting of employer contributions into the plan and net gains relative to the change in value of the company-owned life insurance.

Note 16. Segment Information:

The Company’s operations are organized into the following operating segments:

 

  (1) “Private Pay Schools” includes a national network of nonsectarian private schools, including preschools, elementary schools, middle schools and specialty high schools in 15 states and the District of Columbia. “Other” includes corporate overhead expenses which primarily support the Private Pay Schools operations.

 

  (2) The Laurel Springs School is a global K-12 online distance learning school headquartered in Ojai, California which includes students in all fifty United States and a number of other countries. The Laurel Springs School was acquired during September of Fiscal 2010.

Results and cash-flows of these segments for the thirteen and twenty-six week periods ended January 1, 2011 and December 26, 2009 are highlighted below:

 

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     Thirteen Weeks Ended  
     January 1, 2011      December 26, 2009  
     Private Schools
& Other
     Laurel Springs
School
     Total      Private Schools
& Other
     Laurel Springs
School
     Total  

Total revenue

    $ 58,580          $ 1,972          $ 60,552          $ 56,590          $ 2,003          $ 58,593     

Depreciation and amortization:

                 

Continuing operations

    $ 1,960          $ 271          $ 2,231          $ 2,291        $ 365          $ 2,656     

Discontinued operations

     -             -             -             11         -           11     
                                                     

Depreciation and amortization

    $ 1,960          $ 271          $ 2,231          $ 2,302          $ 365          $ 2,667     

Gross profit

    $ 8,966          $ 1,124          $ 10,090          $ 7,065          $ 1,352          $ 8,417     

Interest expense

     351           -             351           315           -           315     

Income tax expense (benefit)

     1,149           (36)         1,113           911           (38)         873     

Net income (loss)

     1,907           (54)         1,853           1,076           (58)         1,018     

Total additions to property, plant and equipment

     1,248           72           1,320           1,186           134           1,320     
     Twenty-six Weeks Ended  
     January 1, 2011      December 26, 2009  
         Private Schools    
& Other
         Laurel Springs    
School
     Total          Private Schools    
& Other
         Laurel Springs    
School
     Total  

Total revenue

    $ 109,340          $ 3,442          $ 112,782          $ 106,598          $ 2,618          $ 109,216     

Depreciation and amortization:

                 

Continuing operations

    $ 4,196          $ 542          $ 4,738          $ 4,577          $ 379          $ 4,956     

Discontinued operations

     -             -             -             11           -           11     
                                                     

Depreciation and amortization

    $ 4,196          $ 542          $ 4,738          $ 4,588          $ 379          $ 4,967     

Gross profit

    $ 10,619          $ 1,879          $ 12,498          $ 9,988          $ 1,574          $ 11,562     

Interest expense

     768           -           768           582           -           582     

Income tax (benefit) expense

     (226)         (263)         (489)         101           1           102     

Net income (loss)

     (196)         (402)         (598)         (416)         3           (413)   

Total additions to property, plant and equipment

     3,429           92           3,521           3,616           134           3,750     

Goodwill, intangible assets and total assets at January 1, 2011 and July 3, 2010 are presented below:

 

     January 1, 2011      July 3, 2010  
     Private
Schools &
Other
     Laurel
Springs
School
     Total      Private
Schools &
Other
     Laurel
Springs
School
     Total  

Goodwill

    $ 74,187          $ 9,088          $ 83,275          $ 74,187          $ 9,088          $ 83,275     

Intangible assets, net of accumulated amortization and excluding goodwill

     4,656           2,317           6,973           5,389           2,673           8,062     

Total Assets

     119,134           13,544           132,678           120,390           14,006           134,396     

Note 17. Commitments and Contingencies

The Company is engaged in legal actions arising in the ordinary course of its business. The Company currently believes that the ultimate outcome of all such pending matters will not have a material adverse effect on the Company’s consolidated financial statements, although the significance of these pending matters on the Company’s future operating results and cash flows depends on the level of future results of operations and cash flows, as well as on the timing and amounts, if any, of the ultimate outcome. (See Note 19.)

The Company carries property, fire and other casualty insurance on its schools and general liability insurance in amounts which management believes are adequate. As is the case with other entities in the education and preschool industry, the Company cannot effectively insure itself against certain risks inherent in its operations. Some forms of child abuse coverage have insurance sublimits per claim in the general liability coverage.

Note 18. Shareholder Rights Plan

During the first quarter of Fiscal 2009, the Company’s Board of Directors adopted a limited duration Shareholder Rights Plan (“Rights Plan”) designed to protect the Company’s shareholders in the event of an attempt to acquire control of the Company on terms which do not secure fair value for all of the Company’s shareholders. The Rights Plan will expire, in accordance with its terms, on July 19, 2012, rather than the more common ten-year term. The four-year term was selected to provide the Company with an opportunity to maximize long-term shareholder value by enabling management of the Company to execute on its growth strategy, while protecting shareholders from a creeping acquisition or other tactics to gain control of the Company without offering all

 

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shareholders an adequate price. In addition, the Rights Plan is not intended to prevent a takeover. Instead, it is intended to encourage anyone seeking to acquire the Company to negotiate with the Company’s Board of Directors prior to attempting a takeover in order to ensure that any takeover reflects an adequate price and that the interests of all of the Company’s shareholders and other constituencies are protected.

Terms of the Rights Plan provide for a dividend distribution of one right (each a “Right” and, collectively, the “Rights”) for each share of common stock of the Company to holders of record at the close of business on July 31, 2008. The Rights will become exercisable only in the event that, with certain exceptions, an acquiring party accumulates 20% or more of the Company’s common stock then outstanding or, as of July 19, 2008, any existing holder of more than 20% of the Company’s common stock acquires any additional shares. Each Right will entitle the holder to buy one one-hundredth of a share of a new series of preferred stock at a price of $45.00. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either the Company’s stock or shares in an “acquiring entity” at half the market value. The Company will generally be entitled to redeem the Rights at $0.01 per right at any time until the tenth day following the acquisition of 20% of its common stock, subject to extension by a majority of the Directors. The Rights will expire on July 19, 2012.

Note 19. Subsequent Events

During Fiscal 2009, the United States Department of Justice (Disability Rights Section of the Civil Rights Division) (“DOJ”) filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against the Company alleging that the Company violated Title III of the Americans with Disabilities Act of 1990 (“ADA”) by excluding children with disabilities from its schools and programs. On January 18, 2011, the Company reached a settlement ending its litigation with the DOJ and the lawsuit was dismissed with prejudice. The settlement included a payment of $215,000 to families to be identified by the DOJ, this amount has been included in general and administrative expenses in the Statement of Operations for the thirteen and twenty-six weeks ended January 11, 2011. The Company also agreed to formalize and monitor its existing policies and procedures regarding the provision of educational services for children with disabilities and to hire an ADA Compliance Officer.

The Company has evaluated subsequent events through the filing of this Form 10-Q and has determined that there have not been any other events that have occurred that would require adjustments to or additional disclosures in these interim unaudited consolidated financial statements.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended July 3, 2010, filed with the SEC.

The Company has made statements in this report that constitute forward-looking statements as that term is defined in the federal securities laws. These forward-looking statements concern the Company’s operations, economic performance and financial condition and may include statements regarding: opportunities for growth; the number of schools expected to be added in future years; the profitability of newly opened schools; capital expenditure levels; the ability to incur additional indebtedness; strategic acquisitions, investments and other transactions; and changes in operating systems and policies. The forward-looking statements are subject to various known and unknown risks, uncertainties and other factors. When words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects” or similar expressions are used in this Quarterly Report on Form 10-Q, the Company is making forward-looking statements.

Although the Company believes that any forward-looking statements are based on reasonable assumptions, expected results may not be achieved. Actual results may differ materially from the Company’s expectations. Among other risk factors that are discussed in this Quarterly Report on Form 10-Q, the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2010, filed with the SEC, and, from time to time in the Company’s other SEC reports and filings, important factors that could cause actual results to differ from expectations include, but are not limited to:

 

   

changing U.S. economic conditions including unemployment rates, as demand for the Company’s products and services is highly correlated to the U.S. economy and expected to lag any economic recovery;

 

   

changing social and economic conditions and their impact on public school systems;

 

   

the Company’s ability to hire and retain qualified executive directors, principals, teachers and teachers’ aides;

 

   

the Company’s ability to retain key individuals in acquired schools and/or successfully grow and integrate acquired schools’ operations;

 

   

the Company’s ability to defend successfully against or counter negative publicity associated with claims involving alleged incidents at its schools;

 

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impact of regulations related to federal healthcare legislation and increased employer costs of employee healthcare benefits and further employer subsidies;

 

   

control of a majority of the outstanding common stock of the Company by a small number of shareholders;

 

   

the effect of anti-takeover provisions in the Company’s certificate of incorporation, bylaws and Delaware law;

 

   

the Company’s ability to renew existing location leases on terms acceptable to the Company;

 

   

the Company’s ability to obtain the capital required to fully implement its business and strategic plan;

 

   

competitive conditions in the pre-school, elementary school, and secondary school education and services industry, such as the growth of competitors as possible alternatives to the public school system, including virtual charter schools, charter schools and magnet schools;

 

   

government regulations affecting school operations, including square footage requirements per student and student/teacher ratios;

 

   

impacts of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

 

   

the Company’s ability to protect its intellectual property;

 

   

if additional jurisdictions pass “living wage” laws, our operations in those jurisdictions could be negatively impacted;

 

   

breaches in data security could adversely affect the Company’s financial condition and operating results;

 

   

maintaining accreditation and certain course approvals in its schools and distance learning programs;

 

   

the establishment of government-mandated universal pre-K or similar programs or benefits that do not allow for participation by for-profit operators or allow for participation at unprofitable reimbursement rates;

 

   

the Company’s ability to maintain compliance with operational covenants as defined among the Company and its lenders; and

 

   

environmental or health-related events that could affect schools in areas impacted by such events.

Readers are cautioned that these risks may not be exhaustive. The Company operates in a continually changing business and regulatory environment and new risks and requirements emerge from time to time. Readers should not rely upon forward-looking statements except as statements of management’s present intentions and expectations that may or may not occur. Readers should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. The Company assumes no obligation to update or revise the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

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 Company’s consolidated financial statements.

The Company’s critical accounting policies are described in Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for Fiscal 2010. To date, there have been no changes to these accounting policies.

Interim Goodwill Impairment Analysis

The Company has considered whether a triggering event for potential testing of goodwill impairment may have occurred for the reporting period covered herein. One item of consideration and analysis is that the company’s market capitalization exceeded its book value as of this balance sheet date. Based on this and consideration of other facts and circumstances, the Company believes it has not had a triggering event for this period which would require interim goodwill impairment testing.

Overview

The Company operates a national network of over 180 nonsectarian private Preschool and K+ schools and a global K-12 distance learning and online school. The Company offers an array of ancillary educational services, including before and after school programs, the Camp Zone® summer program and learning support programs. The Company is dedicated to providing a high quality private education through small class sizes, caring and skilled teachers, and attention to individual learning styles. The Company’s school facilities are located in fifteen different states and the District of Columbia.

 

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During the first quarter of Fiscal 2010, the Company acquired Laurel Springs School, an online distance learning provider of K-12 education programs. The Laurel Springs School acquisition is intended to broaden the Company’s educational platform by addressing the K-12 distance learning market, including international opportunities.

The number of students enrolled in our schools and tuition rates are two factors, among several, that directly impact the Company’s revenue and gross profits. In turn, the unemployment rate directly impacts enrollments. If unemployment rates improve within the key age groups that represent the majority of our parents, the Company believes this will result in increases in future enrollments, revenue and gross profit. Additionally, the Company has historically implemented tuition increases when appropriate and intends to continue this practice while considering trends in the costs to provide services and competitive factors.

 

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Results from operations are measured each fiscal period by reporting and analyzing results at the Company level. Additionally, the Company seeks to measure revenue and profit growth in the following categories: (i) Comparable Schools, (ii) Core Schools, (iii) New Schools and (iv) Acquired Schools or businesses. Management seeks to balance growth in these categories in order to improve revenue and gross profit while adding to overall system capacity and total company performance. These four categories are measured individually and through several different metrics to help management better understand where growth is derived and manage the balance between growth, investment and profitability the Company seeks to achieve. It is important to note that the set of schools in each category may differ from reporting period to reporting period as schools may be opened, acquired, closed or become comparable at different times during the fiscal year. The four categories are more fully described below.

 

  i. Comparable Schools – consists of an identical set of schools open for each of the entire periods being reported, sometimes referred to as “same schools.” By definition, Comparable Schools are always the same number of identical schools in each comparable period. Comparing results of the performance of these schools provides an “apples-to-apples” comparison of results between periods. Results are measured by revenue, operating expense and gross profit performance for this identical group of schools for the current period versus the prior period. Management seeks to grow revenue and increase gross margin in this category through annual tuition rate increases, enrollment growth and expense management.

 

  ii. Core Schools – consists of schools reported as Comparable Schools for each specific period presented. By definition, the population of Core Schools is schools open and comparable versus the prior period at a fixed point in time. We measure Core Schools’ performance as a percentage of revenue to develop period-over-period trends to understand the contribution provided by our efforts to grow the Core School base. When presenting Core School results there may be schools included within Core School results that were subsequently classified as discontinued operations.

 

  iii. New Schools – consists of newly developed schools. By definition, the population of schools in each period should be different for each period as the Company continues to add schools.

New Schools are an integral part of the Company’s business development strategy and are defined as newly developed schools as compared to “Acquired Schools” which are discussed below. In planning New School development activity, management typically seeks to balance the pre-opening costs and start-up losses associated with the ramp up of new schools and achieving an appropriate growth and profitability balance for the Company as a whole.

New School revenue is expressed as a percentage of total operating revenue for each comparative period. This information is included in the revenue section below. We also measure New School gross profit, gross margin and expense items as a percentage of revenue to develop period-over-period trends to understand the contribution provided by our efforts from this activity when compared to the prior period. We seek to improve New School period-over-period performance by minimizing the impact of pre-opening and ramp up costs, as well as shortening the time it takes a new school to ramp up.

 

  iv. Acquired Schools – consists of purchased schools previously operated by independent third parties.

Acquired Schools are an integral part of the Company’s business development strategy. Management seeks to acquire schools that expand or complement existing markets as well as schools that provide platforms for additional growth in new markets within our demographic parameters. Management seeks to add schools at a rate and in a manner that promotes the appropriate growth and profitability balance described above. While the Company has typically acquired schools that are already profitable, in some cases the Company acquires schools that are just beginning their ramp up periods, and as such may not yet be profitable. Acquired Schools’ revenue is expressed as a percentage of total operating revenue for each comparative period. This information is included in the revenue section below. We measure Acquired Schools’ gross profit, gross margin and expense items as a percentage of revenue to develop period-over-period trends to understand the contribution provided by our efforts from this activity when compared to the prior period.

Results for Comparable Schools for the thirteen weeks ended January 1, 2011 and December 26, 2009, respectively, are included in Revenue, Personnel Costs, School Operating Costs and Rent and Other section of the Results of Operations section below and results for Core Schools, Acquired Schools and New Schools are summarized in tables presented in the Gross Profit section of the Results of Operations section below.

 

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Results of Operations

At January 1, 2011 the Company operated 184 schools. During the thirteen and twenty-six weeks ending January 1, 2011, the Company did not open any new schools or acquire any schools. During the twenty-six weeks ending December 26, 2009, the Company acquired one elementary school, opened three new preschools and closed one preschool. Additionally, The Laurel Springs School (“LSS”) was acquired during the first quarter of Fiscal 2010. LSS delivers its curriculum on-line and a physical school location does not exist for its students. Therefore, LSS is not included in the school counts below for the thirteen and twenty-six weeks ended January 1, 2011 and December 26, 2009:

 

     Thirteen weeks ended      Twenty-six weeks ended  
         January 1, 2011              December 26, 2009              January 1, 2011              December 26, 2009      

Number of schools at the beginning of period

     184         184          184         180    

Acquisitions

     -           -           -             

Openings

     -           -           -             

Closings

     -           (1)         -           (1)   
                                   

Number of schools at the end of the period

     184         183          184         183    
                                   

The table below identifies schools and the periods they were acquired, opened or closed during Fiscal 2010 through January 1, 2011 (the acquisition of LSS is not included in these counts):

 

     Fiscal 2010      Fiscal 2011         
     1st
    Quarter    
     2nd
    Quarter    
     3rd
    Quarter    
     4th
    Quarter    
     1st
    Quarter    
     2nd
    Quarter    
         Total      

Acquired

     1         -             -             -             -             -               

Opened

     3         -             1         -             -             -               

Closed

     -             (1)         -             -             -             -             (1)   
                                                              
     4         (1)         1         -             -             -               
                                                              

The following table sets forth certain statement of operations data as a percentage of revenue for the thirteen and twenty-six weeks ended January 1, 2011, and December 26, 2009 (dollars in thousands):

 

    Thirteen
weeks ended
    January 1, 2011    
        Percent of    
Revenues
    Thirteen
weeks ended
    December 26, 2009    
        Percent of    
Revenues
             
                Increase (decrease)      
                Dollar             Percent      

Revenues

  $ 60,552          100.0%      $ 58,593          100.0%      $ 1,959          3.3%   
                                               

Personnel costs

    27,876          46.0          27,553          47.0          323          1.2     

School operating costs

    7,647          12.6          7,874          13.4          (227)         (2.9)    

Rent and other

    14,939          24.7          14,749          25.2          190          1.3     
                                               

Cost of services

    50,462          83.3          50,176          85.6          286          0.6     
                                               

Gross profit

    10,090          16.7          8,417          14.4          1,673          19.9     

General and administrative expenses

    6,703          11.1          5,841          10.0          862          14.8     
                                               

Operating income

  $ 3,387          5.6%      $ 2,576          4.4%      $ 811          31.5%   
                                               
    Twenty-six
weeks ended
January 1, 2011
    Revenues     Twenty-six
weeks ended
December 26, 2009
    Percent of
Revenues
             
            Increase (decrease)  
            Dollar     Percent  

Revenues

  $ 112,782          100.0%      $ 109,216          100.0%      $ 3,566          3.3%   
                                               

Personnel costs

    54,264          48.1          52,720          48.3          1,544          2.9     

School operating costs

    16,060          14.2          15,543          14.2          517          3.3     

Rent and other

    29,960          26.6          29,391          26.9          569          1.9     
                                               

Cost of services

    100,284          88.9          97,654          89.4          2,630          2.7     
                                               

Gross profit

    12,498          11.1          11,562          10.6          936          8.1     

General and administrative expenses

    12,666          11.2          10,729          9.8          1,937          18.1     
                                               

Operating (loss) income

  $ (168)         (0.1)%      $ 833          0.8%      $ (1,001)         (120.2)%   
                                               

The table below shows the number of schools included in each of the four growth categories. Each category is discussed below for the thirteen and twenty-six weeks ended January 1, 2011 and December 26, 2009, respectively:

 

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      Thirteen weeks ended      Twenty-six weeks ended  

School Category

   January 1, 2011      December 26, 2009      January 1, 2011      December 26, 2009  

Comparable

     183         183         179         179   
                                   

Core

     183         171         179         166   

New

     1         5         4         7   

Acquired

     -           7         1         10   
                                   

Total

     184         183         184         183   
                                   

New schools typically encounter an enrollment ramp-up period after opening, the age of these schools typically impact their costs as a percentage of revenue. The duration for which new schools have operated subsequent to their opening dates during the thirteen and twenty-six week periods ended January 1, 2011 and December 26, 2009 were as follows:

 

     Thirteen weeks ended      Twenty-six weeks ended  
     January 1, 2011      December 26, 2009      January 1, 2011      December 26, 2009  

Number of new schools

     1         5         4         7   

Average days operating since initial opening

     389         208         478         298   

Schools operating greater than 300 days

     1         2         4         4   

Schools in operating less than 300 days

     0         3         0         3   

Revenue

Revenue for the thirteen weeks ended January 1, 2011 increased $1,959,000, or 3.3%, to $60,552,000 from $58,593,000 for the thirteen weeks ended December 26, 2009. The revenue increase for the thirteen week periods was comprised of the following (dollars in thousands):

 

     Thirteen weeks ended      Increase (decrease)  
     January 1, 2011      December 26, 2009      Dollar      Percent  

Total Company revenue

   $ 60,552       $ 58,593       $ 1,959         3.3%   
                                   

Comparable Schools

   $ 58,267       $ 56,539       $ 1,728         3.1%   

Schools acquired, opened or closed after September 26, 2009:

           

New

     270         -           270          n.m.   

Closed

     -           9         (9)         n.m.   

Laurel Springs School

     1,972         2,003         (31)         (1.5)   

Other

     43         42                 2.4    
                                   
   $ 60,552       $ 58,593       $ 1,959         3.3%   
                                   

Comparable school revenue growth during the thirteen weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily driven by increased tuition rates of approximately 2.3% and increased enrollments.

Total Company revenue growth for the thirteen weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of the acquisitions of LSS and an elementary school, both of which occurred during September 2009, and the ramp-up of three new preschools opened during the first quarter of Fiscal 2010 and another opened preschool during the third quarter of Fiscal 2010.

Revenue for the twenty-six weeks ended January 1, 2011 increased $3,566,000, or 3.3%, to $112,782,000 from $109,216,000 for the twenty-six weeks ended December 26, 2009. The revenue increase for the thirteen week periods was comprised of the following (dollars in thousands):

 

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     Twenty-Six weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company revenue

   $ 112,782       $ 109,216       $ 3,566         3.3%   
                                   

Comparable Schools

   $ 105,224       $ 104,158       $ 1,066         1.0%   

Schools acquired, opened or closed after June 27, 2009:

           

Acquired

     1,970         1,261         709          56.2    

New

     2,067         798         1,269          159.0    

Closed

     -           175         (175)         n.m.   

Laurel Springs School

     3,442         2,619         823          31.4    

Other

     79         205         (126)         (61.5)   
                                   
   $ 112,782       $ 109,216       $ 3,566          3.3%   
                                   

Total Company revenue growth for the twenty-six weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of the acquisitions of LSS and an elementary school, both of which occurred during September 2009, and the ramp-up of new schools opened during Fiscal 2010 as the Company opened three new preschools during the first quarter of Fiscal 2010 and another preschool during the third quarter of Fiscal 2010.

Revenue Trends

The revenue results of each of the categories for the thirteen weeks ended January 1, 2011 (core schools, schools acquired or opened subsequent to September 26, 2009) and the thirteen weeks ended December 26, 2009 (schools acquired, opened or closed subsequent to September 27, 2008) are as follows:

 

    Thirteen weeks ended
January 1, 2011
    Number of Schools     Percent of Revenue     Thirteen weeks ended
December 26, 2009
    Number of
Schools
    Percent of
Revenue
 

Core Schools

  $ 58,267        183        96.2%      $ 52,406        171        89.5%   

Acquired Schools

    -          -          -          3,202        7        5.5   

New Schools

    270        1        0.4        932        5        1.6   

LSS

    1,972          3.3        2,003          3.4   

Other

    43          0.1        42          0.1   
                                   
  $ 60,552          100.0%      $ 58,585          100.0%   
                                   

Core Schools’ revenue increased as a percentage of total revenue to 96.2% for the thirteen weeks ended January 1, 2011 as compared to 89.5% for the same period ended December 26, 2009. This was primarily the result of eleven of the twelve schools classified as Acquired Schools and New Schools during the thirteen weeks ended December 26, 2009 becoming Comparable and Core Schools during the thirteen weeks ended January 1, 2011.

The revenue results of each of the growth initiative categories for the twenty-six weeks ended January 1, 2011 (core schools, schools acquired or opened subsequent to December 26, 2009) and the twenty-six weeks ended December 26, 2009 (schools acquired, opened or closed subsequent to June 28, 2008) are as follows:

 

     Twenty-Six weeks ended
January 1, 2011
     Number of Schools      Percent of Revenue      Twenty-Six weeks ended
December 26, 2009
     Number of Schools      Percent of Revenue  

Core Schools

   $ 105,224         179         93.3%       $ 97,676         166         89.4%   

Acquired Schools

     1,970         1         1.7         6,558         10         6.0   

New Schools

     2,067         4         1.8         2,108         7         1.9   

Closed Schools

     -           1         -           175         5         0.2   

LSS

     3,442            3.1         2,619            2.4   

Other

     79            0.1         80            0.1   
                                         
   $ 112,782            100.0%       $ 109,216            100.0%   
                                         

 

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Acquired Schools’ revenue decreased as a percentage of total revenue to 1.7% for the twenty-six weeks ended January 1, 2011, as compared to 6.0% for the twenty-six weeks ended December 26, 2009. This decrease is attributable to the decrease in schools in the “Acquired Schools” category in the twenty-six weeks ended January 1, 2011 as compared to the corresponding period in Fiscal 2010. Acquired Schools for the twenty-six weeks ended January 1, 2011 consisted of one elementary school, compared to six preschools and four elementary schools for the twenty-six weeks ended December 26, 2009.

LSS revenue increased as a percentage of total revenue to 3.1% for the twenty-six weeks ended January 1, 2011, as compared to 2.4% for the twenty-six weeks ended December 26, 2009. LSS results during the twenty-six weeks ended December 26, 2009 were not reflective of an entire twenty-six week period, as LSS was acquired during September of 2009.

Enrollment trends

The Company estimates Comparable School enrollment trends based on the relationship of average tuition rate increases to Comparable School revenue performance. As an example, a 3% increase in Comparable School revenue could result from a 2% tuition increase and a 1% Comparable School enrollment increase. Tuition rate and implied enrollment changes for each thirteen week period during Fiscal 2011 and Fiscal 2010 as compared to the same thirteen week periods during Fiscal 2010 and Fiscal 2009 were as follows:

 

     Comparable School increase (decrease)  

Thirteen Weeks Ended

   Revenue      Tuition Rate      Enrollment  

September 26, 2009 compared to September 27, 2008

     (5.8)%         4.5%         (10.3)%   

December 26, 2009 compared to December 27, 2008

     (4.8)%         4.5%         (9.3)%   

March 27, 2010 compared to March 28, 2009

     (3.9)%         3.0%         (6.9)%   

June 26, 2010 compared to June 27, 2009 (1)

     (1.8)%         3.0%         (4.8)%   

October 2, 2010 compared to September 26, 2009

     (0.5)%         2.3%         (2.8)%   

January 1, 2011 compared to December 26, 2009

     3.1%         2.3%         0.8%   

(1) The fourth quarter of Fiscal 2010 included fourteen weeks whereas the fourth quarter of Fiscal 2009 included thirteen weeks. The above reflects revenues during the first thirteen weeks of the fourth quarter of Fiscal 2010.

Personnel costs

Personnel costs primarily include teacher salaries, wages, payroll taxes, employee benefits and vacation costs. This category of costs is partially variable and primarily affected by wage rate changes, incentive compensation, health care benefit and participant rate increases, staffing ratio requirements and changes in enrollment. The category tends to be variable on a step function basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of New Schools, personnel costs tend to be higher as a percentage of revenue as a base level of personnel and associated costs are established in the early years of a school’s life. However, we expect to leverage these front-end investments as enrollments increase. Preschool staffing ratios are mandated by state requirements which can result in very low student to teacher ratios when class sizes are not optimal, especially in periods of declining enrollment.

Personnel costs for the thirteen weeks ended January 1, 2011 increased $323,000, or 1.2%, to $27,876,000 from $27,553,000 for the thirteen weeks ended December 26, 2009. The increase in personnel costs for the thirteen weeks ended January 1, 2011 and December 26, 2009, respectively, was comprised of the following (dollars in thousands):

 

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     Thirteen weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company personnel costs

   $ 27,876       $ 27,553       $ 323          1.2%   
                                   

Comparable Schools

   $ 27,230       $ 27,211       $ 19          0.1%   

Schools acquired, opened or closed after September 26, 2009:

           

New

     130         -           130          n.m.   

Closed

     -           14         (14)         n.m.   

Laurel Springs School

     516         328         188          57.3   
                                   
   $ 27,876       $ 27,553       $ 323          1.2%   
                                   

Personnel costs for the twenty-six weeks ended January 1, 2011 increased $1,544,000, or 2.9%, to $54,264,000 from $52,720,000 for the twenty-six weeks ended December 26, 2009. The increase in personnel costs for the twenty-six week periods ended January 1, 2011 and December 26, 2009, respectively, was comprised of the following (dollars in thousands):

 

     Twenty-six weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company personnel costs

   $ 54,264       $ 52,720       $ 1,544          2.9%   
                                   

Comparable Schools

   $ 51,228       $ 50,871       $ 357          0.7%   

Schools acquired, opened or closed after June 27, 2009:

           

Acquired

     1,023         562         461          82.0   

New

     1,102         553         549          99.3   

Closed

     -           154         (154)         n.m.   

Laurel Springs School

     911         580         331          57.1   
                                   
   $ 54,264       $ 52,720       $ 1,544          2.9%   
                                   

The Company’s overall increase in personnel costs for the twenty-six weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of the acquisitions of LSS and an elementary school, both of which occurred during September of 2009; the added personnel costs associated with these new schools impacted only the latter half of the Fiscal 2010 period, whereas such costs affected the entire Fiscal 2010 period. The Company also opened three new preschools during the first quarter of Fiscal 2010 and another preschool during the third quarter of Fiscal 2010. In addition, comparable school payroll increased due to increases in staffing required for the opening of new classrooms.

Personnel costs decreased to 46.0% of revenue for the thirteen weeks ended January 1, 2011 as compared to 47.0% for thirteen weeks ended December 26, 2009. Personnel costs decreased to 48.1% of revenue for the twenty-six weeks ended January 1, 2011 as compared to 48.3% for twenty-six weeks ended December 26, 2009. This was comprised of the following:

 

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     Percentage of Revenue  
     Thirteen weeks ended  
       January 1, 2011          December 26, 2009    

Total Company

     46.0%         47.0%   
                 

Comparable Schools

     46.7%         48.1%   

Core Schools

     46.7%         47.9%   

Schools acquired or opened subsequent to December 26, 2009 for Fiscal 2011 and December 27, 2008 for Fiscal 2010

     

Acquired Schools

     -           50.1%   

New Schools

     48.1%         55.8%   

Laurel Springs School

     26.2%         16.4%   
     Percentage of Revenue  
     Twenty-six weeks ended  
       January 1, 2011          December 26, 2009    

Total Company

     48.1%         48.3%   
                 

Comparable Schools

     48.7%         48.8%   

Core Schools

     48.7%         48.4%   

Schools acquired or opened subsequent to June 27, 2009 for Fiscal 2011 and June 28 2008 for Fiscal 2010

     

Acquired Schools

     51.9%         52.2%   

New Schools

     53.3%         60.0%   

Laurel Springs School

     26.5%         22.2%   

Personnel costs at Comparable Schools and Core Schools have decreased as a percentage of revenue for the thirteen and twenty-six week periods ended January 1, 2011 as compared to the same periods ended December 26, 2009. These decreases are reflective of the impact of wage rates which have generally remained frozen since the second quarter of Fiscal 2009 coupled with increases in revenue primarily driven by increased tuition and enrollments.

There were no Acquired Schools during the thirteen weeks ended January 1, 2011. Acquired Schools’ personnel costs as a percentage of revenue decreased to 51.9% for the twenty-six weeks ended January 1, 2011, as compared to 52.2% for the twenty-six weeks ended December 26, 2009. Acquired Schools for the twenty-six weeks ended January 1, 2011 included one elementary school compared to six preschools and four elementary schools for the twenty-six weeks ended December 26, 2009.

New Schools’ personnel costs decreased as a percentage of revenue to 48.1% for the thirteen weeks ended January 1, 2011, as compared to 55.8% for the thirteen weeks ended December 26, 2009. New Schools’ personnel costs decreased as a percentage of revenue to 53.3% for the twenty-six weeks ended January 1, 2011, as compared to 60.0% for the twenty-six weeks ended December 26, 2009. The decrease in both periods was reflective of the typical enrollment ramp-up period common to New Schools.

School operating costs

School operating costs primarily include food, utilities, transportation, maintenance, janitorial, supplies, school level marketing spending and ancillary programs. This category is partially variable with increases driven by additional enrollment. In the case of New Schools, school operating costs tend to be higher as a percentage of revenue because a base level of costs are incurred in the early period of a school’s life and are expected to be leveraged as enrollments increase.

School operating cost for the thirteen weeks ended January 1, 2011 decreased $227,000, or 2.9%, to $7,647,000 from $7,874,000 for the thirteen weeks ended December 26, 2009. The decrease in school operating costs for the thirteen weeks ended January 1, 2011 and December 26, 2009, respectively, was comprised of the following (dollars in thousands):

 

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     Thirteen weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company school operating costs

   $ 7,647       $ 7,874       $ (227)         (2.9)%   
                                   

Comparable Schools

   $ 7,355       $ 7,568       $ (213)         (2.8)%   

Schools acquired, opened or closed after September 26, 2009:

           

New

     30         -           30          n.m.   

Closed

     17         56         (39)         (69.6)   

Laurel Springs School

     240         244         (4)         (1.6)   

Other

     5         6         (1)         (16.7)   
                                   
   $ 7,647       $ 7,874       $ (227)         (2.9)%   
                                   

The Company’s overall decrease in school operating cost for the thirteen weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of lower food, facility maintenance and teaching supply costs partially offset by increased electric and gas utility costs.

School operating costs for the twenty-six weeks ended January 1, 2011 increased $517,000, or 3.3%, to $16,060,000 from $15,543,000 for the twenty-six weeks ended December 26, 2009. The increase in school operating costs for the twenty-six week periods ended January 1, 2011 and December 26, 2009, respectively, was comprised of the following (dollars in thousands):

 

     Twenty-six weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company school operating costs

   $ 16,060       $ 15,543       $ 517          3.3%   
                                   

Comparable Schools

   $ 14,969       $ 14,655       $ 314          2.1%   

Schools acquired, opened or closed after September 26, 2009:

           

Acquired

     252         159         93          58.5    

New

     320         191         129          67.5    

Closed

     41         154         (113)         (73.4)   

Laurel Springs School

     469         375         94          25.1    

Other

     9         9         -           -   
                                   
   $ 16,060       $ 15,543       $ 517          3.3%   
                                   

 

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The Company’s overall increase in school operating costs for the twenty-six weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of higher food, teaching and office supplies costs and gas and electric utility costs during the first fiscal quarter of Fiscal 2011 as compared to the same period during Fiscal 2010.

School operating cost decreased to 12.6% of revenue for the thirteen weeks ended January 1, 2011 as compared to 13.4% for the thirteen weeks ended December 26, 2009. School operating cost was 14.2% of revenue for the twenty-six week periods ended January 1, 2011 and December 26, 2009. This was comprised of the following:

 

     Percentage of Revenue  
     Thirteen weeks ended  
       January 1, 2011             December 26, 2009     
                 

Total Company

     12.6%         13.4%   
                 

Comparable Schools

     12.6%         13.4%   

Core Schools

     12.6%         13.3%   

Schools acquired or opened subsequent to December 26, 2009 for Fiscal 2011 and December 27, 2008 for Fiscal 2010

     

Acquired Schools

     -           12.0%   

New Schools

     11.1%         20.7%   

Laurel Springs School

     12.2%         12.2%   
     Percentage of Revenue  
     Twenty-six weeks ended  
       January 1, 2011          December 26, 2009    

Total Company

     14.2%         14.2%   
                 

Comparable Schools

     14.2%         14.1%   

Core Schools

     14.2%         14.0%   

Schools acquired or opened subsequent to June 27, 2009 for Fiscal 2011 and June 28 2008 for Fiscal 2010

     

Acquired Schools

     12.8%         13.7%   

New Schools

     15.5%         19.5%   

Laurel Springs School

     13.6%         14.3%   

Comparable Schools’ operating costs as a percentage of revenue decreased to 12.6% from 13.4% for the thirteen weeks ended January 1, 2011 as compared to the same period ended December 26, 2009. The decrease was the result of lower food, facility maintenance and teaching supplies costs partially offset by increased electric and gas utility costs.

New Schools’ operating costs decreased as a percentage of revenue to 11.1% for the thirteen weeks ended January 1, 2011, as compared to 20.7% for the thirteen weeks ended December 26, 2009. New Schools’ operating costs decreased as a percentage of revenue to 15.5% for the twenty-six weeks ended January 1, 2011, as compared to 19.5% for the thirteen weeks ended December 26, 2009. The decrease in both periods was reflective of the typical enrollment ramp-up period common to New Schools.

Rent and other

Rent and other costs primarily include property rent and property taxes, the portion of claims retained by the Company for workers’ compensation and property insurance, depreciation and amortization, regional and school marketing, vehicle and equipment rent, and pre-opening costs. Much of this category of costs is relatively fixed in nature with increases related to contractual obligations, changes in marketing initiatives and the addition of new or acquired schools. In the case of New Schools, rent and other costs tend to be higher as a percentage of revenue because these costs are incurred in the early period of a school’s life and are expected to be leveraged as enrollments increase.

Rent and other costs for the thirteen weeks ended January 1, 2011 increased $190,000, or 1.3%, to $14,939,000 from $14,749,000 for the thirteen weeks ended December 26, 2009. The increase in rent and other costs for the thirteen weeks ended January 1, 2011 and December 26, 2009, respectively, was comprised of the following (dollars in thousands):

 

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     Thirteen weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company rent and other costs

   $ 14,939       $ 14,749       $ 190          1.3%   
                                   

Comparable Schools

   $ 14,459       $ 14,344       $ 115          0.8%   

Schools acquired, opened or closed after September 26, 2009:

           

New

     223         45         178          395.6    

Closed

     165         280         (115)         (41.1)   

Laurel Springs School

     92         80         12          15.0    
                                   
   $ 14,939       $ 14,749       $ 190         1.3%   
                                   

The Company’s overall increase in rent and other costs for the thirteen weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of overall contractual rent and property tax escalations and pre-opening costs incurred for one school which opened during the third quarter of Fiscal 2011.

Rent and other costs for the twenty-six weeks ended January 1, 2011 increased $569,000, or 1.9%, to $29,960,000 from $29,391,000 for the twenty-six weeks ended December 26, 2009. The increase in school operating costs for the twenty-six week periods ended January 1, 2011 and December 26, 2009, respectively, was comprised of the following (dollars in thousands):

 

     Twenty-six weeks ended      Increase (decrease)  
       January 1, 2011          December 26, 2009          Dollar          Percent    

Total Company rent and other costs

   $ 29,960       $ 29,391       $ 569          1.9%   
                                   

Comparable Schools

   $ 27,901       $ 27,855       $ 46          0.2%   

Schools acquired, opened or closed after September 26, 2009:

           

Acquired

     367         209         158          75.6    

New

     1,072         700         372          53.1    

Closed

     436         538         (102)         (19.0)   

Laurel Springs School

     184         89         95          106.7    
                                   
   $ 29,960       $ 29,391       $ 569          1.9%   
                                   

 

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The Company’s overall increase in rent and other costs for the twenty-six weeks ended January 1, 2011 as compared to the same period ended December 26, 2009 was primarily the result of scheduled rent escalations at Comparable Schools which were contingent upon Consumer Price Indices. This increase was also the result of the acquisitions of LSS and an elementary school, both of which occurred during September of 2009. The Company also opened three new preschools during the first quarter of Fiscal 2010 and another preschool during the third quarter of Fiscal 2010.

Rent and other costs decreased to 24.7% of revenue for the thirteen weeks ended January 1, 2011 as compared to 25.2% for thirteen weeks ended December 26, 2009. Rent and other costs decreased to 26.6% of revenue for the twenty-six weeks ended January 1, 2011 as compared to 26.9% for twenty-six weeks ended December 26, 2009. This was comprised of the following:

 

     Percentage of Revenue  
     Thirteen weeks ended  
       January 1, 2011             December 26, 2009     
                 

Total Company

     24.7%         25.2%   
                 

Comparable Schools

     24.8%         25.4%   

Core Schools

     24.8%         25.2%   

Schools acquired or opened subsequent to December 26, 2009 for Fiscal 2011 and December 27, 2008 for Fiscal 2010

     

Acquired Schools

     -           20.8%   

New Schools

     82.6%         56.0%   

Laurel Springs School

     4.7%         3.9%   
     Percentage of Revenue  
     Twenty-six weeks ended  
       January 1, 2011          December 26, 2009    

Total Company

     26.6%         26.9%   
                 

Comparable Schools

     26.5%         26.7%   

Core Schools

     26.5%         26.1%   

Schools acquired or opened subsequent to June 27, 2009 for Fiscal 2011 and June 28 2008 for Fiscal 2010

     

Acquired Schools

     18.6%         26.7%   

New Schools

     51.9%         69.9%   

Laurel Springs School

     5.3%         3.4%   

Increases in rent and other costs as a percentage of revenue at Comparable Schools and Core Schools are reflective of overall contractual rent and property tax escalations at these schools offset by overall enrollment and tuition increases.

New Schools’ rent and other costs increased as a percentage of revenue to 82.6% for the thirteen weeks ended January 1, 2011, as compared to 56.0% for the thirteen weeks ended December 26, 2009. New Schools during the thirteen weeks ended January 1, 2011 included pre-opening and rent costs for one school which opened during the third quarter of Fiscal 2011.

New Schools’ rent and other costs decreased as a percentage of revenue to 51.9% for the twenty-six weeks ended January 1, 2011 as compared to 69,9% for the same period ended December 26, 2009. These decreases in both periods were reflective of the typical enrollment ramp-up period common to New Schools.

Gross profit

As a result of the factors described above, gross profit for the thirteen weeks ended January 1, 2011 increased $1,673,000, or 19.9%, to $10,090,000 from $8,417,000 for the thirteen weeks ended December 26, 2009. Gross profit for the twenty-six weeks ended January 1, 2011 increased $936,000, or 8.1%, to $12,498,000 from $11,562,000 for the twenty-six weeks ended December 26, 2009.

 

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The change in gross profit for the thirteen and twenty-six weeks ended January 1, 2011 as compared to the same periods ended December 26, 2009 was as follows (dollars in thousands):

 

     Thirteen
weeks ended
     Percent of      Thirteen weeks ended      Percent of      Increase (decrease)  
       January 1, 2011          Revenues          December 26, 2009          Revenues          Dollar          Percent    

Revenues

   $ 60,552         100.0%       $ 58,593         100.0%       $ 1,959          3.3%   
                                                     

Personnel costs

     27,876         46.0         27,553         47.0         323          1.2    

School operating costs

     7,647         12.6         7,874         13.4         (227)         (2.9)   

Rent and other

     14,939         24.7         14,749         25.2         190          1.3    
                                                     

Cost of services

     50,462         83.3         50,176         85.6         286          0.6    
                                                     

Gross profit

   $ 10,090         16.7%       $ 8,417         14.4%       $ 1,673          19.9%   
                                                     
     Twenty-six weeks
ended
            Twenty-six
weeks ended
     Percent of      Increase (decrease)  
       January 1, 2011          Revenues          December 26, 2009          Revenues          Dollar          Percent    

Revenues

   $ 112,782         100.0%       $ 109,216         100.0%       $ 3,566         3.3%   
                                                     

Personnel costs

     54,264         48.1         52,720         48.3         1,544         2.9   

School operating costs

     16,060         14.2         15,543         14.2         517         3.3   

Rent and other

     29,960         26.6         29,391         26.9         569         1.9   
                                                     

Cost of services

     100,284         88.9         97,654         89.4         2,630         2.7   
                                                     

Gross profit

   $ 12,498         11.1%       $ 11,562         10.6%       $ 936         8.1%   
                                                     

The change in gross profit for Comparable Schools for the thirteen and twenty-six weeks ended January 1, 2011 as compared to the same periods ended December 26, 2009 was as follows (dollars in thousands):

 

     Thirteen
weeks ended
     Percent of      Thirteen weeks ended      Percent of      Increase (decrease)  
       January 1, 2011          Revenues          December 26, 2009          Revenues          Dollar          Percent    

Revenues

   $ 58,267         100.0%       $ 56,539         100.0%       $ 1,728          3.1%   
                                                     

Personnel costs

     27,230         46.7         27,211         48.1         19          0.1    

School operating costs

     7,355         12.6         7,568         13.4         (213)         (2.8)   

Rent and other

     14,459         24.8         14,344         25.4         115          0.8    
                                                     

Cost of services

     49,044         84.2         49,123         86.9         (79)         (0.2)   
                                                     

Gross profit

   $ 9,223         15.8%       $ 7,416         13.1%       $ 1,807          24.4%   
                                                     
     Twenty-six weeks
ended
            Twenty-six
weeks ended
     Percent of      Increase (decrease)  
       January 1, 2011          Revenues          December 26, 2009          Revenues          Dollar          Percent    

Revenues

   $ 105,224         100.0%       $ 104,158         100.0%       $ 1,066         1.0%   
                                                     

Personnel costs

     51,228         48.7         50,871         48.8         357         0.7   

School operating costs

     14,969         14.2         14,655         14.1         314         2.1   

Rent and other

     27,901         26.5         27,855         26.7         46         0.2   
                                                     

Cost of services

     94,098         89.4         93,381         89.7         717         0.8   
                                                     

Gross profit

   $ 11,126         10.6%       $ 10,777         10.3%       $ 349         3.2%   
                                                     

 

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The table below shows comparative information as a percentage of revenue for the thirteen weeks ended January 1, 2011 and December 26, 2009 for Core Schools, New Schools, Acquired Schools and Closed Schools (dollars in thousands):

 

     Thirteen weeks ended
January 1, 2011
     Percentage of
Revenue
     Thirteen weeks ended
December 26, 2009
     Percentage of
Revenue
     Increase
(Decrease)
     Percent
Increase
(Decrease)
 

Core Schools

                 

Number of schools

     183           -           171           -           

Revenue

   $ 58,267           100.0%       $ 52,406           100.0%       $ 5,861           11.2%   

Personnel Cost

     27,230           46.7           25,086           47.9           2,144           8.5     

School Operating Cost

     7,355           12.6           6,992           13.3           363           5.2     

Rent and Other

     14,459           24.8           13,204           25.2           1,255           9.5     
                                                     

Gross Profit

   $ 9,223           15.8%       $ 7,124           13.6%       $ 2,099           29.5%   
                                                     

Acquired Schools

                 

Number of schools

     0              7              

Revenue

   $ -           n.m.         $ 3,202           100.0%       $ (3,202)         n.m.     

Personnel Costs

     -           n. m.           1,605           50.1           (1,605)         n. m.     

School Operating Costs

     -           n. m.           385           12.0           (385)         n. m.     

Rent and Other

     -           n. m.           665           20.8           (665)         n. m.     
                                                     

Gross Profit

   $ -           n.m.         $ 547           17.1%       $ (547)         n.m.     
                                                     

New Schools

                 

Number of schools

     1              5              

Revenue

   $ 270           100.0%       $ 932           100.0%       $ (662)         (71.0)%   

Personnel Costs

     130           48.1           520           55.8           (390)         (75.0)   

School Operating Costs

     30           11.1           193           20.7           (163)         (84.5)   

Rent and Other

     223           82.6           522           56.0           (299)         (57.3)   
                                                     

Gross Loss

   $ (113)         (41.9)%       $ (303)         (32.5)%       $ 190           62.7%   
                                                     

Closed Schools

                 

Number of schools

     1              1              

Revenue

   $ -           n.m.         $ 8           n. m.         $ (8)         -     

Personnel Costs

     -           n.m.           14           n.m.           (14)         (100.0)   

School Operating Costs

     17           n.m.           55           n.m.           (38)         (69.1)   

Rent and Other

     165           n.m.           279           n.m.           (114)         (40.9)   
                                                     

Gross Profit

   $ (182)         n.m.         $ (340)         n.m.         $ 158           46.5%   
                                                     

Laurel Springs School

                 

Revenue

   $ 1,972           100.0%         $ 2,003           100.0%       $ (31)         (1.5)%   

Personnel Costs

     516           26.2           328           16.4           188           57.32     

School Operating Costs

     240           12.2           244           12.2           (4)         (1.6)    

Rent and Other

     92           4.7           79           3.9           13           16.5     
                                                     

Gross Profit

   $ 1,124           57.0%       $ 1,352           6 7.5%       $ (228)         (16.9)%   
                                                     

Other

                 

Revenue

   $ 43           100.0%       $ 42           100.0%       $ 1           2.4%   

Personnel Costs

     -           -           -           -           -           n.a.     

School Operating Costs

     5           11.6           5           11.9           -           -     

Rent and Other

     -           -           -           -           -           n.a.     
                                                     

Gross Profit

   $ 38           88.4%       $ 37           88.1%       $ 1           2.7%   
                                                     

Total

                 

Revenue

   $ 60,552           100.0%       $ 58,593           100.0%       $ 1,959           3.3%   

Personnel Costs

     27,876           46.0           27,553           47.0           323           1.2     

School Operating Costs

     7,647           12.6           7,874           13.4           (227)         (2.9)   

Rent and Other

     14,939           24.7           14,749           25.2           190           1.3     
                                                     

Gross Profit

   $ 10,090           16.7%       $ 8,417           14.4%       $ 1,673           19.9%   
                                                     

 

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The table below shows comparative information as a percentage of revenue for the twenty-six weeks ended January 1, 2011 and December 26, 2009 for Core Schools, New Schools, Acquired Schools and Closed Schools (dollars in thousands):

 

     Twenty-Six weeks ended
January 1, 2011
     Percentage of
Revenue
     Twenty-Six weeks ended
December 26, 2009
     Percentage of
Revenue
     Increase
(Decrease)
     Percent
Increase
(Decrease)
 

Core Schools

                 

Number of schools

     179           -           166           -           

Revenue

   $ 105,224           100.0%       $ 97,676           100.0%       $ 7,548           7.7%   

Personnel Cost

     51,228           48.7           47,296           48.4           3,932           8.3     

School Operating Cost

     14,969           14.2           13,694           14.0           1,275           9.3     

Rent and Other

     27,901           26.5           25,537           26.1           2,364           9.3     
                                                     

Gross Profit

   $ 11,126           10.6%       $ 11,149           11.4%       $ (23)          (0.2)%   
                                                     

Acquired Schools

                 

Number of schools

     1              10              

Revenue

   $ 1,970           100.0%       $ 6,558           100.0%       $ (4,588)         (70.0)%   

Personnel Costs

     1,023           51.9           3,425           52.2           (2,402)         (70.1)   

School Operating Costs

     252           12.8           900           13.7           (648)         (72.0)   

Rent and Other

     367           18.6           1,753           26.7           (1,386)         (79.1)   
                                                     

Gross Profit

   $ 328           16.6%       $ 480           7.3%       $ (152)         (31.7)%   
                                                     

New Schools

                 
                 -        

Number of schools

     4              7              

Revenue

   $ 2,067           100.0%       $ 2,108           100.0%       $ (41)         (1.9)%   

Personnel Costs

     1,102           53.3           1,264           60.0           (162)         (12.8)   

School Operating Costs

     320           15.5           411           19.5           (91)         (22.1)   

Rent and Other

     1,072           51.9           1,474           69.9           (402)         (27.3)   
                                                     

Gross Loss

   $ (427)         (20.7)%       $ (1,041)         (49.4)%       $ 614          59.0%   
                                                     

Closed Schools

                 

Number of schools

     1              1              

Revenue

   $ -           n.m.         $ 175           n. m.         $ (175)           

Personnel Costs

     -           n.m.           154           n.m.           (154)         (100.0)   

School Operating Costs

     41           n.m.           154           n.m.           (113)         (73.4)   

Rent and Other

     436           n.m.           538           n.m.           (102)         (19.0)   
                                                     

Gross Profit

   $ (477)         n.m.         $ (671)         n.m.         $ 194          28.9%   
                                                     

Laurel Springs School

                 

Revenue

   $ 3,442           100.0%       $ 2,619           100.0%       $ 823           31.4%   

Personnel Costs

     911           26.5           581           22.2           330           56.80     

School Operating Costs

     469           13.6           375           14.3           94           25.1     

Rent and Other

     184           5.3           89           3.4           95           106.7     
                                                     

Gross Profit

   $ 1,878           54.6%       $ 1,574           60.1%       $ 304           19.3%   
                                                     

Other

                 

Revenue

   $ 79           100.0%       $ 80           100.0%       $ (1)         (1.3)%   

Personnel Costs

     -           -           -           -           -           n.a.     

School Operating Costs

     9           11.4           9           11.3           -           -     

Rent and Other

     -           -           -           -           -           n.a.     
                                                     

Gross Profit

   $ 70           88.6%       $ 71           88.8%       $ (1)         (1.4)%   
                                                     

Total

                 

Revenue

   $ 112,782           100.0%       $ 109,216           100.0%       $ 3,566           3.3%   

Personnel Costs

     54,264           48.1           52,720           48.3           1,544           2.9     

School Operating Costs

     16,060           14.2           15,543           14.2           517           3.3     

Rent and Other

     29,960           26.6           29,391           26.9           569           1.9     
                                                     

Gross Profit

   $ 12,498           11.1%       $ 11,562           10.6%       $ 936           8.1%   
                                                     

 

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Table of Contents

General and administrative expenses

For the thirteen weeks ended January 1, 2011, general and administrative expenses increased $862,000, or 14.8%, to $6,703,000 from $5,841,000 for the thirteen weeks ended December 26, 2009. The increase in general and administrative expenses included $615,000 of company bonus programs. The increase also included $215,000 for the settlement reached between the Company and the United States Department of Justice (“DOJ”) in regard to a lawsuit that had been filed by the DOJ alleging the Company violated Title III of the Americans with Disabilities Act of 1990 (“ADA”).

For the twenty-six weeks ended January 1, 2011, general and administrative expenses increased $1,937,000, or 18.1%, to $12,666,000 from $10,729,000 for the twenty-six weeks ended December 26, 2009. The increase in general and administrative expenses included increased costs at LSS of $802,000 as LSS was acquired in September 2009. The increase in general and administrative expenses also included $750,000 of company bonus programs. The increase also included $215,000 for the settlement reached between the Company and the DOJ in regard to the lawsuit noted above.

Operating income (loss)

As a result of the factors mentioned above, the Company’s operating income increased $811,000 to $3,387,000 for the thirteen weeks ended January 1, 2011 from $2,576,000 of operating income for the thirteen weeks ended December 26, 2009. The Company’s operating income decreased $1,001,000 to an operating loss of $168,000 for the twenty-six weeks ended January 1, 2011 from operating income of $833,000 for the twenty-six weeks ended December 26, 2009.

Interest expense

Interest expense for the thirteen weeks ended January 1, 2011 and December 26, 2009 was $351,000 and $315,000, respectively. Interest expense for the twenty-six weeks ended January 1, 2011 and December 26, 2009 was $768,000 and $582,000, respectively. During the twenty-six weeks ended January 1, 2011, the Company had average daily debt outstanding of $21,793,000 as compared to average daily debt outstanding of $25,313,000 during the twenty-six weeks ended December 26, 2009. Lower average outstanding debt was offset by an approximate 100 - 150 bps increase in interest rates under the terms of the 2008 Amended Credit Agreement, which increased interest expense by approximately $11,000 and $136,000 for the thirteen and twenty-six week periods ended January 1, 2011 as compared to the same periods ended December 26, 2009, respectively. The thirteen and twenty-six weeks ended January 1, 2011 also included $25,000 and $50,000 of loan fee amortization expense, respectively, which were incurred when amending the 2008 Credit Agreement which occurred during the third quarter of Fiscal 2010.

Income taxes

Income tax expense for the thirteen weeks ended January 1, 2011 was $1,113,000 as compared to $873,000 for the thirteen week period ended December 26, 2009. The Company’s income tax benefit for the twenty-six weeks ended January 1, 2011 was $489,000 as compared to income tax expense of $102,000 for the twenty-six week period ended December 26, 2009. The Company’s effective tax rate was 52.8% and 38.3% for the twenty-six week periods ended January 1, 2011 and December 26, 2009, respectively. The increase in the Company’s effective tax rate was the result of a tax refund received that was related to LSS, the amount received exceeded the estimated fair value of income tax receivable that had been recorded in accounting for the business combination.

 

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Table of Contents

Discontinued operations

The results of operations for schools that are no longer operating under the Company’s management have been reflected in the consolidated financial statements and notes as discontinued operations for all periods presented. The operating results for discontinued operations in the unaudited statements of operations for all periods presented, net of tax are as follows (dollars in thousands):

 

             For the Thirteen Weeks Ended                       For the Twenty-Six Weeks Ended           
     January 1, 2011      December 26, 2009      January 1, 2011      December 26, 2009  

Cost of services

   $ (25)       $ (58)       $ (46)       $ (120)   

Rent and other

     (97)         (555)         (218)         (818)   
                                   

Loss from discontinued operations before income tax benefit

     (122)         (613)         (264)         (938)   

Income tax benefit

     48           236           104           361    
                                   

Loss from discontinued operations

   $ (74)       $ (377)       $ (160)       $ (577)   
                                   

Net income (loss )

As a result of the above factors, the Company’s net income was $1,853,000 for the thirteen weeks ended January 1, 2011 as compared to $1,018,000 for the thirteen weeks ended December 26, 2009. As a result of the above factors, the Company’s net loss was $598,000 for the twenty-six weeks ended January 1, 2011 as compared to $413,000 for the twenty-six weeks ended December 26, 2009.

Liquidity and Capital Resources

Cash Flow

The Company’s principal sources of liquidity are cash flow from operations and amounts available under its revolving credit facility under the 2008 Amended Credit Agreement. Principal uses of liquidity are to meet working capital needs, debt service, capital expenditures related to the renovation and maintenance of its existing schools, and capital expenditures related to new school development, furniture, fixtures, technology, curriculum and acquisitions.

Under the 2008 Amended Credit Agreement, at January 1, 2011 and February 4, 2011, there was $21,800,000 and $20,100,000 of borrowings outstanding, respectively. In addition, there was $2,615,000 outstanding for letters of credit at January 1, 2011 and February 7, 2011. The total unused and available portion of the 2008 Amended Credit Agreement, after allowance for the letters of credit, at January 1, 2011 was $50,585,000 and at February 4, 2011 was $52,285,000. The Company uses derivative financial instruments to manage its exposure to fluctuations in interest rates, at January 1, 2011 and February 7, 2011, the Company had interest rate swap contracts with notional amounts totaling $13,000,000.

Due to the inherent nature of the education and preschool business, cash flows during the twenty-six week periods presented are not necessarily indicative of cash flow patterns of the remaining business cycle. During the first quarter of the fiscal year, operating income is typically lower than any other period during the year. Also, during this period, collection of registration fees and the pre-payment of tuition are at a peak.

Cash provided by operating activities for the twenty-six weeks ended January 1, 2011 was $1,650,000 and cash used by operating activities for the twenty-six weeks ended December 26, 2009 was $165,000. The $1,815,000 increase in the twenty-six weeks ended January 1, 2011 as compared to same period ended December 26, 2009 was primarily due to an increase in the change of deferred revenue of $2,604,000 of which $2,387,000 came from schools acquired subsequent to the first quarter of Fiscal 2011. Also, a decrease in the change in customer accounts receivable of $574,000 contributed to the increase in cash provided by operating activities. These increases were partially offset by a decrease of accounts payable and current liabilities of $741,000, increases in the change in prepaid expenses of $615,000 and an increase in net losses of $185,000.

Cash used in investing activities for the twenty-six weeks ended January 1, 2011 and the same period ended December 26, 2009 was $3,280,000 and $15,233,000, respectively. During the first quarter of Fiscal 2010, the Company used $11,983,000 for the acquisition of one elementary school and an on-line distance learning school.

Cash provided by financing activities during the twenty-six weeks ended January 1, 2011 was $320,000, which primarily consisted of the Company’s borrowings of long-term debt. Cash provided by financing activities during the twenty-six weeks ended December 26, 2009 was $15,998,000 which included net borrowings of $15,975,000, of which $11,983,000 was used to fund the acquisition of one elementary school and an on-line distance learning school.

As a result of the above cash flow activity, total cash and cash equivalents decreased by $1,310,000 from $1,606,000 at July 3, 2010 to $296,000 at January 1, 2011.

 

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Table of Contents

Revolving Credit Agreement

The Company and its lenders entered into a credit agreement during Fiscal 2008 which has subsequently been amended (“2008 Amended Credit Agreement”). The 2008 Amended Credit Agreement provides for a $75,000,000 Revolving Credit Commitment with a $25,000,000 accordion feature permitting the Company to increase the size of the facility under its current terms and conditions. Under the terms of the 2008 Amended Credit Agreement, proceeds may be used to fund permitted acquisitions, capital expenditures and ongoing business operations.

As of January 1, 2011 and July 3, 2010, outstanding borrowings totaled $21,800,000 and $21,500,000, respectively and outstanding letters of credit as of January 1, 2011 and July 3, 2010 were $2,615,000.

The Company’s obligation under its 2008 Amended Credit Agreement bears interest, at the Company’s option, at either:

 

  (1) a selected LIBOR rate plus a margin based on our debt to defined EBITDA leverage ratio; or

 

  (2) a defined base rate plus a margin based on our debt to defined EBITDA leverage ratio.

The applicable margins may be adjusted quarterly based on the leverage ratio and adjusted periodically based on adjustments to the indexed LIBOR rate or defined base rate. The Company also pays a letter of credit fee based on the face amount of each letter of credit calculated at the margin applicable to loans under the 2008 Amended Credit Agreement bearing interest based on the selected LIBOR rate.

The ranges of margins applicable during the twenty-six week periods ended January 1, 2011 and December 26, 2009 were as follows:

 

         Spreads added to LIBOR or Base Rates     
Thirteen weeks ended
         January 1, 2011            December 26, 2009    

LIBOR rate plus debt to defined EBITDA-indexed rate

   2.50% - 3.75%    1.15% - 2.40%

Base rate plus debt to defined EBITDA-indexed rate

   1.50% - 2.75%    0.15% - 0.90%

Letter of Credit fees LIBOR plus defined EBITDA-indexed rate

   2.50% -3.75%    1.15% - 2.40%

The 2008 Amended Credit Agreement contains customary covenants and provisions that restrict the Company’s ability to change its business, acquire businesses, declare or pay dividends, grant liens, incur additional indebtedness, make capital expenditures, and to govern the use of proceeds from disposition of assets or equity related transactions and require repayment in certain change of control events. In addition, the 2008 Amended Credit Agreement provides that the Company must meet or exceed amounts for defined EBITDA and fixed charge coverage ratios and must not exceed certain leverage ratios. The Company’s loan covenants under the 2008 Amended Credit Agreement limit the amount of senior debt borrowings and acquisitions that are permitted. The Company’s obligations under the 2008 Amended Credit Agreement are collateralized in part by a pledge of the stock of the Company’s subsidiaries and liens on all real and personal property owned by the Company.

Long-Term Obligations and Commitments

The Company has certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a loan agreement or lease agreement. Commercial commitments represent potential obligations for performance in the event of demands by third parties. At January 1, 2011, letter of credit commitments totaled $2,615,000.

The Company’s most significant contractual obligations are real estate leases for its schools. Additionally, the Company has closed locations for which it continues to have cash obligations under lease agreements with third party landlords. The Company attempts to mitigate these cash payment obligations by subleasing the locations to third parties. The Company has cash risk for the future real estate leases for closed schools for which it does not have third party sublease coverage or where third party sublease coverage on any specific sublease may not equal the total cash obligation under the lease agreement for that property.

 

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Table of Contents

Future minimum lease obligations, by year and in the aggregate, for all real properties, vehicle and other leases that the Company and its subsidiaries have entered into, consisted of the following at January 1, 2011 (dollars in thousands):

 

                   Fiscal  
     Total      Twenty-six
weeks ending
July 2, 2011
     2012      2013      2014      2015      Thereafter  

Long term debt obligations including contractual interest

   $ 24,856         $ 998         $ 998         $ 22,860         $ -         $ -         $ -     

Letters of credit

     2,615           2,615           -           -           -           -           -     

Operating leases

     337,304           20,998           40,516           37,933           34,952           32,503           170,402     
                                                              

Total

   $ 364,775         $ 24,611         $ 41,514         $ 60,793         $ 34,952         $ 32,503         $ 170,402     
                                                              

Most of the above real estate leases are triple-net leases requiring the Company to pay all applicable real estate taxes, utility expenses, maintenance and insurance costs, that are not included in the amounts presented above. Most of the above operating leases are real estate leases that contain annual rent increase provisions based on changes in consumer price indexes or other formulas, which are not reflected in the above schedule.

At January 1, 2011, there were seven leased properties included in discontinued operations. Five of these properties were sub-leased and two remained vacant. The obligations of the leases that are subject to a sublease are substantially covered by the subtenant. If the parties under these sublease agreements default, the Company has the obligation to pay rent under the terms of these leases. The operating lease commitments reflected are net of sublease amounts due to the Company of $5,720,000. Some of the closed location real estate lease obligations extend beyond the term of the current subleases on those properties. The leases on the closed schools expire between 2011 and 2017. The Company’s liability with respect to closed school lease commitments could change if sublessees default under their sublease with the Company or if the Company is unsuccessful in subleasing additional closed schools or extending existing sublease agreements.

In addition to the lease obligations noted above, the Company has made guarantees for twelve leases that were assigned to third parties. All of these leases will expire no later than April of 2013. The Company has assessed its exposure regarding the assignment of the Guaranteed Properties and has determined that the fair value of this exposure is de minimis and therefore has not recorded a liability for this contingency. The maximum potential undiscounted amount of future payments the Company could be required to pay under these guarantees as of January 1, 2011 is $1,284,000.

Capital Expenditures

Company-funded capital expenditures for New School development includes school equipment, furniture, fixtures and curricula purchased by the Company for the operations of the New Schools. The funds used to open or acquire these schools were provided by cash flow from operations, the Company’s Revolving Credit Agreement or asset sales. Renovations and equipment purchases are capital expenditures incurred for existing schools in order to maintain the operations and, where necessary, upgrade the school facility and/or extend the service life of the school. The Company’s current senior bank credit facility has annual limitations on the amount of capital expenditures. This limitation is $15,000,000 for Fiscal 2011.

Capital expenditures for the twenty-six weeks ended January 1, 2011 and December 26, 2009 were as follows (dollars in thousands):

 

     Twenty-Six weeks ended  
     January 1, 2011      December 26, 2009  

New school development

   $ 687         $ 1,016     

Facility renovations

     1,525           1,512     

Curriculum

     617           705     

Corporate and information systems

     692           517     
                 
   $ 3,521         $ 3,750     
                 

 

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Insurance

Companies involved in the education and care of children may not be able to obtain insurance for the totality of risks inherent in their operations. In particular, general liability coverage can have insurance sub-limits 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.

 

Item 3. 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 form of interest rates.

Interest Rates

The Company’s exposure to market risk for changes in interest rates relates primarily to debt obligations. The Company has cash flow exposure as a result of the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement and the 2008 Credit Agreement were subject to variable 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 $21,000 and $41,000 for the thirteen weeks ended January 1, 2011and December 26, 2009, respectively. A 1.0% change in the LIBOR rate and the prime rate would have resulted in interest expense changing by approximately $44,000 and $62,000 for the twenty-six weeks ended January 1, 2011and December 26, 2009, respectively.

Interest Rate Swap Agreements

The Company uses derivative financial instruments to manage its exposure to fluctuations in interest rates. The instruments are subject to varying degrees of market risk, including rate and price fluctuations and elements of credit risk in the event the counterparty should default. Amounts received or paid with regard to derivative instruments as a part of designated transactions result in the reclassification of amounts previously recognized as other comprehensive income related to the forecasted transaction, which when realized, are netted in interest expense.

At January 1, 2011 and July 3, 2010, the Company had the following interest rate swap contracts outstanding that were designated as cash flow hedges and were determined to be highly-effective:

 

Swap #            

  

Notional

  Amount  

  

Fixed Rate

Payment

Obligation

  

Counterparty

payments

index

  

  Termination Date  

1

   $3,000      1.15%    LIBOR    February 27, 2012

2

     5,000      1.48%    LIBOR    March 26, 2012

In addition to the above interest rate swaps, during Fiscal 2010, the Company entered into a “blend and extend” transaction with its bank, whereby the original interest rate swap was terminated and replaced with a new interest rate swap with a notional amount of $5,000,000, a termination date of May 28, 2012 and a rate of 1.86%. This swap is not fully effective and changes in value are recognized on the Company’s Consolidated Statements of Operations.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management has evaluated, with the participation of its Chief Executive Officer and its Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of January 1, 2011. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this Quarterly Report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

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Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II

Other Information

 

Item 1A. Risk Factors

5.                 Other Information

On January 14, 2011, the Company reached a settlement ending its litigation with the DOJ and the lawsuit was dismissed with prejudice.

 

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Item 6. Exhibits

 

31.1*    Certification of the Chief Executive Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2*    Certification of the Chief Financial Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1*    Certification of the Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
32.2*    Certification of the Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

 

* Filed herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NOBEL LEARNING COMMUNITIES, INC.
Dated: February 10, 2011     By:   /S/     THOMAS FRANK        
        Thomas Frank
        Chief Financial Officer
        (duly authorized officer and principal financial officer)

 

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EXHIBIT INDEX

 

31.1    Certification of the Chief Executive Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2    Certification of the Chief Financial Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1    Certification of the Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
32.2    Certification of the Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

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