Nobel Learning Communities (NLCI) 10-Q 2007 Q4 Quarterly report

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: December 29, 2007

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  ¨

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

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  x

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 1, 2008 was 10,391,810.

INDEX TO FORM 10-Q

Nobel Learning Communities, Inc.

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of December 29, 2007 (Unaudited) and June 30, 2007	2
	Consolidated Statements of Income for the thirteen and twenty-six weeks ended December 29, 2007 and December 30, 2006 (Unaudited)	3
	Consolidated Statement of Changes in Stockholders’ Equity for the twenty-six weeks ended December 29, 2007 (Unaudited)	4
	Consolidated Statements of Cash Flows for the twenty-six weeks ended December 29, 2007 and December 30, 2006 (Unaudited)	5
	Notes to Consolidated Interim Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4T.	Controls and Procedures	28
PART II. OTHER INFORMATION
Item 4.	Submission of Matters to Vote for Security Holders	29
Item 6.	Exhibits	29

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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 Nobel Learning Communities, Inc. (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” of this report and in Part I Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007. In addition, the Company’s results may be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, 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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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Balance Sheet

(Dollars in thousands, except share amounts)

	December 29, 2007			June 30, 2007
	(Unaudited)
ASSETS
Cash and cash equivalents	$	1,118		$	3,814
Customer accounts receivable, less allowance for doubtful accounts of $140 at December 29, 2007 and $187 at June 30, 2007		1,017			949
Deferred tax asset		449			458
Prepaid rent		2,759			2,664
Prepaid expenses and other current assets		3,172			3,142
Total Current Assets		8,515			11,027
Property and equipment, at cost		73,720			69,665
Accumulated depreciation and amortization		(46,645	)		(45,253	)
Property and equipment, net		27,075			24,412
Goodwill		51,580			47,499
Intangible assets, net		4,328			4,182
Deferred tax asset		215			—
Deposits and other assets		1,934			1,194
Total Assets	$	93,647		$	88,314
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and other current liabilities	$	18,420		$	18,655
Current portion of accrued lease obligations for discontinued operations		731			1,174
Deferred revenue		12,894			12,835
Total Current Liabilities		32,045			32,664
Long-term debt		2,350			—
Long-term portion of accrued lease obligations for discontinued operations		1,081			1,019
Deferred tax liability		—			70
Other long term liabilities		1,498			343
Total Liabilities		36,974			34,096
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; $2,000 liquidation preference		1			1
Common stock, $0.001 par value; 20,000,000 shares authorized;
10,391,810 and 10,365,610 shares issued and outstanding at December 29, 2007 and June 30, 2007 respectively		10			10
Additional paid-in capital		57,339			56,676
Accumulated deficit		(677	)		(2,469	)
Total Stockholders’ Equity		56,673			54,218
Total Liabilities and Stockholders’ Equity	$	93,647		$	88,314

The accompanying notes and the notes to the financial statements included in the Company’s Annual Report on Form 10-K are an integral part of these consolidated financial statements.

2

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Income

(Dollars in thousands, except per share data)

(Unaudited)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	December 29, 2007			December 30, 2006			December 29, 2007			December 30, 2006
Revenues	$	51,207		$	45,556		$	95,839		$	84,663
Personnel costs		24,778			21,620			46,635			40,920
School operating costs		6,435			5,785			13,195			12,240
Rent and other		12,129			10,921			24,030			21,080
Cost of services		43,342			38,326			83,860			74,240
Gross profit		7,865			7,230			11,979			10,423
General and administrative expenses		4,463			4,230			8,923			7,916
Operating income		3,402			3,000			3,056			2,507
Interest expense		105			808			152			1,130
Other income		(298	)		(3,688	)		(315	)		(3,824	)
Income from continuing operations before income taxes		3,595			5,880			3,219			5,201
Income tax expense		1,402			2,293			1,255			2,028
Income from continuing operations		2,193			3,587			1,964			3,173
Loss from discontinued operations, net of income tax effect		(67	)		(1,398	)		(128	)		(1,654	)
Net income		2,126			2,189			1,836			1,519
Preferred stock dividends		—			132			—			263
Net income applicable to common stockholders	$	2,126		$	2,057		$	1,836		$	1,256
Basic income per share:
Income from continuing operations	$	0.21		$	0.42		$	0.19		$	0.36
Loss from discontinued operations		(0.01	)		(0.17	)		(0.01	)		(0.20	)
Net income per share	$	0.20		$	0.25		$	0.18		$	0.16
Diluted income per share:
Income from continuing operations	$	0.21		$	0.34		$	0.19		$	0.30
Loss from discontinued operations		(0.01	)		(0.13	)		(0.01	)		(0.16	)
Net income per share	$	0.20		$	0.21		$	0.17		$	0.14
Weighted average common shares outstanding:
Basic		10,379			8,093			10,373			8,093
Diluted		10,551			10,549			10,546			10,539

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

The accompanying notes and the notes to the financial statements included in the Company’s Annual Report on Form 10-K 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 December 29, 2007

(Dollars in thousands, except share data)

(Unaudited)

	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit			Total
	Shares	Amount		Shares	Amount
June 30, 2007	1,063,830	$	1	10,365,610	$	10	$	56,676	$	(2,469	)	$	54,218
Net income	—		—	—		—		—		1,836			1,836
Cumulative impact from adoption of FASB Interpertaion No. 48	—		—	—		—		—		(44	)		(44	)
Stock options compensation expense	—		—	—		—		354		—			354
Stock options exercised and related tax benefits	—		—	26,200		—		309		—			309
December 29, 2007	1,063,830	$	1	10,391,810	$	10	$	57,339	$	(677	)	$	56,673

The accompanying notes and the notes to the financial statements included in the Company’s Annual Report on Form 10-K are an integral part of these consolidated financial statements.

4

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Twenty-Six Weeks Ended
	December 29, 2007			December 30, 2006
Cash Flows from Operating Activities:
Net income	$	1,836		$	1,519
Adjustments to reconcile net income to net cash Provided by operating activities:
Depreciation and amortization		3,430			3,269
Provision for losses on accounts receivable		158			439
Stock option compensation		354			290
Gain on sale of fixed assets		—			(310	)
Gain on recovery of notes receivable		—			(3,300	)
Lease reserves		83			2,039
Other		(221	)		(207	)
Changes in Assets and Liabilities, net of business combinations:
Accounts receivable		(260	)		(294	)
Prepaid expenses		(85	)		945
Other assets and liabilities		(791	)		71
Deferred revenue		52			363
Tax benefit from exercise of stock options		(107	)		—
Accounts payable and accrued expenses		8			(1,830	)
Total adjustments		2,621			1,475
Net Cash Provided by Operating Activities		4,457			2,994
Cash Flows from Investing Activities:
Purchases of capital assets, net of acquired amounts		(5,365	)		(5,140	)
School acquisitions		(4,447	)		(12,050	)
Proceeds from recovery of notes receivable		—			3,510
Proceeds from sale of fixed assets		—			1,028
Net Cash Used in Investing Activities		(9,812	)		(12,652	)
Cash Flows from Financing Activities:
Proceeds from issuance of long term debt		21,350			—
Repayment of long term debt		(19,000	)		(2,285	)
Bank overdraft		—			3,781
Proceeds from exercise of stock options		202			6
Tax benefits from exercise of stock options		107			—
Dividends paid to preferred stockholders		—			(219	)
Net Cash Provided by Financing Activities		2,659			1,283
Net decrease in cash and cash equivalents		(2,696	)		(8,375	)
Cash and cash equivalents at beginning of period		3,814			9,837
Cash and cash equivalents at end of period	$	1,118		$	1,462
Supplemental disclosure of cash flow information:
Interest paid	$	61		$	431
Income taxes paid, net	$	2,738		$	752

The accompanying notes and the notes to the financial statements included in the Company’s Annual Report on Form 10-K are an integral part of these consolidated financial statements.

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NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES

Notes to Consolidated Interim Financial Statements

for the Twenty-six weeks ended December 29, 2007

(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 December 29, 2007 and results of operations for the thirteen and twenty-six weeks ended December 29, 2007 and December 30, 2006, 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 June 30, 2007.

Due to the inherent seasonal nature of the education and child care 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 2008 and Fiscal 2007 are to the 52 weeks ending June 28, 2008 and June 30, 2007, respectively. The second quarter of Fiscal 2008 and Fiscal 2007 are each comprised of thirteen weeks.

The Company has conformed previously reported amounts in its Quarterly Report on Form 10-Q for the period ended December 30, 2006 to reflect discontinued operations. Certain other prior period amounts have been reclassified to conform to the current period’s presentation.

At the beginning of Fiscal 2007, discontinued operations consisted of fifteen schools, eight of which the Company did not operate during Fiscal 2007 and seven of which the Company continued to operate until they were sold during the third and fourth quarters of Fiscal 2007. In addition to the remaining eight schools classified as discontinued operations during Fiscal 2007, as part of an acquisition during the first quarter of Fiscal 2008, one additional school was added to discontinued operations. This school was operated by the Company during part of the first quarter of Fiscal 2008 and closed during the period.

The Company’s significant 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 2007. The following accounting policies are considered critical to the preparation of the Company’s consolidated financial statements due to the estimation processes and business judgment involved in their application.

Revenue Recognition

The recognition of net revenues meets the following criteria: the existence of an arrangement through a registration, an enrollment agreement or a contract, the rendering of educational services over time, a specific tuition rate and/or fee and probable collection. Net revenues include tuition, fees and other net revenues, reduced by discounts. Fees are received for registration, other educational services and charter school management fees. Ancillary income is primarily comprised of supplemental fees from certain after school programs, summer programs, camps and field trips. Tuition revenues, net of discounts and other revenues, are recognized as services are performed. Tuition payments received in advance of the time period for which service is to be performed are recorded as deferred revenue. Registration fees are recognized over the applicable school period. Charter school management fees are recognized based on a contractual relationship with the charter school and do not include any tuition revenue received by the charter school. Certain fees may be received in advance of services being rendered, in which case the fee revenue is deferred and recognized over the appropriate period of service.

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Accounts Receivable

The Company’s accounts receivable are comprised primarily of tuition due from parents and governmental agencies. Accounts receivable are presented at estimated net realizable value. The Company uses estimates in determining the collectibility of its accounts receivable and must rely on its evaluation of its experience with historical trends, governmental funding processes, specific customer issues and current economic trends to arrive at appropriate reserves. Material differences may result in the amount and timing of bad debt expense if actual experience differs significantly from management estimates.

The Company provides education services to the parents and guardians of the children attending its schools. In certain circumstances, the Company grants small amounts of credit for a limited period of time. Exposure to losses on receivables is principally dependent on each person’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company’s schools are located in 13 states and the District of Columbia and, as a result, the Company is not dependent on economic conditions in any one geographic area or market.

Long-lived and Intangible Assets

In accordance with Statement of Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”), long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset’s value is impaired if management’s estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges.

Goodwill

The Company estimates fair values for each reporting unit using discounted cash flow projections in evaluating and measuring a potential impairment charge on an annual basis in the fourth quarter of each fiscal year or when changes in circumstances warrant. The Company engages an independent, third party consultant to review its calculations required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and, if necessary, the level two analysis in order to determine the amount of goodwill impaired. Any impairment of goodwill resulting from the required testing by SFAS 142 is recorded as a component of income from operations.

For Fiscal 2007, the Company performed its annual impairment test as required by SFAS 142. The level one impairment test for Fiscal 2007 indicated that no impairment existed for the Company’s reporting units. As such, the Company did not record goodwill impairment for Fiscal 2007; however, there can be no assurance that such a charge will not be recorded in future periods.

Income Taxes

The Company accounts for income taxes using the asset and liability method, in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A valuation allowance is recorded based on the uncertainty regarding the ultimate realizability of deferred tax assets.

The Company files a U.S. federal income tax return and various state income tax returns, which are subject to examination by tax authorities. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. The Company’s estimated tax liability is subject to change as examinations of specific tax years may occur in the respective jurisdictions, which may include possible adjustments related to the nature and timing of deductions and the local attribution of income.

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Note 2. New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, SFAS 141(R) requires that acquisition costs generally be expensed in the period incurred and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141(R) is effective for the Company’s fiscal year beginning June 28, 2009, with early adoption prohibited. The Company is evaluating the effect the implementation to SFAS 141(R) will have on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a component of equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for the Company’s fiscal year beginning June 28, 2009, with early adoption prohibited. The Company is evaluating the effect the implementation of SFAS 160 will have on the consolidated financial statements.

Note 3. Earnings Per Share

Earnings per share are based on the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume conversion of the Company’s convertible preferred stock and the exercise of options if such shares are dilutive. In the calculation of basic earnings per share, weighted average numbers of shares outstanding are used as the denominator. Earnings per share is computed as follows (dollars and average common stock outstanding in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	December 29, 2007		December 30, 2006		December 29, 2007		December 30, 2006
Basic income per share:
Net income	$	2,126	$	2,189	$	1,836	$	1,519
Less preferred dividends		—		132		—		263
Income applicable to common stockholders		2,126		2,057		1,836		1,256
Weighted average common stock outstanding		10,379		8,093		10,373		8,093
Basic income per share	$	0.20	$	0.25	$	0.18	$	0.16
Diluted income per share:
Net income	$	2,126	$	2,189	$	1,836	$	1,519
Average common stock oustanding		10,379		8,093		10,373		8,093
Convertible preferred stock, options and warrants		172		2,456		173		2,446
Average common stock and dilutive securities outstanding		10,551		10,549		10,546		10,539
Diluted income per share	$	0.20	$	0.21	$	0.17	$	0.14

As of December 29, 2007, 164,000 stock options were issued and outstanding and were deemed to be anti-dilutive, these stock options are not included in the above earnings per share calculations.

During Fiscal 2007, the Company caused the holders of Series E Preferred Stock and Series F Preferred Stock to convert their shares into Common Stock in accordance with the terms of the Company’s Certificates of Designation. As a result of these conversions, the Company’s common stock outstanding increased by approximately 2,256,000 shares and no shares of the Series E Preferred Stock or the Series F Preferred Stock remain outstanding.

Note 4. Acquisitions

During the second quarter of Fiscal 2008, the Company acquired the assets of two Teddy Bear Tree House preschools. Both schools will be rebranded under the Discovery Isle brand. These schools expand our existing market coverage in a geographic market in which the Company currently operates. The purchase price of the assets acquired and

8

transaction costs totaled approximately $2,304,000. The purchase price has been allocated based on the estimated fair value of the assets acquired at the date of the acquisition and included, among other items, $69,000 of property and equipment and net current assets of $4,000. In addition, the Company has made an allocation of $281,000 for the value of the acquired student roster. This intangible asset will be amortized over the next three years. The remaining $1,950,000 includes the purchase price and transaction costs and has been recorded as goodwill.

During the first quarter of Fiscal 2008, the Company acquired the assets of four Learning Ladder preschools, three of which have been rebranded under the Chesterbrook Academy brand. The fourth Learning Ladder school was closed during the first quarter of Fiscal 2008. These schools expand our existing market coverage in a geographic market in which the Company currently operates. The aggregate of the purchase price for the assets acquired and transaction costs totaled approximately $2,133,000. The purchase price has been allocated based on the estimated fair value of the assets acquired at the date of the acquisition and included, among other items, $112,000 of property and equipment and net current liabilities of $319,000. In addition, the Company has made an allocation of $252,000 for the value of the acquired student roster. This intangible asset will be amortized over the next four years. The remaining $2,088,000 includes the purchase price and transaction costs and has been recorded as goodwill.

SEC Regulation S-X does not require that pro-forma financial information be furnished as a result of either of the above acquisitions, nor are they deemed material for further disclosure as required by SFAS No. 141 “Business Combinations”.

Note 5. Income Taxes

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on July 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the adoption of FIN 48, the Company recognized a $44,000 reduction of its current deferred tax asset, which was accounted for as an increase to accumulated deficit on July 1, 2007.

The Company’s income tax jurisdictions are in the United States. The Company remains subject to federal tax examination for Fiscal 2004 and subsequent years. For most U.S. states, with few exceptions, the Company remains subject to examination for Fiscal 2003 and subsequent years.

Note 6. Credit Agreement

At the beginning of Fiscal 2007, the Company had a credit agreement with Harris Trust in the amount of $25,000,000, which provided for a $15,000,000 Term Loan, a $10,000,000 Revolving Credit Commitment and up to $3,500,000 in letters of credit as a sub-limit of the Revolving Credit Commitment (“Prior Credit Agreement”). The Prior Credit Agreement was scheduled to terminate on February 20, 2009. On October 30, 2006, the Company extinguished the loan facility under its Prior Credit Agreement.

On October 30, 2006, the Company entered into an Amended and Restated Credit Agreement (as amended, the “2006 Credit Agreement”) with BMO Capital Markets, an affiliate of Harris Trust. The 2006 Credit Agreement provides for a $50,000,000 Revolving Credit Commitment. The 2006 Credit Agreement replaced and extinguished all outstanding balances under the Prior Credit Agreement. Under terms of the 2006 Credit Agreement, proceeds may be used to fund permitted acquisitions, additional capital expenditures and for ongoing business operations. The 2006 Credit Agreement has a five year term that ends on October 30, 2011.

The 2006 Credit Agreement contains customary covenants and provisions that restrict the Company’s ability to make acquisitions, change its business, declare dividends, grant liens, incur additional indebtedness, make capital expenditures and use proceeds from disposition of assets or equity related transactions. In addition, the 2006 Credit Agreement provides that the Company must meet or exceed amounts for defined EBITDA and fixed charges and must not exceed certain leverage ratios. The Company’s loan covenants under its 2006 Credit Agreement limit the amount of senior debt borrowings.

At December 29, 2007, there was $2,350,000 outstanding on the 2006 Credit Agreement. At December 29, 2007 there was $1,737,000 outstanding for letters of credit. The total unused amount available under the 2006 Agreement, after allowance for the letters of credit, was $45,913,000 at December 29, 2007.

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Note 7. 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 $71,000 and $2,819,000 at December 29, 2007 and June 30, 2007, respectively. The Company’s funds were invested in money market accounts, which periodically exceed federally insured limits. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents as such deposits are maintained in high quality financial institutions.

Note 8. Advertising Costs

Advertising costs are expensed as incurred. Advertising expense was $248,000 and $210,000 for the thirteen week periods ended December 29, 2007 and December 30, 2006, respectively. Advertising expense was $456,000 and $397,000 for the twenty-six week periods ended December 29, 2007 and December 30, 2006, respectively.

Note 9. Lease Reserves

In accordance with Statement of Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), the Company records estimated costs for school closures when they are incurred rather than at the date of a commitment to an exit or disposal plan. As of June 30, 2007, the reserves for closed schools were 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 between 2009 and 2017. At December 29, 2007 and June 30, 2007, the lease reserve for closed schools was $1,812,000 and $2,193,000, respectively. The following table summarizes activity recorded to the lease reserves (dollars in thousands):

Lease reserve at June 30, 2007	$	2,193
Payments against reserve		(762	)
Lease reserve from acquisition		298
Adjustments to reserve		83
Lease reserve at December 29, 2007	$	1,812

Adjustments to the lease reserve during Fiscal 2008 included an increase to the lease reserve with a corresponding charge to goodwill for $298,000 due to the addition of one school that was acquired and closed during the twenty-six week period ended December 29, 2007.

Note 10. Discontinued Operations

In accordance with SFAS 144, 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.

10

The operating results for discontinued operations in the unaudited statements of income for all periods presented, net of tax are as follows (dollars in thousands):

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	December 29, 2007			December 30, 2006			December 29, 2007			December 30, 2006
Revenues	$	2		$	1,230		$	44		$	2,442
Cost of services		(13	)		(1,064	)		(48	)		(2,231	)
Closed school lease reserve		(64	)		(2,039	)		(83	)		(2,039	)
Rent and other		(35	)		(419	)		(123	)		(884	)
Loss from discontinued operations before income tax benefit		(110	)		(2,292	)		(210	)		(2,712	)
Income tax benefit		43			894			82			1,058
Loss from discontinued operations	$	(67	)	$	(1,398	)	$	(128	)	$	(1,654	)

Note 11. Goodwill and Intangible Assets, Net

Intangible assets include non-compete agreements, a franchise agreement, and identifiable intangibles from acquisitions. Changes in the carrying amounts of goodwill and intangibles were primarily due to the acquisition of the four Learning Ladder schools and two Teddy Bear Tree House schools as well as purchase accounting adjustments related to acquisitions which occurred in prior periods. At December 29, 2007 and June 30, 2007, the Company’s goodwill and intangible assets were as follows (dollars in thousands):

	Weighted Average Amortization Period (in months)	December 29, 2007						June 30, 2007
		Gross Carrying Amount		Accumulated Amortization		Net Balance		Gross Carrying Amount		Accumulated Amortization		Net Balance
Goodwill	n.a.	$	51,580	$	—	$	51,580	$	47,499	$	—	$	47,499
Amortized intangible assets:
Franchise agreement	84		410		92		318		410		62		348
Non-compete agreements	43		—		—		—		405		394		11
Trade Names	240		2,110		139		1,971		2,110		81		2,029
Student Rosters	50		2,638		599		2,039		2,105		311		1,794
Total Intangible Asets		$	5,158	$	830	$	4,328	$	5,030	$	848	$	4,182

Amortization expense related to intangible assets was $199,000 and $53,000 for the thirteen weeks ended December 29, 2007 and December 30, 2006, respectively. Amortization expense related to intangible assets was $387,000 and $108,000 for the twenty-six weeks ended December 29, 2007 and December 30, 2006, respectively.

Note 12. Accounts Payable and Other Current Liabilities

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

	December 29, 2007		June 30, 2007
Accounts payable	$	7,103	$	5,721
Accrued payroll and related items		4,619		6,377
Accrued income and property taxes		3,013		3,572
Accrued rent		818		563
Other accrued expenses		2,867		2,422
		18,420		18,655

Note 13. Stock-Based Compensation

On October 6, 2004, the stockholders approved the 2004 Omnibus Incentive Equity Compensation Plan (the “Plan”). Under the Plan, common stock may be issued in connection with stock grants, incentive stock options and non-qualified stock options for key employees and outside directors. The purpose of the Plan is to attract and retain quality employees.

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All grants to date under the Plan have been non-qualified stock options which vest over three years (except that 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 of Directors vest immediately). Beginning July 1, 2007, stock-based compensation awarded to the Company’s non-employee Board of Directors was granted in the form of restricted stock awards that vest on the earlier of the first anniversary of the date of the grant or the day prior to the next annual meeting of the Company’s stockholders at which directors are elected. The first restricted stock awards granted to the Company’s non-employee Board of Directors were granted during the second quarter of Fiscal 2008. As of December 29, 2007, there were approximately 998,000 stock options and approximately 17,000 restricted stock awards issued and outstanding under the Plan.

In February, 2000, the Company established the 2000 Stock Option Plan for Consultants (the “Consultant Plan”). This 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 December 29, 2007, approximately 41,000 non-qualified stock options have been issued and are outstanding under the Consultant Plan.

As of December 29, 2007, the total number of shares of common stock available for issuance under the Plan and the Consultant Plan was 852,000.

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

	Thirteen and Twenty-Six Weeks Ended
	December 29, 2007		December 30, 2006
Expected dividend yield	0.0	%	0.0	%
Expected stock price volatility	21.7	%	32.6	%
Risk-free interest rate	4.2	%	4.6	%
Weighted average expected life of options	6 years		5 years
Expected rate of forfeiture	7.3	%	6.4	%

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 the statement of operations for the thirteen weeks ended December 29, 2007 and December 30, 2006 was approximately $184,000 and $192,000, respectively. Stock-based compensation expense included in the statement of operations for the twenty-six weeks ended December 29, 2007 and December 30, 2006 was approximately $354,000 and $290,000, respectively. As of December 29, 2007 and December 30, 2006, there was approximately $1,158,000 and $1,055,000 of total unrecognized stock-based compensation cost related to options granted under our plans that will be recognized over a weighted average period of 1.4 years. The Company expects to continue its historical practice of issuing stock options and board grants, which will result in additional stock-based compensation in the future, although amounts may vary.

A summary of option activity under the Company’s employee and consultant stock option plans as of June 30, 2007 and changes during the twenty-six weeks ended December 29, 2007 is presented below:

	Shares Available for Grant		Options Outstanding						Options Exercisable
			Shares		Weighted Average Grant & Exercise Price		Aggregate Intrinsic Value		Shares	Weighted Average Grant & Exercise Price		Aggregate Intrinsic Value
Balance at June 30, 2007	1,016,202		860,482		$	7.71	$	5,913,000	608,299	$	6.91	$	4,666,000
Granted at market	(164,000	)	164,000			14.73		—	—		—		—
Exercised	—		(26,200	)		7.72		192,600	—		—		—
Balance at December 29, 2007	852,202		998,282		$	8.86	$	5,242,000	680,426	$	7.20	$	4,620,000

The weighted average fair value of stock options granted during Fiscal 2008 and during Fiscal 2007 was $4.44 and $3.84, respectively. The total fair value of options vested during the twenty-six weeks ended December 29, 2007 and December 30, 2006 was $354,000 and $445,000, respectively. The weighted average remaining contractual term for options outstanding and options exercisable as of December 29, 2007 was 7.3 and 6.4 years, respectively.

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Note 14. 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 the employee’s salary. The Company’s matching contributions under the plan were $84,000 for the thirteen week periods ended December 29, 2007 and $73,000 and December 30, 2006. The Company’s matching contributions under the plan were $183,000 for the twenty-six week period ended December 29, 2007 and $154,000 for the twenty-six week period ended December 30, 2006.

During Fiscal 2007, the Company initiated 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. Company contributions are made at the discretion of the Compensation Committee of the Company’s Board of Directors. At December 29, 2007, the Company has included $783,000 in “Other long term liabilities” to reflect its liability under the plan. General and administrative expense related to the deferred compensation plan was $103,000 and $101,000 for the thirteen weeks ended December 29, 2007 and December 30, 2006 respectively. General and administrative expense related to the deferred compensation plan was $175,000 and $101,000 for the twenty-six weeks ended December 29, 2007 and December 30, 2006 respectively. The Company has established a rabbi trust fund to finance the obligations under the plan with corporate owned whole life insurance contracts on certain individuals who are participants in the plan. The Company has included $773,000 in “Deposits and other assets” as of December 29, 2007, which represents the cash surrender value of these policies.

Note 15. 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 position. 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.

The Company carries fire and other casualty insurance on its schools and 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 abuse coverage have insurance sublimits per claim in the general liability coverage.

Note 16. Segment Information

The Company primarily manages the same type of business in its private pay schools. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), the private pay schools are disclosed as a segment. For the twenty-six weeks ended December 29, 2007, the Company also performed back office services for one charter school; during the twenty-six weeks ended December 30, 2006, the Company performed back office services for three charter schools. In accordance with SFAS 131, the Company discloses the charter school as a separate segment in the “other” category.

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The table below presents information about the financial results and condition of the Company’s segments for the thirteen and twenty-six weeks ended December 29, 2007 and December 30, 2006 (dollars in thousands):

	Thirteen Weeks ended December 29, 2007								Thirteen Weeks ended December 30, 2006
	Private Schools		Other		Corporate		Total		Private Schools		Other		Corporate		Total
Revenues	$	51,175	$	32	$	—	$	51,207	$	45,078	$	478	$	—	$	45,556
Gross profit		7,832		33		—		7,865		7,001		229		—		7,230
Depreciation and amortization:
Continuing operations	$	1,465	$	—	$	339	$	1,804	$	1,255	$	77	$	343	$	1,675
Disccontinued operations		2		—		—		2		—		—		—		—
Total depreciation and amortization	$	1,467	$	—	$	339	$	1,806	$	1,255	$	77	$	343	$	1,675
	Twenty-Six Weeks ended December 29, 2007								Twenty-Six Weeks ended December 30, 2006
	Private Schools		Other		Corporate		Total		Private Schools		Other		Corporate		Total
Revenues	$	95,711	$	128	$	—	$	95,839	$	83,655	$	1,008	$	—	$	84,663
Gross profit		11,872		107		—		11,979		9,967		456		—		10,423
Depreciation and amortization:
Continuing operations	$	2,828	$	—	$	597	$	3,425	$	2,403	$	193	$	651	$	3,247
Disccontinued operations		5		—		—		5		22		—		—		22
Total depreciation and amortization	$	2,833	$	—	$	597	$	3,430	$	2,425	$	193	$	651	$	3,269
Goodwill	$	51,580		—		—	$	51,580	$	47,480		—		—	$	47,480
Segment Assets
Continuing operations	$	90,346	$	—	$	3,265	$	93,611	$	83,327	$	1,879	$	3,078	$	88,284
Disccontinued operations		33		3		—		36		1,850		—		—		1,850
Total Assets	$	90,379	$	3	$	3,265	$	93,647	$	85,177	$	1,879	$	3,078	$	90,134

Note 17. Subsequent Event

During the third quarter of Fiscal 2008, the Company announced it had signed an agreement to acquire all the outstanding shares of Enchanted Care Learning Centers, Inc. (“Enchanted Care”), a leading private school for children ages infant through preschool in the Columbus, Ohio market. This transaction is expected to close during the third quarter of Fiscal 2008. The purchase price for the assets to be acquired is expected to be $15,000,000 plus transaction costs. Enchanted Care generated revenue of approximately $12,000,000 for the calendar year ending December 31, 2007. Enchanted Care will add nine preschools and six before- and after-school and camp facilities to the Company’s existing portfolio of schools and programs.

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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 filed with the SEC for the year ended June 30, 2007.

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 pre-elementary and elementary 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 the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007, 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:

• 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;

• competitive conditions in the preschool and elementary 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;

• the Company’s ability to find affordable real estate and renew existing locations on terms acceptable to the Company and the impact this may have on enrollment;

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

• government regulations affecting school operations, including student/teacher ratios, accreditation, and the acceptance of course credits from our special purpose high schools;

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

• changing economic conditions;

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

• approval of licensing authorities relating to potential acquisitions;

• environmental or health related events that could affect schools in areas impacted by such events;

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

• our ability to maintain effective controls over financial reporting; and

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

15

Negative developments in these areas could have a material adverse effect on the Company’s business, financial condition and results of operations.

Beginning with the Company’s Annual Report on Form 10-K for the year ending June 28, 2008, Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to include a report of management’s assessment of the effectiveness of its internal control over financial reporting as of the end of the fiscal year and an attestation report of the Company’s internal control over financial reporting from the Company’s independent auditors. Risk factors associated with these new requirements include:

• the Company’s ability to complete the work necessary to issue management’s attestation report in a timely manner, or to complete the extensive work that will be required for the Company to report that its internal control over financial reporting is effective;

• the ability of the Company’s independent auditors to complete the work required for them to issue an attestation report in a timely manner;

• the Company’s ability to ensure that no material weaknesses in internal control will emerge, or that any remediation efforts will be completed successfully;

• the Company’s ability to implement and integrate information systems throughout our schools in such a way that we have appropriate time to finish all the testing and documentation associated with the system; and

• substantial increase in professional fees associated with compliance requirements.

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.

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Results of Operations

At December 29, 2007, the Company operated 160 schools. Since June 30, 2007, the Company has opened four new preschools and acquired six preschools. One of the acquired preschools was subsequently closed within the same fiscal quarter. School counts for the twenty-six weeks ended December 29, 2007 and December 30, 2006 are as follows:

	Twenty-Six Weeks Ended
	December 29, 2007		December 30, 2006
Number of schools at the beginning of period	151		150
Acquisitions	6		6
Openings	4		2
Closings	(1	)	(1	)
Number of schools at the end of the period	160		157

The following table sets forth certain statement of operations data as a percentage of revenue for the thirteen and twenty-six weeks ended December 29, 2007 and December 30, 2006 (dollars in thousands):

	Thirteen Weeks Ended		Percent of Revenues		Thirteen Weeks Ended		Percent of Revenues		Change Amount Increase/ (Decrease)		Percent Increase (Decrease)
	December 29, 2007				December 30, 2006
Revenues	$	51,207	100.0	%	$	45,556	100.0	%	$	5,651	12.4	%
Personnel costs		24,778	48.4			21,620	47.5			3,158	14.6
School operating costs		6,435	12.6			5,785	12.7			650	11.2
Rent and other		12,129	23.7			10,921	24.0			1,208	11.1
Cost of services		43,342	84.6			38,326	84.1			5,016	13.1
Gross profit		7,865	15.4			7,230	15.9			635	8.8
General and administrative expenses		4,463	8.7			4,230	9.3			233	5.5
Operating income	$	3,402	6.6	%	$	3,000	6.6	%	$	402	13.4	%
	Twenty-Six Weeks Ended		Percent of Revenues		Twenty-Six Weeks Ended		Percent of Revenues		Change Amount Increase/ (Decrease)		Percent Increase (Decrease)
	December 29, 2007				December 30, 2006
Revenues	$	95,839	100.0	%	$	84,663	100.0	%	$	11,176	13.2	%
Personnel costs		46,635	48.7			40,920	48.3			5,715	14.0
School operating costs		13,195	13.8			12,240	14.5			955	7.8
Rent and other		24,030	25.1			21,080	24.9			2,950	14.0
Cost of services		83,860	87.5			74,240	87.7			9,620	13.0
Gross profit		11,979	12.5			10,423	12.3			1,556	14.9
General and administrative expenses		8,923	9.3			7,916	9.4			1,007	12.7
Operating income	$	3,056	3.2	%	$	2,507	3.0	%	$	549	21.9	%

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Revenue

Revenue for the thirteen weeks ended December 29, 2007 increased $5,651,000 or 12.4% to $51,207,000 from $45,556,000 for the thirteen weeks ended December 30, 2006. Revenue for the twenty-six weeks ended December 29, 2007 increased $11,176,000 or 13.2% to $95,839,000 from $84,663,000 for the twenty-six weeks ended December 30, 2006. The revenue increase for the thirteen and twenty-six weeks ended December 29, 2007, as compared to the same period in the prior year, is as follows (dollars in thousands):

	Thirteen Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	46,406	$	44,216	$	2,190		5.0	%
Schools opened or acquired		4,768		826		3,942		477.2
Closed schools		—		36		(36	)	(100.0	)
Other, non-school		33		478		(445	)	(93.1	)
	$	51,207	$	45,556	$	5,651		12.4	%
	Twenty-Six Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	86,126	$	81,990	$	4,136		5.0	%
Schools opened or acquired		9,584		1,593		7,991		501.6
Closed schools		—		72		(72	)	(100.0	)
Other, non-school		129		1,008		(879	)	(87.2	)
	$	95,839	$	84,663	$	11,176		13.2	%

Revenue for comparable schools (those which operated the entire period) increased $2,190,000 or 5.0% during the thirteen weeks ended December 29, 2007, as compared to the same period in the prior year. Revenue for comparable schools (those which operated the entire period) increased $4,136,000 or 5.0% during the twenty-six weeks ended December 29, 2007, as compared to the same period in the prior year.

Revenue for schools opened or acquired subsequent to the fourth quarter of Fiscal 2007 was $3,942,000 higher during the thirteen week period ended December 29, 2007, as compared to revenue for schools opened or acquired during the thirteen week period ended December 30, 2006. Revenue for schools opened or acquired subsequent to the fourth quarter of Fiscal 2007 was $7,991,000 higher during the twenty-six week period ended December 29, 2007, as compared to revenue for schools opened or acquired during the twenty-six week period ended December 30, 2006. The thirteen and twenty-six week period ended December 29, 2007 included revenues from five preschools that were acquired during Fiscal 2008, four new preschools that were opened during Fiscal 2008, six preschools that were acquired during the second quarter of Fiscal 2007, and three new preschools that were opened during Fiscal 2007.

Other revenues, primarily related to a reduction in contracts and lease renewals in our charter school management business, decreased by $445,000 during the thirteen weeks ended December 29, 2007 as compared to the respective period in the prior year. Other revenues, primarily related to a reduction in contracts and lease renewals in our charter school management business, decreased by $879,000 during the twenty-six weeks ended December 29, 2007 as compared to the respective period in the prior year.

Revenue trends

Comparable private pay schools net revenue increased $2,190,000 or 5.0% to $46,406,000 for the thirteen weeks ended December 29, 2007 from $44,216,000 for the thirteen weeks ended December 30, 2006. Comparable private pay schools net revenue increased $4,136,000 or 5.0% to $86,126,000 for the twenty-six weeks ended December 29, 2007 from $81,990,000 for the twenty-six weeks ended December 30, 2006.

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Revenue increases were due primarily to average tuition increases of approximately 3.8% along with an increase in average enrollments at comparable schools as compared to the same periods in the prior year.

In total, revenue from comparable and newly opened or acquired schools has increased $6,132,000 or 7.3% when comparing the thirteen week period ended December 29, 2007 to the same period ended December 30, 2006 and $12,127,000 or 6.9% when comparing the twenty-six week period ended December 29, 2007 to the same period ended December 30, 2006.

Personnel costs

Personnel costs primarily include wages, payroll taxes, employee benefits and vacation costs. This category of costs is partially variable and primarily affected by changes in enrollment, incentive compensation, health care benefit rate increases and staffing ratio requirements. 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, a base level of personnel and associated costs are required in the early years of a school’s life which are expected to be leveraged as enrollments ramp up.

	Thirteen Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	22,367	$	21,226	$	1,141		5.4	%
Schools opened or acquired		2,411		371		2,040		549.9
Closed schools		—		23		(23	)	(100.0	)
	$	24,778	$	21,620	$	3,158		14.6	%
	Twenty-Six Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	41,645	$	39,992	$	1,653		4.1	%
Schools opened or acquired		4,990		881		4,109		466.4
Closed schools		—		47		(47	)	(100.0	)
	$	46,635	$	40,920	$	5,715		14.0	%

For the thirteen weeks ended December 29, 2007, personnel cost increased $3,158,000 to $24,778,000 from $21,620,000 for the thirteen weeks ended December 30, 2006. The 14.6% increase was primarily driven by wages and salaries of $2,040,000 from eighteen schools opened or acquired during Fiscal 2007 and the first two quarters of Fiscal 2008. The remaining $1,118,000 increase was primarily driven by increases in total wages, payroll tax, and vacation pay for comparable schools operated by the Company during the thirteen weeks ended December 29, 2007, as compared to the same period ended December 30, 2006.

Personnel costs increased to 48.4% of revenue for the thirteen week period ended December 29, 2007, as compared to 47.5% for the same period ended December 30, 2006.

For the twenty-six weeks ended December 29, 2007, personnel cost increased $5,715,000 to $46,635,000 from $40,920,000 for the twenty-six weeks ended December 30, 2006. The 14.0% increase was primarily driven by wages and salaries of $4,109,000 from eighteen schools opened or acquired during Fiscal 2007 and the first two quarters of Fiscal 2008. The remaining $1,606,000 increase was primarily driven by increases in total wages, payroll tax, and vacation pay for comparable schools operated by the Company during the twenty-six weeks ended December 29, 2007, as compared to the same period ended December 30, 2006.

Personnel costs increased to 48.7% of revenue for the twenty-six week period ended December 29, 2007, as compared to 48.3% for the same period ended December 30, 2006.

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School operating costs

School operating costs primarily include maintenance, janitorial, food, supplies, utilities, transportation, school level marketing spending and ancillary programs. The category is partially variable with increases in revenue primarily when those revenue increases are driven by additional enrollment. In the case of new schools, a base level of costs are incurred in the early years of a school’s life which are expected to be leveraged in later years as enrollments ramp up.

	Thirteen Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	5,900	$	5,676	$	224		3.9	%
Schools opened or acquired		531		85		446		524.7
Other, non school		4		24		(20	)	(83.3	)
	$	6,435	$	5,785	$	650		11.2	%
	Twenty-Six Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	12,075	$	11,990	$	85		0.7	%
Schools opened or acquired		1,100		176		924		525.0
Closed schools		—		10		(10	)	(100.0	)
Other, non school		20		64		(44	)	(68.8	)
	$	13,195	$	12,240	$	955		7.8	%

For the thirteen weeks ended December 29, 2007, school operating costs increased $650,000 to $6,435,000 from $5,785,000 for the thirteen weeks ended December 30, 2006. The 11.2% increase was primarily driven by an increase in school operating costs of $446,000 from eighteen schools opened or acquired during Fiscal 2007 and the first two quarters of Fiscal 2008. Operating costs from comparable schools operated by the Company during both the entire thirteen week period ended December 29, 2007 and the entire thirteen week period ended December 30, 2006 increased $224,000 to $5,900,000 for the thirteen weeks ended December 29, 2007 from $5,676,000 for the thirteen weeks ended December 30, 2006. This 3.9% increase was primarily the result of increased maintenance costs of $109,000 and increased utility costs of $85,000, and a net increase in other school operating costs including food, transportation, and ancillary program costs of $30,000.

For the thirteen weeks ended December 29, 2007, school operating costs as a percentage of revenue decreased to 12.6% from 12.7% as compared to the thirteen weeks ended December 30, 2006. This reduction was primarily the result of comparable school revenue growth and continued focus on improving school operations and cost controls.

For the twenty-six weeks ended December 29, 2007, school operating costs increased $955,000 to $13,195,000 from $12,240,000 for the twenty-six weeks ended December 30, 2006. The 7.8% increase was primarily driven by school operating costs of $924,000 from eighteen schools opened or acquired during Fiscal 2007 and the first two quarters of Fiscal 2008. Operating costs from comparable schools operated by the Company during both the entire twenty-six week period ended December 29, 2007 and the entire twenty-six week period ended December 30, 2006 increased $85,000 to $12,075,000 for the twenty-six weeks ended December 29, 2007 from $11,990,000 for the twenty-six weeks ended December 30, 2006. This 0.7% increase was primarily the result increased utility costs of $107,000 and increased food costs of $138,000 offset by a reduction of bad debt expense of $202,000 and an increase in other school operating costs including food, transportation, and ancillary program costs of $44,000.

For the twenty-six weeks ended December 29, 2007, school operating costs as a percentage of revenue decreased to 13.8% from 14.5% as compared to the twenty-six weeks ended December 30, 2006. This reduction was primarily the result of comparable school revenue growth and continued focus on improving school operations and cost controls.

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Rent and other

Rent and other costs primarily include property rent and property taxes, claims retention for workers’ compensation and property damage, depreciation and amortization, regional marketing, vehicle and equipment rent, and pre-opening costs. This category of costs is relatively fixed in nature with increases related to contractual occupancy obligations, changes in marketing initiatives or additional school openings.

	Thirteen Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	10,664	$	10,399	$	265		2.5	%
Schools opened or acquired		1,465		293		1,172		400.0
Closed schools		—		4		(4	)	(100.0	)
Other, non school		—		225		(225	)	(100.0	)
	$	12,129	$	10,921	$	1,208		11.1	%
	Twenty-Six Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	20,919	$	20,068	$	851		4.2	%
Schools opened or acquired		3,111		522		2,589		496.0
Closed schools		—		2		(2	)	(100.0	)
Other, non school		—		488		(488	)	(100.0	)
	$	24,030	$	21,080	$	2,950		14.0	%

For the thirteen weeks ended December 29, 2007, rent and other costs increased $1,208,000 to $12,129,000 from $10,921,000 for the thirteen weeks ended December 30, 2006. The 11.1% increase was primarily driven by school rent and other costs of $1,172,000 from eighteen schools opened or acquired during Fiscal 2007 and the first two quarters of Fiscal 2008.

Rent and other costs from comparable schools operated by the Company during the entire thirteen week period ended December 29, 2007 and the entire thirteen week period ended December 30, 2006 increased $265,000 to $10,664,000 for the thirteen weeks ended December 29, 2007 from $10,399,000 for the thirteen weeks ended December 30, 2006. This 2.5% increase was the result of increased occupancy costs of $215,000 and an increased estimate in claims retention for workers’ compensation and property damages of $143,000 partially offset by a decrease in other costs of $89,000. The increase in occupancy costs in comparable schools is mainly due to contractual rent increases driven by the Consumer Price Index (“CPI”), certain lease renewals or extensions and property tax increases.

For the thirteen weeks ended December 29, 2007, rent and other costs as a percentage of revenue decreased to 23.7%, from 24.0% as compared to the thirteen weeks ended December 30, 2006.

For the twenty-six weeks ended December 29, 2007, rent and other costs increased $2,950,000 to $24,030,000 from $21,080,000 for the twenty-six weeks ended December 30, 2006. The 14.0% increase was primarily driven by an increase in school rent and other costs of $2,589,000 from eighteen schools opened or acquired during Fiscal 2007 and the first two quarters of Fiscal 2008.

Rent and other costs from comparable schools operated by the Company during the entire twenty-six week period ended December 29, 2007 and the entire twenty-six week period ended December 30, 2006 increased $851,000 to $20,919,000 for the twenty-six weeks ended December 29, 2007 from $20,068,000 for the twenty-six weeks ended December 30, 2006. This 4.2% increase was the result of increased occupancy costs of $439,000 and an increased estimate in claims retention for workers’ compensation and property damages of $420,000 and a decrease in other costs of $8,000. The increase in occupancy costs in comparable schools is mainly due to contractual rent increases driven by the Consumer Price Index (“CPI”), certain lease renewals or extensions and property tax increases.

For the twenty-six weeks ended December 29, 2007, rent and other costs as a percentage of revenue increased to 25.1%, from 24.9% as compared to the thirteen weeks ended December 30, 2006.

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Gross profit

As a result of the factors described above, gross profit for the thirteen weeks ended December 29, 2007 increased $635,000 or 8.8% to $7,865,000 from $7,230,000 for the thirteen weeks ended December 30, 2006. Gross profit was 15.4% of revenue for the thirteen weeks ended December 29, 2007 and 15.9% of revenue for the thirteen weeks ended December 30, 2006. This reduction was primarily related to newly opened schools as they enter the normal new school enrollment ramp up period. There have been four newly opened schools during the first six months of Fiscal 2008.

Gross profit for the twenty-six weeks ended December 29, 2007 increased $1,556,000 or 14.9% to $11,979,000 from $10,423,000 for the twenty-six weeks ended December 30, 2006. Gross profit was 12.5% of revenue for the twenty-six weeks ended December 29, 2007 and 12.3% for the twenty-six weeks ended December 30, 2006.

The gross profit increase for the thirteen and twenty-six weeks ended December 29, 2007 as compared to the same period in the prior year is as follows (dollars in thousands):

	Thirteen Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	7,475	$	6,916	$	559		8.1	%
Schools opened or acquired		362		78		284		364.1
Closed schools		—		7		(7	)	(100.0	)
Other, non school		28		229		(201	)	(87.8	)
	$	7,865	$	7,230	$	635		8.8	%
	Twenty-Six Weeks Ended				Increase (Decrease)			Percent Increase (Decrease)
	December 29, 2007		December 30, 2006
Comparable schools	$	11,487	$	9,940	$	1,547		15.6	%
Schools opened or acquired		383		12		371		3,091.7
Closed schools		—		15		(15	)	(100.0	)
Other, non school		109		456		(347	)	(76.1	)
	$	11,979	$	10,423	$	1,556		14.9	%

General and administrative expenses

For the thirteen weeks ended December 29, 2007, general and administrative expenses increased $233,000 to $4,463,000 from $4,230,000 for the thirteen weeks ended December 30, 2006. General and administrative expenses decreased to 8.7% of revenue for the thirteen weeks ended December 29, 2007 from 9.3% for the thirteen weeks ended December 30, 2006.

The overall increase in general and administrative expenses for the thirteen weeks ending December 29, 2007 as compared to the same period during the prior fiscal year was driven by a number of factors including increased wage and personnel costs of $54,000, amortization expense from acquisitions of $90,000, and increased consulting and professional fees of $39,000 primarily attributable to the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and an overall $50,000 increase of other general and administrative expenses.

For the twenty-six weeks ended December 29, 2007, general and administrative expenses increased $1,007,000 to $8,923,000 from $7,916,000 for the twenty-six weeks ended December 30, 2006. General and administrative expenses decreased to 9.3% of revenue for the twenty-six weeks ended December 29, 2007 from 9.4% for the twenty-six weeks ended December 30, 2006.

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The overall increase in general and administrative expenses for the twenty-six weeks ending December 29, 2007, as compared to the same period during the prior fiscal year was driven by a number of factors including increased wage and personnel costs of $472,000, amortization expense from acquisitions of $221,000, and increased consulting and professional fees of $202,000 primarily attributable to the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the next round of the Company’s strategic plan. Other general and administrative expenses increased $112,000. These general and administrative expenses included increased recruiting costs, board fees and implementation costs associated with the Company’s migration to an outsourced payroll provider.

Corporate personnel costs for the twenty-six weeks ending December 29, 2007, as compared to the same period during the prior fiscal year increased approximately $472,000. Approximately $122,000 of this increase was due to higher performance-based incentive compensation (based on targets as determined by the Compensation Committee and approved by the Board of Directors during the fourth quarter of Fiscal 2007). Increased wages and benefit costs added $276,000 due to the addition of management personnel to direct expanded regions that were the result of the Company’s acquisition activity subsequent to the first quarter of Fiscal 2007. The addition of the deferred compensation plan that was implemented subsequent to the first quarter of Fiscal 2007 added $74,000.

Increases in amortization expense reflect the amortization of intangible assets acquired from the acquisition of the Discovery Isle, Learning Ladder, and Teddy Bear Tree House schools which were all acquired subsequent to the first quarter of Fiscal 2007.

Operating income

As a result of the factors mentioned above, operating income increased $402,000 to $3,402,000 for the thirteen weeks ended December 29, 2007 from $3,000,000 for the thirteen weeks ended December 30, 2006. Operating income increased $549,000 to $3,056,000 for the twenty-six weeks ended December 29, 2007 from $2,507,000 for the twenty-six weeks ended December 30, 2006.

Interest expense

Interest expense decreased $703,000 to $105,000 for the thirteen weeks ended December 29, 2007 from $808,000 for the thirteen weeks ended December 30, 2006. Interest expense decreased $978,000 to $152,000 for the twenty-six weeks ended December 29, 2007 from $1,130,000 for the twenty-six weeks ended December 30, 2006. This decrease was primarily the result of the recognition of $562,000 of unamortized financing fees when the Company’s borrowing facility with Harris Bank was retired and replaced with a new borrowing facility during the second quarter of Fiscal 2007 as well as a reduction in the Company’s average debt outstanding during Fiscal 2008 as compared to Fiscal 2007.

Other Income from Operations

Other income from operations for the thirteen weeks ended December 29, 2007 decreased $3,390,000 to $298,000 from $3,688,000 for the thirteen weeks ended December 30, 2006. Other income from operations for the twenty-six weeks ended December 29, 2007 decreased $3,509,000 to $315,000 from $3,824,000 for the twenty-six weeks ended December 30, 2006.

During the second quarter of Fiscal 2008 the Company received a payment of $300,000 for the settlement and release of a contract for which the Company no longer has performance obligations.

During the second quarter of Fiscal 2007, the Company received payment from Total Education Solutions (“TES”) in the amount of $3,510,000. This payment settled all outstanding receivables from TES. Upon receipt of this payment, TES was released from all obligations to the Company. Payment of this note resulted in the recognition of $3,300,000 of other income in continuing operations in the second quarter of Fiscal 2007.

During the second quarter of Fiscal 2007, the Company also received payments from Franklintowne Charter High School (“FTCHS”) in the amount of $1,028,000. The Company had a sublease agreement with FTCHS which included rental payments for tenant improvements that were funded by the Company. FTCHS purchased its school property that the Company had subleased to them from the Company’s landlord. The payment to the Company released FTCHS from its sublease obligations to the Company, and transferred ownership of leasehold improvements and other assets that the Company had funded on behalf of FTCHS. This resulted in the recognition of $310,000 of other income in continuing operations in the second quarter of Fiscal 2007.

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Income tax expense from continuing operations

Income tax expense for the thirteen weeks ended December 29, 2007 was $1,402,000 as compared to $2,293,000 for the thirteen weeks ended December 30, 2006. Income tax expense for the twenty-six weeks ended December 29, 2007 was $1,255,000 as compared to $2,028,000 for the twenty-six weeks ended December 30, 2006. The Company’s effective tax rate was 39.0% for the thirteen and twenty-six weeks ended December 29, 2007 and December 30, 2006.

Discontinued operations

At the beginning of Fiscal 2007, discontinued operations consisted of fifteen schools, eight of which the Company did not operate during Fiscal 2007 and seven of which the Company continued to operate until they were sold during the third and fourth quarters of Fiscal 2007. In addition to the remaining eight schools classified as discontinued operations during Fiscal 2007, as part of an acquisition during the first quarter of Fiscal 2008, one additional school was added to discontinued operations. This school was operated by the Company during part of the first quarter of Fiscal 2008 and closed during the period. Discontinued operations during the first twenty-six weeks of Fiscal 2008 consist of nine schools. The operating results for discontinued operations in the unaudited statements of income for all periods presented, net of tax are as follows (dollars in thousands):

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	December 29, 2007			December 30, 2006			December 29, 2007			December 30, 2006
Revenues	$	2		$	1,230		$	44		$	2,442
Cost of services		(13	)		(1,064	)		(48	)		(2,231	)
Closed school lease reserve		(64	)		(2,039	)		(83	)		(2,039	)
Rent and other		(35	)		(419	)		(123	)		(884	)
Loss from discontinued operations before income tax benefit		(110	)		(2,292	)		(210	)		(2,712	)
Income tax benefit		43			894			82			1,058
Loss from discontinued operations	$	(67	)	$	(1,398	)	$	(128	)	$	(1,654	)

Net income

As a result of the above factors, the Company’s net income was $2,126,000 for the thirteen weeks ended December 29, 2007 as compared to $2,189,000 for the thirteen weeks ended December 30, 2006. For the twenty-six weeks ended December 29, 2007, the Company’s net income was $1,836,000 as compared to net income of $1,519,000 for the twenty-six weeks ended December 30, 2006.

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Liquidity and Capital Resources

Cash Flow

The Company’s principal sources of liquidity are cash flow from operations and amounts available under its 2006 Credit Agreement (described below). Principal uses of liquidity are debt service, acquisitions, capital expenditures related to the renovation and maintenance of its existing schools and new school development, furniture, fixtures, technology and curriculum. The Company believes it has access to sufficient cash and borrowing capacity to meet its near term capital requirements.

Total cash and cash equivalents decreased by $2,696,000 to $1,118,000 at December 29, 2007 from $3,814,000 at June 30, 2007. Cash provided by operations increased cash flow by $4,457,000. Cash used in investing activities totaled $9,812,000 and included $4,447,000 related to the purchase of the Learning Ladder schools and the Teddy Bear Treehouse schools and an additional $5,365,000 used for capital expenditures. Cash provided by financing activities was $2,659,000 and included $2,350,000 of net proceeds from the revolving line of credit.

Revolving Credit Agreement

On October 30, 2006, the Company entered into an Amended and Restated Credit Agreement (as amended, the “2006 Credit Agreement”) with BMO Capital Markets, an affiliate of Harris Trust. The 2006 Credit Agreement provides for a $50,000,000 Revolving Credit Commitment. The 2006 Credit Agreement replaced and extinguished all outstanding balances under the Company’s prior Credit Agreement. Under terms of the 2006 Credit Agreement, proceeds may be used to fund permitted acquisitions and additional capital expenditures and for ongoing business operations. The borrowing rates on the 2006 Credit Agreement are provided by a leverage-based matrix associated with LIBOR indexed borrowings. The 2006 Credit Agreement has a five-year term that ends on October 30, 2011. As of December 29, 2007, outstanding borrowings totaled $2,350,000, along with $1,737,000 of letters of credit.

The 2006 Credit Agreement contains customary covenants and provisions that restrict the Company’s ability to make acquisitions, change its business, declare dividends, grant liens, incur additional indebtedness, make capital expenditures and use proceeds from disposition of assets or equity related transactions. In addition, the 2006 Credit Agreement provides that the Company must meet or exceed amounts for defined EBITDA and fixed charges and must not exceed leverage ratios. The Company’s loan covenants under its 2006 Credit Agreement limit the amount of senior debt borrowings.

Long-Term Obligations and Commitments

The Company has significant commitments under operating lease agreements and other contractual obligations. 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. The Company’s contractual obligations as of December 29, 2007 are as follows (dollars in thousands):

	Total		Twenty-Six Weeks Ended June 29, 2008		Fiscal Year
					2009		2010		2011		2012		Thereafter
Long term debt obligations	$	3,355	$	131	$	262	$	262	$	262	$	2,438	$	—
Letters of credit		1,737		1,737		—		—		—		—		—
Operating leases		243,679		16,658		31,638		30,036		27,499		24,158		113,690
Total	$	248,771	$	18,526	$	31,900	$	30,298	$	27,761	$	26,596	$	113,690

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

The operating lease commitments reflected above do not reflect sublease amounts due to the Company of $9,876,000. 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 successful or unsuccessful in subleasing additional closed schools or extending existing sublease agreements. Some of the closed school lease commitments extend beyond the term of the current subleases on those properties.

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Leases included in discontinued operations total nine leases, eight of which are subleased and one of which remain vacant. The obligations of the leases that are subject to a sublease are substantially covered by the subtenant. If such parties under the sublease agreements default, the Company has the obligation to pay rent under the terms of these leases. In addition to the lease obligations noted above, the Company also has made guarantees for ten leases that were assigned to a third party during or before Fiscal 2000 and four properties during Fiscal 2007 (the “Guaranteed Properties”). In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), the Company has assessed its exposure regarding the assignment of the Guaranteed Properties and has determined that the fair value of this exposure is diminimus, 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 at December 29, 2007 is $1,082,000.

Capital Expenditures

Capital expenditures for new school development include school equipment, furniture and fixtures and curricula purchased by the Company for the operations of the schools. Funding of capital expenditures for these schools is expected to be provided by cash from operations or funds available under the Company’s 2006 Credit Agreement. Renovations and equipment purchases are expenditures incurred for existing schools in order to maintain the operations and, where necessary, upgrade the school facility.

During the first twenty-six weeks of Fiscal 2008, the Company placed four new schools in operation that were financed by a developer and leased by the Company. During the first quarter of Fiscal 2008, the Company also acquired operations of four existing schools, one of which was closed during the quarter. During the second quarter of Fiscal 2008, the Company acquired operations of two existing schools. Increased capital expenditures are in support of the Company’s growth strategy.

The Company’s current senior bank credit facility has annual limitations on the amount of capital expenditures, as defined. Capital expenditures for the twenty-six weeks ended December 29, 2007 and December 30, 2006, respectively, are as follows (dollars in thousands):

	Twenty-Six Weeks Ended
	December 29, 2007	December 30, 2006
New school development	980	396
Renovations and equipment purchases	3,833	4,124
Corporate and information systems	552	620
Total capital expenditures	5,365	5,140

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.

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 significant 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 2007. The following accounting policies are considered critical to the preparation of the Company’s consolidated financial statements due to the estimation processes and business judgment involved in their application.

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Revenue Recognition

The recognition of net revenues meets the following criteria: the existence of an arrangement through a registration, an enrollment agreement or a contract, the rendering of educational services over time, a specific tuition rate and/or fee and probable collection. Net revenues include tuition, fees and other net revenues, reduced by discounts. Fees are received for registration, other educational services and charter school management fees. Ancillary income is primarily comprised of supplemental fees from certain after school programs, summer programs, camps and field trips. Tuition revenues, net of discounts and other revenues, are recognized as services are performed. Tuition payments received in advance of the time period for which service is to be performed are recorded as deferred revenue. Registration fees are recognized over the applicable school period. Charter school management fees are recognized based on a contractual relationship with the charter school and do not include any tuition revenue received by the charter school. Certain fees may be received in advance of services being rendered, in which case the fee revenue is deferred and recognized over the appropriate period of service.

Accounts Receivable

The Company’s accounts receivable are comprised primarily of tuition due from parents and governmental agencies. Accounts receivable are presented at estimated net realizable value. The Company uses estimates in determining the collectibility of its accounts receivable and must rely on its evaluation of historical trends, governmental funding processes, specific customer issues and current economic trends to arrive at appropriate reserves. Material differences may result in the amount and timing of bad debt expense if actual experience differs significantly from management estimates.

The Company provides education services to the parents and guardians of the children attending its schools. In certain circumstances, the Company grants credit for a limited period of time. Exposure to losses on receivables is principally dependent on each person’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for estimated losses incurred but not realized as of the balance sheet date. The Company’s schools are located in 13 states and the District of Columbia and, as a result, the Company is not dependent on economic conditions in any one geographic area or market.

Long-lived and Intangible Assets

In accordance with Statement of Accounting Standard (“SFAS”) SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset’s value is impaired if management’s estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges.

Goodwill

The Company estimates fair values for each reporting unit using discounted cash flow projections in evaluating and measuring a potential impairment charge on an annual basis in the fourth quarter of each fiscal year or when changes in circumstances warrant. The Company engages an independent, third party consultant to review its calculations required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and, if necessary, the level two analysis in order to determine the amount of goodwill impaired. Any impairment of goodwill resulting from the required testing by SFAS 142 is recorded as a component of income from operations.

For Fiscal 2007 the Company performed its annual impairment test as required by SFAS 142. The level one impairment test for Fiscal 2007 indicated that no impairment existed for the Company’s reporting units. As such, the Company did not record goodwill impairment for Fiscal 2007; however, there can be no assurance that such a charge will not be recorded in future periods.

Income Taxes

The Company accounts for income taxes using the asset and liability method, in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences

27

between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A valuation allowance is recorded based on the uncertainty regarding the ultimate realizability of deferred tax assets.

The Company files a U.S. federal income tax return and various state income tax returns, which are subject to examination by tax authorities. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. The Company’s estimated tax liability is subject to change as examinations of specific tax years may occur in the respective jurisdictions, which may include possible adjustments related to the nature and timing of deductions and the local attribution of income.

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 also had cash flow exposure on certain notes payable and other subordinate debt agreements aggregating $0 and $112,000 at December 29, 2007 and December 30, 2006, respectively. Further, the Company has cash flow exposure as a result of its 2006 Credit Agreement. The 2006 Agreement and the Prior 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 $1,000 and $32,000 for the twenty-six weeks ended December 29, 2007 and December 30, 2006, respectively.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management has evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of December 29, 2007. 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 Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on that evaluation, the Company’s Chief Executive Officer and 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.

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.

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Part II

Other Information

Item 4. Submission of Matters to Vote of Security Holders

The Company held its Annual Meeting of Stockholders on November 8, 2007. Of the combined total of 10,366,810 votes eligible to be cast at the meeting, holders entitled to cast a combined total of 6,077,610 votes at such meeting were present, in person, or by proxy, for purposes of a quorum. At the meeting, stockholders elected to the Board of Directors George H. Bernstein and Michael J. Rosenthal as Class II Directors, both with terms expiring at the 2010 Annual Meeting of Stockholders. Votes cast for and votes withheld in the election were as follows:

Director	Votes For	Votes Abstained
George H. Bernstein	6,072,089	5,521
Michael J. Rosenthal	6,072,195	5,415

There were no broker non-votes.

Additional Directors, whose term of office as Directors continued after the meeting are as follows:

Term Expiring at the 2010 Annual Meeting of Shareholders:

Richard J. Pinola

Peter H. Havens

Ralph Smith

David L. Warnock

Term Expiring at the 2009 Annual Meeting of Shareholders:

Therese Kreig Crane, Ed.D.

Steven B. Fink

David Beale

The stockholders also ratified the appointment of Grant Thornton, LLP as independent auditors for the 2008 fiscal year. Voting for this resolution were 6,071,336 votes, voting against the resolution were 4,226 votes, abstaining were 2,046 votes and there were not broker non-votes.

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.)

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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 7, 2008	By:	/s/ Thomas Frank
		Thomas Frank
		Chief Financial Officer
		(duly authorized officer and principal financial officer)

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