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| NLCI > SEC Filings for NLCI > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
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 28, 2008.
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 28, 2008, 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;
• the Company's inability to defend successfully against or counter negative publicity associated with claims involving alleged incidents at its schools;
• a small number of shareholders control a majority of the outstanding common stock of the Company;
• the effect of anti-takeover provisions in the Company's certificate of incorporation, bylaws and Delaware law;
• the impact on our business and management stability related to the proposal by Knowledge Learning Corporation to acquire 100% of the Company;
• the impact on management time and resources directed towards the Company's strategic growth plans related to the proposal by Knowledge Learning Corporation;
• the impact on certain potential sellers of schools to the Company and their possible reluctance to do so with the uncertainty of this potential transaction related to the Knowledge Learning Corporation proposal;
• changing economic conditions;
• the Company's ability to hire and retain qualified executive directors, principals, teachers and teachers' aides;
• 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;
• competitive conditions in the pre-school 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;
• 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;
• the Company's ability to maintain effective controls over financial reporting;
Negative developments in these areas could have a material adverse effect on the Company's valuation, business, financial condition and results of operations.
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.
Results of Operations
Results from operations are measured each fiscal period by reporting and analyzing results at the Company level. Additionally, the Company seeks to measure and balance revenue and profit growth in four growth initiative categories; 1) Comparable Schools, 2) Core Schools, 3) New Schools and 4) Acquired Schools or businesses. Management seeks to balance growth in order to improve revenue and gross profit while adding to overall system capacity and total company performance. These four categories are measured individually and through different metrics to help management better understand where growth is derived and facilitate the balance between growth, investment and profitability the Company seeks to achieve. It is important to note that the set of schools in each category may differ from reporting period to reporting period as schools may be opened, acquired, closed or become comparable at different times during the fiscal year. The four categories are more fully described below.
1) Comparable Schools - those identical schools open for each of the entire periods being reported, sometimes referred to as "same schools." By definition, Comparable Schools are always the same number of schools in each period. Comparing results of the performance of these schools provides an "apples-to-apples" comparison of results between periods. Results are measured by revenue, operating expense and gross profit performance for this identical group of schools for the current period versus the prior period. Management seeks to grow revenue and increase gross margin in this category through annual tuition rate increases, enrollment growth, and expense management. Information related to Comparable Schools is included in each relevant section below and summarized in the Gross Profit sections below.
2) Core Schools - consists of schools reported as Comparable Schools for each specific period presented. By definition the population of Core Schools is schools open and comparable versus the prior period at a fixed point in time. The number and specific Core Schools may be different in each period presented as the Company continues to add or close schools. We measure Core Schools' performance as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts to grow the Core School base. The table presented in the gross profit sections below shows this information.
3) New Schools - consists of newly developed schools. By definition the population of schools in each period should be different for each period as the Company continues to add schools.
New Schools are an integral part of the Company's business development strategy and are defined as newly developed schools as compared to "Acquired Schools" as discussed below. In planning New School development activity, management typically seeks to balance the pre-opening costs and start-up losses associated with the ramp up of new schools with achieving an appropriate growth and profitability balance for the Company as a whole.
New School revenue is measured by New School revenue as a percent of total operating revenue for each comparative period. This information is included in the revenue section below. We also measure New School gross profit, gross margin and expense items as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts from this activity when compared to the prior period. We seek to improve New School period over period performance by minimizing the impact of pre-opening and ramp up costs and the time it takes a new school to ramp up. The tables presented in the gross profit sections below show New School percent of revenue information for each period presented.
Acquired Schools are an integral part of the Company's business development strategy. Management seeks to acquire schools that fill out existing markets or provide platforms for additional growth in new markets within our demographic parameters. For acquired school activity, management seeks to add schools in pursuit of adding to the appropriate growth and profitability balance described above. While the Company has typically acquired schools that are already profitable, in some cases a school is acquired that may be either early in its respective ramp up period and so not yet profitable, or in the case of Camelback Desert Schools in a well matched demographic but with issues that have made them not profitable but acquired for their potential as we believe our core competencies are appropriate to solve the school's issues and move them to profitability.
Acquired Schools' revenue is measured by the Acquired Schools' revenue as a percent of total operating revenue for each comparative period. This information is included in the revenue section below. We measure Acquired School gross profit, gross margin and expense items as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts from this activity when compared to the prior period. We seek to improve Acquired School period over period performance by honing our screening and due diligence processes and streamlining our integration activities. The table presented in the gross profit sections below shows Acquired School percent of revenue information for each period presented.
At September 27, 2008, the Company operated 178 schools. Since June 28, 2008, the Company has opened two new preschools and acquired one elementary school and two preschools. During the thirteen weeks ended September 29, 2007, the Company opened three new preschools and acquired four new preschools, one of which was subsequently closed during the same thirteen week period. School counts for the thirteen weeks ended September 27, 2008 and September 29, 2007 are as follows:
Thirteen Weeks Ended
September 27, September 29,
2008 2007
Number of schools at the beginning of period 173 151
Acquisitions 3 4
Openings 2 3
Closings - (1 )
Number of schools at the end of the period 178 157
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The following table sets forth certain statement of operations data as a percentage of revenue for the thirteen weeks ended September 27, 2008 and September 29, 2007 (dollars in thousands):
Thirteen Thirteen Change
Weeks Ended Weeks Ended Amount Percent
September 27, Percent of September 29, Percent of Increase/ Increase
2008 Revenues 2007 Revenues (Decrease) (Decrease)
Revenues $ 51,376 100.0 % $ 44,633 100.0 % $ 6,743 15.1 %
Personnel costs 25,209 49.1 21,857 49.0 3,352 15.3
School operating costs 7,966 15.5 6,761 15.1 1,205 17.8
Rent and other 13,560 26.4 11,901 26.7 1,659 13.9
Cost of services 46,735 91.0 40,519 90.8 6,216 15.3
Gross profit 4,641 9.0 4,114 9.2 527 12.8
General and administrative expenses 4,942 9.6 4,460 10.0 482 10.8
Operating loss $ (301 ) (0.6 )% $ (346 ) (0.8 )% $ 45 13.0 %
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The table below shows the number of schools included in each of the four growth initiative categories for each section where they are respectively discussed below:
September 27, September 29,
School Category 2008 2007
Comparable 149 149
Core 149 142
New 7 6
Acquired 22 9
Total 178 157
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Revenue
Revenue for the thirteen weeks ended September 27, 2008 increased $6,743,000 or
15.1% to $51,376,000 from $44,633,000 for the thirteen weeks ended September 29,
2007. The revenue increase for the thirteen weeks ended September 27, 2008, as
compared to the same period in the prior year, is as follows (dollars in
thousands):
Thirteen weeks ending Increase
September 27, September 29,
2008 2007 Dollar Percent
Total Company revenue $ 51,376 $ 44,633 $ 6,743 15.1 %
Comparable Schools $ 44,114 $ 43,518 $ 596 1.4 %
Percent of Percent of
2008 Revenue 2007 Revenue
Core Schools $ 44,114 85.9 % $ 40,463 90.7 %
New Schools 1,111 2.2 1,278 2.9
Acquired Schools 6,107 11.9 2,796 6.3
Closed schools and other 44 0.1 96 0.2
$ 51,376 100.0 % $ 44,633 100.0 %
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note -percentages may not add due to rounding
Revenue trends
Comparable Schools' net revenue increased $596,000 or 1.4% for Fiscal 2009 compared to Fiscal 2008. As a percentage, revenue growth fell below that of tuition rate increases, due in large part to a softening economy in a number of areas that the Company operates. Revenue increases were due primarily to average tuition rate increases of between 3.0% and 3.3% which were offset by a decrease in average enrollments. Management believes that industry norms in recent years have seen tuition rate increases in approximately a 3% to 5% range.
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 incentive compensation, health care benefit and participant rate increases, staffing ratio requirements and changes in enrollment. The category tends to be variable on a step function basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of New Schools, personnel costs tend to be higher as a percentage of revenue as a base level of personnel and associated costs are established in the early years of a school's life and which are expected to leverage as enrollments increase.
Thirteen weeks ending Increase
September 27, September 29,
2008 2007 Dollar Percent
Total $ 25,209 $ 21,857 $ 3,352 15.3 %
Comparable Schools $ 21,287 $ 21,155 $ 132 0.6 %
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Personnel costs for the thirteen weeks ended September 27, 2008 increased $3,352,000 or 15.3% to $25,209,000 from $21,857,000 for the thirteen weeks ended September 29, 2007. The 15.3% increase was primarily driven by wages and benefits of $3,457,000 from schools opened or acquired during the first thirteen weeks of Fiscal 2009 or from new Schools opened or acquired during Fiscal 2008 as compared to Fiscal 2007.
Personnel costs increased slightly to 49.1% of revenue for the first quarter of Fiscal 2009 as compared to 49.0% for the first quarter of Fiscal 2008.
School operating costs
School operating costs primarily include food, utilities, transportation, maintenance, janitorial, supplies, school level marketing spending and ancillary programs. This category is partially variable with increases primarily driven by additional enrollment. In the case of New Schools, school operating costs tend to be higher as a percent of revenue as a base level of costs are incurred in the early period of a school's life and are expected to be leveraged as enrollments increase.
Thirteen weeks ending Increase
September 27, September 29,
2008 2007 Dollar Percent
Total $ 7,966 $ 6,761 $ 1,205 17.8 %
Comparable Schools $ 6,732 $ 6,552 $ 180 2.7 %
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School operating costs for the thirteen weeks ended September 27, 2008 increased $1,205,000 or 17.8% to $7,966,000 from $6,761,000 for the thirteen weeks ended September 29, 2007. The increase was primarily driven by school operating costs of $1,103,000 from schools opened or acquired during the first thirteen weeks of Fiscal 2009 or from new Schools opened or acquired during Fiscal 2008 as compared to Fiscal 2007.
School operating costs increased to 15.5% of revenue for the first quarter of Fiscal 2009 as compared to 15.1% for the first quarter of Fiscal 2008. This increase was partially the result of school operating costs from several Acquired Schools with lower than average occupancy levels than exist in our Comparable Schools. These schools' higher costs as a percent of revenue are a result of being in an early stage of the school's operating life cycle or as the result of low occupancy due to its operating history prior to our acquiring the school. The Company expects these schools will leverage these cost to revenue as enrollments increase.
Rent and other
Rent and other costs primarily include property rent and property taxes, the portion of claims retained by the Company for workers' compensation and property damage, depreciation and amortization, regional and school marketing, vehicle and equipment rent, and pre-opening costs. This category of costs is relatively fixed in nature with increases related to contractual obligations, changes in marketing initiatives and the addition of new or acquired schools. In the case of New Schools, the Company expects these costs to be leveraged significantly as enrollments ramp up.
Thirteen weeks ending Increase (Decrease)
September 27, September 29,
2008 2007 Dollar Percent
Total $ 13,560 $ 11,901 $ 1,659 13.9 %
Comparable Schools $ 11,157 $ 11,272 $ (115 ) (1.0 )%
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For the thirteen weeks ended September 27, 2008, rent and other costs increased $1,659,000 to $13,560,000 from $11,901,000 for the thirteen weeks ended September 29, 2007. The 13.9% increase was primarily driven by school rent and other costs of $1,778,000 from schools opened or acquired during the first thirteen weeks of Fiscal 2009 or from new schools opened or acquired after the first quarter of Fiscal 2008.
Rent and other costs from comparable schools decreased $115,000 to $11,157,000 for the thirteen weeks ending September 27, 2008 from $11,272,000 for the thirteen weeks ending September 29, 2007. This decrease included a decrease in workers' compensation claims retained by the Company of $182,000 partially offset by an increase in property rents of $71,000 and a net decrease in other costs of $4,000.
For the thirteen weeks ended September 27, 2008, rent and other costs as a percentage of revenue decreased to 26.4%, from 26.7% as compared to the thirteen weeks ended September 29, 2007.
Gross profit
As a result of the factors mentioned above, gross profit for the thirteen weeks ended September 27, 2008 increased $527,000 or 12.8% to $4,641,000 from $4,114,000 for the thirteen weeks ended September 29, 2007. Gross profit was 9.0% of revenue for the thirteen weeks ended September 27, 2008 and 9.2% of revenue for the thirteen weeks ended September 29, 2007. The change in gross profit for first quarter of Fiscal 2009 as compared to the same period in the prior year is as follows (dollars in thousands):
`
Thirteen Thirteen Change
Weeks Ended Weeks Ended Amount Percent
September 27, Percent of September 29, Percent of Increase/ Increase
2008 Revenues 2007 Revenues (Decrease) (Decrease)
Revenues $ 51,376 100.0 % $ 44,633 100.0 % $ 6,743 15.1 %
Personnel costs 25,209 49.1 21,857 49.0 3,352 15.3
School operating costs 7,966 15.5 6,761 15.1 1,205 17.8
Rent and other 13,560 26.4 11,901 26.7 1,659 13.9
Cost of services 46,735 91.0 40,519 90.8 6,216 15.3
Gross profit 4,641 9.0 % 4,114 9.2 % 527 12.8 %
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The table below shows the change in gross profit for the first quarter of Fiscal 2009 as compared to the same period in the prior year for Comparable Schools:
Thirteen Thirteen
weeks ended weeks ended Amount Percent
September 27, Percent of September 29, Percent of Increase Increase
2008 Revenues 2007 Revenues (Decrease) (Decrease)
Revenues $ 44,114 100.0 % $ 43,518 100.0 % $ 596 1.4 %
Personnel costs 21,287 48.3 21,155 48.6 132 0.6
School operating costs 6,732 15.3 6,552 15.1 180 2.7
Rent and other 11,157 25.3 11,272 25.9 (115 ) (1.0 )
Cost of services 39,176 88.8 38,979 89.6 197 0.5
Gross profit $ 4,938 11.2 % $ 4,539 10.4 % $ 399 8.8 %
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The table below shows comparative information as a percent of revenue for Core Schools, New Schools and Acquired Schools:
Thirteen weeks ended Percent of Thirteen weeks ended Percent of
September 27, 2008 Revenue September 29, 2007 Revenue
Core Schools
Revenue $ 44,114 100.0 % $ 40,463 100.0 %
Personnel Cost 21,287 48.3 19,663 48.6
School Operating Cost 6,732 15.3 6,237 15.4
Rent and Other 11,157 25.3 10,387 25.7
Gross Profit $ 4,938 11.2 % $ 4,176 10.3 %
New Schools
Revenue $ 1,111 100.0 % $ 1,278 100.0 %
Personnel Costs 661 59.5 753 58.9
School Operating Costs 197 17.7 162 12.7
Rent and Other 687 61.8 643 50.3
Gross Profit (loss) $ (434 ) (39.1 )% $ (280 ) (21.9 )%
Acquired Schools
Revenue $ 6,107 100.0 % $ 2,796 100.0 %
Personnel Costs 3,247 53.2 1,441 51.5
. . .
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