SecProbe.io

CORRESP
1
filename1.htm

Correspondence Letter

 May 31, 2005

 Via EDGAR

 Via Facsimile

United
States Securities and Exchange Commission

Division
of Corporation Finance

100
F Street, NE

Washington,
D.C. 20549-5546

 Attention: Larry Spirgel, Assistant Director

 Re:

Nobel Learning Communities, Inc.

Form 10-K for the fiscal year ended July 3, 2004

Filed September 15, 2004

Form 10-Q for the quarter ended January 1, 2005

File No. 000-27024

Filed February 9, 2005

 Ladies and Gentlemen:

 This letter responds to the Staff’s questions from phone conversations
held May 6, 2005 and May 20, 2005, which followed our written response to the initial comment letter dated February 25, 2005 from the Staff (“Letter) regarding the above captioned Form 10-K for the fiscal year ended July 3, 2004, and Quarterly
Report on Form 10-Q for the quarter ended January 1, 2005, each filed by Nobel Learning Communities, Inc. (“NLCI”).

 As a follow up to our call with the SEC Staff (Carlos Pacho, Melissa Hauber and Adam Washecka) on May 20, 2005, the following information is provided which support
NLCI’s position with respect to issues raised in the Letter and will clarify points discussed in that call. Specifically NLCI would like to address the following points discussed with the Staff:

•

The determination of the operating and reporting segments of NLCI,

•

The determination of the 10 reporting units as defined in SFAS 142, Goodwill and other Intangible Assets

 NLCI believes that the guidance of Statement 131, Disclosures about Segments of an
Enterprise and Related Information requires that NLCI:

1.
Determine its operating segments based on the guidance in paragraph 10 of SFAS 131

 1 of 11

2.
Determine whether, under the additional guidance of Statement 131 paragraph 17, aggregation of operating segments into a reporting segment is appropriate

 Applying the guidance to the way NLCI operated the business in 2002, 2003, and 2004 NLCI
determined its operating segments and then used these operating segments as a basis to determine NLCI’s reporting units (which under the guidance of SFAS 142 paragraph 30 it is clear that reporting units can exist “one level below an
operating segment”) for purposes of testing goodwill for impairment under SFAS 142.

 NLCI is providing the following discussion to clarify its accounting treatment under SFAS 131 and SFAS 142. NLCI believes that the literature discussed above as further explained below clearly supports its accounting
treatment and disclosure.

 Finally, NLCI is providing additional background
information describing NLCI as it existed at the time periods in question, the changes in senior management and management structure of NLCI which have occurred over the past 22 months and finally the continuing evolution today under which current
management is moving NLCI to a more centralized reporting structure.

 Please
note references to 2002, 2003, 2004 and 2005 refer to those fiscal years ended June 30 or the closest Saturday to June 30 of each respective year.

 This letter contains information responsive the Staff’s Letter, as well as the additional concerns raised during our telephone conversations. The information in this
letter supports NLCI’s accounting treatment and disclosures, including the determination of operating segments, reporting segments and reporting units for the periods in question. The segments and units were determined, in good faith, by the
NLCI’s management at the time (2002, 2003 and 2004) and reflected the way in which the business was then operated and managed. NCLI’s financial statements for the fiscal year ended 2002 were audited by PriceWaterhouseCoopers and received
an unqualified opinion. In 2003, NCLI engaged BDO Seidman as its independent auditor. The Current Report on Form 8-K filed by NLCI reflecting the change in auditor stated that there were no disagreements with PriceWaterhouseCoopers “ on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure...” BDO Seidman’s opinions on NLCI’s financial statements for the fiscal years ended 2003 and 2004 are similarly unqualified.

 Determination of Segments

 Under the guidance of SFAS 131, NLCI determined it had two reportable segments:

1.
Private Schools – private pay - pre-elementary, elementary, and middle school clusters in 14 states and special purpose high schools in the Houston, Texas market.

 2 of 11

2.
Other - charter school management services, a curriculum distribution business and operation of four charter schools in the Phoenix, Arizona market (the charter schools had all
become discontinued operations by the end of fiscal 2003 and as such were not included in the reportable segment disclosure).

 Additionally, NLCI incurs corporate level general and administrative overhead not allocated to the segments described in 1. and 2. above and is included in its segment
reporting as required to equal total reported amounts.

 As discussed below,
NLCI first determined its operating segments and then determined which of those did not meet the quantitative thresholds of paragraph 18 of SFAS 131 and which met the criteria for aggregation under paragraph 17 of SFAS 131 as reportable segments.

 NLCI determined it had the following seven operating segments:

1.
North Region

2.
South Region

3.
West Region

4.
HLA (Houston Learning Academy) – Special purpose high schools in the Houston, Texas market

5.
Charter school management services

6.
The Activities Club (TAC) (now shutdown and no longer operating)

7.
Charter schools (now shut down and no longer operating)

 NLCI used the following guidance of SFAS 131 paragraph 10 to determine these seven operating segments:

a.
Each operating segment engages in revenue producing and expense incurring activities.

b.
The operating results of each operating segment are reviewed by NLCI’s chief operating decision maker; and

c.
Discrete financial information is available for each operating segment.

 Point a above. Regarding operating segments 1.-4. above. NLCI operates regional groups of private pay schools operating in clusters based on their local geography. These
groups are aggregated together to create an operating segment. These segments produce revenue through collection of tuition and other revenues from private paying customers. Expenses are incurred in the form of costs of occupancy for the facilities
they operate in and personnel costs for the principal and teachers who operate the school. Additional expenses are incurred for supplies, food, marketing, etc. Charter school management services produce revenue through billing for “back
office” services provided to charter schools. Charter schools produce revenue from billing state and local government in

 3 of 11

accordance with the provisions of the charter under which they operate and the laws of the state and local government. TAC produced revenue from sale of
curriculum kits to third party education providers.

 Point b above. NLCI’s
chief operating decision maker (CODM) is the CEO. The CODM regularly reviews the information of each operating segment. The CODM uses that information to allocate resources and assess the performance of the segment. NLCI’s CODM utilizes this
information to internally evaluate segment performance. The CODM works with the COO to assess the first four operating segments listed above (North, South, West and HLA). The additional operating segments are/were managed through either a business
unit manager (TAC), the CFO (Charter school management services) or the COO or CFO (Charter schools).

 Please note that NLCI recognizes certain of its responses with respect to how it determined its chief operating decision maker may have caused some confusion. The confusion is a result of new management’s having
made certain assumptions in attempting to describe how the business operated in 2002, 2003 and 2004 (which we confirmed in preparing this response through interviews and other due diligence) as compared with how new management operates and manages
today.

 Point c above. Discrete financial information exists for each operating
segment and is utilized in managing these segments.

 Upon determination of the
seven operating segments, NLCI followed the guidance of SFAS 131 paragraph 16 to determine if its operating segments were reportable segments.

 Reportable Segments

 SFAS 131 paragraph 16 provides guidance to determine reportable segments. Under this guidance NLCI determined it was required to consider paragraph 17 aggregation
criteria and paragraph 18 quantitative thresholds in regards to the seven operating segments.

 SFAS 131 paragraph 17 provides aggregation criteria NLCI used to determine that four of its operating segments (North, South, West and HLA) (Segments) constitute one reportable segment - Private Schools. The
aggregation criteria are comprised of two criteria groups as follows:

1.
Similar long-term economic characteristics; and

2.
Similar attributes in each of the following areas:

a.
The nature of products and services

b.
The nature of the production processes

c.
The type or class of customer for their products and services

d.
The methods used to distribute their products or provide their services

e.
If applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

 4 of 11

 In answer to item 1 above, the four operating segments have the following similar long-term economic characteristics:

A.
The segments are sensitive to economic cycles and perform better when economies are strong and less so when downturns occur. The general economic sluggishness for 2000 – 2003
had a decided impact on all of the Regions. Private education is generally a discretionary expense so the enrollment is impacted by economic factors.

B.
The segments generate approximately 97% of revenue from private pay sources. This means only approximately 3% of revenue is obtained from government agencies and is subject to their
attendant economic and political volatility.

C.
The segments incur expenses in the form of occupancy costs for the physical facilities. Personnel costs for principals and teachers, food, supplies, marketing and other similar
costs.

D.
The segments’ operating margins when viewed on a long-term basis are expected to be managed to the highest level possible. During fiscal 2002, 2003 and 2004 total company gross
margins from continuing operations ran between 9.9% and 12.9%. For the fiscal periods under discussion, the Regions had the following margins:

Gross Margin

 Region

2004

2003

 North

14.6
%

14.3
%

 South

9.5
%

8.4
%

 West

13.0
%

14.1
%

 Total

12.7
%

12.7
%

 These gross margins
provide support for the geographic Regions operating in a relatively tight range and thereby having similar economic characteristics.

 While HLA has a different gross margin at approximately 25% due primarily to its cost of real estate occupancy and related facilities maintenance and
service, it operates with the same economic characteristics as the other segments as discussed above. Therefore, NLCI determined HLA an operating segment appropriately aggregated in the Private School reportable segment.

 In answer to item 2 above the four operating segments have similar attributes in the
following areas:

a.
Segments provide educational services in all of our schools

b.
Segments deliver curriculum based education to customers

c.
Segment customers are pre-school and school age children and their parents

d.
Segments provide our services through schools

e.
Segment operations are subject to similar state and local regulations and licensing requirements.

 5 of 11

 Based on the forgoing discussion relative to the four operating segments and in answer of item 1 and 2 above: North,
South, West and HLA - NLCI concluded it has one reportable segment representing these four operating segments.

 NCLI next assessed the three remaining operating segments to determine if they met the quantitative threshold to be separate segments. SFAS 131 paragraph 18 and 19 provide thresholds which permit these to be combined
into one reportable segment as they do not meet the quantitative criteria for separate disclosure and they share a majority of the aggregation criteria.

 Please note in the 10-Q report filed for the quarter ended April 2, 2005 NLCI included in its Segment Information the two reportable segments described above.

 Reporting Units

 After first reaching its determination under the guidance of SFAS 131 paragraph 10 to
determine its operating segments, NLCI followed the guidance of SFAS 142 to determine its reporting units. As discussed above SFAS 131 paragraph 10 led NLCI to identify four operating segments which aggregated to the Private School reportable
segment and three operating segments which are included in Other. Based on this and the fact that all goodwill relates to acquisitions in the four operating segments, impairment evaluation was directed to those four operating segments.

 In reviewing its organization chart NLCI determined, in accordance with the guidance of
SFAS 142 paragraph 30 there exists sufficient substantive evidence to conclude that a reporting unit structure exists one level below the four operating segments, at the component level. Additionally, NLCI concluded this component structure is
identified as the ten reporting units on the organization chart previously provided to the Staff. The ten reporting units are comprised of geographically cohesive units which is the way NLCI viewed its business and which were determined in
accordance with the guidance discussed below. In certain cases schools move between geographically local districts (so they would fall under different executive directors) not only over the years but in some cases within a year. This is important to
understanding how NLCI concluded it had ten reporting units. In considering the district level as a possibility, NLCI determined that the district level provided too much room for movement of locations between districts and thereby would have lacked
a basis for consistent application of goodwill impairment testing. However, the structure of the ten reporting units provided a level at which a more consistent application of goodwill impairment testing could be performed and provided a basis to
associate the goodwill at the most appropriate level, that being the geographic basis under which it was acquired and could naturally be associated. With this determination of ten reporting units NLCI arrived at a methodology to determine the amount
of goodwill assigned to a reporting unit was reasonable, supportable and applied in a consistent manner.

 To determine whether a reporting unit existed one level below an operating segment (known as a component) NLCI referred to the following guidance from paragraph 30:

1.
Does the component constitute a business?

 6 of 11

2.
Is discrete financial information available by component?

3.
Does segment management regularly review the operating results of that component?

4.
Are there similar operating characteristics requiring aggregation?

 In answer to item 1 above, the following is provided:

 For NLCI, the position of the reporting units constituting a business is supported by the guidance in EITF Issue No. 98-3 “Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”. That guidance states “for a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to
continue to conduct normal operations after the transferred asset is separated from the transferor”, NLCI’s conclusion that the reporting units could separately conduct operations is supported by the fact that a reporting unit could be
sold and operate as a stand alone business.

 In answer to item 2 above the
following is provided:

 As discussed in the answer