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|SECURITIES AND EXCHANGE COMMISSION
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|Washington, D.C. 20549            
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|FORM 10-K                         
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|x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
  year ended April 1, 2005                   
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                  
|o | 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 0-27656                                                                                                                   

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|                                                      
|LEARNING CARE GROUP, INC.                             
|(Exact name of registrant as specified in its charter)
|                                                      

|Michigan                                                   | 38-3261854         
|---------------------------------------------------------- | -------------------
|(State or other jurisdiction of                            | (I.R.S. Employer   
|incorporation or organization)                             | Identification No.)
|                                                          
|21333 Haggerty Road, Suite 300, Novi, Michigan 48375      
|(Address of principal executive offices)        (Zip Code)

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|Registrants telephone number, including area code: (248) 697-9000    Securities registered pursuant to Section 12(b) of the Act: None    Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | (Title of Class)
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
  13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
  period that the registrant was required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days.  YesxNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.oIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
  the Securities Exchange Act of 1934).  YesoNox
  The aggregate market value of voting Common Stock held by non-affiliates of the registrant as of October
  15, 2004, computed by reference to the last sale price for such stock on that date as reported on
  The Nasdaq SmallCap Market, was approximately $18,673,000.
  At June 21, 2005, the number of shares outstanding of the registrants Common Stock, no par value,
  was 19,839,610.
  Portions of the registrants Proxy Statement for its 2005 Annual Meeting of Shareholders have
  been incorporated by reference in Part III of this Annual Report on Form 10-K.

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|Safe Harbor Statement Under Private Securities Litigation Reform Act of 1995
Statements included 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. Forward-looking
statements involve a number of risks and uncertainties, including, but not limited to, continuation
of federal and state assistance programs, demand for child care, general economic conditions as well
as pricing, competition and insurability. Learning Care Group, Inc. cautions that actual results
could differ materially from those projected forward-looking statements.
Item 1. Business
General
Learning Care Group, Inc. is one of the largest publicly traded, for-profit providers of early childhood
care and educational services in the United States. Learning Care Group, Inc. conducts business through
its wholly-owned subsidiaries, Childtime Childcare, Inc., and Tutor Time Learning Centers, L.L.C.
(collectively, the Company). The Company and its predecessors began operations in 1967.
The Company provides center-based educational services and child care to children between the ages
of six weeks and 12 years under two distinct brand identities: Childtime Learning Centers (Childtime)
and Tutor Time Child Care/Learning Centers (Tutor Time).
As of April 1, 2005, the Company operated or franchised a total of 459 centers system-wide under three
major lines of business, and had system-wide licensed capacity capable of serving over 69,000 children.
The Companys three lines of business are:
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| |  | Childtime Learning Centers:262 centers operated by the Company, consisting of:
| | - | ------------------------------------------------------------------------------
| |   |                                                                               

| |  256 Childtime centers and                              
| | ---------------------------------------------------------
| |                                                          
| |  6 Childtime-branded centers operated for third parties;
| |                                                          

| |  | Tutor Time Learning Centers:69 Tutor Time centers operated by the Company; and
| | - | ------------------------------------------------------------------------------
| |   |                                                                               
| |  | Tutor Time Franchise Operations:128 franchised Tutor Time centers.            

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|The Childtime and Tutor Time brands operate in largely distinct market segments. Childtime centers
are, on average, smaller and less standardized in construction. They appeal to parents who are looking
for a homey feel and more intimate experience for their child. Tutor Time centers are
larger, more standardized in layout, and designed to appeal to parents who value a more structured
educational and developmental experience. Both brands place emphasis on educational quality and content,
with the Companys Education Department developing proprietary content distinct to each brand.
With their larger size, Tutor Time centers generally deliver the potential for higher economic returns
per center. However, Tutor Time centers also require higher investment and are typically fitted with
more expensive equipment and supplies (e.g., telephones, intercoms and security cameras in each room,
and childrens computers).
The Companys primary objective is to maximize the development and preparation of children for
school. To ensure achievement of this goal, the Company provides high quality child care and a proprietary
curriculum, based on developmentally appropriate practices that align with nationally recognized,
early childhood educational standards. With over 7,500 employees, the quality, skills, and motivation
of the Companys center staff is of paramount importance. The Company places a great deal of
emphasis on the recruitment, selection and ongoing training of its child care center directors and
area managers.
Childtime and Tutor Time corporate centers are located throughout the United States (in 25 states).
The vast majority of these centers are operated on leased premises, with typical lease terms ranging
from 1 to 25 years. Thirty-six of the Childtime centers are operated on Company-owned premises.
The Company operates six Childtime centers under management contracts serving hospitals, corporations
and the federal government. Under these contracts, the Company receives an annual operating fee and,
in some cases, is eligible to receive incentives for improving revenues and/or managing costs. These
contracts are typically up for renewal on an annual basis.

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|Tutor Time franchise centers are also predominantly located in the U.S., with 117 centers operating
in 15 states. An additional 11 centers are operated in Hong Kong, Indonesia, and the Philippines,
mostly under master franchise agreements. The Company is currently the primary obligor or guarantor
on leases for 49 of its franchise centers. Tutor Time is currently one of the largest franchisors
of child care services based in the United States.
The Company utilizes a 52 to 53 week fiscal year (generally comprised of 13 four-week periods) ending
on the Friday closest to March 31. The fiscal year ended April 1, 2005 contained 52 weeks. The fiscal
year ended April 2, 2004 contained 53 weeks and the fiscal year ended March 28, 2003 contained 52
weeks. The first quarter for each of fiscal 2005, 2004 and 2003 contained 16 weeks, while the second
and third quarters contained 12 weeks. The fourth quarter of fiscal 2005 contained 12 weeks, while
the fourth quarter of fiscal 2004 contained 13 weeks and the fourth quarter of fiscal 2003 contained
12 weeks. All significant inter-company transactions have been eliminated.
Mission, Vision, Values
Mission
We are an international leader in child education and family solutions, which impact and inspire lifelong
learning.
Vision
To develop innovative learning care solutions which enable us to grow the number of children and families
served, and to be recognized as the premier child and family education corporation in the world.
Through our leadership and passion, we will:
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| |  | Provide a secure, caring and enriched environment that promotes learning and the development of the
  whole child.                                     
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                        
| |  | Develop lifelong relationships, create family solutions, and enhance the quality of life for our families.                                             
| |   |                                                                                                                                                        
| |  | Provide a fun, challenging work environment that fosters teamwork, inspires professional excellence,
  and encourages contribution by all team members.
| |   |                                                                                                                                                        
| |  | Leverage technology to develop innovative learning products and solutions.                                                                             
| |   |                                                                                                                                                        
| |  | Provide superior levels of support and service to our franchisees.                                                                                     
| |   |                                                                                                                                                        
| |  | Achieve the best financial performance in the industry, allowing us to fulfill our mission.                                                            

|                                                                               
|-------------------------------------------------------------------------------
|Values
Honesty, Trust, Passion for Excellence, Love of Learning and Innovation.

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|Business Strategy
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|                 

|Increase system wide revenues and deliver annual EBITDA growth through:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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|(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|Management believes that focus in these areas will help create value in the near-term, and position
  the Company for profitable growth in the medium to long-term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|Increasing Center Utilization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|Providing a superior quality product is critical to increasing net enrollments in existing centers.
  Happy children, satisfied parents, and positive word-of-mouth are the most critical tests of how
  well the Company is delivering on its quality promise and its ability to capture a price premium.
  Based on experience, the most important factors that create a superior quality product include: the
  skills, and often, the longevity of center directors and staff; the differentiation and quality of
  the educational offering; the condition and the operations of the facility, and the degree to which
  the Company is perceived as service-oriented and values-driven.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|While the focus on hiring, training and retaining the right people as well as the Companys new
  developments in curricula are discussed in subsequent paragraphs, it is important to note that management
  is also targeting increased utilization via many other initiatives including improvements in the
  quality and quantity of support materials and directives. For example, the Company is continuing
  its focus on providing timely and responsive customer service, and on delivering a top-quality product
  to every customer at all times, whether they are children, parents, center staff, Center Directors,
  Area Managers, or the corporate or franchise operations team. The Company has developed and implemented
  standards for service delivery and a service environment that can be measured and tracked via center
  evaluation tools. Other initiatives include the development of new on-line operational manuals to
  standardize best practices, ongoing analysis of under-performing centers to determine the reasons
  for poor performance with appropriate action plans to turn around each center or remove it from the
  portfolio, and an intense focus on driving enrollments and pricing appropriate to each market. In
  addition to the centralization of purchasing and facilities management in order to maximize buying
  power, reduce costs, and improve the quality of centers, the Company is also centralizing its federal
  food billing process in order to accomplish the same goals.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Streamlining processes, clarifying goals and objectives, focusing on delivering superior customer service,
  and driving a performance culture are key objectives for the Operations department in delivering
  an increase in utilization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|Creating Unique and Innovative Curricula                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|In order to differentiate the brands from one another and to establish Learning Care Group, Inc. as
  the leader in early education, the Company has developed a new and proprietary curricular direction
  for both Childtime and Tutor Time schools. Each curriculum was designed by early childhood experts
  and follows the guidelines for developmentally appropriate practices as outlined by the National
  Association for the Education of Young Children (NAEYC).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|Targeting the specific needs of Childtime customers, the Education Department developed The Empowered Child curriculum. Using Creative Curriculumas a framework for child developmental assessment, the Companys The Empowered Child curriculum is inspired by the Reggio Emilia approach to learning which began in Italy 50 years ago
  and is now the fastest growing method in the field of early childhood education. Emphasizing home-like
  nurturing environments, this curriculum provides the three components of quality early                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|childhood education: developmentally appropriate activities,
  a comfortable learning environment and quality teacher-child interactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The Tutor Time brand has always had a strong academic emphasis and the new LifeSmart curriculum builds upon that foundation to nurture and educate the whole child  cognitively,
  physically, socially and emotionally. The LifeSmart curriculum is designed around the principle that children are smart in many different ways, which
  have been classified as the eight Tutor Time Smarts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Grounded in the latest research and understanding on early childhood education, the LifeSmart curriculum provides children with the foundations that prepare them for elementary school and beyond.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Each of these new curricula will be implemented in the Companys Pre-K and Preschool classrooms
    this fall with further curriculum updates coming for other age groups over the next few years. A
    more detailed explanation of educational offerings appears below under Educational Programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Utilizing Technology to Create Points of Differentiation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|In order to improve performance, the right systems and people must be in place to ensure quality, create
  excellence, and maximize productivity. In an effort to improve the timeliness and accuracy of information,
  as well as to streamline workload at the center level, the Company has installed a new financial
  reporting system, a new HR management system, and has developed a new center-level application to
  track leads, attendance, billing, and cash that will be installed in all centers by the end of fiscal
  2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Leveraging our Corporate Infrastructure to Provide Value-added Support to Tutor Time Franchisees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Franchising represents an important component of the Companys current Tutor Time business and
  is a primary growth opportunity for the Company going forward. The Company is focused on further
  strengthening franchise relations by providing superior support to franchisees through its franchise
  district management team, with additional support from key roles in the regional management structure,
  including regional training and human resource managers, and marketing support. In addition, the
  Education, Technology and Marketing Departments have improved their value delivery and support infrastructures,
  and continue to bolster their respective contributions to the Companys franchisees. Support
  has also been expanded by providing products and services to franchisees at the corporate rates.
  Additionally, the Franchise Operations group is expanding its role to include business advisory and
  performance benchmarking in order to help franchisees improve their individual results.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Creating the Infrastructure to Support New Franchise School Growth Goals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The Company is in the process of creating the tools and infrastructure necessary to fuel future franchise
  growth. This growth is anticipated to be due to a combination of adding schools for existing franchisees
  and finding new franchisees to join our system. To that end, the Company has developed and is successfully
  executing a comprehensive marketing plan to attract new franchisee prospects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Further Improving the Companys Hiring, Training, and Retention Capabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Understanding the significant impact that a Center Director has on the quality and performance of a
  center, the Company has developed sophisticated selection tools to identify desirable candidates.
  In addition, a complete training program has been created based on the required competencies to improve
  the skills of current and future directors. Retaining valuable employees at all levels is also critical
  to the success of a center and can play a key role in retaining current customers, as well as ensuring
  the quality of our product. To that end, the Company has developed a comprehensive strategy to reduce
  center staff turnover through improved hiring processes, new training programs, improved compensation
  and benefit programs and better management.                                                                                                                                                                                                                                      

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|Growth Strategy
|---------------
|               

|The following table illustrates the number of centers in operation (acquired or otherwise opened) as well as those which were closed during the periods indicated. Figures include Tutor Time franchise centers.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                

|                                 | Childtime |     | Tutor Time |  | Franchise |   | Total |    
|-------------------------------- | --------- | --- | ---------- |  | --------- | - | ----- | ---
|                                 |           |     |            |  |           |   |       |    
|March 28, 2003                   |           |     |            |  |           |   |       |    
|Beginning of period              |           | 286 |            |  |          |   |       |   
|Acquisitions                     |           |    |            |  | 58        |   |       | 124
|New center openings              |           |    |            |  | 5         |   |       | 16 
|Closures and sales               |           | (10 | )          |  |          |   |       | (8 
|                                 |           |     |            |  |           |   |       |    
|End of period                    |           | 276 |            |  | 63        |   |       | 132
|                                 |           |     |            |  |           |   |       |    
|April 2, 2004                    |           |     |            |  |           |   |       |    
|Beginning of period              |           | 276 |            |  | 63        |   |       | 132
|New center openings              |           |    |            |  | 2         |   |       | 4  
|Franchising of Corporate centers |           |    |            |  | (1        | ) |       | 1  
|Closures and sales               |           | (7  | )          |  |          |   |       | (3 
|                                 |           |     |            |  |           |   |       |    
|End of period                    |           | 269 |            |  | 64        |   |       | 134
|                                 |           |     |            |  |           |   |       |    
|April 1, 2005                    |           |     |            |  |           |   |       |    
|Beginning of period              |           | 269 |            |  | 64        |   |       | 134
|Acquisitions                     |           |    |            |  | 8         |   |       | (8 
|New center openings              |           |    |            |  | 1         |   |       | 5  
|Franchising of Corporate centers |           |    |            |  | (3        | ) |       | 3  
|Closures and sales               |           | (7  | )          |  | (1        | ) |       | (6 
|                                 |           |     |            |  |           |   |       |    
|End of period                    |           | 262 |            |  | 69        |   |       | 128
|                                 |           |     |            |  |           |   |       |    

|In fiscal 2005, the Company opened five new franchise centers and one new corporate Tutor Time center.
  The Company acquired eight franchise centers from franchise owners and converted them to corporate
  Tutor Time centers and transferred three corporate Tutor Time centers to franchise owners. The Company
  converted one Childtime center to a corporate Tutor Time center and converted one corporate Tutor
  Time center to a Childtime center (this change is not reflected on the chart). During the year, the
  Company chose to discontinue operations for seven of its corporate Childtime locations that were
  not performing or whose contracts expired and sold one corporate Tutor Time center located in Canada.
  Six franchise centers were also closed during 2005.
  In addition to the current development pipeline, which is comprised of additional sites for existing
Tutor Time franchisees, the Company is actively seeking new franchisees, as well as new sites to
satisfy the demand from current franchise owners. Current plans are to open sites within existing
franchise and corporate geographies. The Company will prioritize adding units in its existing markets
in order to increase market concentration and to leverage administrative and advertising expenses.
The Company continues to experience a number of inquiries from qualified candidates interested in
franchise opportunities, as well as ongoing demand from its existing base of franchisees. The Company
will also entertain growth in its Childtime portfolio through viable acquisitions, and will continue
to research sites for additional corporate Tutor Time centers.
In choosing locations for new centers, the Company considers a number of factors, emphasizing suburban
neighborhoods with growing populations of young families. Management looks for sites in proximity
to newly developed or developing residential areas on heavily traveled local streets. The Company
performs a detailed analysis of the demographics of the area surrounding the proposed site and focuses
on several site selection criteria including: the percentage of children under age six; the population
density within a three-mile radius surrounding a proposed site; and the average household income.
The Company also analyzes the percentage of the population consisting of college-educated, dual-income
families, as well as the average home value in the target area.
In addition to acquiring or building centers in residential areas, the Company obtains contracts with
employers and office complex managers to operate centers in at-work locations. Historically, public
agencies and hospitals have been the principal employers providing or otherwise arranging for child
care services for their employees. A number of private sector employers also offer this benefit,
as they recognize that reduction of employee absenteeism due to a lack of reliable and available
child care can significantly offset the offering of such benefits.
The Companys expansion activity is limited to child care centers in market areas showing strong
growth potential, and to sites which the Company believes can conform to its standard facility and
educational format. The Company utilizes prototype building designs in its build-to-suit centers.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



|The Company continuously reviews its existing center portfolio in an effort to ensure all centers meet
minimum performance standards. Centers become candidates for closure when they fail to meet certain
demographic or financial criteria.
Going forward, there are no assurances that the Company will be able to continue to develop or acquire
new sites in a manner that will meet its requirements.
Educational Programs
The Companys educational programs are based on the early education principle that children learn
best when actively involved in constructing knowledge through self-directed activities. The Companys
staff is trained to support the learning process by providing children with opportunities to solve
problems, investigate questions and creatively use materials in safe and secure settings; activities
that build a true understanding of math, science and literacy concepts. A proprietary educational
curriculum, combined with ongoing parent-staff dialogue, helps the Company foster all aspects of
a childs development: cognitive, physical, social and emotional.
Tutor Time centers use a proprietary curriculum administered by Richard Cohen. Grounded in the latest research and understanding of early childhood education, the
curriculum incorporates self-directed learning investigations with specially focused large group
activities. This approach provides children with the foundations that prepare them for elementary
school and set them on a path of life-long learning. When a child reaches preschool, he or she is
introduced to Tutor Time LifeSmart, an innovative curriculum based on the work of respected child development/early education theorists
Jean Piaget, Erik Erikson, Lev Vygotsky and Howard Gardner.
Childtime centers also use a proprietary curriculum administered by Mr. Richard Cohen, M.A. Inspired
by the Reggio Emilia approach to learning and following guidelines set forth by the National Association
for the Education of the Young Child (NAEYC), the curriculum focuses on three components
of quality early childhood education: developmentally appropriate activities, a comfortable learning
environment and quality teacher-child interactions. The Childtime curriculum empowers children to
acquire skills to become responsible members of the community, creative problem-solvers, and life-long
learners. In preschool, students are introduced to The Empowered Child curriculum, a new addition to Childtimes curricular offerings.
The Companys educational offerings are the core of the product and are the key differentiators
for each of the Companys brands. Further, the innovative TutorTime LifeSmart curriculum and Childtimes new The Empowered Child curriculum position the Company as an educational leader in the industry.
Children in the Companys care are grouped according to age and developmental stage. Learning
goals, established by early education specialists, provide a guide by which staff members structure
daily activities. Because children construct their knowledge at different paces, in different ways,
daily activities may vary for individual students. Generally speaking, the Companys classrooms
under both brands are organized in seven levels following the sequential process of growth and development,
from infancy through school-age, with each level supplemented by a summer program:
Infants (six weeks  twelve months)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | Warm, secure settings and experienced, comforting caregivers foster each infants sense of trust,
  while growing his or her independence and self-esteem. Daily routines and sensory experiences promote
  listening and language skills. Play activities and interactions focus on the development of large
  muscles for sitting, crawling, standing and walking, and small muscles for grasping, reaching and
  holding.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           
|---------------------------
|Young Toddler (1  2 years)
|                           

| | Classroom space and materials are organized to support a young toddlers need to explore, investigate,
  discover and play. Caregivers provide plenty of time for play, incorporating fun, hands-on activities
  that help children learn about their body, communicate with words and solve problems. And the use
  of stories, pictures and books in small group activities encourages literacy. Childrens continued
  participation in daily routines further develops self-help skills and self-esteem.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     
|---------------------
|Toddler (2  3 years)
|                     

| | Classroom space and materials are organized to support the older toddlers increased need for
  independence. This organization provides opportunities for toddlers to make simple decisions, engage
  in pretend play and cooperate with other children while practicing listening and speaking skills. Indoor and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-



| | outdoor activities strengthen large and small
  muscles, and aid in the development of hand-eye coordination. Caregivers support self-help skills
  and encourage voluntary participation in daily routines, teaching sequence of events and fostering
  self-esteem.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        
|------------------------
|Preschool  (3  4 years)
|                        

| | Classroom space and materials are organized to support preschoolers need to test their independence
  and discover the world in a safe and secure way. Caregivers provide opportunities to solve problems,
  investigate questions and create unique works of art. Because our society places a strong emphasis
  on these skills, play activities are structured to increase childrens understanding of numbers
  and literacy. Portions of the day include self-directed exploration time that builds critical thinking
  skills and self esteem, while lessons on character education, physical fitness, science and a variety
  of curricular themes create a rounded educational experience. An increasingly structured environment
  works to ensure each child is well-prepared for elementary school, and life.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              
|------------------------------
|Pre-Kindergarten (4  5 years)
|                              

| | Classroom organization and daily scheduling provides pre-kindergarteners countless opportunities
  to investigate, while preparing them for the distinctive differences of a kindergarten classroom.
  Skilled teachers foster childrens rapidly advancing social, emotional and educational growth
  and incorporate numerous activities that spur literacy development and support emerging writing skills.
  Because children learn best when actively involved in constructing their own knowledge, much time
  is dedicated to playful exploration, in rich stimulating environments, monitored by caring, encouraging
  adults. Self-directed investigations build problem-solving and critical thinking skills and foster
  self-esteem while nurturing a love of learning. Group activities incorporate lessons on science,
  nature, mathematics and the arts while stressing the importance of communication and teamwork.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          
|--------------------------
|Kindergarten (5  6 years)
|                          

| | Kindergarten programs are designed to successfully transition children to first grade, and are aligned
  with local school district goals and assessment requirements. Classroom organization, materials and
  activities build childrens skills in mathematics, visual and performing arts, social studies,
  science and language while encouraging play, peer interaction and family involvement. Individual
  and group activities provide opportunities for sharpening observation skills, exploring cause and
  effect, sharing and playing with others, and planning and carrying out tasks. Other scenarios teach
  children how to follow directions, recall and sequence events, understand measurement, think creatively
  to solve problems and improve coordination. Low student to teacher ratios allow staff members to
  nurture and encourage children in a familiar, comfortable and secure environment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         
|-------------------------
|School-age (6  12 years)
|                         

| | School-age programs are designed to support childrens need for independence while providing outlets
  for their increasing educational and social interests in safe, supervised environments. Sports, art,
  music and more are incorporated into a variety of group and individual activities. Teachers offer
  academic support and mentoring, helping children set goals and manage tasks. Before or after school
  care provides a positive environment in which children can interact with peers, and have fun.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      
|----------------------
|Summer Camp (All Ages)
|                      

| | During the months when school is not in session, summer camp programs fill parents needs for
  a safe, supervised, educational environment for their children, and childrens needs for an
  engaging, entertaining way to spend their summer break. Yearly themes guide the structure of weekly
  activities and fieldtrips. Trained counselors lead experiences that allow children to see and learn
  things in new ways.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company continually assesses the quality of its brands. Recently, the Education Department, led
by Mr. Richard Cohen, completed an evaluation of each brands curriculums versus major
competitors. The process involved surveying all stakeholders, consulting with industry experts, and
creating education committees. Results were gathered and considered during the development of the
new preschool and pre-kindergarten curriculums. Parents and franchisees are informally and formally
surveyed on a regular basis to assess the quality of our facilities, services and franchise support.
The results of these surveys are forwarded to management for review and future planning.

|8
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|The Company continues to focus its efforts on obtaining accreditation for many of its centers by the
NAEYC or the National Early Childhood Program Accreditation (NECPA). NAEYC and NECPA
are national organizations that have established comprehensive criteria for providing quality child
care. Centers which earn such national accreditation status demonstrate a commitment to excellence
by operating centers of the highest quality for the children they serve. The Company believes that
the process of earning accreditation assists in the Companys efforts to continually improve
its programs, training and facilities. The Company shares NAEYCs and NECPAs commitment
to provide the highest quality child care and, thus, continues to pursue an aggressive accreditation
schedule.
Products and Services
General.The Companys corporate centers are under the leadership of a Vice President of Corporate Operations
and are organized into four regions based on geography. Each region is managed by a Regional Operations
Manager and is supported by a team that includes a Regional Facilities Manager, a Regional Human
Resource Manager and a Regional Training Manager. The regions are further divided into areas headed
by an Area Manager who is responsible for ten to 16 centers. Each individual center has a dedicated
Center Director and a staff generally ranging from 15 to 30 persons. The centers operate year-round,
five days per week, generally opening at 6:30 a.m. and remaining open until 6:30 p.m. A child may
be enrolled in any of a variety of program schedules, from a full-time, five-day-per-week plan to
as little as two or three half-days a week. A child attending full-time typically spends approximately
ten hours a day, five days per week, at a center.
The Companys current weekly tuition for full-day service typically ranges from approximately
$100 to $400 depending on the location of the center, the age of the child, and whether it is a Childtime
or Tutor Time center. Tuition is generally paid in advance on a weekly basis. The Company also charges
additional registration and materials fees, which vary by brand and location. The Company generally
reviews its tuition rates on a regular basis to determine whether rates at a particular center should
be changed in light of that centers competitive environment and financial results.
The Companys franchise operations are headed by a Vice President of Franchise Operations. The
Vice President oversees Franchise District Managers, who in turn are the main point of contact between
franchisees and the Company. The Franchise District Managers provide support and training to franchisees
and their center staff, and also ensure that franchisee operations are in compliance with Company
standards through the use of a comprehensive evaluation tool.
Both the regional corporate operations teams and the Franchise District Managers can draw on additional
resources within the Company to bring in expert advice on specific topics including marketing, curriculum,
human resources, training, technology, finance and business management, licensing, new center openings,
state and federal grants, government relations, real estate and facilities management.
Center Operations.Each center is managed by a Director who is supervised by an Area Manager. The Company places a great
deal of emphasis on the recruitment, selection and ongoing training of Center Directors. Center Directors
are hired by their respective Area Manager and Regional HR Manager from a pool of candidates who
have undergone an initial psychological profile screen, a reference check, and a criminal background
check. In addition, candidates are screened for the appropriate skills and abilities necessary for
success in the position. All Center Directors are required by state regulations to have some minimum
level of training, which is typically in the form of credit hours from a state approved training
agency or an accredited educational institution. The Company prefers that potential Directors have
a bachelors degree in early childhood education, child development or a health-related field
plus a minimum of two years experience in a licensed child care facility. Many Directors are recruited
from within the Company and have served as teachers or Assistant Directors in one of the Companys
centers. A Center Director has overall responsibility for the operations of a center including: ensuring
that the center is operated in accordance with Company and state licensing standards and operating
procedures; providing an educational, caring and safe environment for children and their parents;
marketing the Company to parents and otherwise promoting the positive image of the Company in the
community. The Center Directors receive a salary and bonus tied to the financial and operating performance
of their center. Each Center Director is also responsible for hiring his or her staff, including teachers.
The Center Director assesses and collects tuition and fees. All funds received by each center are deposited
in an account established by the Company in a local bank. All payroll and most other center expenses
are paid directly by the Companys corporate office. Basic supplies are purchased by the centers
pursuant to national vendor contracts negotiated by the corporate office to take advantage of volume
buying discounts and to retain financial controls. Direct expenditures by the centers are limited
to miscellaneous operating expenses.
Training.The Company believes that the skills and expertise of the Director and staff at each center are among
the most significant factors for parents selecting center-based child care programs. In order to
enhance the quality of the staff at each center, the Company provides both externally and internally developed training
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|9
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|programs for its personnel. It has developed
training materials and manuals for its staff and conducts seminars for its Area Managers and Center
Directors on such subjects as interpersonal and business skills, curriculum, health and safety, basic
financial concepts and marketing. All management personnel (including Area Managers, Center Directors
and Assistant Directors) participate in periodic training programs or meetings and must comply with
applicable state and local licensing regulations. Center staff are required to participate in orientation
and training sessions. The Company divides operations into regions, each of which has an on-site
Regional Training Manager to assist in the development and implementation of its training programs.
These training programs are designed to prepare and enhance the skills of its teachers to meet the
Companys internal standards and applicable state licensing requirements. All new Center Directors
participate in a two-week training program immediately upon hire, followed by three-and-a-half days
spent in our Director Academy within their first 120 days.
Safety.The Company is committed to the health and safety of the children in its care. To prevent unauthorized
persons from entering the center, virtually all centers are equipped with front door security systems
requiring card keys, security codes, or other forms of access control. In addition, most centers
use a double door entrance and have a centrally monitored security system to protect the center after
hours. Each day, children must be signed in and out by parents, legal guardians or an authorized
designee of the parent or guardian. All centers have at least one staff member trained in first aid
and CPR.
Center staff members are trained to detect child neglect and abuse, and are required by law and Company
policy to immediately report all suspected instances. In the rare event that an employee is accused
of child neglect or abuse, it is the Companys policy to place the employee on administrative
leave pending the results of an independent state agency investigation, in which the Company cooperates
fully. No assurances can be made that allegations of child neglect or abuse will not be made in the
future. However, allegations of child neglect or abuse against an employee are rare and, in most
cases, covered by the Companys general liability insurance. Since these incidents fall within
the insurance policy limits, it is the Companys position that such occurrences will not materially
affect the financial position, results of operations, or cash flow of the Company. The Company maintains
general liability insurance and appropriate umbrella policies in adequate amounts, as described under
Insurance.
Financial Planning, Budgeting and Cost Control.The Company has a program of financial planning and cost control which seeks to maximize operational
profit without sacrificing quality child care. This goal is accomplished by actively engaging the
Area Managers and Center Directors in the formulation and implementation of the budget for each center.
Directors are then responsible for implementing the approved budget and become primarily responsible
for the financial performance of the center. In order to encourage profitable performance, the Company
has a financial incentive program for meeting or exceeding pre-approved budget goals.
Facilities.Most of the Companys centers are freestanding structures leased or owned by the Company. When
new centers are constructed, the Company utilizes prototype buildings designed specifically for each
state emphasizing energy efficiencies, lower maintenance costs and enhanced appearance. Childtime
centers average 6,800 square feet. Tutor Time centers are typically larger with an average of over
10,000 square feet.
The interiors primarily consist of closed classrooms bordering a central hallway. This design allows
children the freedom to explore their environment as well as the staffs need to be able to
monitor activities in the classroom. The Companys centers contain classrooms, recreational
areas, a kitchen and bathroom facilities and are designed to accommodate the grouping of children
by age or development level. Two unique features of Tutor Time centers are the Tutor Towne Village and self-contained classrooms.The Tutor Towne Village is a common room outfitted with a child-sized post office, firehouse, and other facades that
create a play and learning environment imitating a small town. Use of the room is purposefully integrated
into the Tutor Time curriculum in a way that enables staff to teach children through guided socio-dramatic
play. Each classroom is self-contained, with its own areas for play, learning, eating, crafts and
diaper changing. Teachers and children do not need to leave the room, except for other special activities
such as use of playgrounds or theTutor Towne Village. Childtime centers do not have the same level of standardization of features due to the varying
age of centers and the fact that many were acquired. However, most centers have unique and appealing
features in line with the educational and developmental philosophy of the Company.
As of April 1, 2005, the Company operated 331 Company-owned centers and franchised 128 centers. Aggregate
licensed capacity for these centers was over 69,000 children. The capacity of centers differs from
state to state because of various licensing requirements.
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|10
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|Management Contracts.As of April 1, 2005, the Company also had contracts to manage six child care centers. Most of these
centers are located on or near the premises of a specific employer and involve varying degrees of
involvement from the employer, such as ownership of the premises, minimum enrollment guarantees,
the assumption of financial responsibility for the ongoing operations of the center, other management arrangements, or any combination of the above. Historically,
public agencies and hospitals have been the principal employers providing or otherwise arranging
for child care services for their employees.
Marketing
The Company believes that the quality of a centers director, staff and center location, supported
by consistent national and localized marketing and sales efforts, are the key components to a successful,
profitable center. The Marketing Department is responsible for implementing two separate marketing
strategies to support both the individual development of the Childtime and Tutor Time brands, as
well as providing marketing and sales training and support for both corporate and franchise centers.
The core marketing strategy for the Company is to focus on developing cost-efficient programs that
drive enrollments, especially during the peak periods of Back to School, Summer Camp, and Winter
Enrollment. The Companys primary year-long advertising strategy is Yellow Pages, a top source
of new enrollments each year. Other year-long marketing initiatives include: media relations, community
events, customer referrals, collateral material development and Internet marketing. Peak enrollment
period advertising strategies consist of using several mediums in each centers area to saturate
the marketplace during a set time period and may consist of: direct mail, Val-Pak, ADVO, and ads
in local publications. All marketing materials are customized with the nearest centers information
as well as a toll-free number and Website address where interested customers can obtain more information
about the Company or their nearest center.
Seasonality
Generally, the Companys accounting periods are organized into 13 four-week periods, with 4 four-week
periods comprising the first fiscal quarter and 3 four-week periods comprising each of the second,
third and fourth fiscal quarters. Consequently, the Companys revenues, gross profit and operating
results for the first quarter are favorably impacted by the additional four weeks included in that
quarter. Periodically, as was the case in fiscal 2004, the Company will have five weeks in the thirteenth
period of its fiscal year due to the Companys closing the fiscal year on the Friday closest
to March 31.
Due to the impact of summer vacation, in July and August of each year (the last month of the Companys
first fiscal quarter and the first month of the Companys second fiscal quarter), the Company
has historically experienced an enrollment decline. In addition, the Company typically experiences
revenue declines in the months of November and December due to the impact of several major holidays.
To partially offset these declines, the Company has successfully implemented and marketed both a
summer camp program with a new theme and focus each year, as well as a December holiday camp.
New enrollments are generally highest in September and January; accordingly, August and December are
traditionally the best months to open new centers. Total enrollments (and, accordingly, the Companys
results) are typically the strongest in the fourth quarter (which include the months of January,
February and March).
Competition
The child care and preschool education industry is highly fragmented and competitive and has historically
been dominated by small, local nursery schools and child care centers. The Companys competition
consists principally of local nursery schools and child care centers (many of which are non-profit,
including church-affiliated centers), providers of services that operate out of homes, and other
proprietary multi-unit child care center providers, some of which are larger and may have substantially
greater financial resources than the Company. Among the larger providers of for-profit child care
and preschool education are Knowledge Learning Corporation, La Petite Academy, Inc., and Nobel Learning
Communities, Inc. Bright Horizons Family Solutions, Inc. is the largest competitor in the at-work/management
contract segment. Major competitors in the franchise segment include Goddard School, Primrose Schools,
and Kiddie Academy.
The Company believes it is able to compete favorably with these providers by offering a high quality
level of child care services. This is especially true in competing against local nursery schools,
child care centers and in-home providers where the Company is often at a price disadvantage, because
these providers generally charge less for their services than the Company charges. Many church-affiliated
and other non-profit child care centers have lower occupancy costs than the Company and may receive
donations or other funding to cover operating expenses. Consequently, operators of such centers may
charge tuition rates that are less than the Companys rates. In addition, fees for home-based
and not-for-profit care are normally lower than fees for center-based care, because these providers
are often not regulated and, thus, not required to satisfy the same health, safety, insurance or
state regulations as the Companys centers.
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|The Company competes by hiring and training quality Center Directors and by offering professionally-planned
educational and recreational programs, well-equipped facilities, and trained staff and supervisory
personnel. In addition, the Company provides a range of enrichment programs, including foreign language,
dance, music and karate. The Company also provides drop in service, as well as transportation between
the Companys child care centers and schools of children enrolled in the Companys before
and after school program.
Personnel
As of April 1, 2005, the Company employed approximately 7,500 persons (including part-time and substitute
caregivers), of which 87 are employed at the corporate headquarters in Michigan, 23 are employed
at regional offices and 34 are employed as Area Managers or Franchise District Managers. The remainder
are employed at the Companys child care centers. Center employees include Center Directors,
Assistant Directors, full-time and part-time teachers, caregivers, substitute caregivers, aides and
other staff, including cooks and van drivers. All Center Directors, Regional Managers, Area Managers
and most corporate supervisory personnel are salaried; all other employees are paid on an hourly
basis. The Company does not have an agreement with any labor union and believes that its relations
with its employees are favorable.
Regulation
Child care centers are subject to numerous state and local regulations and detailed state licensing
requirements. Although these regulations vary from jurisdiction to jurisdiction, government agencies
generally review, among other things, the adequacy of buildings and equipment, licensed capacity,
the ratio of staff to children, staff training, record keeping, the dietary program, the daily curriculum
and health and safety standards. In most jurisdictions, these agencies conduct scheduled and unscheduled
inspections of centers, and licenses must be renewed periodically. In a few jurisdictions, new legislation
or regulations have been enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care centers. Repeated
failures by a center to comply with applicable regulations can subject it to state sanctions, which
might include fines, corrective orders, being placed on probation or, in more serious cases, suspension
or revocation of the centers license to operate. Management believes the Company is in substantial
compliance with all material regulations applicable to its business.
For the fiscal year ended April 1, 2005, approximately 22% of the Companys revenues were generated
from federal and state child care assistance programs, primarily the Child Care and Development Block
Grant and At-Risk Programs. These programs are typically designed to assist low-income families with
child care expenses and are administered through various state agencies. Although no federal license
is required at this time, there are minimum standards that must be met to qualify for participation
in certain federal programs. There is no assurance that funding for such federal and state programs
will continue at current levels and a significant reduction in such funding may have an adverse impact
on the Company.
There are certain tax incentives for parents utilizing child care programs. Section 21 of the Internal
Revenue Code provides a federal income tax credit ranging from 20% to 35% of certain child care expenses
for qualifying individuals (as defined therein). The fees paid to the Company for child
care services by eligible taxpayers qualify for the tax credit, subject to the limitations of Section
21. For 2003, 2004 and 2005, the tax credit ranged from 20% to 35% of qualifying child care expenses
and was limited to $3,000 for one child and $6,000 for two or more children. Therefore, the maximum
credits ranged from $600 to $1,050 for one child and $1,200 to $2,100 for two or more children. Tax
incentives provided under the Internal Revenue Code are subject to change.
The Company must also comply with the Americans with Disabilities Act (ADA), which prohibits
discrimination on the basis of disability in public accommodations and employment. Costs incurred
to date by the Company to comply with the ADA have not been significant. A determination that the
Company is not in compliance with the ADA, however, could result in the imposition of fines or an
award of damages to private litigants, and could require significant expenditures. The Company believes
that the majority of its centers are substantially in compliance with all material ADA requirements.
Insurance
The Companys insurance program currently includes the following types of policies: workers compensation,
commercial general and automobile liability, commercial property, director and officer liability,
flood coverage in applicable locations, excess umbrella liability, and a medical payment
program for accidents which provides secondary coverage for each child enrolled in a Company center.
The policies provide for a variety of coverages and are subject to various limits and deductibles.
For fiscal 2005 and 2003, the Companys policies for workers compensation had per occurrence
deductibles of $100,000 and $250,000 respectively. For fiscal 2004, the workers
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|12
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|compensation did not have a deductible. The commercial general liability policy has
a $1,000,000 limit per occurrence, with a $3,000,000 general aggregate limit per location. There
is a separate limit for sexual abuse and molestation coverage of $1,000,000 for each occurrence and
$3,000,000 in the aggregate, with defense limits of $1,000,000 per occurrence and $3,000,000 in the
aggregate. The Company also has excess umbrella coverage, relating to general liabilities
(exclusive of sexual/physical abuse claims) in the amount of $20,000,000 per year. Management believes
the Companys current insurance coverages are adequate to meet its needs.
Item 2. Properties
The following table shows the locations of the Companys centers, including those operated under
management contracts, as of April 1, 2005 (the numbers reflect the number of centers in that state
or country):
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|               | Tutor Time |    
|-------------- | ---------- | ---
|               |            |    
|
|               |            |    
|Arizona        |            | 20 
|California     |            | 34 
|Connecticut    |            | 0  
|Delaware       |            | 0  
|Florida        |            | 12 
|Georgia        |            | 15 
|Illinois       |            | 6  
|Iowa           |            | 3  
|Kansas         |            | 0  
|Maryland/DC    |            | 12 
|Massachusetts  |            | 0  
|Michigan       |            | 17 
|Minnesota      |            | 0  
|Missouri       |            | 4  
|Nevada         |            | 7  
|New Jersey     |            | 3  
|New York       |            | 24 
|North Carolina |            | 12 
|Ohio           |            | 22 
|Oklahoma       |            | 8  
|Pennsylvania   |            | 1  
|Texas          |            | 42 
|Virginia       |            | 13 
|Washington     |            | 6  
|Wisconsin      |            | 1  
|Hong Kong      |            | 0  
|Indonesia      |            | 0  
|Philippines    |            | 0  
|               |            |    
|Total          |            | 262
|               |            |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As of April 1, 2005, the Company operated 262 Childtime centers and 69 Tutor Time corporate centers.
Of the Childtime centers, 220 were operated under lease or operating agreements, 36 were owned and
six were operated under management contracts. Of the Tutor Time corporate centers, all 69 were under
lease agreements. Both the Childtime and Tutor Time leases have terms ranging from 1 to 25 years,
often with renewal options, with most leases having an initial term of 5 to 20 years. The leases
typically require the Company to pay utilities, maintenance, insurance and property taxes, and some
provide for contingent rentals if the centers revenues exceed a specified base level. In addition,
the Company serves as guarantor on 49 franchise leases.

|13
|--



|                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------
|As of April 1, 2005, the Company had leases or operating agreements with initial terms (including renewal
options) expiring as follows:

| | Fiscal Year    |  | Number of Leases or
      Operating Agreements Expiring |    
| | -------------- |  | ------------------------------------------------------- | ---
| |                |  |                                                         |    
| |                |  |                                                         |    
| | 2006           |  |                                                         | 25 
| | 2007           |  |                                                         | 21 
| | 2008           |  |                                                         | 26 
| | 2009           |  |                                                         | 27 
| | 2010           |  |                                                         | 39 
| | 2011 and later |  |                                                         | 148
| |                |  |                                                         |    
| | Total          |  |                                                         | 286
| |                |  |                                                         |    

|Item 3. Legal Proceedings
Various legal actions and other claims are pending or could be asserted against the Company including


pending claims relating to exposure to mold and other contaminants resulting from the condition

of
one of the Companys former centers. In addition, the Company has and will continue to

vigorously
protect its rights against parties that violate franchise agreements or infringe on

its intellectual
property rights. Litigation is subject to many uncertainties; the outcome of
individual
litigated
matters is not predictable with assurance, and it is reasonably possible
that some of
these matters
may be decided unfavorably to the Company. Although there is a chance
that any unfavorable
decision
could have a material adverse impact on the Companys financial
position, liquidity
and results
of operations, it is the opinion of management that the
ultimate liability, if
any, with respect
to these matters will not materially affect the financial
position, results of
operations or cash
flows of the Company beyond amounts already accrued.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4A. Executive Officers of the Registrant
The information regarding executive officers of the Company contained in Item 10 of this Report as
it appears in Part III of this Report is incorporated herein by reference.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14
|--



|PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases
of Equity Securities
The following table sets forth the high and low bid prices of the Companys Common Stock for the
fiscal years ended April 1, 2005 and April 2, 2004 as reported on The Nasdaq SmallCap Market. These
quotations represent prices between dealers and do not include retail mark-ups, mark-downs or other
fees or commissions and may not represent actual transactions.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|             | Common Stock
      Bid Prices |     
|------------ | ----------------------------- | ----
|             |                               |     
|
|             |                               |     
|Fiscal 2005: |                               |     
|1st Quarter  | $                             | 3.90
|2nd Quarter  | $                             | 3.70
|3rd Quarter  | $                             | 3.75
|4th Quarter  | $                             | 4.00
|             |                               |     
|Fiscal 2004: |                               |     
|1st Quarter  | $                             | 2.93
|2nd Quarter  | $                             | 2.50
|3rd Quarter  | $                             | 2.55
|4th Quarter  | $                             | 2.42

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company has not paid dividends on shares of Common Stock and has no intention of declaring or paying
any such dividends in the foreseeable future. The Company is not currently subject to any contractual
restrictions on its ability to pay dividends. Nonetheless, the Company intends to retain its earnings,
if any, to finance the growth and development of its business, including future acquisitions.
As of June 21, 2005, there were approximately 795 holders of the Companys Common Stock (including
individual participants in security position listings).
Item 6. Selected Financial Data
The following table sets forth, for the periods indicated, selected data from the Companys financial
statements. This table should be read in conjunction with Item 7 (Managements Discussion and
Analysis of Financial Condition and Results of Operations) and with the Companys Consolidated
Financial Statements and related Notes for the year and period ended April 1, 2005 appearing elsewhere
in this Report.

|15
|--



|                                                       
|-------------------------------------------------------
|Learning Care Group, Inc. and Consolidated Subsidiaries

|                                                                                                                                    | April 1,
      2005 |         | April 2,
      2004 |   | March 28,
      2003 |   | March 29,
      2002 |         | March 30,
      2001 |  
|----------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------- | ------------------- | - | -------------------- | - | -------------------- | ------- | -------------------- | -
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Revenue from Learning Center Operations                                                                                             | $                   | 204,913 |                     | $ | 194,748              |   | $                    | 167,782 |                      | $
|Revenue from Franchise Operations                                                                                                   |                     | 7,261   |                     |   | 6,715                |   |                      | 4,293   |                      |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Revenue, net                                                                                                                        |                     | 212,174 |                     |   | 201,463              |   |                      | 172,075 |                      |  
|Operating expenses of Learning Centers                                                                                              |                     | 182,397 |                     |   | 175,297              |   |                      | 152,165 |                      |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Gross profit                                                                                                                        |                     | 29,777  |                     |   | 26,166               |   |                      | 19,910  |                      |  
|General and administrative expenses                                                                                                 |                     | 19,351  |                     |   | 18,951               |   |                      | 16,561  |                      |  
|Depreciation and amortization expenses (1)                                                                                          |                     | 4,370   |                     |   | 4,003                |   |                      | 3,462   |                      |  
|Gain on sale of centers and vacant land                                                                                             |                     | (666    | )                   |   |                     |   |                      |        |                      |  
|Provision for doubtful accounts                                                                                                     |                     | 1,491   |                     |   | 1,291                |   |                      | 1,746   |                      |  
|Exit and closure expenses                                                                                                           |                     | 153     |                     |   | 251                  |   |                      | 1,051   |                      |  
|Mold remediation expense                                                                                                            |                     |        |                     |   |                     |   |                      |        |                      |  
|Failed merger costs                                                                                                                 |                     |        |                     |   |                     |   |                      |        |                      |  
|Intangible asset impairment charges (2)                                                                                             |                     |        |                     |   |                     |   |                      | 4,181   |                      |  
|Fixed asset impairment charges (2)                                                                                                  |                     |        |                     |   |                     |   |                      | 3,401   |                      |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|OPERATING INCOME (LOSS)                                                                                                             |                     | 5,078   |                     |   | 1,670                |   |                      | (10,492 | )                    |  
|Interest expense, net                                                                                                               |                     | 2,179   |                     |   | 2,127                |   |                      | 2,577   |                      |  
|Other (income) expense, net                                                                                                         |                     | (155    | )                   |   | (93                  | ) |                      | (84     | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|INCOME (LOSS) BEFORE INCOME TAXES, DISCONTINUED
        OPERATIONS AND CUMULATIVE EFFECT OF 
        CHANGE IN ACCOUNTING PRINCIPLE |                     | 3,054   |                     |   | (364                 | ) |                      | (12,985 | )                    |  
|Income tax provision (benefit)                                                                                                      |                     | 66      |                     |   | 93                   |   |                      | (239    | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
        AND CUMULATIVE EFFECT OF CHANGE IN
        ACCOUNTING PRINCIPLE                |                     | 2,988   |                     |   | (457                 | ) |                      | (12,746 | )                    |  
|Discontinued operations, net of taxes                                                                                               |                     | 154     |                     |   | (466                 | ) |                      | (438    | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
        CHANGE IN ACCOUNTING PRINCIPLE                                                    |                     | 3,142   |                     |   | (923                 | ) |                      | (13,184 | )                    |  
|Cumulative effect of change in accounting principle (2)                                                                             |                     |        |                     |   |                     |   |                      | (4,967  | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|NET INCOME (LOSS)                                                                                                                   | $                   | 3,142   |                     | $ | (923                 | ) | $                    | (18,151 | )                    | $
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|EARNINGS (LOSS) PER SHARE:                                                                                                          |                     |         |                     |   |                      |   |                      |         |                      |  
|Basic income (loss) before discontinued operations
      and cumulative effect of change in accounting principle                    | $                   | 0.15    |                     | $ | (0.02                | ) | $                    | (2.38   | )                    | $
|Discontinued operations, net                                                                                                        |                     | 0.01    |                     |   | (0.03                | ) |                      | (0.08   | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Basic income (loss) before cumulative effect of
        change in accounting principle                                              | $                   | 0.16    |                     | $ | (0.05                | ) | $                    | (2.46   | )                    | $
|Cumulative effect of change in accounting principle                                                                                 |                     |        |                     |   |                     |   |                      | (0.93   | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Net income (loss)                                                                                                                   | $                   | 0.16    |                     | $ | (0.05                | ) | $                    | (3.39   | )                    | $
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Diluted income (loss) before discontinued operations
        and cumulative effect of change in accounting principle                | $                   | 0.14    |                     | $ | (0.02                | ) | $                    | (2.38   | )                    | $
|Discontinued operations, net                                                                                                        |                     | 0.01    |                     |   | (0.03                | ) |                      | (0.08   | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Diluted income (loss) before cumulative effect of
        change in accounting principle                                            | $                   | 0.15    |                     | $ | (0.05                | ) | $                    | (2.46   | )                    | $
|Cumulative effect of change in accounting principle                                                                                 |                     |        |                     |   |                     |   |                      | (0.93   | )                    |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Net income (loss)                                                                                                                   | $                   | 0.15    |                     | $ | (0.05                | ) | $                    | (3.39   | )                    | $
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|WEIGHTED AVERAGE SHARES OUTSTANDING                                                                                                 |                     |         |                     |   |                      |   |                      |         |                      |  
|Basic                                                                                                                               |                     | 19,821  |                     |   | 17,820               |   |                      | 5,362   |                      |  
|Diluted                                                                                                                             |                     | 20,804  |                     |   | 17,820               |   |                      | 5,362   |                      |  
|                                                                                                                                    |                     |         |                     |   |                      |   |                      |         |                      |  
|Selected Balance Sheet Data:                                                                                                        |                     |         |                     |   |                      |   |                      |         |                      |  
|Total assets                                                                                                                        | $                   | 87,357  |                     | $ | 85,619               |   | $                    | 83,945  |                      | $
|Total long-term debt                                                                                                                | $                   | 7,921   |                     | $ | 8,397                |   | $                    | 29,631  |                      | $
|Total shareholders equity                                                                                                           | $                   | 40,334  |                     | $ | 37,006               |   | $                    | 25,813  |                      | $
|Selected Operating Data:                                                                                                            |                     |         |                     |   |                      |   |                      |         |                      |  
|Number of centers (at end of period)                                                                                                |                     | 331     |                     |   | 333                  |   |                      | 339     |                      |  

|16
|--



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Prior to the adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, the Company amortized goodwill for the fiscal years ended March 29,
2002 and March 30, 2001 of $1.1 and $1.4 million, respectively, which had an
impact on the net loss per share of $(0.22) and $(0.27), respectively. If goodwill amortization had not been recorded for the
    prior periods, net income (loss) and earnings (loss) per share as shown above would have been as
    follows:

|     | Net Income
      (Loss) |   | Earnings (Loss)
      Per Share |  
|---- | ----------------------- | - | ------------------------------- | -
|     |                         |   |                                 |  
|
|2002 |                         | $ | (2.9                            | )
|2001 |                         | $ | 0.8                             |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During the second quarter of 2003, the Company completed the implementation of SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is no longer amortized. Instead, goodwill and indefinite-lived intangible
  assets are tested for impairment in accordance with the provisions of SFAS No. 142. The Company completed
  its impairment test and recorded an impairment loss of $5.0 million (net of a tax benefit of $0.9
  million) as a cumulative effect of a change in accounting principle. In addition, as a result of
  continuing weakening economic conditions, the Company tested for goodwill impairment as of October
  11, 2002, and recorded an impairment loss during the second quarter of $4.2 million. Due to the continuing
  weakening economic conditions, the Company also tested for long-lived asset impairment, which consists
  primarily of equipment, leasehold improvements and other assets, as of October 11, 2002, in accordance
  with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company employed a cash flow analysis in conducting its impairment test. The Company completed
  its impairment test and recorded an impairment loss of $3.5 million, including $0.1 million in discontinued
  operations, which impacted the Childtime reporting segment.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | The impairment charges shown for fiscal years ended March 2002 and 2001 reflect charges for the write-down
  of goodwill and fixed assets determined in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
The Company utilizes a 52-53 week fiscal year ending on the Friday closest to March 31. Fiscal 2005
ended April 1, 2005 and contained 52 weeks. Fiscal 2004 ended April 2, 2004 and contained 53 weeks.
Results of Operations comparisons will be impacted by the additional week in fiscal 2004.
The results of Learning Centers opened, acquired or disposed of are included in the Companys
consolidated financial statements from the date of opening or acquisition and through the date of
disposition. The timing of such new openings, acquisitions or dispositions could influence comparisons
of year over year results. These comparisons were particularly influenced by the Companys acquisition
of substantially all of the assets of Tutor Time Learning Systems, Inc., a Florida Corporation, on
July 19, 2002.
The following table details the number of centers in operation during fiscal years 2003, 2004 and 2005,
respectively.

|17
|--



| |                                  | Childtime |     | Tutor Time |  | Franchise |   | Total |    
| | -------------------------------- | --------- | --- | ---------- |  | --------- | - | ----- | ---
| |                                  |           |     |            |  |           |   |       |    
| | March 28, 2003                   |           |     |            |  |           |   |       |    
| | Beginning of period              |           | 286 |            |  |          |   |       |   
| | Acquisitions                     |           |    |            |  | 58        |   |       | 124
| | New center openings              |           |    |            |  | 5         |   |       | 16 
| | Closures and sales               |           | (10 | )          |  |          |   |       | (8 
| |                                  |           |     |            |  |           |   |       |    
| | End of period                    |           | 276 |            |  | 63        |   |       | 132
| |                                  |           |     |            |  |           |   |       |    
| | April 2, 2004                    |           |     |            |  |           |   |       |    
| | Beginning of period              |           | 276 |            |  | 63        |   |       | 132
| | New center openings              |           |    |            |  | 2         |   |       | 4  
| | Franchising of Corporate centers |           |    |            |  | (1        | ) |       | 1  
| | Closures and sales               |           | (7  | )          |  |          |   |       | (3 
| |                                  |           |     |            |  |           |   |       |    
| | End of period                    |           | 269 |            |  | 64        |   |       | 134
| |                                  |           |     |            |  |           |   |       |    
| | April 1, 2005                    |           |     |            |  |           |   |       |    
| | Beginning of period              |           | 269 |            |  | 64        |   |       | 134
| | Acquisitions                     |           |    |            |  | 8         |   |       | (8 
| | New center openings              |           |    |            |  | 1         |   |       | 5  
| | Franchising of Corporate centers |           |    |            |  | (3        | ) |       | 3  
| | Closures and sales               |           | (7  | )          |  | (1        | ) |       | (6 
| |                                  |           |     |            |  |           |   |       |    
| | End of period                    |           | 262 |            |  | 69        |   |       | 128
| |                                  |           |     |            |  |           |   |       |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company is subject to certain risks common to the providers of child care and early education,
including dependence on key personnel, dependence on client relationships, competition from alternate
sources or providers of the Companys services, market acceptance of work and family services,
the ability to hire and retain qualified personnel, the Companys ability to manage its overall
cost structure and general economic conditions.
Critical Accounting Policies
The Company prepares its financial statements in conformity with accounting principles generally accepted
in the United States of America. In preparing these statements management makes certain estimates,
judgments and assumptions, which affect the reported amounts of assets and liabilities at the date
of the financial statements, as well as the amounts of revenue and expenses for each period presented.
The application of the Companys accounting policies, in certain instances, requires the exercise
of judgment and assumptions that pertain to future uncertainties and as a result, actual future results
could differ from managements estimates. The accounting policies management believes are critical
in the preparation of the Companys financial statements relate to revenue recognition, accounts
receivable, impairment of long-lived assets, liability for workers compensation insurance obligations,
and the consolidation of variable interest entities.
Revenue Recognition.The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin 101, which requires

that the following criteria be met before recognizing revenue: persuasive evidence of an arrangement

exists, delivery has occurred or services have been rendered, the fee is fixed and determinable,

and collectibility is reasonably assured. The Companys revenues consist primarily of tuition

paid by parents, supplemented in some cases by payments (either partial or in total) from government

agencies. Each agency has its own set of guidelines, including record keeping requirements, in
administering
subsidies and management must constantly monitor affected centers to ensure compliance.
Revenues
also include, to a lesser degree, management fees paid by corporate sponsors. Revenue
is recognized
as services are performed. In some centers, the Company receives revenue in advance
of services being
rendered, in which case, revenue is deferred until the services have been provided.
Franchise fees
are recognized as revenue at the time the franchise center opens. Royalty income
related to franchise
operations is recognized as revenue is earned by franchisees.
Accounts Receivable.The Company generates accounts receivable primarily from fees charged to governmental agencies, franchisees

and, to a lesser degree, parents. The Company monitors collections and payments from these customers

and maintains a provision for estimated losses based on historical trends and current overall economic

conditions. Amounts charged to this provision for uncollectible accounts receivable have historically

been within the Companys expectations, but there can be no assurance that future experience

will be consistent with the Companys past experience.

|18
|--



|Impairment of Intangible and Long-lived Assets under SFAS 142 and SFAS 144.During the second quarter of 2003, the Company completed the implementation of SFAS 142, Goodwill and Other Intangible Assets.Under SFAS 142, goodwill is no longer amortized. Instead, goodwill and intangible assets with indefinite
lives are tested for impairment in accordance with the provisions of SFAS 142. The Company employed
a discounted cash flow analysis to compute fair value in conducting its impairment tests under SFAS
142. The Company also tested for long-lived asset impairment, which consists primarily of equipment,
leasehold improvements and other assets, as of October 11, 2002, in accordance with the provisions
of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.The Company employed a cash flow analysis in conducting its impairment test. At the end of fiscal 2004
and 2005, the Company again tested for impairment using the discounted, forecasted cash flows for
the three segments of the Company  Childtime, Tutor Time and Franchise
Operations. These cash flows were compared to the fair value of intangible and long-lived assets
for each segment, and it was determined that there was no further impairment. Assumptions and estimates
about future cash flows are subjective in nature and can be affected by a variety of factors, such
as the economy, regulatory changes and changes in state mandated programs. There is a potential for
impairment charges in future years that would reduce operating income and asset values on our balance sheet.
Liability for Workers Compensation Insurance Obligations.The Company has self-insured a significant portion of its workers compensation insurance plans except

during fiscal 2004. The full extent of certain liabilities, in many cases, may not become fully
recognized
for several years. The Company, therefore, estimates the potential obligation for liabilities
which
have been incurred but not yet reported based upon historical data and experience, and utilizes
an
outside consulting firm to assist the Company in developing these estimates. Although management

believes that the amounts accrued for these obligations are sufficient, any significant increase

in either the number of claims and/or costs associated with claims made under these plans could
have
a material effect on the Companys financial results.
Consolidation of Variable Interest Entities.During fiscal 2004, the Company implemented FIN 46, Consolidation of Variable Interest Entities. In accordance with FIN 46, the Company determined that some of its franchise operations are variable
interest entities (VIE) and the Company had variable interests in these entities including royalty
payments and in some cases debt, leasing arrangements and lease guarantees. Two franchises were identified
in which the Company was the primary beneficiary and these two franchises were included in the 2004
consolidated financial statements. During fiscal 2005, the Company acquired these entities. As a
result, these entities are no longer VIEs as of April 1, 2005. The Company has determined that it
has no other VIEs.
Results of Operations
Fiscal 2005 Compared to Fiscal 2004
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | Fiscal Year
      Ended
      April 1, 2005 |         | Percent
      of
      Revenues |        | Fiscal Year
      Ended
      April 2, 2004 |   | Percent
      of
      Revenues |  | Change
      Amount
      (in Dollars) | 
|--------------------------------------- | ------------------------------------------- | ------- | ------------------------------- | ------ | ------------------------------------------- | - | ------------------------------- |  | -------------------------------------- | 
|                                        |                                             |         |                                 |        |                                             |   |                                 |  |                                        | 
|                                        |                                             |         |                                 |        |                                             |   |                                 |  |                                        | 
|Revenue from Learning Center Operations | $                                           | 204,913 |                                 | 96.6%  |                                             | $ | 194,748                         |  | 96.7%                                  | 
|Revenue from Franchise Operations       |                                             | 7,261   |                                 | 3.4%   |                                             |   | 6,715                           |  | 3.3%                                   | 
|                                        |                                             |         |                                 |        |                                             |   |                                 |  |                                        | 
|Revenue, net                            |                                             | 212,174 |                                 | 100.0% |                                             |   | 201,463                         |  | 100.0%                                 | 
|Operating expenses of Learning Centers  |                                             | 182,397 |                                 | 86.0%  |                                             |   | 175,297                         |  | 87.0%                                  | 
|                                        |                                             |         |                                 |        |                                             |   |                                 |  |                                        | 
|Gross profit                            |                                             | 29,777  |                                 | 14.0%  |                                             |   | 26,166                          |  | 13.0%                                  | 
|General and administrative expenses     |                                             | 19,351  |                                 | 9.1%   |                                             |   | 18,951                          |  | 9.4%                                   | 
|Depreciation and amortization expenses  |                                             | 4,370   |                                 | 2.1%   |                                             |   | 4,003                           |  | 2.0%                                   | 
|Gain on sale of centers and vacant land |                                             | (666    | )                               | -0.3%  |                                             |   |                                |  | 0.0%                                   | 
|Provision for doubtful accounts         |                                             | 1,491   |                                 | 0.7%   |                                             |   | 1,291                           |  | 0.7%                                   | 
|Exit and closure expenses               |                                             | 153     |                                 | 0.1%   |                                             |   | 251                             |  | 0.1%                                   | 
|                                        |                                             |         |                                 |        |                                             |   |                                 |  |                                        | 
|OPERATING INCOME                        | $                                           | 5,078   |                                 | 2.3%   |                                             | $ | 1,670                           |  | 0.8%                                   | 
|                                        |                                             |         |                                 |        |                                             |   |                                 |  |                                        | 

|19
|--



|Revenues, net.Net revenues for fiscal 2005 increased $10.7 million, or
5.3%, from fiscal 2004 to $212.2 million. This increase was net of a reduction
of $4.1 million that resulted from an additional week in fiscal 2004 (53 weeks)
compared to fiscal 2005. Learning Center revenues increased $10.2 million or
5.2%. Revenue increases were achieved through a combination of increased tuition
rates and enrollments. Childtime Learning Centers revenues increased $4.9
million, with comparable Childtime center revenues (centers opened 18 months or
longer) increasing 5.5%. Tutor Time Learning Centers revenues increased $6.1
million, with comparable Tutor Time center revenues increasing 6.4%. Revenue
attributable to the consolidation of two franchise arrangements considered
variable interest entities (VIEs as discussed in Note 19 of the Notes to
Consolidated Financial Statements included in this Report under Item 15) offset
the increase by $0.8 million. Franchise Operations
revenues, which consisted primarily of royalties,
increased $0.5 million, or 8.1%, from fiscal 2004 to $7.3 million primarily as a result of increased
revenues at Tutor Time franchise centers.
Operating expenses of Learning Centers.Operating expenses for fiscal 2005 increased $7.1 million, or 4.1%, from fiscal 2004 to $182.4 million.
The increase was a result of an increase in personnel expense ($2.9 million), which increased with
higher enrollments and general wage increases; an increase in occupancy expense ($2.4 million), which
was primarily a result of rent on new center openings and acquired centers, and increased insurance
and other occupancy costs for existing centers; and an increase in center level operating expenses
($1.8 million), which increased with higher enrollments and increased costs from center maintenance
improvements, food, transportation and utility expenses. Operating expenses as a percentage of revenue
from Learning Center Operations decreased to 86.0% for fiscal 2005, from 87.0% for fiscal 2004. This
decrease is a result of a decrease in personnel expenses as a percentage of net revenues, resulting
from improved labor efficiencies, and the increased portion of revenues derived from Franchise Operations,
which have no associated costs in Operating expenses of Learning Centers.
Gross profit.Gross profit for fiscal 2005 increased $3.6 million, or 13.8%, from fiscal 2004 to $29.8 million. Gross profit for fiscal
2005 was 14.0% of net revenue, an improvement of 1.0% from 13.0% in fiscal 2004. This
increase was a result of a $3.1 million increase in Learning Center Operations gross profit and a
$0.5 million increase in Franchise Operations gross profit. The increase in Learning Center Operations
gross profit was primarily a result of increased revenues and improved labor efficiency. The increase
in Franchise Operations gross profit was a result of increased revenues. Gross profit percentages
for fiscal 2005 by segment were 12.5% for Childtime centers (as compared to 12.5% for fiscal 2004),
7.3% for Tutor Time centers (as compared to 3.5% for fiscal 2004) and 100.0% for Franchise Operations
for both years.
General and administrative expenses.General and administrative expenses for fiscal 2005 increased $0.4 million, or 2.1%, from fiscal 2004
to $19.4 million. The increase was a result of increased center staff training expenses, general
wage increases and increased employee bonuses due to operating improvements, partially offset by
a decrease in consulting and temporary help expenses. General and administrative costs as a percentage
of net revenue decreased to 9.1% for fiscal 2005 from 9.4% for fiscal 2004 due to the greater rate
of increase in net revenue for the current period.
Depreciation and amortization expenses.Depreciation and amortization expenses for fiscal 2005 increased $0.4 million, or 9.2%, from fiscal
2004 to $4.4 million. The increase was primarily a result of depreciation expense attributable to
capital expenditures. Depreciation and amortization expense as a percentage of net revenue increased
to 2.1% for fiscal 2005 from 2.0% for fiscal 2004.
Gain on sale of centers and vacant land.  Gain on sale of centers was a result of the sale under a franchise agreement of two Tutor Time
centers to an existing franchisee in first quarter 2005, the sale of vacant land in second quarter
2005, and the sale under a franchise agreement of one Tutor Time center to a franchisee in the fourth
quarter of fiscal 2005.
Provision for doubtful accounts.Provision for doubtful accounts for fiscal 2005 increased $0.2 million, or 15.5%, from fiscal 2004
to $1.5 million. The increase was a result of increased revenues and less favorable collection experience.
Exit and closure expenses.For fiscal 2005, the Company recorded exit and closure expenses of $0.2 million compared to $0.3 million
in fiscal 2004. The expenses for fiscal 2005 and 2004 were to increase reserves. The reserve adjustments
related to previously closed centers and were made as a result of current real estate market conditions.
During fiscal 2005 and fiscal 2004, the Company made cash payments of $0.3 million and $1.0 million,
respectively, related to lease termination costs.
Operating income.As a result of the foregoing changes, the Companys operating income was $5.1 million for fiscal
2005, compared to $1.7 million for fiscal 2004.
Interest expense.Interest expense for fiscal 2005 was $2.2 million, compared to $2.1 million for fiscal 2004. This increase
was a result of interest on sale leaseback transactions completed in the fourth quarter of fiscal
2004, offset by a reduction in borrowings.
Income tax provision.An income tax provision for fiscal 2005 of $0.1 million (all related to state income taxes) was recorded
in income before income taxes and discontinued operations of $3.1 million, compared to an income
tax provision of $0.1 million on a loss before discontinued operations of ($0.4 million) for fiscal
2004. Income tax expense for fiscal 2005 varied from the U.S. statutory rate of 34% due primarily
to the utilization of net operating loss carryforwards for which a valuation allowance had been recorded.
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|20
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|Discontinued operations, net of taxes.Discontinued operations, net of taxes, for fiscal 2005 was $0.2 million, compared to ($0.5) million for fiscal 2004. This income includes gain on the disposal of assets in one closed center of $0.6 million and the gain on the sale of one center of $0.2 million, offset by operating and lease termination costs associated with closed centers.
      Net income (loss).As a result of the foregoing changes, net income increased to $3.1 million, compared to net a loss of ($0.9) million for fiscal 2004.
    Fiscal 2004 Compared to Fiscal 2003
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                        | Fiscal Year
      Ended
      April 2, 2004 |         | Percent
      of
      Revenues |        | Fiscal Year
      Ended
      March 28, 2003 |   | Percent
      of
      Revenues |   | Change
      Amount
      (in Dollars) | 
|--------------------------------------- | ------------------------------------------- | ------- | ------------------------------- | ------ | -------------------------------------------- | - | ------------------------------- | - | -------------------------------------- | 
|                                        |                                             |         |                                 |        |                                              |   |                                 |   |                                        | 
|                                        |                                             |         |                                 |        |                                              |   |                                 |   |                                        | 
|Revenue from Learning Center Operations | $                                           | 194,748 |                                 | 96.7%  |                                              | $ | 167,782                         |   | 97.5%                                  | 
|Revenue from Franchise Operations       |                                             | 6,715   |                                 | 3.3%   |                                              |   | 4,293                           |   | 2.5%                                   | 
|                                        |                                             |         |                                 |        |                                              |   |                                 |   |                                        | 
|Revenue, net                            |                                             | 201,463 |                                 | 100.0% |                                              |   | 172,075                         |   | 100.0%                                 | 
|Operating expenses of Learning Centers  |                                             | 175,297 |                                 | 87.0%  |                                              |   | 152,165                         |   | 88.4%                                  | 
|                                        |                                             |         |                                 |        |                                              |   |                                 |   |                                        | 
|Gross profit                            |                                             | 26,166  |                                 | 13.0%  |                                              |   | 19,910                          |   | 11.6%                                  | 
|General and administrative expenses     |                                             | 18,951  |                                 | 9.4%   |                                              |   | 16,561                          |   | 9.6%                                   | 
|Depreciation and amortization expenses  |                                             | 4,003   |                                 | 2.0%   |                                              |   | 3,462                           |   | 2.0%                                   | 
|Provision for doubtful accounts         |                                             | 1,291   |                                 | 0.6%   |                                              |   | 1,746                           |   | 1.0%                                   | 
|Exit and closure expenses               |                                             | 251     |                                 | 0.1%   |                                              |   | 1,051                           |   | 0.6%                                   | 
|Goodwill impairment charges             |                                             |        |                                 | 0.0%   |                                              |   | 4,181                           |   | 2.4%                                   | 
|Fixed asset impairment charges          |                                             |        |                                 | 0.0%   |                                              |   | 3,401                           |   | 2.0%                                   | 
|                                        |                                             |         |                                 |        |                                              |   |                                 |   |                                        | 
|OPERATING INCOME (LOSS)                 | $                                           | 1,670   |                                 | 0.9%   |                                              | $ | (10,492                         | ) | -6.0%                                  | 
|                                        |                                             |         |                                 |        |                                              |   |                                 |   |                                        | 

|Revenues, net.Net revenues for fiscal 2004 increased $29.4 million, or 17.1%, from fiscal 2003 to $201.5 million.
Of this increase, $4.1 million, or 13.9% was a result of the additional week in fiscal 2004. Learning
Center revenues increased $27.0 million or 16.1% of which $21.7 million was contributed by Tutor
Time Learning Centers. This was primarily a result of Tutor Time being acquired at the end of the
first quarter of fiscal 2003 and having a full year of operating results in fiscal 2004. Childtime
Learning Centers revenues increased $4.1 million, with comparable Childtime center revenues (centers
opened more than 18 months) increasing 1.3%. Revenue attributable to the consolidation of 2 franchise
arrangements considered variable interest entities (see Note 19 to the Companys Notes to Consolidated
Financial Statements) accounted for $1.2 million of the 2004 increase. Franchise Operations revenues,
which consisted primarily of royalties, increased $2.4 million, or 56.4%, from fiscal 2003 to $6.7
million in fiscal 2004, primarily a result of Tutor Time being acquired at the end of the first quarter of fiscal 2003.
Operating expenses of Learning Centers.Operating expenses for fiscal 2004 increased $23.1 million, or 15.2%, from fiscal 2003 to $175.3 million.
The increase was a result of additional operating expenses of $20.8 million for Tutor Time centers
and an increase of operating expenses of $2.3 million for Childtime centers. The operating expenses
increase for Childtime centers was primarily in personnel, where wage increases were implemented
prior to tuition increases, and occupancy costs that rose with inflation on comparable revenues.
For fiscal 2004, operating
expenses as a percentage of revenue from Learning Center Operations decreased to 87.0%, from 88.4%
for fiscal 2003. This decrease was a result of Franchise Operations revenues increasing as a percentage
of total revenues, improved labor efficiency, and a reduction in start-up costs that were incurred
with new center openings in fiscal 2003, partially offset by increased occupancy costs of newly opened
Tutor Time centers.
Gross profit.Gross profit for fiscal 2004 increased $6.3 million, or 31.4%, from fiscal 2003 to $26.2 million. The
increase was a result of a $3.9 million increase in Learning Center Operations and a $2.4 million
increase in Franchise Operations gross profit. The increase in Learning Center gross profit was
primarily a result of increased revenues and improved labor efficiency. The increase in Franchise
Operations gross profit was a result of increased revenues. Gross profit percentages for fiscal 2004
by segment were 12.5% for Childtime centers (as compared to 11.7% for fiscal 2003), 3.5% for Tutor
Time centers (as compared to (1.0%) for fiscal 2003) and 100.0% for Franchise Operations for both
years. The increase in the Childtime centers gross profit is attributable to improved labor efficiency.
The increase in Tutor Time centers gross profit is attributable to improved labor efficiency and
a reduction in start-up costs that were incurred with new center openings in fiscal 2003, partially
offset by increased occupancy
costs of newly opened Tutor Time centers.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21
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|General and administrative expenses.General and administrative expenses for fiscal 2003 increased $2.4 million, or 14.4%, from fiscal 2003
to $19.0 million. This increase was primarily a result of increased expenses associated with a full
year of supporting the Tutor Time centers. As a percentage of net revenue, however, general and administrative
expenses decreased from 9.6% for fiscal 2003 to 9.4% for fiscal 2004 as a result of higher revenues
and the reduction of certain Tutor Time expenses after integration.
Depreciation and amortization expenses.Depreciation and amortization expenses for fiscal 2004 increased $0.5 million, or 15.6% from fiscal
2003 to $4.0 million. This increase was primarily a result of depreciation and amortization expenses
associated with a full year of operations of the Tutor Time centers.
Provision for doubtful accounts.Provision for doubtful accounts for fiscal 2004 was $1.3 million, as compared to $1.7 million in fiscal
2003. The decrease was a result of improved Franchise Operations collections.
Exit and closure expenses.For fiscal 2004, the Company recorded exit and closure expenses of $0.3 million compared to $1.1 million
in fiscal 2003. The expenses for fiscal 2004 were to increase reserves. Of the expenses for fiscal
2003, $0.7 million related to the closure of three centers and the remaining $0.4 million was to
increase reserves. The reserve adjustments related to previously closed centers and were made as
a result of current real estate market conditions. During fiscal 2004 and fiscal 2003, the Company
made cash payments of $1.0 million and $0.9 million, respectively, related to lease termination costs.
Impairment charges.During fiscal 2003, the Company incurred an expense of $4.2 million as a result of an evaluation done
under SFAS No. 142, Goodwill and Other Intangible Assets. During fiscal 2003, the Company incurred an expense of $3.5 million, including $0.1 million in discontinued
operations as a result of an evaluation done under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. There were no charges for these items in fiscal 2004.
Operating income (loss).As a result of the foregoing changes, the Companys operating income was $1.7 for fiscal 2004
compared to operating losses of ($10.5) million for fiscal 2003.
Interest expense.Interest expense for fiscal 2004 was $2.1 million compared to $2.6 million for fiscal 2003. The decrease
was a result of the issuance of common stock to repay long term debt through the Companys rights
offering in fiscal 2003.
Income tax provision (benefit).Income tax provision for fiscal 2004 of $0.1 million (all related to state income taxes) was recorded
on a loss before income taxes and discontinued operations of ($0.4 million), compared to an income
tax benefit of ($0.2 million) on a loss before income taxes, discontinued operations and cumulative
effect of change in accounting principle of ($13.0 million) for fiscal 2003. Income tax expense for
fiscal 2004 varied from the U.S. statutory rate of 34% due primarily to the utilization of net operating
loss carryforwards for which a valuation allowance had been recorded.
Discontinued operations, net of taxes.Discontinued operations, net of taxes, for fiscal 2004 was ($0.5 million), compared to ($0.4 million)
for fiscal 2003 as a result of higher exit and closure expenses in the discontinued centers in fiscal
2005.
Cumulative effect of change in accounting principle.An adjustment of $5.0 million as the cumulative effect of goodwill impairment under SFAS 142, Goodwill and Other Intangibles,was made for fiscal 2003. This amount was reduced by a tax benefit of $0.9 million, which has been
reduced by a valuation reserve. There was no charge for this item in fiscal 2004.
Net loss.As a result of the foregoing changes, net loss for fiscal 2004 was ($0.9) million, compared to net
a loss of ($18.2) million for fiscal 2003.
Liquidity and Capital Resources
The Companys primary cash requirements currently consist of repayment of debt and capital expenditures.
The Company expects to fund cash needs through the revolving credit facility, described below, and
cash generated from operations. The Company has also funded cash needs through sale leaseback transactions,
as described in Note 7 of the Companys Notes to Consolidated Financial Statements. The Company
may evaluate alternative forms of funding and new arrangements may be entered into in the future.
The Company experiences decreased liquidity during the calendar year-end holidays due to decreased
attendance. While new enrollments are generally highest during the traditional fall back to
school period and after the calendar year-end holidays, enrollment generally
decreases during the summer months and calendar year-end holidays. Should cash flow
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|22
|--



|generated from
operations and borrowings available under the revolving credit facility not be adequate to provide
for its working capital and debt service needs, the Company will attempt to make other arrangements
to provide needed liquidity. No assurance can be given that such sources of capital will be sufficient.
On November 22, 2004, the Company entered into a Second Amended and Restated Credit Agreement. This
agreement provides a $17.5 million revolving line of credit that will mature on July 31, 2006. It
is collateralized by the Companys receivables, equipment and real estate, with interest payable
at a variable rate, at the Companys option, based on either the prime rate or the Eurodollar
rate. There were outstanding borrowings of $4.3 million at April 1, 2005, and outstanding borrowings
of $5.4 million at April 2, 2004. Outstanding letters of credit reduced the availability under the
line of credit in the amount of $3.4 million at April 1, 2005, and $2.1 million at April 2, 2004
(see Note 5 of the Companys Notes to Consolidated Financial Statements). As of April 1, 2005
and April 2, 2004, unused amounts available for borrowing under this line of credit were $9.8 million
and $6.2 million, respectively.
Under this agreement, the Company is required to maintain certain financial ratios and other financial

conditions. In addition, there are restrictions on the incurrence of additional indebtedness, disposition

of assets and transactions with affiliates. The Company was in compliance with the agreement as
of
April 1, 2005.
Net cash provided / net cash used in operating activities of $6.6 million for fiscal 2005 compared
to ($1.8) million for fiscal 2004, primarily resulted from increased net income and improved changes
in operating assets and liabilities. During fiscal 2005, financing activities totaled ($2.8) million
and consisted primarily of repayments under long-term debt and paydowns on the revolving line of
credit offset by proceeds from sale leaseback transactions. During fiscal 2004, net cash provided
by financing activities totaled $4.5 million and consisted primarily of the issuance of shares net
of issuance cost of $12.0 million, proceeds from sale leaseback transactions of $10.1 million, the
issuance of subordinated notes of $3.5 million and a $1.6 million increase in drafts payable, offset
by repayments of long-term debt of $15.1 million and repayments on the line of credit of $7.6 million.
Net cash used in investing activities was ($4.2) million for fiscal 2005, of which $6.5 million was
used for capital spending and $0.3 was used to acquire centers from a franchisee. This was partially
offset by $2.6 million of proceeds from asset disposals. Net cash used in investing activities was
($3.8) million for fiscal 2004, of which $4.0 million was used for capital spending which was partially
offset by $0.2 million of proceeds from asset sales.
On May 16, 2003, the Company completed a rights offering under which it issued 100,000 units at $158.52
per unit. Total proceeds from the offering were $15.9 million, of which $12.4 million ($11.6 million
net of expenses) was for the issuance of 14.1 million shares of common stock and $3.5 million was
Subordinated Debt. The proceeds of the offering were used to pay off the balance, which included
accrued interest, of the Subordinated Debt issued to a group of lenders organized by Jacobson Partners
(see Related Party Transactions below).
On July 19, 2002, the Company acquired the assets of Tutor Time Learning Systems, Inc., for an aggregate
purchase price of approximately $22.8 million, including acquisition costs, plus the assumption of
certain liabilities. The assets acquired by the Company consisted of substantially all of the operating
assets and contract rights used by Tutor Time in its child care operations, which were comprised
of 198 company-owned and franchised child care centers operating in 23 states and internationally,
and were purchased to improve the range of the Companys product offering and to enter the child
care franchise business. The Tutor Time acquisition was financed, in part, through the Companys
$17.5 million secured bank credit facility as well as the issuance of $14 million of subordinated
loans. The subordinated loans were extended by the JP Acquisition Fund Group (see Related Party
Transactions below) to fund the balance of the Tutor Time acquisition purchase price and to
provide related working capital. The related subordinated notes had an original maturity of December
31, 2004 and bore interest at 15%, of which 7% was payable in cash, with the balance payable in kind
by the issuance of additional subordinated notes.
The Company has entered into interest rate swap contracts to manage its exposure to fluctuations in
interest rates relating to the revolving line of credit. Swap contracts fix the interest payments
of floating rate debt instruments. As of April 1, 2005, contracts representing $5.0 million of notional
amount were outstanding with maturity dates of November 2005 and January 2006. These contracts provide
for the Company to pay interest at an average fixed rate of 2.98% in return for receiving interest
at a floating rate of three month LIBOR, which is reset in three month intervals. The fair value
of interest rate swap agreements is subject to changes in value due to changes in interest rates.
During fiscal 2005, the Company recognized income of $0.1 million as a result of an increase in the
market value of the outstanding interest rate contracts. The value of these contracts was substantially
unchanged in fiscal 2004.
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|23
|--



|Contractual Obligations and Commitments
|---------------------------------------

|At April 1, 2005, aggregate principal payments due on short and long-term debt and operating leases over the next five fiscal years and thereafter are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            |   |         |  |   |        |  |   |        |  |  
| | -------------------------- | - | ------- |  | - | ------ |  | - | ------ |  | -
|
| |                            |   |         |  |   |        |  |   |        |  |  
|
| |                            |   |         |  |   |        |  |   |        |  |  
| | Short-term debt            | $ | 81      |  | $ | 81     |  | $ |       |  | $
| | Long-term debt             |   | 7,921   |  |   |       |  |   | 4,421  |  |  
| | Sale leaseback obligations |   | 11,128  |  |   | 32     |  |   | 118    |  |  
| | Operating leases           |   | 267,143 |  |   | 33,347 |  |   | 59,233 |  |  
| |                            |   |         |  |   |        |  |   |        |  |  
| | Total                      | $ | 286,273 |  | $ | 33,460 |  | $ | 63,772 |  | $
| |                            |   |         |  |   |        |  |   |        |  |  

|Included in operating leases above, are obligations totaling $0.8 million related to closed centers.
The Company has accrued as of April 1, 2005, $0.2 million in exit and closure expenses related to
these lease payments. The Company is primarily liable on approximately $0.5 million for lease assignments
(included in the $0.8 million for closed centers) already negotiated in connection with previously
closed centers.
A subsidiary of the Company is primarily or contingently liable for many of the leases of Tutor Times
franchisees. In an effort to build its franchisee network, Tutor Time either leased the prospective
site for a franchisee, with a subsequent sublease of the site to the franchisee, or provided a lease
guarantee to the landlord for the benefit of the franchisee in exchange for a monthly lease guarantee
fee payable by the franchisee that is based upon the monthly rent expense of the guaranteed lease.
The payments the Company could be required to pay related to leases and guarantees aggregates $71.9
million and $12.8 million, respectively, in case of default by the franchisee. Should the Company
be required to make payments under these leases, it may assume obligations for operating the center.
Should the center not be economically viable, the Company will make provision for the lease termination
at that time. The Company does not anticipate that it will be required to make payments under any
of these leases or guarantees, does not believe that any payments are likely and has not recorded
any related liability. At April 1, 2005, aggregate potential payments on leases and guarantees over
the next five fiscal years and thereafter are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                             | Total |        | Less Than
      1 Year |   | 1 to 3
      Years |  | 4 to 5
      Years |        | After
      5 Years |  
| | --------------------------- | ----- | ------ | ---------------------- | - | ------------------ |  | ------------------ | ------ | ------------------- | -
| |                             |       |        |                        |   |                    |  |                    |        |                     |  
|
| |                             |       |        |                        |   |                    |  |                    |        |                     |  
| | Franchise Lease Guarantees  | $     | 12,838 |                        | $ | 1,209              |  | $                  | 2,005  |                     | $
| | Franchise Lease Commitments |       | 71,898 |                        |   | 6,586              |  |                    | 12,933 |                     |  
| |                             |       |        |                        |   |                    |  |                    |        |                     |  
| | Total                       | $     | 84,736 |                        | $ | 7,795              |  | $                  | 14,938 |                     | $
| |                             |       |        |                        |   |                    |  |                    |        |                     |  

|Related Party Transactions
      In July 2000, the Company retained Jacobson Partners to provide management and financial consulting services. Jacobson Partners is a private equity firm of which Benjamin R. Jacobson, the Chairman of the Board of the Company, is the managing general partner, and James J. Morgan, a director and member of the Compensation Committee and former Chairman of the Board and Interim Chief Executive Officer, are partners. As consideration for the provision of such services to the Company and the Board of Directors, Jacobson Partners receives an annual fee of $250,000, plus
reimbursement of reasonable out-of-pocket expenses. The agreement will continue in effect until terminated by either party upon six months prior written notice. As additional consideration for the provision of such services, Jacobson Partners acquired 294,117 shares pursuant to a stock option granted in 2002. Such shares are subject to registration rights until July 2007.
    In July 2002, certain members (the Optionees) of the JP Acquisition Fund Group, a group of lenders organized by Jacobson Partners, agreed to arrange for the Company to obtain a standby purchase commitment in connection with its proposed rights offering (which was contemplated to repay the debt incurred in connection with the Companys Tutor Time acquisition). As consideration for this commitment, a Special Committee of the Board of Directors approved the grant to the Optionees of options (the Standby Commitment Options) to purchase, in the
aggregate, up to 400,000 shares of common stock, until July 19, 2006, at an exercise price of $5.00 per share (approximately 171% of the five-day average of the daily closing prices of the common stock on The Nasdaq National Market System as of July 19, 2002, the date of the agreement). All shares acquired by the Optionees would be subject to registration rights, pursuant to which, until July 6, 2007, the Optionees would have the right to cause the Company to register, at its expense, the Optionees shares of common stock, whenever the Company is otherwise registering shares (except in certain
circumstances). The option grant to the
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
|--



|Optionees was approved by the Companys shareholders and became effective, and fully vested, upon consummation of the rights offering in May 2003. Optionees receiving Standby Commitment Options included Mr. Jacobson (options for 4,790 shares, including 473 shares reflecting his proportionate interest in options beneficially owned by Jacobson Partners) and Mr. Morgan (options for 5,303 shares, including 5 shares reflecting his proportionate interest in options beneficially owned by Jacobson Partners).
        In May 2003, upon consummation of our rights offering and purchases contemplated under the standby purchase commitment from the JP Acquisition Fund Group,
the JP Acquisition Fund Group acquired units consisting of 10,719,243 shares of common stock and $2,660,805 principal amount of subordinated notes, at the same price that units were made available for purchase by our other shareholders.
Of such amounts, Mr. Jacobson acquired 887,525 shares and $220,308 of subordinated notes (including 11,069 shares and $2,748 of subordinated notes reflecting his proportionate interest in securities beneficially owned by Jacobson Partners),
and Mr. Morgan acquired 226,569 shares and $56,241 of subordinated notes (including 123 shares and $31 of subordinated notes reflecting his proportionate
interest in securities beneficially owned by Jacobson Partners).
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The subordinated notes issued as part of the rights offering bear interest at 15% per annum, payable quarterly, and are due May 15, 2008. Subject to applicable subordination provisions, these notes may be redeemed, at our option, at any time and must be redeemed following the occurrence of a change of control. In either case, the redemption price is 100% of the principal balance of the notes, plus accrued and unpaid interest on such principal balance to the date of redemption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|During fiscal 2005, the subordinated notes issued to those lenders related to Jacobson Partners accrued interest in the following amounts: JP Acquisition Fund II, L.P. and JP Acquisition Fund III, L.P. - $328,000; Mr. Jacobson - $5,000; and Mr. Morgan - $8,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|During fiscal 2005, a Tutor Time franchisee controlled by Daniel Boyle, a Company director, paid $0.1 million to the Company in royalties and technology fees, and for advertising, net of reimbursement of certain advertising expenses. These payments were made pursuant to the Companys standard form of franchise agreement, which agreement is expected to remain in effect for the next fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Contingencies
        Various legal actions and other claims are pending or could be asserted against the Company including pending claims relating to exposure to mold and other contaminants resulting from the condition of one of the Companys former centers.
In addition, the Company has and will continue to vigorously protect its rights against parties that violate franchise agreements or infringe on its intellectual property rights. Litigation is subject to many uncertainties; the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of these matters may be decided unfavorably to the Company. Although there is a chance that any unfavorable decision could have a material adverse impact on the Companys financial position, liquidity and results of operations,
it is the opinion of management that the ultimate liability, if any, with respect to these matters will not materially affect the financial position, results of operations or cash flows of the Company beyond amounts already accrued.                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|New Accounting Pronouncements
        In December 2004, the FASB issued SFAS 123 (Revised 2004), Share-Based Payment.  This standard requires expensing of stock options and other share-based payments and supersedes SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion No. 25, Accounting for Stock Issued to Employees,and its related implementation guidance that had allowed companies to choose between expensing stock options or showing proforma disclosure only. This standard, together with a new rule adopted by the Securities and Exchange Commission in April 2005, is effective for the Company April 1, 2007 and will apply to all awards granted, modified, cancelled or repurchased after that date. The ultimate amount of increased compensation expense will be dependent on the number of option shares granted, their timing and vesting period and










 the method used to calculate the fair value of the awards, among other factors. The Company is currently evaluating the expected impact that the adoption of SFAS 123R will have on results of operations and cash flows in the future.                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Wage Increases
        Expenses for center-level salaries, wages and benefits represented approximately 51% of net revenue for fiscal 2005, as compared to approximately 52% of net revenue for fiscal 2004.
Management believes that, through increases in tuition rates, the Company can offset any future center-level wage increases caused by adjustments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|25
|--



|to the federal, state or county
minimum wage rates or other market adjustments. However, no assurance can be given that rates can
be increased sufficiently to cover such increased costs. The Company continually evaluates its wage
structure and may implement changes at targeted local levels.
Effect of Inflation
The Company does not believe that general inflation has had an overall material effect on the results
of its operations over the past three fiscal years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the Companys consolidated financial position,
results of operations or cash flow. The Company is exposed to market risk due to changes in interest
rates and foreign currency exchange rates.
Interest Rates.The Company has exposure to market risk for changes in interest rates related to its debt obligations.
The Company does not have cash flow exposure due to rate changes on its 15% Subordinated Notes in
the amount of $3.5 million at April 1, 2005. The Company has cash flow exposure on the revolving
line of credit, with an outstanding balance of $4.3 million and its notes payable, with an outstanding
balance of $0.2 million, each as of April 1, 2005. These exposures have been partially offset by
the Company entering into $5.0 million notional amount of interest rate swap contracts. Accordingly,
a 2% (200 basis points) change in the LIBOR rate or the prime rate would have resulted in interest
expense changing by approximately $0.1 million for fiscal 2005.
Foreign Currency Exchange Rates.The Companys exposure to foreign currency exchange rates is limited to royalties for 11 international
franchised centers. Based upon the relative size of its foreign operations, the Company does not
believe that the reasonably possible near-term change in the related exchange rate would have a material
effect on its financial position, results of operations and cash flows.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this Item are included in the Consolidated
Financial Statements set forth on pages F-1 through F-24, attached hereto and found following the
signature page of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Under the supervision and with the participation of the Companys management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as of April 1, 2005, and, based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls
and procedures are effective.
During the fiscal quarter ended April 1, 2005 there were no significant changes in the Companys
internal controls or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
Disclosure controls and procedures are the Companys controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that the Company files or
submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed
by the Company in the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



|PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to the officers of the Company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                        

|Name               |  | Age |  | Position                                          
|------------------ |  | --- |  | --------------------------------------------------
|
|William D. Davis   |  | 55  |  | President and Chief Executive Officer and Director
|Kathryn L. Myers   |  | 49  |  | Vice President and Chief Operating Officer        
|Frank M. Jerneycic |  | 56  |  | Chief Financial Officer and Treasurer             
|Scott W. Smith     |  | 47  |  | Chief Human Resources Officer                     
|Ira L. Young       |  | 46  |  | Secretary and General Counsel                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|William D. Davishas served as the President and Chief Executive Officer of the Company since July 22, 2002, and as
a Director since August 2002. Mr. Davis was formerly President and Chief Executive Officer of Tutor
Time Learning Systems, Inc., from March 2002 until the Companys acquisition of Tutor Time in
July 2002. Tutor Time filed Chapter 11 bankruptcy in May 2002. Prior to joining Tutor Time, Mr. Davis
served as Chief Executive Officer of Waterbury Holdings, a holding company located in Burlington,
Vermont, from March 1995 through January 1998. During his association with Waterbury Holdings, Mr.
Davis held the position of Partner and Chief Executive Officer of Waterburys affiliates, including
McKenzie LLC, All Seasons Kitchen LLC, Franklin County Cheese Corporation, Waterbury Fresh
Foods LLC, Rondele LLC, and Frank Hahn Incorporated. In December 1998, Mr. Davis, along with other
investors, purchased Rondele Foods LLC from Waterbury Holdings, and he served as a Board member of
the newly-formed company, Rondele Specialty Foods, based in Wausau, Wisconsin, until its sale in
December 2004. Mr. Davis also served as the President and Chief Executive Officer of ChefExpress.Net
Inc., an Internet-based virtual warehouse providing ingredients and specialty food, from January
2000 through June 2001. Mr. Davis is also a board member of Green Mountain Coffee Roasters Inc.,
where he serves as Chairman of the Audit Committee.
Kathryn L. Myershas served as the Chief Operating Officer since September 16, 2003. Mrs. Myers previously served for
23 years at Borders Group Inc., most recently as a member of the Executive Committee and the President
of Merchandising and Distribution. Mrs. Myers held various positions at Borders, including President,
Borders Group Stores, President, Waldenbooks Stores and Senior Vice President, Store Operations Waldenbooks.
Mrs. Myers holds a BS from the University of Michigan.
Frank M. Jerneycichas served as the Chief Financial Officer and Treasurer since August 30, 2002. Mr. Jerneycic previously
served for six years as the Senior Vice President and Chief Financial Officer of Decision Consultants,
Inc., a software services company located in Southfield, Michigan.
Scott W. Smithhas served as Chief Human Resources Officer since May 10, 2005, having previously served as Vice President
of Human Resources since May 1, 2002. Prior to joining the Company, Mr. Smith was the Vice President
of Human Resources for Glotel, PLC, a human capital solutions provider located in London, England,
where he had responsibility for the startup of the Human Resources Department. Prior to that, Mr.
Smith worked for Kelly Services, a temporary employment placement firm located in Troy, Michigan,
for eight years, most recently serving as the Vice President of Human Resources. Mr. Smith holds
a BS from Central Michigan University.
Ira L. Younghas served as General Counsel and Secretary of the Company since July 22, 2002. Prior to assuming this
position with the Company, Mr. Young served as General Counsel of Tutor Time Learning Systems, Inc.
from February 1999 and Corporate Secretary of Tutor Time from June 1999. Mr. Young joined Tutor Time
as Litigation Counsel in March 1998, having previously served as an associate attorney with Mandel,
Weisman & Kirschner, of Boca Raton, Florida, since 1993.
Additional information required by this Item will be contained in the 2005 Proxy Statement of the Company
under the captions, Election of Directors, Other Information Relating to Directors
and Nominees, Meetings and Committees of the Board of Directors, Code of
Business Conduct and Ethics and Section 16(a) Beneficial Ownership Reporting Compliance,
and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 2005 Proxy Statement of the Company under
the captions, Compensation of Executive Officers and Compensation of Directors,
and is incorporated herein by reference.

|27
|--



|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item will be contained in the 2005 Proxy Statement of the Company under
the captions, Election of Directors, Voting Securities and Principal Holders
and Additional Equity Compensation Plan Information, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the 2005 Proxy Statement under the captions,
Certain Relationships of Related Party Transactions and Compensation Committee
Interlocks and Insider Participation, and is incorporated herein by reference. Additionally,
see Note 9 of the Companys Notes to Consolidated Financial Statements and Related Party
Transactions under Item 7 of this Report.
Item 14. Principal Accountant Fees and Services
Information required by this Item will be contained in the 2005 Proxy Statement under the Caption Independent
Accountants and is incorporated herein by reference.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|28
|--



|PART IV
Item 15. Exhibits and Financial Statement Schedules
|-----------------------------------------------------------
|                                                           

| | (a) | 1. Financial Statements
| | --- | -----------------------
| |     |                        

| | The financial statements filed with this Report are listed on page F-1.
| | -----------------------------------------------------------------------
| |                                                                        

| | 2. Financial Statement Schedule                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                  
| | The financial statements schedule filed with this Report is listed on page F-1. Other financial statement
  schedules, for which provision is made in the applicable accounting regulations of the Securities
  and Exchange Commission, are not required under the related instructions or are inapplicable and,
  therefore, have been omitted.
| |                                                                                                                                                                                                                                                                                                                                                  
| | 3. Exhibits                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                  
| | The exhibits filed with this Report are listed on the Exhibit Index on pages E-1 through
E-2.                                                                                                                                                                                                                                                  

|29
|--



|SIGNATURES                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                  
|Pursuant to the requirements of Section 13 or 15(d) 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, on June 29, 2005.
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                  
|Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on June 29, 2005.                    
|                                                                                                                                                                                                                                  

|Signature                |  | Title                                                                            
|------------------------ |  | ---------------------------------------------------------------------------------
|                         |  |                                                                                  
|/s/ WILLIAM D. DAVIS     |  | President, Chief Executive Officer and Director(Principal Executive Officer)     
|                         | 
|William D. Davis         | 
|                         |  |                                                                                  
|/s/ FRANK M. JERNEYCIC   |  | Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
|                         | 
|Frank M. Jerneycic       | 
|                         |  |                                                                                  
|/s/ DANIEL BOYLE         |  | Director                                                                         
|                         |  |                                                                                  
|Daniel Boyle             |  |                                                                                  
|                         |  |                                                                                  
|/s/ JASON K. FELD        |  | Director                                                                         
|                         |  |                                                                                  
|Jason K. Feld            |  |                                                                                  
|                         |  |                                                                                  
|/s/ BENJAMIN R. JACOBSON |  | Director                                                                         
|                         |  |                                                                                  
|Benjamin R. Jacobson     |  |                                                                                  
|                         |  |                                                                                  
|/s/ JERRY KANE           |  | Director                                                                         
|                         |  |                                                                                  
|Jerry Kane               |  |                                                                                  
|                         |  |                                                                                  
|/s/ ELSIE MCCABE         |  | Director                                                                         
|                         |  |                                                                                  
|Elsie McCabe             |  |                                                                                  
|                         |  |                                                                                  
|/s/ JAMES J. MORGAN      |  | Director                                                                         
|                         |  |                                                                                  
|James J. Morgan          |  |                                                                                  
|                         |  |                                                                                  
|/s/ BRETT D. SHEVACK     |  | Director                                                                         
|                         |  |                                                                                  
|Brett D. Shevack         |  |                                                                                  

|30
|--



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES                                                             
|-------------------------------------------------------------------------------------------------------
|                                                                                                       
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                             
|AND FINANCIAL STATEMENT SCHEDULE                                                                       
|                                                                                                       
|The following consolidated financial statements of Learning Care Group, Inc. are referred to in Item
8:
|                                                                                                       

|                                                                                                         | Pages
|-------------------------------------------------------------------------------------------------------- | -----
|                                                                                                         |      
|Report of Independent Registered Public Accounting Firm                                                  | F-2  
|Financial Statements:                                                                                    |      
|Consolidated Balance Sheets                                                                              | F-4  
|Consolidated Statements of Operations                                                                    | F-5  
|Consolidated Statement of Changes in Shareholders Equity                                                | F-6  
|Consolidated Statements of Cash Flows                                                                    | F-7  
|Notes to Consolidated Financial Statements                                                               | F-8  
|The following consolidated financial statement schedule of Learning Care Group, Inc. is included herein: |      
|Schedule II  Valuation and qualifying accounts                                                          | F-24 

|                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|All other schedules for which provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or are inapplicable, and
therefore have been omitted.

|F-1
|---



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|To the Board of Directors and Stockholders ofLearning Care Group, Inc. and SubsidiariesNovi, Michigan
We
have audited the accompanying consolidated balance sheet of Learning Care Group, Inc. and subsidiaries
(the Company) as of April 1, 2005, and the related consolidated statement of income,
shareholders equity, and cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the Index at Item 8. These financial statements and the financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on our audit. The
financial statements of the Company for the year ended April 2, 2004 and March 28, 2003 were audited
by other auditors whose report, dated June 30, 2004, expressed an unqualified opinion on those statements.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of Learning Care Group, Inc. and subsidiaries at April 1, 2005, and the results
of their operations and their cash flows for the year ended April 1, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLPDetroit, MichiganJune 27, 2005

|F-2
|---



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    To the Board of Directors and Shareholders ofLearning Care Group, Inc. and Subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders equity and cash flows present fairly, in all material respects, the financial position of Learning Care Group, Inc. and
its subsidiaries at April 2, 2004 and the results of their operations and their cash flows for each of the two fiscal years in the period ended April 2, 2004 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing on page F-1 presents fairly, in all material respects, the fiscal 2004 and 2003 information set forth therein when read
in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits
of these statements in accordance with the standards established by the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|/s/ PricewaterhouseCoopers LLP
Detroit, Michigan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|June 30, 2004, except for the effects of discontinued operations describe in
Note 14,as to which the date is June 26, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|F-3
|---



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES                                                                                                          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -
|
|
|
|
|                                                                                                                                                    |  
|
|                                                                                                                                                    |  
|ASSETS                                                                                                                                              |  
|CURRENT ASSETS:                                                                                                                                     |  
|Cash and cash equivalents                                                                                                                           | $
|Accounts receivable, net                                                                                                                            |  
|Prepaid expenses and other current assets                                                                                                           |  
|                                                                                                                                                    |  
|Total current assets                                                                                                                                |  
|                                                                                                                                                    |  
|LAND, BUILDINGS AND EQUIPMENT:                                                                                                                      |  
|Land                                                                                                                                                |  
|Buildings                                                                                                                                           |  
|Leasehold improvements                                                                                                                              |  
|Vehicles, furniture and equipment                                                                                                                   |  
|                                                                                                                                                    |  
|                                                                                                                                                    |  
|Less: accumulated depreciation and amortization                                                                                                     |  
|                                                                                                                                                    |  
|                                                                                                                                                    |  
|                                                                                                                                                    |  
|OTHER NONCURRENT ASSETS:                                                                                                                            |  
|Goodwill, net                                                                                                                                       |  
|Intangible assets, net                                                                                                                              |  
|Refundable deposits and other                                                                                                                       |  
|                                                                                                                                                    |  
|                                                                                                                                                    |  
|                                                                                                                                                    |  
|TOTAL ASSETS                                                                                                                                        |  
|                                                                                                                                                    |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                |  
|CURRENT LIABILITIES:                                                                                                                                |  
|Accounts and drafts payable                                                                                                                         | $
|Accrued wages and benefits                                                                                                                          |  
|Current portion of long-term debt                                                                                                                   |  
|Exit and closure expense accrual                                                                                                                    |  
|Other current liabilities                                                                                                                           |  
|                                                                                                                                                    |  
|Total current liabilities                                                                                                                           |  
|LONG-TERM DEBT, NET OF CURRENT PORTION                                                                                                              |  
|DEFERRED RENT LIABILITY & MINORITY INTEREST                                                                                                         |  
|OBLIGATIONS UNDER SALE LEASEBACK TRANSACTIONS                                                                                                       |  
|                                                                                                                                                    |  
|Total liabilities                                                                                                                                   |  
|                                                                                                                                                    |  
|SHAREHOLDERS EQUITY                                                                                                                                |  
|Common Stock, 40,000,000 shares authorized, no par value; 19,839,410 and
      19,809,010 issued and outstanding at April 1, 2005 and April 2, 2004 |  
|Preferred Stock, 100,000 shares authorized, no par value; no shares issued oroutstanding                                                            |  
|Retained earnings (accumulated deficit)                                                                                                             |  
|                                                                                                                                                    |  
|Total shareholders equity                                                                                                                          |  
|                                                                                                                                                    |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                          | $
|                                                                                                                                                    |  
|                                                                                                                                                    |  
|The accompanying footnotes are an integral part of the consolidated financial statements.                                                           |  
|                                                                                                                                                    |  

|F-4
|---



|                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------
|**LEARNING CARE GROUP, INC. AND SUBSIDIARIES**                                                                            
|                                                                                                                          
|**CONSOLIDATED STATEMENTS OF OPERATIONS**                                                                                 
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Revenue from Learning Center Operations                                                                                   
|Revenue from Franchise Operations                                                                                         
|                                                                                                                          
|Revenue, net                                                                                                              
|Operating expenses of Learning Centers (exclusive of depreciation
  and amortization)                                     
|                                                                                                                          
|Gross profit                                                                                                              
|                                                                                                                          
|General and administrative expenses                                                                                       
|Depreciation and amortization expenses                                                                                    
|Gain on sale of centers and vacant land                                                                                   
|Provision for doubtful accounts                                                                                           
|Exit and closure expenses                                                                                                 
|Goodwill impairment charges                                                                                               
|Fixed asset impairment charges                                                                                            
|                                                                                                                          
|Operating income (loss)                                                                                                   
|Interest expense, net                                                                                                     
|Other (income), net                                                                                                       
|                                                                                                                          
|                                                                                                                          
|Income (loss) before income taxes, discontinued operations and 
       cumulative effect of change in accounting principle
|Income tax provision (benefit)                                                                                            
|                                                                                                                          
|                                                                                                                          
|Income (loss) before discontinued operations and cumulative effect of
       change in accounting principle               
|Discontinued operations, net of taxes                                                                                     
|                                                                                                                          
|Income (loss) before cumulative effect of change in accounting principle                                                  
|Cumulative effect of change in accounting principle, net of taxes                                                         
|                                                                                                                          
|Net income (loss)                                                                                                         
|                                                                                                                          
|                                                                                                                          
|INCOME (LOSS) PER SHARE - BASIC:                                                                                          
|Income (loss) before discontinued operations and cumulative effectof change in accounting principle                       
|Discontinued operations, net of taxes                                                                                     
|                                                                                                                          
|Income (loss) before cumulative effect of change in accounting principle                                                  
|Cumulative effect of change in accounting principle                                                                       
|                                                                                                                          
|Net income (loss)                                                                                                         
|                                                                                                                          
|INCOME (LOSS) PER SHARE - DILUTED:                                                                                        
|Income (loss) before discontinued operations and cumulative effect
      of change in accounting principle                
|Discontinued operations, net of taxes                                                                                     
|                                                                                                                          
|Income (loss) before cumulative effect of change in accounting principle                                                  
|Cumulative effect of change in accounting principle                                                                       
|                                                                                                                          
|Net income (loss)                                                                                                         
|                                                                                                                          
|Weighted average shares outstanding                                                                                       
|Basic                                                                                                                     
|Diluted                                                                                                                   
|                                                                                                                          
|                                                                                                                          
|The accompanying footnotes are an integral part of the consolidated financial statements.                                 

|F-5
|---



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY**
|-------------------------------------------------------------------------------------------------------
|
|
|
|
|
|
|
|
|Balances, March 29, 2002                                                                               
|Shares issued                                                                                          
|                                                                                                       
|Net income (loss)                                                                                      
|                                                                                                       
|Balances, March 28, 2003                                                                               
|                                                                                                       
|Shares issued                                                                                          
|                                                                                                       
|Stock compensation                                                                                     
|Rights offering                                                                                        
|                                                                                                       
|Net income (loss)                                                                                      
|                                                                                                       
|Balances, April 2, 2004                                                                                
|                                                                                                       
|Shares issued                                                                                          
|                                                                                                       
|Stock compensation                                                                                     
|                                                                                                       
|Net income                                                                                             
|                                                                                                       
|Balances, April 1, 2005                                                                                
|                                                                                                       
|                                                                                                       
|The accompanying footnotes are an integral part of the consolidated financial statements.              

|F-6
|---



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CASH FLOWS**                                                     
|----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                        
|
|
|
|
|
|OPERATING ACTIVITIES:                                                                                                                   
|                                                                                                                                        
|Net income (loss)                                                                                                                       
|Adjustments to reconcile net income (loss) to cash                                                                                      
|provided (used) by operating activities:                                                                                                
|Depreciation and amortization                                                                                                           
|                                                                                                                                        
|Interest capitalized as part of subordinated notes                                                                                      
|                                                                                                                                        
|Intangible and fixed asset impairment charges (includes $5,877
       classified as cumulative effect of change in accounting principle)
|Provision for doubtful accounts                                                                                                         
|                                                                                                                                        
|Stock compensation expense                                                                                                              
|Deferred rent liability                                                                                                                 
|                                                                                                                                        
|Minority interest in variable interest entities                                                                                         
|                                                                                                                                        
|Deferred income taxes                                                                                                                   
|                                                                                                                                        
|(Gain)/loss on sale of assets                                                                                                           
|Changes in operating assets and liabilities:                                                                                            
|Accounts receivable                                                                                                                     
|Prepaid expenses and other current assets                                                                                               
|                                                                                                                                        
|Income tax receivable                                                                                                                   
|Accounts payable, accruals and other current liabilities                                                                                
|Exit and closure expense accrual                                                                                                        
|                                                                                                                                        
|Net cash provided (used) by operating activities                                                                                        
|                                                                                                                                        
|INVESTING ACTIVITIES:                                                                                                                   
|Acquisition of Tutor Time (net of cash of $614)                                                                                         
|                                                                                                                                        
|Acquisiton of Minnesota centers (net of cash of $27)                                                                                    
|Capital spending                                                                                                                        
|Proceeds from sale of assets                                                                                                            
|Payments for refundable deposits and other assets                                                                                       
|                                                                                                                                        
|Net cash used in investing activities                                                                                                   
|FINANCING ACTIVITIES:                                                                                                                   
|Net (paydowns) borrowings on revolving line of credit                                                                                   
|Repayments under long-term debt                                                                                                         
|                                                                                                                                        
|Issuance of subordinated notes                                                                                                          
|Changes in drafts payable                                                                                                               
|                                                                                                                                        
|Proceeds from sale leaseback                                                                                                            
|                                                                                                                                        
|Issuance of common shares (net of issuance costs)                                                                                       
|                                                                                                                                        
|Net cash provided (used) by financing activities                                                                                        
|Net (decrease) in cash and cash equivalents                                                                                             
|Cash and cash equivalents, beginning of year                                                                                            
|                                                                                                                                        
|Cash and cash equivalents, end of period                                                                                                
|                                                                                                                                        
|                                                                                                                                        
|The accompanying footnotes are an integral part of the consolidated financial statements.                                               

|F-7
|---



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation and Corporate Organization:
The consolidated financial statements include the accounts of Learning Care Group, Inc. and its wholly
owned subsidiaries (together referred to as the Company). All significant intercompany
transactions have been eliminated. The Company began operations in 1967. Childtime Learning Centers,
Inc. was incorporated on November 2, 1995 and completed its initial public offering on February 2,
1996. As of April 1, 2005, the Company provided for-profit child care through 459 corporate and franchise
child care centers.
2. Summary of Significant Accounting Policies:
a. Fiscal Year:The Company utilizes a 52 to 53 week fiscal year (generally comprised of 13 four-week periods), ending
on the Friday closest to March 31. The fiscal year ended April 1, 2005 contained 52 weeks. The fiscal
year ended April 2, 2004 contained 53 weeks. The fiscal year ended March 28, 2003 contained 52 weeks.
b. Cash and Cash Equivalents:The Company considers all temporary investments with original maturities of three months or less at
time of purchase to be cash equivalents.
c. Land, Buildings and Equipment:Land, buildings and equipment are recorded at cost. Depreciation is provided on a straight-line basis
over the estimated useful lives of the assets (generally 40 years for buildings and between 3 and
10 years for vehicles, furniture and equipment). Leasehold improvements are recorded at cost and
amortized on a straight-line basis over the lesser of the estimated useful life of the leasehold
improvement (generally 15 years) or the life of the lease. Gains and losses on sales and retirements
are included in the determination of the results of operations. Maintenance and repair costs for
new centers are charged to operating expense in the period incurred.
d. Accounts Receivable:The Company generates accounts receivable primarily from fees charged to governmental agencies, franchisees

and, to a lesser degree, parents. The Company monitors collections and payments from these customers

and maintains a provision for estimated losses based on historical trends and current overall economic

conditions. Amounts charged to this provision for uncollectible accounts receivable have historically

been within the Companys expectations, but there can be no assurance that future experience

will be consistent with the Companys past experience.
e. Intangible Assets:Intangible assets represent principally goodwill and identifiable intangible assets related to franchise
agreements, trademarks and curriculum and beginning in fiscal 2003 are accounted for in accordance
with SFAS 142, Goodwill and Other Intangible Assets. Under SFAS 142, goodwill is no longer amortized. Instead, goodwill and intangible assets with indefinite
lives are tested annually for impairment in accordance with the provisions of SFAS 142. Intangible
assets with a determinable life are amortized on a straight-line basis over the estimated period
benefited, ranging from five to twenty years.
f.  Impairment of Long-Lived Assets:Long-lived assets are reviewed for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable in accordance with SFAS No.
144, Accounting for the Impairment and Disposal of Long-Lived Assets. The Company assesses the recoverability of the unamortized cost of acquired assets in excess of fair
value based on a review of projected undiscounted cash flows of the related centers. Once the Company
has utilized its resources in order to make the center profitable, without success, and future cash
flows fail to recover the carrying value of the assets, they are deemed to be impaired. The extent
of the impairment is measured as the difference between the fair market value of the asset and its
carrying value.
g. Liability for Workers Compensation Insurance Obligations:The Company has self-insured a significant portion of its workers compensation insurance plans except

during fiscal 2004. The full extent of certain liabilities, in many cases, may not become fully
recognized
for several years. The Company, therefore, estimates the potential obligation for liabilities
which
have been incurred but not yet reported based upon historical data and experience, and utilizes
an
outside consulting firm to assist the Company in developing these estimates. Although management

believes that the amounts accrued for these obligations are sufficient, any significant increase

in either the number of claims and/or costs associated with claims made under these plans could
have
a material effect on the Companys financial results.
h. Income Taxes:The Company provides for income taxes for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-8
|---



|financial statement and tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. Valuation allowances are provided
when it is more likely than not that a deferred tax asset will not be recovered through future taxable
income.
i.  Financial Instruments:In managements opinion, the carrying values of cash and cash equivalents, accounts receivable
and payable, and accrued liabilities approximate fair value due to the short-term maturities of these
instruments. The carrying values of long-term debt approximate fair value based on the current borrowing
rates for similar instruments.
j.  Risk Concentration:Accounts receivable is the principal financial instrument that subjects the Company to concentration
of credit risk. Concentration of credit risk is somewhat limited due to the Companys large
number, diversity and dispersion of customers. The Company maintains an allowance for doubtful accounts
based upon the expected collectibility of accounts receivable.
Revenues from federal and state child care assistance programs represent a significant portion of total
revenues. For fiscal 2005, 2004 and 2003, federal assistance revenues were approximately $45.0 million
(22 percent), $43.4 million (22 percent) and $40.4 million (24 percent), respectively. For fiscal
2005, 2004 and 2003, federal assistance accounts receivable were approximately $6.2 million (68 percent),
$6.8 million (73 percent) and $5.6 million (69 percent), respectively.
k. Stock-Based Compensation:The Company has adopted the disclosure provisions of SFAS No. 123 Accounting for Stock-Based Compensation,and continues to measure compensation cost using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.Had stock option compensation cost for these plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the methodology of SFAS No. 123, the Companys
net income and earnings per share would have been reduced to the pro forma amounts indicated below
(in thousands, except per share amounts):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                                      | Fiscal Years Ended |  
|----------------------------------------------------- | ------------------ | -
|                                                      |                    |  
|
|                                                      |                    |  
|Net income (loss)                                     | As reported        | $
|                                                      | Pro forma          | $
|Net income (loss) per share:                          |                    |  
|Basic                                                 | As reported        | $
|                                                      | Pro forma          | $
|Diluted                                               | As reported        | $
|                                                      | Pro forma          | $
|                                                      |                    |  
|Weighted average fair value of options granted during |                    |  
|the year                                              |                    | $
|                                                      |                    |  

|The fair value of the options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for fiscal 2005, 2004, and 2003, respectively: no dividend yield; expected volatility of 100.0, 52.1 and 56.4 percent; risk free interest rate of 5.5, 3.4 and 3.2; and expected holding periods of 5.0 years for fiscal 2005 and 4.0 years for fiscal 2004 and fiscal 2003.
    l.  Common Stock and Earnings Per Share:All earnings per share amounts have been presented to conform with the requirements of SFAS 128, Earnings Per Share.A reconciliation of the denominators used in the basic and diluted EPS calculation follows (in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                         | Calculation of Incremental Shares Outstanding |       
|---------------------------------------- | --------------------------------------------- | ------
|                                         |                                               |       
|
|                                         |                                               |       
|Basic shares (based on weighted average) |                                               | 19,821
|Stock options                            |                                               | 983   
|                                         |                                               |       
|Diluted shares                           |                                               | 20,804
|                                         |                                               |       

|                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Incremental shares from assumed conversion of options of 974,723 646,903 and 605,251 in fiscal 2005,
2004 and 2003, respectively, have been excluded from shares used in computing diluted earnings (loss)
per share as the effect would be anti-dilutive.

|F-9
|---



|m. Revenue Recognition:The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin 101, which requires

that the following criteria be met before recognizing revenue: persuasive evidence of an arrangement

exists, delivery has occurred or services have been rendered, the fee is fixed and determinable,

and collectibility is reasonably assured. The Companys revenues consist primarily of tuition

paid by parents, supplemented in some cases by payments (either partial or in total) from government

agencies. Each agency has its own set of guidelines, including record keeping requirements, in
administering
subsidies and management must constantly monitor affected centers to ensure compliance.
Revenues
also include, to a lesser degree, management fees paid by corporate sponsors. Revenue
is recognized
as services are performed. In some centers, the Company receives revenue in advance
of services being
rendered, in which case, revenue is deferred until the services have been provided.
Franchise fees
are recognized as revenue at the time the franchise center opens. Royalty income
related to franchise
operations is recognized as revenue is earned by franchisees.
n. Pre-Opening Costs:Pre-opening costs are expensed as incurred.
o. Advertising Expenses:Yellow pages advertising costs are expensed concurrent with the period in which the Yellow Pages books
are distributed to customers. The Company has a contractual agreement  to contribute a percentage
of Tutor Time revenues to an advertising fund along with franchisees. Contributions to this fund
are expensed as a percentage of revenue. All other marketing costs are treated as period expenses
and, accordingly, are expensed in the period incurred. The Company incurred advertising expenses
of $2.2 million, $2.6 million, and $1.5 million during fiscal 2005, 2004, and 2003, respectively.
p. Business Risks:The Company is subject to certain risks common to the providers of child care and early education,
including dependence on key personnel, dependence on client relationships, competition from alternate
sources or providers of the Companys services, market acceptance of work and family services,
the ability to hire and retain qualified personnel and general economic conditions.
q. Use of Estimates:The preparation of financial statements in conformity with generally accepted accounting principles
  requires management to make estimates and assumptions (in areas, among others, such as provision
  for doubtful accounts, exit and closure expense accrual, deferred tax asset valuation and accrued
  workers compensation expense), that affect the reported amounts of assets and liabilities and
  disclosure of contingent assets and liabilities at the date of the financial statements and the reported
  amounts of revenues and expenses during the reporting period. Actual results could differ from those
  estimates.
r.  Reclassifications:Certain amounts for the fiscal years ended April 2, 2004 and March 28, 2003 have been reclassified
    to conform to the presentation adopted in fiscal 2005.
s.  Segment Reporting:The Company has three reportable segments: Childtime, Tutor Time and Franchise Operations. Childtime
  operates child care centers primarily under the Childtime Learning Centers brand name, Tutor Time
  operates child care centers under the Tutor Time brand name and Franchise Operations licenses and
  provides developmental and administrative support to franchises operating under the Tutor Time brand
  name. The accounting polices of the segments are the same as those described in the summary of significant
  accounting policies. The Companys reportable segments are reported separately because the Companys
  chief operating decision maker uses the segment information in determining the allocation of resources
  among segments and appraising the performance of the segments. (See Note 16)

t.  New Accounting Pronouncements:
This standard requires expensing of stock options and other share-based payments
and supersedes SFAS 123, Accounting for Stock-Based Compensation, and APB
Opinion No. 25, Accounting for Stock Issued to Employees,and its related
implementation guidance that had allowed companies to choose between expensing
stock options or showing proforma disclosure only. This standard, together with
a new rule adopted by the Securities and Exchange Commission in April 2005, is
effective for the Company April 1, 2007 and will apply to all awards granted,
modified, cancelled or repurchased after that date. The ultimate amount of
increased compensation expense will be dependent on the number of option shares
granted, their timing and vesting period and the method used to calculate the
fair value of the awards, among other factors. The Company is currently
evaluating the expected impact that the adoption of SFAS 123R will have on
results of operations and cash flows in the future.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|F-10
|----



|3. Acquisition and Pro Forma Information:
|-----------------------------------------
|                                         

|On July 19, 2002, the Company acquired substantially all of the assets of Tutor Time Learning Systems,
Inc., a Florida corporation (Tutor Time), for an aggregate purchase price of approximately
$22.8 million, including acquisition costs, plus the assumption of certain liabilities. In consideration
for providing investment advisory services with respect to the acquisition, Jacobson Partners was
paid an advisory fee consisting of a cash payment of $333,336 and the issuance of 175,438 shares
of common stock. These costs have been capitalized as part of the acquisition costs. Jacobson Partners
is the management and financial consultant to the Company of which Benjamin R. Jacobson, the Companys
Chairman of the Board is the managing general partner, and James J. Morgan, a director and member
of the Compensation Committee and the Companys former Chairman of the Board and interim Chief
Executive Officer, is a partner.
The Tutor Time acquisition was financed, in part, by Bank One, NA through its secured revolving line
of credit with the Company. Subordinated loans (the Subordinated Notes) in the aggregate
amount of $14 million were provided by a group of lenders organized by Jacobson Partners to fund
the balance of the Tutor Time acquisition purchase price and to provide related working capital.
(See Note 5) Although Jacobson Partners received no consideration for arranging this financing, lenders
included JP Acquisition Fund II, L.P. and JP Acquisition Fund III, L.P., entities controlled and
managed by affiliates of Jacobson Partners (for an aggregate of $10,497,154), and three directors
of the Company at the time of the loans (Mr. Jacobson, Mr. Morgan and Mr George A. Kellner) and trusts
for the benefit of their children (for an aggregate of $545,132).
In connection with the Tutor Time acquisition, JP Acquisition Fund II, L.P., JP Acquisition Fund III,
L.P., and certain of their co-investors (collectively, the Optionees), including Messrs.
Jacobson and Morgan, agreed to arrange for the Company to obtain a standby purchase commitment in
connection with the Companys Rights Offering. As consideration for obtaining such commitment,
a Special Committee of the Board of Directors approved the grant to the Optionees of options to purchase,
in the aggregate, up to 400,000 shares of common stock, until July 19, 2006, at an exercise price
of $5.00 per share.
Pro forma unaudited information for the Company and Tutor Time follows (in thousands, except per share
data):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                                                               | Fiscal Year
      Ended
      March 28,
      2003 |        
|-------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | -------
|                                                                                                               |                                                    |        
|Revenue, net                                                                                                   | $                                                  | 193,443
|Operating (loss)                                                                                               |                                                    | (9,256 
|(Loss) before income taxes, discontinued operations and cumulative effect of 
   change in accountingprinciple | $                                                  | (12,559
|(Loss) before cumulative of change effect in accounting principle                                              | $                                                  | (12,950
|Net (loss)                                                                                                     | $                                                  | (17,917
|Net (loss) per share                                                                                           | $                                                  | (3.34  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In connection with the Tutor Time Learning Systems, Inc. bankruptcy proceedings, Tutor Time, at the
request of the Company, was able to reject numerous leases and franchise agreements. The preceding
pro forma information includes only the revenues and costs from those Tutor Time centers and franchises
that were not rejected as part of the bankruptcy proceedings. No pro forma adjustments were made
to the historical Tutor Time corporate overhead expenses ($2.0 million for the 52 weeks ended March
28, 2003), other than to include estimates related to certain franchisees that were consolidated
by the Company during 2004 in accordance with FIN 46. Additional interest expense was included in
the pro forma results based upon the additional debt incurred to finance the Tutor Time acquisition.

|F-11
|----



|4. Other Current Assets and Liabilities:
    Other current assets and liabilities are composed of the following:
|----------------------------------------------------------------------------------------------------------------

|                                                                                                                                                             |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | -----
|
|
|
|Prepaid expenses and other current assets:                                                                                                                   |   |      
|Prepaid rent                                                                                                                                                 | $ | 2,611
|Prepaid insurance                                                                                                                                            |   | 1,129
|Prepaid property taxes                                                                                                                                       |   | 749  
|Other                                                                                                                                                        |   | 1,122
|                                                                                                                                                             |   |      
|                                                                                                                                                             | $ | 5,611
|                                                                                                                                                             |   |      
|Other current liabilities:                                                                                                                                   |   |      
|Unearned revenue                                                                                                                                             | $ | 2,540
|Accrued rent                                                                                                                                                 |   | 103  
|Accrued property taxes                                                                                                                                       |   | 744  
|Ad fund                                                                                                                                                      |   | 581  
|Deposits                                                                                                                                                     |   | 128  
|Franchise obligations                                                                                                                                        |   | 592  
|Accrued workers compensation expense (net of $1,073 and $928 of advancedeposits held by insurance company at April 1, 2005 and April 2, 2004, respectively) |   | 2,112
|Accrued utilities                                                                                                                                            |   | 226  
|Other                                                                                                                                                        |   | 2,447
|                                                                                                                                                             |   |      
|                                                                                                                                                             | $ | 9,473
|                                                                                                                                                             |   |      

|                                                                           
|---------------------------------------------------------------------------
|5. Financing Arrangements:
Financing arrangements consist of the following:

|                                                                                                                                                                                                                                   |   |       |  |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----- |  | -
|                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                   |   |       |  |  
|                                                                                                                                                                                                                                  
|Revolving line of credit, due July 2006 interest at prime plus 0.25% (6.0%) or Eurodollar plus 2.75% (ranging from 5.45% to 5.64%) at April 1, 2005 and prime plus 0.75% (4.75%) or Eurodollar plus 3.50% (4.60%) at April 2, 2004 | $ | 4,332 |  | $
|                                                                                                                                                                                                                                   |   |       |  |  
|Subordinated debt with a maturity of May 15, 2008, interest at 15% payable quarterly and principal due upon maturity                                                                                                               |   | 3,500 |  |  
|                                                                                                                                                                                                                                   |   |       |  |  
|Note payable (collateralized by a letter of credit) to a corporation resulting from an acquisition, interest at prime (4.00% at April 2, 2004), quarterly principal payments of $100,000 plus interest                             |   |      |  |  
|                                                                                                                                                                                                                                   |   |       |  |  
|Notes payable (non-collateralized) to corporations resulting from an acquisition, interest at prime (4.00% at April 2, 2004)                                                                                                       |   |      |  |  
|                                                                                                                                                                                                                                   |   |       |  |  
|Notes payable (non-collateralized) to various entities and individuals resulting from acquisitions, interest at various fixed rates (aggregate rate of 8.2% at April 1, 2005), with various due dates through 2008                 |   | 170   |  |  
|                                                                                                                                                                                                                                   |   |       |  |  
|                                                                                                                                                                                                                                   |   | 8,002 |  |  
|Less current maturities of long-term debt                                                                                                                                                                                          |   | 81    |  |  
|                                                                                                                                                                                                                                   |   |       |  |  
|                                                                                                                                                                                                                                   | $ | 7,921 |  | $
|                                                                                                                                                                                                                                   |   |       |  |  
|                                                                                                                                                                                                                                   |   |       |  |  

|F-12
|----



|At April 1, 2005, aggregate principal payments due on long-term debt through maturity are as follows:
|-----------------------------------------------------------------------------------------------------

| |      
| | -----
| |      
| |      
| | 2006 
| | 2007 
| | 2008 
| | 2009 
| |      
| | Total
| |      

|On November 22, 2004, the Company entered into a Second Amended and Restated Credit Agreement. This
agreement provides a $17.5 million revolving line of credit that will mature on July 31, 2006. It
is collateralized by the Companys receivables, equipment and real estate, with interest payable
at a variable rate, at the Companys option, based on either the prime rate or the Eurodollar
rate. There were outstanding borrowings of $4.3 million at April 1, 2005, and outstanding borrowings
of $5.4 million at April 2, 2004. Outstanding letters of credit reduced the availability under the
line of credit in the amount of $3.4 million at April 1, 2005, and $2.1 million at April 2, 2004.
As of April 1, 2005 and April 2, 2004, unused amounts available for borrowing under this line of
credit were $9.8 million and $6.2 million, respectively.
Under this agreement, the Company is required to maintain certain financial ratios and other financial

conditions. In addition, there are restrictions on the incurrence of additional indebtedness, disposition

of assets and transactions with affiliates. The Company was in compliance with the agreement as
of
April 1, 2005.
On May 16, 2003, the Company completed a rights offering. Total proceeds from the offering were $15.9
million, of which $12.4 million ($11.6 million net of expense) was for the issuance of 14.1 million
shares of common stock and $3.5 million was Subordinated Debt. The proceeds of the offering were
used to pay off the balance, which included accrued interest, on the Subordinated Debt issued to
a group of lenders organized by Jacobson Partners (see Note 9).
6. Income Taxes:
The income tax provision or benefit reflected in the consolidated statement of operations consists
of the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                | Fiscal Years Ended |    
|--------------- | ------------------ | ---
|
|
|
|Current:        |                    |    
|Federal         | $                  | 43 
|State and local |                    | 23 
|Non- US         |                    | 68 
|                |                    |    
|                |                    | 134
|                |                    |    
|Deferred:       |                    |    
|Federal         |                    |   
|State and local |                    |   
|Non- US         |                    |   
|                |                    |    
|                |                    |   
|                |                    |    
|                | $                  | 134
|                |                    |    

|F-13
|----



|Differences between the income tax provision on income before income taxes reflected in the statement of operations and that computed by applying the statutory federal income tax rate are attributable to the following:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                          

|                                                  | Fiscal Years Ended |       
|------------------------------------------------- | ------------------ | ------
|
|
|
|                                                  |                    |       
|Income tax provision (benefit) at statutory level | $                  | 1,114 
|State and local taxes, net of federal tax benefit |                    | 23    
|AMT Tax                                           |                    | 43    
|Non- US                                           |                    | 68    
|Valuation allowance                               |                    | (1,170
|Other                                             |                    | 56    
|                                                  |                    |       
|                                                  | $                  | 134   
|                                                  |                    |       

|                                                                                                               
|---------------------------------------------------------------------------------------------------------------
|Temporary differences and carryforwards that give rise to deferred tax assets and (liabilities) are
as follows:
|                                                                                                               

|                                                     | April 1,
      2005 |        | April 2,
      2004 |  
|---------------------------------------------------- | ------------------- | ------ | ------------------- | -
|                                                     |                     |        |                     |  
|
|Deferred
      tax asset:                            |                     |        |                     |  
|Allowance
      for doubtful accounts                | $                   | 221    |                     | $
|Vested
      and non-vested vacation balance         |                     | 756    |                     |  
|Workers
      compensation accrual                   |                     | 1,167  |                     |  
|Section
      197 amortization                       |                     | 2,496  |                     |  
|Gain
      on sale-leaseback                         |                     | 3,944  |                     |  
|NOL
      carryforward                               |                     | 1,741  |                     |  
|Provision
      for restructuring charges            |                     | 68     |                     |  
|Straight-line
      rent                             |                     | 1,300  |                     |  
|Deferred
      registration fees                     |                     | 403    |                     |  
|All
      other                                      |                     | 338    |                     |  
|                                                     |                     |        |                     |  
|                                                     |                     | 12,434 |                     |  
|                                                     |                     |        |                     |  
|Deferred
      tax liability:                        |                     |        |                     |  
|Basis
      and depreciation differences of property |                     | (5,592 | )                   |  
|Prepaid
      expenses                               |                     | (468   | )                   |  
|                                                     |                     |        |                     |  
|Net deferred
      tax asset                         |                     | 6,060  |                     |  
|Valuation
      allowance                            |                     | (6,374 | )                   |  
|                                                     |                     |        |                     |  
|Net
      deferred tax asset                         | $                   |       |                     | $
|                                                     |                     |        |                     |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Due to the history of losses and uncertainties, the Company has determined that it is more likely than
not that the deferred tax assets will not be recovered through future taxable income. As a result,
a valuation reserve has been provided reducing deferred tax assets to an amount recoverable through
the reversal of deferred tax liabilities.
7. Leases:
The Company leases certain land and buildings, primarily childrens centers and vehicles, under
non-cancelable operating leases with original terms ranging from 1 to 25 years. Certain leases contain
purchase and renewal options, impose restrictions upon making certain payments and incurring additional
debt, and may provide for rental increases at specified intervals and contingent rents based upon
a specified percentage of the gross revenues derived from operating a business at the lease facility.
Rental expense for the years ended April 1, 2005, April 2, 2004 and March 28, 2003 was $36.5 million,
$31.3 million and $29.3 million, respectively. These amounts included contingent rental expense of
$1.1 million, $0.8 and $0.5 million for the years ended April 1, 2005, April 2, 2004 and March 28,
2003, respectively.
During the years ended April 1, 2005 and April 2, 2004, the Company sold one center for $0.6 million
  and 13 centers for approximately $10.1 million, respectively, to individual real estate investors
  and then leased these centers back. These sales have been accounted for as financing transactions
  and no gain or loss was recorded for any of these sales. The Company will continue to operate the
  centers that were sold in these transactions.

|F-14
|----



|Future minimum rental commitments at April 1, 2005 for all non-cancelable sale leaseback obligations and operating leases are as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------

|                                                             |   | Operating Leases | 
|------------------------------------------------------------ | - | ---------------- | 
|
|
|
|Fiscal Year:                                                 |   |                  | 
|2006                                                         | $ | 1,095            | 
|2007                                                         |   | 1,117            | 
|2008                                                         |   | 1,119            | 
|2009                                                         |   | 1,136            | 
|2010                                                         |   | 1,225            | 
|Thereafter                                                   |   | 19,820           | 
|                                                             |   |                  | 
|Total                                                        |   | 25,512           | 
|                                                             |   |                  | 
|                                                             |   |                  | 
|                                                             |   |                  | 
|Less amounts representing interest                           |   | 14,384           | 
|                                                             |   |                  | 
|Present value of sale leaseback obligations at April 1, 2005 |   | 11,128           | 
|Less current portion of sale leaseback obligations           |   | 32               | 
|                                                             |   |                  | 
|                                                             | $ | 11,096           | 
|                                                             |   |                  | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Closed Centers Only column in the table above represents the minimum lease payments
in total for all closed centers. The Company has accrued as of April 1, 2005, $0.2 million in exit
and closure expenses related to these lease payments. The Company is primarily liable on approximately
$0.5 million (included in the $0.8 million closed centers total) for lease assignments already negotiated
in connection with certain lease terminations resulting from previously closed centers.
The net book value of property and building improvements recorded under sale leaseback transactions
were as follows:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                                          | April 1, 2005 |       
|------------------------------------------------------------------------- | ------------- | ------
|                                                                          |               |       
|
|Land and Land Improvements under sale leaseback obligations               | $             | 4,046 
|Building and Building Improvements under sale leaseback obligations       |               | 6,194 
|                                                                          |               |       
|                                                                          |               | 10,240
|Accumulated Depreciation                                                  |               | (2,137
|                                                                          |               |       
|Net book value of property and equipment under sale leaseback obligations | $             | 8,103 
|                                                                          |               |       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. Employee Benefit Plan:
The Company has a 401(k) Savings and Retirement Plan (the Plan) covering substantially
all of its full-time employees. The Company matches a portion of employee contributions up to a maximum
Company contribution of one percent of compensation. Employees may contribute up to 15 percent of
compensation to the Plan. Amounts expensed for the years ended April 1, 2005, April 2, 2004 and March
28, 2003, were $131,000, $129,000 and $116,000, respectively.
9. Option Grants for Consulting Services and Related Party Transactions:
In July 2000, the Company retained Jacobson Partners, of which Benjamin R. Jacobson, the Companys
Chairman of the Board, is the managing general partner, to provide management and financial consulting
services. As part of the consideration paid to, and to add further incentive for such services, Jacobson
Partners was granted stock options to purchase 557,275 shares. Jacobson Partners has exercised options
totaling 294,117 shares at an exercise price of $8.50 and a cost of $2,500,000. The remaining 263,158
shares expired in July 2002.
Additionally, Jacobson Partners receives an annual consulting fee in the amount of $250,000, plus reimbursement
of reasonable out-of-pocket expenses. In connection with the Tutor Time acquisition, Jacobson Partners
was paid an advisory fee consisting of $333,336 and the issuance of 175,438 shares, and options were
granted to certain related parties to acquire up to 400,000 shares of the Companys common stock
(see Note 3). Fees incurred for Jacobson Partners (exclusive of out-of-pocket expenses and the Tutor
Time fee) were $250,000,

|F-15
|----



|$400,000 and $250,00 for fiscal 2005, 2004 and 2003, respectively, and are included
in general and administrative expense in the accompanying Consolidated Statement of Operations.
10. Commitments and Contingencies:
A subsidiary of the Company is primarily or contingently liable for many of the leases of Tutor Times
franchisees. In an effort to build its franchisee network, Tutor Time either leased the prospective
site for a franchisee, with a subsequent sublease of the site to the franchisee, or provided a lease
guarantee to the landlord for the benefit of the franchisee in exchange for a monthly lease guarantee
fee payable by the franchisee that is based upon the monthly rent expense of the guaranteed lease.
The payments the Company could be required to pay related to leases and guarantees aggregates $71.9
million and $12.8 million, respectively, in case of default by the franchisee. Should the Company
be required to make payments under these leases, it may assume obligations for operating the center.
Should the center not be economically viable, the Company will make provision for the lease termination
at that time. The Company does not anticipate that it will be required to make payments under any
of these leases or guarantees, does not believe that any payments are likely and has not recorded
any related liability.
Various legal actions and other claims are pending or could be asserted against the Company including


pending claims relating to exposure to mold and other contaminants resulting from the condition

of
one of the Companys former centers. In addition, the Company has and will continue to

vigorously
protect its rights against parties that violate franchise agreements or infringe on

its intellectual
property rights. Litigation is subject to many uncertainties; the outcome of
individual
litigated
matters is not predictable with assurance, and it is reasonably possible
that some of
these matters
may be decided unfavorably to the Company. Although there is a chance
that any unfavorable
decision
could have a material adverse impact on the Companys financial
position, liquidity
and results
of operations, it is the opinion of management that the
ultimate liability, if
any, with respect
to these matters will not materially affect the financial
position, results of
operations or cash
flows of the Company beyond amounts already accrued.
11. Accounts Receivable:
Accounts receivable is presented net of an allowance for doubtful accounts. At April 1, 2005 and April
2, 2004, the allowance for doubtful accounts was $0.6 million and $2.0 million, respectively.
12. Drafts Payable:
Drafts payable represent unfunded checks drawn on zero balance accounts that have not been presented
for funding to the Companys banks. The drafts are funded, without finance charges, as soon
as they are presented. At April 1, 2005 and April 2, 2004, the aggregate drafts payable were $4.7
million and $4.5 million, respectively.
13. Exit and Closure Expenses:
The Company has made provisions for closed center lease obligations and discontinued operations in
connection with the closing of under performing centers. For the fiscal years ended April 1, 2005,
April 2, 2004 and March 28, 2003 the Company recorded exit and closure expenses of $0.5 million,  $0.7 million and $1.4 million,
respectively. A summary of the accrual is as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-16
|----



|                                          | Exit and Closure Expenses and Discontinued Operations Accrual Analysis |    
|----------------------------------------- | ---------------------------------------------------------------------- | ---
|                                          |                                                                        |    
|
|                                          |                                                                        |    
|Closed center lease obligations           | $                                                                      | 241
|                                          |                                                                        |    
|Discontinued operations lease obligations |                                                                        | 207
|                                          |                                                                        |    
|Total                                     | $                                                                      | 448
|                                          |                                                                        |    

|                                          | Beginning
      Accrual
      March 28, 2003 |       | Expenses |   | Cash
      Payments |  | Ending
      Accrual
      April 2, 2004 |      
|----------------------------------------- | -------------------------------------------- | ----- | -------- | - | ------------------- |  | ---------------------------------------- | -----
|                                          |                                              |       |          |   |                     |  |                                          |      
|Closed center lease obligations           | $                                            | 951   |          | $ | 251                 |  | $                                        | 961  
|                                          |                                              |       |          |   |                     |  |                                          |      
|Discontinued operations lease obligations |                                              | 319   |          |   | 468                 |  |                                          | 580  
|                                          |                                              |       |          |   |                     |  |                                          |      
|Total                                     | $                                            | 1,270 |          | $ | 719                 |  | $                                        | 1,541
|                                          |                                              |       |          |   |                     |  |                                          |      

|                                           | Beginning
      Accrual
      March 29, 2002 |     | Expenses |   | Cash
      Payments |   | Ending
      Accrual
      March 28, 2003 |    
|------------------------------------------ | -------------------------------------------- | --- | -------- | - | ------------------- | - | ----------------------------------------- | ---
|                                           |                                              |     |          |   |                     |   |                                           |    
|Continuing operations:                     |                                              |     |          |   |                     |   |                                           |    
|Lease obligations                          | $                                            | 755 |          | $ | 1,051               |   | $                                         | 855
|Severance obligations                      |                                              | 74  |          |   | (20                 | ) |                                           | 54 
|                                           |                                              |     |          |   |                     |   |                                           |    
|Continuing operations total                |                                              | 829 |          |   | 1,031               |   |                                           | 909
|Discontinued operations leases obligations |                                              |    |          |   | 386                 |   |                                           | 67 
|                                           |                                              |     |          |   |                     |   |                                           |    
|Total                                      | $                                            | 829 |          | $ | 1,417               |   | $                                         | 976
|                                           |                                              |     |          |   |                     |   |                                           |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The liability for the leases on closed centers during fiscal years ended April 1, 2005 and April 2,
2004 has been measured at the fair value, which is determined by the present value of the remaining
lease rentals and costs, to the extent that they exceed the reasonably attainable sublease rentals.
The exit and closure expenses primarily relate to underperforming centers closed
through the end of the year.  There are no adjustments to the reserve.
All exit and closure expenses are in the Childtime business segment.
14. Discontinued Operations:
The Consolidated Statements of Operations include discontinued operations of seven centers closed during
fiscal 2005, five centers closed during fiscal 2004 and three centers closed during fiscal 2003.
Prior year amounts have been reclassified to reflect these changes. A summary of discontinued operations
was as follows (in thousands):

|                                          | Fiscal Years Ended |      
|----------------------------------------- | ------------------ | -----
|
|
|
|Revenues, net                             | $                  | 2,987
|Operating expenses of Learning Centers    |                    | 3,013
|                                          |                    |      
|Gross profit (loss)                       |                    | (26  
|Depreciation and amortization expenses    |                    | 49   
|Gain on sale of centers and vacant land   |                    | (773 
|Provision for doubtful accounts           |                    | 22   
|Exit and closure expenses                 |                    | 339  
|Goodwill impairment charges               |                    |     
|Fixed asset impairment charges            |                    |     
|Other non-operating expense               |                    | 115  
|                                          |                    |      
|Discontinued operations before income tax |                    | 222  
|                                          |                    |      
|Income tax provision                      |                    | 68   
|                                          |                    |      
|Discontinued operations, net of tax       | $                  | 154  
|                                          |                    |      

|F-17
|----



|15. Impairment of Intangible Assets and Long-lived Assets:
During the second quarter of fiscal 2003, the Company completed the implementation of SFAS 142, Goodwill and Other Intangible Assets. Under SFAS 142, goodwill is no longer amortized. Instead, goodwill and indefinite-lived intangible
assets are tested for impairment in accordance with the provisions of SFAS 142. In accordance with
its impairment policy, the Company employed a discounted cash flow analysis in conducting its impairment
tests as of the beginning of fiscal 2003. The Company completed its impairment test and recorded
an impairment loss of $5.0 million (net of a tax benefit of $0.9 million) as a cumulative effect
of a change in accounting principle. In addition, as a result of continuing weakening economic conditions,
the Company tested for goodwill impairment as of October 11, 2002, and recorded an impairment loss
during the second quarter of $4.2 million. During fiscal 2003, the Company incurred an expense of
$3.5 million, including $0.1 million in discontinued operations, as a result of a fixed asset impairment
evaluation done under SFAS No. 144.
In accordance with SFAS 142, the Company also employed a discounted cash flow analysis in conducting
its impairment tests of goodwill and indefinitely-lived assets impairment at the end of fiscal 2005
and 2004, and found that no further impairment was indicated. The Company will continue to perform
such tests in the future and will record an impairment should one be indicated.
In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the Company did not amortize goodwill for the fiscal years ended April 1, 2005 and April 2, 2004.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-18
|----



|The changes in the carrying amounts of goodwill and other intangible assets for the fiscal years ended April 1, 2005 and April 2, 2004 were as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                      

|                             | Balance
      April 2, 2004 |        | Additions |   | Disposals |  | Amortization |     | Balance
      April 1, 2005 |   | Useful Life | 
|---------------------------- | --------------------------- | ------ | --------- | - | --------- |  | ------------ | --- | --------------------------- | - | ----------- | 
|                             |                             |        |           |   |           |  |              |     |                             |   |             | 
|Goodwill                     | $                           | 17,866 |           | $ | 1,245     |  | $            | 179 |                             | $ |            | 
|Franchise Agreements         |                             | 8,320  |           |   |          |  |              |    |                             |   | 455         | 
|Trade Name and Trademarks    |                             | 3,574  |           |   |          |  |              |    |                             |   | 195         | 
|Curriculum                   |                             | 304    |           |   |          |  |              |    |                             |   | 92          | 
|Covenants                    |                             |       |           |   |          |  |              |    |                             |   |            | 
|                             |                             |        |           |   |           |  |              |     |                             |   |             | 
|Total intangible assets, net | $                           | 30,064 |           | $ | 1,245     |  | $            | 179 |                             | $ | 742         | 
|                             |                             |        |           |   |           |  |              |     |                             |   |             | 

|                             | Balance
      March 28, 2003 |        | Additions |   | Disposals |  | Amortization |   | Balance
      April 2, 2004 |   | Useful Life | 
|---------------------------- | ---------------------------- | ------ | --------- | - | --------- |  | ------------ | - | --------------------------- | - | ----------- | 
|                             |                              |        |           |   |           |  |              |   |                             |   |             | 
|Goodwill                     | $                            | 17,866 |           | $ |          |  | $            |  |                             | $ |            | 
|Franchise Agreements         |                              | 8,775  |           |   |          |  |              |  |                             |   | 455         | 
|Trade Name and Trademarks    |                              | 3,770  |           |   |          |  |              |  |                             |   | 196         | 
|Curriculum                   |                              | 396    |           |   |          |  |              |  |                             |   | 92          | 
|Covenants                    |                              | 5      |           |   |          |  |              |  |                             |   | 5           | 
|                             |                              |        |           |   |           |  |              |   |                             |   |             | 
|Total intangible assets, net | $                            | 30,812 |           | $ |          |  | $            |  |                             | $ | 748         | 
|                             |                              |        |           |   |           |  |              |   |                             |   |             | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On July 30, 2004, the Company acquired eight Tutor Time centers from a franchisee for $1.3 million,
adjusted for certain assets and liabilities, which resulted in an addition to goodwill. On March
31, 2005, the Company sold one Tutor Time center to a third party, which resulted in the disposal
of goodwill. Estimated amortization of intangible assets is expected to be approximately $0.7 million
for each of the next five years.
16. Segment Information:
The Company has three reportable segments: Childtime, Tutor Time and Franchise Operations. Childtime
operates child care centers primarily under the Childtime Learning Centers brand name, Tutor Time
operates child care centers under the Tutor Time brand name and Franchise Operations licenses and
provides developmental and administrative support to franchises operating under the Tutor Time brand
name. The accounting polices of the segments are the same as those described in the summary of significant
accounting policies. The Companys reportable segments are reported separately because the Companys
chief operating decision maker uses the segment information in determining the allocation of resources
among segments and appraising the performance of the segments.
Information about the Companys operating segments are presented below (in thousands):

|F-19
|----



| |                                                   | Fiscal Years Ended |        
| | ------------------------------------------------- | ------------------ | -------
| |                                                   |                    |        
|
| |                                                   |                    |        
| | Revenues:                                         |                    |        
| | Childtime                                         | $                  | 145,007
| | Tutor Time                                        |                    | 59,460 
| | Franchise Operations                              |                    | 7,261  
| | Revenue associated with the consolidation of VIEs |                    | 446    
| |                                                   |                    |        
| | Total                                             | $                  | 212,174
| |                                                   |                    |        
| |                                                   |                    |        
| | Operating income (loss):                          |                    |        
| | Childtime                                         | $                  | 18,153 
| | Tutor Time                                        |                    | 4,362  
| | Franchise Operations                              |                    | 7,261  
| | Depreciation and amortization                     |                    | (4,370 
| | Corporate and other                               |                    | (20,328
| |                                                   |                    |        
| | Total                                             | $                  | 5,078  
| |                                                   |                    |        
| |                                                   |                    |        
| | Goodwill:                                         |                    |        
| | Childtime                                         | $                  | 7,215  
| | Tutor Time                                        |                    | 6,644  
| | Franchise Operations                              |                    | 5,073  
| |                                                   |                    |        
| | Total                                             | $                  | 18,932 
| |                                                   |                    |        
| |                                                   |                    |        
| | All other assets:                                 |                    |        
| | Childtime                                         | $                  | 47,498 
| | Tutor Time                                        |                    | 11,380 
| | Franchise Operations                              |                    | 9,547  
| | Assets associated with the consolidation of VIEs  |                    |       
| |                                                   |                    |        
| | Total                                             | $                  | 68,425 
| |                                                   |                    |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|17. Stock Options:
In November 1995, the Company adopted the 1995 Stock Incentive Plan for Key Employees (the Stock
Option Plan). The Stock Option Plan became effective, February 2, 1996, concurrent with the
effectiveness of the registration statement relating to the Companys initial public offering
of Common Stock. The aggregate number of shares that may be issued pursuant to the Stock Option Plan,
was 300,000 shares. At the 2000 Annual Shareholders Meeting, an amendment was approved increasing
the amount of shares available for grant or award by 300,000, bringing the new total to 600,000 shares.
Options may be granted, or restricted stock awarded, at the discretion of the Companys compensation
committee from time to time at a range of 75 percent to 110 percent of the market value of the stock
on the date on which such option is granted as defined in the Stock Option Plan. Each option granted
under the plan shall expire in five to ten years from the date of grant, as defined in the Stock
Option Plan. Restrictions on sale or transfer of stock awarded under the Stock Option Plan, if any,
range from six months to five years. Vesting requirements are determined by the committee at the
time of the grant, provided however, no stock option may be exercisable prior to the expiration of
six months from the date of grant unless the participant dies or becomes disabled prior thereto.
At the discretion of the committee, vesting may be accelerated upon a change in control of the Company.
As of April 1, 2005, there are 136,847 shares available for issuance under the 1995 Stock Option Plan.
No compensation expense has been recorded on any employee options, as all options were granted at
or above the fair market price. In addition, the Company adopted the Director Stock Option Plan,
effective February 2, 1996, providing for annual grants of stock options to non-employee directors
to purchase common stock at fair value as of the date of such grant. The aggregate number of shares
which may be issued pursuant to the Director Stock Option Plan, is 75,000 shares. Each option grant
under the plan shall expire five years from the date of grant. Options vest in full on the first
anniversary of the date of grant and 15,000, 15,000 and 7,500 options were granted under the plan
during fiscal 2005, 2004 and 2003, respectively. As of April 1, 2005, there are 35,000 shares available
for issuance under the Director Stock Option Plan.

|F-20
|----



|In July 2003, the Company adopted the Childtime Learning Centers, Inc. 2003 Equity Compensation Plan
(the 2003 Plan). The 2003 Plan become effective July 30, 2003, upon its adoption at the
Companys 2003 Annual Meeting of Shareholders. The aggregate number of shares that may be issued
pursuant to the 2003 Plan is 1,500,000 shares. The 2003 Plan permits the granting of the following
awards: (1) stock options, including both nonqualified options (at an exercise price
of at least 50% of the market price on the date of grant) and incentive options (at an exercise price
of at least 100% of the market price on the date of grant), which may be for any term set by the
Companys compensation committee, (2) stock appreciation rights, which may be granted either
in conjunction with a stock option or as an independent right, (3) restricted stock and restricted
stock units, (4) performance shares and performance share rights (with the performance goal being
established in writing no later than the earlier of 90 days after the start of a performance period
or expiration of the first 25% of the performance period and being based on certain business criteria,
such as free cash flow, cash flow return on investment, stock price, market price, sales, revenues,
earnings per share, return on equity, total shareholder return, costs, net income, working capital,
turnover, inventory or receivable turnover and/or margins of the Company), and (5) other awards which
are denominated or payable in, valued by reference to, or otherwise based on common stock, including
rights to make an outright purchase of unrestricted or restricted stock. As of April 1, 2005, there
are 383,600 shares available for issuance under the 2003 Equity Compensation Plan.
Presented below is a summary of the status of the stock options and performance share rights held by employees of the Company as
of April 1, 2005, April 2, 2004 and March 28, 2003:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                           | April 1, 2005 |           | April 2, 2004 |   | March 28, 2003 | 
|------------------------------------------ | ------------- | --------- | ------------- | - | -------------- | 
|                                           |               |           |               |   |                | 
|
|                                           |               |           |               |   |                | 
|                                           |               |           |               |   |                | 
|Options outstanding at beginning of period |               | 1,323,936 |               | $ | 2.75           | 
|Granted                                    |               | 137,000   |               |   | 0.60           | 
|Exercised                                  |               | (400      | )             |   | 1.69           | 
|Forfeited / expired                        |               | (61,683   | )             |   | 7.66           | 
|                                           |               |           |               |   |                | 
|Options outstanding at end of period       |               | 1,398,853 |               | $ | 2.32           | 
|                                           |               |           |               |   |                | 
|Options exercisable                        |               | 424,973   |               | $ | 3.37           | 
|                                           |               |           |               |   |                | 

|                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------
|The table below details the exercise prices and weighted average remaining contractual lives of the 1,398,853 employee options outstanding at April 1, 2005:
|                                                                                                                                                            

| | Exercise Price Range |       | Options
      Outstanding |   | Weighted
      Average Exercise
      Price |  | Remaining
      Contractual Life
      (Years) |  |  
| | -------------------- | ----- | ------------------------- | - | ------------------------------------------- |  | ---------------------------------------------- |  | -
| | $                    |      |                           | $ |                                            |  | 100,000                                        |  | $
| |                      | 0.90  |                           |   | 0.90                                        |  | 258,600                                        |  |  
| |                      | 1.55  |                           |   | 2.47                                        |  | 696,900                                        |  |  
| |                      | 3.15  |                           |   | 3.50                                        |  | 290,000                                        |  |  
| |                      | 6.75  |                           |   | 7.97                                        |  | 39,620                                         |  |  
| |                      | 11.81 |                           |   | 11.81                                       |  | 13,733                                         |  |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) Reflects a $0.0 exercise price with respect to performance share rights.
18. Financial Instrument:

    The Company enters into interest rate swap contracts to manage its exposure to fluctuations in interest rates relating to the revolving line of credit. Swap contracts fix the interest payments of floating rate debt instruments. As of April 1, 2005 and April 2, 2004, contracts representing $5.0 million of notional amount were outstanding with maturity dates of November 2005 and January 2006. These contracts provide for the Company to pay interest at an average fixed rate of 2.98% in return for receiving interest at a floating rate of three month LIBOR, which is reset in three month intervals. The fair value of interest rate swap
agreements is subject to changes in value due to changes in interest rates, and the fair value of $(0.0) million and $(0.1) million is included in other current liabilities as of April 1, 2005 and April 2, 2004, respectively.
During fiscal 2005, the Company recognized income of $0.1 million as a result of a change in the market value of the outstanding interest rate contracts.

|F-21
|----



|During fiscal
  2004, the Company recognized no income or loss as a result of a change in the market value of the
  outstanding interest rate contracts.
  19. Consolidation of Variable Interest Entities:
During the fourth quarter of 2004 the Company implemented FIN 46R. The Company concluded that some
  of its franchise arrangements represented variable interest entities (VIEs) which were
  subject to the provisions of FIN 46R. The Companys variable interest in these entities included
  royalty fees and in some cases leasing lease guarantees and debt due to the Company from the franchisee.
  The Company analyzed these franchise agreements and determined that two franchises were entities
  in which the Company is the primary beneficiary. As a result, these entities were consolidated as
  of April 2, 2004. During the quarter ended October 15, 2004, the Company acquired the two franchise
  entities that had previously been consolidated as VIEs. As a result, these entities are not considered
  VIEs as of April 1, 2005. The following is a summary of the effect of consolidating these entities in 2004.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                                                  | Fiscal Year
      Ended
      April 2, 2004 |      
|----------------------------------------------------------------- | ------------------------------------------- | -----
|                                                                  |                                             |      
|Revenue, net of elimination of fees of $41,000                    | $                                           | 1,208
|Cost and minority interest, net of elimination of fees of $41,000 |                                             | 1,208
|                                                                  |                                             |      
|Net income                                                        | $                                           |     
|                                                                  |                                             |      
|Total Assets                                                      | $                                           | 107  
|Total Liabilities                                                 |                                             | 74   
|                                                                  |                                             |      
|Minority interest                                                 | $                                           | 33   
|                                                                  |                                             |      

|                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company did not restate prior periods for the above consolidation as there was no cumulative effect
on the prior years related to the consolidation during fiscal 2004.
20. Supplemental Cash Flow Information:
|                                                                                                                                                                                                                   

| |                                                                   | Fiscal Years Ended |      
| | ----------------------------------------------------------------- | ------------------ | -----
| |                                                                   |                    |      
|
| |                                                                   |                    |      
|
| | Cash payment information:                                         |                    |      
| | Interest                                                          | $                  | 2,239
| | Income taxes                                                      | $                  | 100  
| | Non-cash information:                                             |                    |      
| | Stock issued to Jacobson Partners forTutor Time acquisition costs | $                  |     

|                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In connection with the acquisition of certain assets, the Company incurred debt of $14.0 million in fiscal 2003. During fiscal 2005, the Company entered into a like-kind exchange transaction, exchanging an owned building for a building previously leased. No gain or loss was recorded on this transaction.

|F-22
|----



|21. Quarterly Data (unaudited):
Quarterly financial data for fiscal 2005 and 2004 are summarized as follows in thousands except per
share data:
|-----------------------------------------------------------------------------------------------------------------------------------------------

|                                |   |        |  |   |        |  |   |       
|------------------------------- | - | ------ |  | - | ------ |  | - | ------
|
|
|
|
|
|
|Revenue                         | $ | 51,884 |  | $ | 47,713 |  | $ | 47,390
|Gross profit                    | $ | 8,859  |  | $ | 6,632  |  | $ | 5,188 
|Net income (loss)               | $ | 2,254  |  | $ | 855    |  | $ | (924  
|Income (loss) per share Basic   | $ | 0.12   |  | $ | 0.04   |  | $ | (0.05 
|Income (loss) per share Diluted | $ | 0.11   |  | $ | 0.04   |  | $ | (0.05 

|                                           | Fiscal 2004 |       
|------------------------------------------ | ----------- | ------
|
|
|
|Revenue                                    | $           | 52,678
|Gross profit                               | $           | 8,165 
|Net income (loss)                          | $           | 1,452 
|Income (loss) per share Basic and Diluted: | $           | 0.07  

|F-23
|----



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES     
|-----------------------------------------------
|                                               
|SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
|                                               

|Description                                                            | Balance at
      Beginning
      of Period |       | Cost and
      Expenses |   | Other*
      Accounts |  | Deductions |       | Balance at
      End of
      Period |   
|---------------------------------------------------------------------- | ------------------------------------------ | ----- | ----------------------- | - | --------------------- |  | ---------- | ----- | ------------------------------------ | --
|                                                                       |                                            |       |                         |   |                       |  |            |       |                                      |   
|
|Fiscal year ended March 28, 2003, reserve for doubtful accounts claims | $                                          | 693   |                         | $ | 1,802                 |  | $          | 6,115 |                                      | ($
|                                                                       |                                            |       |                         |   |                       |  |            |       |                                      |   
|Fiscal year ended April 2, 2004, reserve for doubtful accounts claims  | $                                          | 2,721 |                         | $ | 1,302                 |  | $          | 0     |                                      | ($
|                                                                       |                                            |       |                         |   |                       |  |            |       |                                      |   
|Fiscal year ended April 1, 2005, reserve for doubtful accounts claims  | $                                          | 2,027 |                         | $ | 1,513                 |  | $          | 0     |                                      | ($
|                                                                       |                                            |       |                         |   |                       |  |            |       |                                      |   
|                                                                       |                                            |       |                         |   |                      

|                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------
|* Other accounts in fiscal 2003, represents amounts associated with the Tutor Time opening balance
  sheet reserve.

|F-24
|----



|EXHIBIT INDEX
|-------------
|             

|Exhibit | Description                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|3.1     | Restated Articles of Incorporation of the Registrant, as amended, filed as Exhibit 3(i) to the Registrants
  Quarterly Report on Form 10-Q for the fiscal quarter ended July 23, 2004, are incorporated herein
  by reference.                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|3.2     | Restated Bylaws of the Registrant, filed as Exhibit 3.1 to the Registrants Quarterly Report on
  Form 10-Q for the fiscal quarter ended July 19, 2002, are incorporated herein by reference.                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|4.1     | Second Amended and Restated Credit Agreement dated as of November 22, 2004, between Childtime
  Childcare, Inc. (Childtime) and JPMorgan Chase Bank, N.A., filed as Exhibit 4.1 to the
  Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended October 15, 2004,
  is incorporated herein by reference.                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|4.2     | Indenture dated as of May 16, 2003, between the Registrant and U.S. Bank National Association, as trustee,
  related to Subordinated Debt Securities, filed as Exhibit 4.1 to the Registrants Current Report
  on Form 8-K (filed with the Securities and Exchange Commission on May 20, 2003), is incorporated
  herein by reference.                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|4.3     | First Supplemental Indenture, dated as of May 16, 2003, between the Registrant and U.S. Bank National
  Association, as trustee, related to the 15% Subordinated Notes due 2008, including the form of Subordinated
  Note, filed as Exhibit 4.2 to the Registrants Current Report on Form 8-K (filed with the Securities
  and Exchange Commission on May 20, 2003), is incorporated herein by reference.
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.1    | Director Stock Option Plan, filed as Exhibit 10.1 to the Registrants Form S-1 Registration Statement
  (Registration No. 33-99596), is incorporated herein by reference.                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.2    | 1995 Stock Incentive Plan for Key Employees, filed as Exhibit 10.2 to the Registrants Form S-1
  Registration Statement (Registration No. 33-99596), is incorporated herein by reference.                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.3    | First Amendment to 1995 Stock Incentive Plan for Key Employees, filed as Exhibit 10.3 to the Registrants
  Annual Report on Form 10-K for the year ended March 30, 2001, is incorporated herein by reference.                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.4    | Letter agreement dated July 6, 2000, between the Registrant and Jacobson Partners, regarding management
  and financial consulting services, filed as Exhibit 10.4 to the Registrants Annual Report on
  Form 10-K for the year ended March 30, 2001, is incorporated herein by reference.                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.5    | Consulting Agreement dated January 16, 2001, between the Registrant and James Morgan, filed as
  Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended January 5, 2001,
  is incorporated herein by reference.                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.6    | Letter agreement dated July 26, 2001, between Jacobson Partners, on behalf of the Registrant, and James
  J. Morgan, filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal
  quarter ended October 12, 2001, is incorporated herein by reference.                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.7    | Option Agreement dated September 5, 2001, between the Registrant and Leonard C. Tylka, filed as Exhibit
  10.15 to the Registrants Annual Report on Form 10-K for the year ended March 29, 2002, is incorporated
  herein by reference.                                                                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                                                                                                                            
|10.8    | Option grant letter agreement, dated July 19, 2002, among the Registrant, JP Acquisition Fund II, L.P.
  and JP Acquisition Fund III, L.P., filed as Exhibit 10.1 to the Registrants Current Report
  on Form 8-K (filed with the Securities and Exchange Commission on August 6, 2002), is incorporated
herein by reference.                                                                             

|E-1
|---



|10.9  | Stock Option Agreement, dated as of August 15, 2002, between the Registrant and William D. Davis, filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended July 19, 2002, is incorporated herein by reference.                                                                                                   
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.10 | Employment Agreement, dated August 26, 2002, between the Registrant and Frank Jerneycic, filed as Exhibit
  10.2 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended July 19,
  2002, is incorporated herein by reference.                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.15 | Option Agreement, dated as of October 16, 2002, between the Registrant and Brett D. Shevack, filed
  as Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended
  October 11, 2002, is incorporated herein by reference.                                                                                                 
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.11 | Employment Agreement, dated as of September 9, 2003, between the Registrant and Kathryn Winklehaus,
  filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter
  ended October 10, 2003, is incorporated herein by reference.                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.12 | 2003 Equity Compensation Plan, filed as Exhibit 99.1 to the Registrants Form S-8 Registration
  Statement (Registration No. 333-107483), is incorporated herein by reference.                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.13 | Amendment to the 2003 Equity Compensation Plan, filed as Exhibit 99.2 to the Registrants Current
  Report on Form 8-K (filed with the Securities and Exchange Commission on August 18, 2004), is
  incorporated herein by reference.                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.14 | Specimen form of Stock Option Agreement with respect to options granted to officers and key employees
  under the Registrants 1995 Stock Incentive Plan for Key Employees, as amended, filed as Exhibit 10.1
  to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended January 7,
  2005, is incorporated herein by reference.       
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.15 | Specimen form of Stock Option Agreement with respect to options granted to officers and key employees
  under the Registrants 2003 Equity Compensation Plan, as amended, filed as Exhibit 10.2,
  to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended January 7,
  2005, is incorporated herein by reference.                    
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.16 | Specimen form of Stock Option Agreement with respect to options granted to directors under the Registrants
  2003 Equity Compensation Plan, as amended, filed as Exhibit 10.3, to the Registrants
  Quarterly Report on Form 10-Q for the fiscal quarter ended January 7, 2005, is incorporated
  herein by reference.                                     
|      |                                                                                                                                                                                                                                                                                                                                                              
|10.17 | Specimen form of Performance Share Rights Agreement with respect to performance share rights granted
  to executive officers under the Registrants 2003 Equity Compensation Plan, as amended, filed
  as Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter
  ended January 7, 2005, is incorporated herein by reference.
|      |                                                                                                                                                                                                                                                                                                                                                              
|14    | Code of Business Conduct and Ethics, filed as Exhibit 14 to the Registrants Annual Reprot on
  Form 10-K for the fiscal year ended April 2, 2004.                                                                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                              
|21    | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                              
|23.1  | Consent of PricewaterhouseCoopers LLP, dated June 28, 2005.                                                                                                                                                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                              
|23.2  | Consent of Deloitte & Touche LLP, dated June 29, 2005.                                                                                                                                                                                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                              

|31.1 | Rule 13a-14(a) Certification by William D. Davis, President and Chief Executive Officer.                  
|---- | ----------------------------------------------------------------------------------------------------------
|     |                                                                                                           
|31.2 | Rule 13a-14(a) Certification by Frank M. Jerneycic, Treasurer and Chief Financial Officer.                
|     |                                                                                                           
|32.1 | Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley

Act of 2002.
|     |                                                                                                           

| | 32.2 | Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley

Act of 2002.
| | ---- | ----------------------------------------------------------------------------------------------------------

|E-2
|---