SECURITIES
    AND EXCHANGE COMMISSION WASHINGTON,
    D.C. 20549 FORM
    10-Q (MARK
    ONE) |X|
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR
    THE QUARTERLY PERIOD ENDED OCTOBER 15, 2004 OR |_|
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR
    THE TRANSITION PERIOD FROM ______TO ______ COMMISSION
    FILE NUMBER: 0-27656 LEARNING
    CARE GROUP, INC. (Exact
    Name Of Registrant As Specified In Its Charter) MICHIGAN
      38-3261854(State
          or other jurisdiction of incorporation)
      (I.R.S.
          Employer Identification No.)  21333
    Haggerty Road, Suite 300 Novi,
    Michigan 48375 (Address
    of principal executive offices) (248)
    697-9000 (Registrants
    telephone number, including area code) 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 required
    for the past 90 days. Yes |X| No |_| Indicate
    by check mark whether the registrant is an accelerated filer (as defined in
    Rule 12b-2 of the Exchange Act). Yes |_| No |X| The
    number of shares of Registrants Common Stock, no par value per share,
    outstanding at November 10, 2004, was 19,816,510.    LEARNING
    CARE GROUP, INC. AND SUBSIDIARIES
  FORM
    10-Q
  INDEX
  For
    the Quarterly Period Ended October 15, 2004

PageNumberPART
        I.     FINANCIAL
        INFORMATIONITEM
        1.
    Condensed
        Consolidated Financial StatementsA.
    Condensed
        Consolidated Balance Sheets October 15, 2004 and April 2, 2004
    3B.
    Condensed
        Consolidated Statements of Operations 12 and 28 weeks ended
        October 15, 2004 and October 10, 2003
    4C.
    Condensed
        Consolidated Statements of Cash Flows 28 weeks ended 
        October 15, 2004 and October 10, 2003
    5D.
    Notes
        to Condensed Consolidated Financial Statements
    6-12ITEM
        2.
    Managements
        Discussion and Analysis of Financial Condition and Results of
        Operations
    12-18ITEM
        3.
    Quantitative
        and Qualitative Disclosures about Market Risks
    18ITEM
        4.
    Controls
        and Procedures
    19PART
        II.     OTHER
        INFORMATIONITEM
        1.
    Legal
        Proceedings
    20ITEM
        5.
    Other
        Information
    20ITEM
        6.
    Exhibits,
        Reports on Form 8-K
    20SIGNATURES
    21EXHIBIT
        INDEX
    222
  



PART
    I  FINANCIAL
    INFORMATION
  ITEM
    1. Condensed Consolidated Financial Statements
  LEARNING
    CARE GROUP, INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED BALANCE SHEETS



October 15,
      2004
    
    April 2,
      2004(Unaudited)(In thousands)ASSETSCURRENT ASSETS:Cash
      and cash equivalents
    
    
    $
    203
    
    $
    1,377Accounts
      receivable, net
    
    
    
    9,937
    
    
    9,379Prepaid
      expenses and other current assets
    
    
    
    4,646
    
    
    5,435Total
      current assets
    
    
    
    14,786
    
    
    16,191LAND, BUILDINGS
      AND EQUIPMENT:Land
    
    
    
    9,347
    
    
    9,347Buildings
    
    
    
    20,520
    
    
    20,443Leasehold
      improvements
    
    
    
    14,420
    
    
    12,462Vehicles,
      furniture and equipment
    
    
    
    13,991
    
    
    13,59958,278
    
    
    55,851Less:
      accumulated depreciation and amortization
    
    
    
    (20,688
    )
    
    (19,128
    )37,590
    
    
    36,723OTHER NONCURRENT
      ASSETS:Intangible
      assets, net
    
    
    
    30,910
    
    
    30,064Refundable
      deposits and other
    
    
    
    2,667
    
    
    2,64133,577
    
    
    32,705TOTAL
      ASSETS
    
    
    $
    85,953
    
    $
    85,619LIABILITIES
      AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts
      and drafts payable
    
    
    $
    5,858
    
    $
    6,810Accrued
      wages and benefits
    
    
    
    6,962
    
    
    7,531Current
      portion of long-term debt
    
    
    
    9,405
    
    
    3,328Exit
      and closure expense accrual
    
    
    
    214
    
    
    448Other
      current liabilities
    
    
    
    9,830
    
    
    10,016Total
      current liabilities
    
    
    
    32,269
    
    
    28,133LONG-TERM
      DEBT, NET OF CURRENT PORTION
    
    
    
    3,637
    
    
    8,397DEFERRED
      RENT LIABILITY & MINORITY INTEREST
    
    
    
    2,445
    
    
    1,945OBLIGATIONS
      UNDER SALE LEASEBACK TRANSACTIONS
    
    
    
    10,503
    
    
    10,138Total
      liabilities
    
    
    
    48,854
    
    
    48,613SHAREHOLDERS
      EQUITYCommon
      Stock, 40,000,000 shares authorized, no par value; 19,809,010issued
      and outstanding at October 15, 2004 and April 2, 2004
    
    
    
    43,841
    
    
    43,781Preferred
      Stock, 100,000 shares authorized, no par value;no
      shares issued or outstanding
    
    
    
    
    
    
    Retained
      earnings (accumulated deficit)
    
    
    
    (6,742
    )
    
    (6,775
    )Total
      shareholders equity
    
    
    
    37,099
    
    
    37,006TOTAL
      LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    $
    85,953
    
    $
    85,619The
    accompanying footnotes are an integral part of the condensed consolidated
    financial statements.
  
  3
  



LEARNING
    CARE GROUP, INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
  (UNAUDITED)


12 Weeks Ended
     
     28 Weeks EndedOctober 15,
2004
     
     October 10,
2003
     
     October 15,
2004
     
     October 10,
2003(In thousands, except per share data)Revenue from Learning Center Operations
     
     
     $46,663
        
     $43,405
        
     $110,853
        
     $103,842Revenue from Franchise Operations
     1,540
        
     1,376
        
     3,874
        
     3,236Revenue, net
     48,203
        
     44,781
        
     114,727
        
     107,078Operating expenses of Learning Centers
     42,992
        
     40,597
        
     100,114
        
     94,882Gross profit
     5,211
        
     4,184
        
     14,613
        
     12,196General and administrative expenses
     4,239
        
     4,094
        
     10,636
        
     9,938Depreciation and amortization expenses
     946
        
     858
        
     2,270
        
     2,095Gain on sale of centers and vacant land
     (135
        )
     
        
     (684
        )
     Provision for doubtful accounts
     559
        
     244
        
     838
        
     534Exit and closure expenses
     21
        
     
        
     61
        
     OPERATING INCOME (LOSS)
     (419
        )
     (1,012
        )
     1,492
        
     (371
        )Interest expense, net
     521
        
     374
        
     1,165
        
     1,087INCOME (LOSS) BEFORE INCOME TAXES AND       DISCONTINUED OPERATIONS
     (940
        )
     (1,386
        )
     327
        
     (1,458
        )Income tax provision
     (50
        )
     
        
     54
        
     INCOME (LOSS) BEFORE DISCONTINUED       OPERATIONS
     (890
        )
     (1,386
        )
     273
        
     (1,458
        )Discontinued operations, net of taxes
     (34
        )
     (167
        )
     (240
        )
     (365
        )NET INCOME (LOSS)
     $(924
        )
     $(1,553
        )
     $33
        
     $(1,823
        )INCOME (LOSS) PER SHARE - BASIC:Income (loss) before discontinued operations
     $(0.05
        )
     $(0.07
        )
     $0.01
        
     $(0.09
        )Discontinued operations, net of taxes
     (0.00
        )
     (0.01
        )
     (0.01
        )
     (0.02
        )Net income (loss)
     $(0.05
        )
     $(0.08
        )
     $0.00
        
     $(0.11
        )INCOME (LOSS) PER SHARE - DILUTED:Income (loss) before discontinued operations
     $(0.05
        )
     $(0.07
        )
     $0.01
        
     $(0.09
        )Discontinued operations, net of taxes
     (0.00
        )
     (0.01
        )
     (0.01
        )
     (0.02
        )Net income (loss)
     $(0.05
        )
     $(0.08
        )
     $0.00
        
     $(0.11
        )Weighted average shares outstanding
     19,812
        
     19,708
        
     19,810
        
     16,074The
    accompanying footnotes are an integral part of the condensed consolidated
    financial statements.
  
  
  4
  



LEARNING
    CARE GROUP, INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  (UNAUDITED)



28 Weeks EndedOctober 15,
2004
     
     October 10,
2003(In thousands)OPERATING ACTIVITIES:Net income (loss)
     $33
        
     $(1,823
        )Adjustments to reconcile net income (loss) to cashprovided (used) by operating activities:Depreciation and amortization
     2,233
        
     2,136Provision for doubtful accounts
     838
        
     583Stock option compensation expense
     44
        
     Deferred rent liability
     533
        
     138Minority interest in variable interest entities
     (33
        )
     (Gain) loss on sale of assets
     (593
        )
     58Changes in operating assets and liabilities:Accounts receivable
     (1,614
        )
     (2,670
        )Prepaid expenses and other current assets
     151
        
     (1,445
        )Accounts payable, accruals and other current liabilities
     640
        
     1,595Exit and closure expense accrual
     (234
        )
     (662
        )Net cash provided (used) by operating activities
     1,998
        
     (2,090
        )INVESTING ACTIVITIES:Acquisiton of centers, net of cash
     (314
        )
     Capital spending
     (2,845
        )
     (2,327
        )Proceeds from sale of assets
     761
        
     1,054Payments for refundable deposits and other assets
     (26
        )
     (43
        )Net cash used in investing activities
     (2,424
        )
     (1,316
        )FINANCING ACTIVITIES:Net borrowings on revolving line of credit
     3,785
        
     1,614Repayments under long-term debt
     (2,507
        )
     (15,067
        )Issuance of long-term debt
     
        
     3,500Changes in drafts payable
     (2,042
        )
     641Issuance of common shares (net of issuance costs)
     16
        
     12,094Net cash provided (used) by financing activities
     (748
        )
     2,782Net decrease in cash and cash equivalents
     (1,174
        )
     (624
        )Cash and cash equivalents, beginning of year
     1,377
        
     2,499Cash and cash equivalents, end of period
     $203
        
     $1,875The
    accompanying footnotes are an integral part of the condensed consolidated
    financial statements.
  
  
  5
  



LEARNING
    CARE GROUP, INC. AND SUBSIDIARIES
  NOTES
    TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
  NOTE
    1  DESCRIPTION OF BUSINESS
  Learning
    Care Group, Inc. conducts business through its wholly-owned subsidiary Childtime
    Childcare, Inc. and its other wholly-owned subsidiaries (collectively, the
    Company). The Company and its predecessors began operations in
    1967. The Company operates in three business segments: Childtime Learning
    Centers, Tutor Time Learning Centers and Franchise Operations. 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 Childcare Learning
    Centers (Tutor Time). As of October 15, 2004, the Company operated
    or franchised a total of 466 centers system-wide under three major lines of
    business and had system-wide licensed capacity capable of serving over 70,000
    children. The Companys three lines of business are:
  
      Childtime
          Learning Centers:267 centers operated by the
          Company, consisting of:
      258
          Childtime centers and
      9
          Childtime-branded centers operated for third parties;
      Tutor
          Time Learning Centers:69 Tutor Time centers
          operated by the Company; and
      Tutor
          Time Franchise:royalties and other fees received
          from 130 franchised Tutor Time centers.Childtime
    and Tutor Time corporate centers are located throughout the United States
    (in 26 states) and Canada (one location). The vast majority of these centers
    are operated on leased premises, with typical lease terms ranging from 1 to
    25 years. Thirty-eight of the Childtime centers are operated on Company-owned
    premises.
  The
    Company operates nine Childtime centers under management contracts. Located
    throughout the U.S., these centers serve 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.
  Tutor
    Time franchise centers are also predominantly located in the U.S., with 118
    centers operating in 17 states. An additional 12 centers are operated in Canada,
    Hong Kong, Indonesia, and the Philippines, mostly under master franchise agreements.
    The Company is currently the primary obligor or guarantor on leases for 51
    of its franchise centers.
  An
    amendment to the Companys Restated Articles of Incorporation was approved
    by shareholders on August 17, 2004, which resulted in a change in the Companys
    name from Childtime Learning Centers, Inc. to Learning Care Group, Inc.
  NOTE
    2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles
    of Consolidation
  The
    condensed consolidated financial statements include the accounts of Learning
    Care Group, Inc. and its wholly owned subsidiaries. All significant intercompany
    transactions have been eliminated in consolidation.
  The
    accompanying financial statements have been prepared by the Company in accordance
    with the accounting policies described in the Companys audited financial
    statements included in the Companys Annual Report on Form 10-K for the
    year ended April 2, 2004, and should be read in conjunction with the notes
    thereto.
  
  6
  



In
    the opinion of the Companys management, the accompanying unaudited condensed
    consolidated financial statements contain all adjustments which are necessary
    to present fairly its financial position as of October 15, 2004, and the results
    of its operations and cash flows for the periods ended October 15, 2004 and
    October 10, 2003, respectively, and are of a normal and recurring nature.
    The results of operations for interim periods are not necessarily indicative
    of the operating results to be expected for the full year.
  Use
    of Estimates
  The
    preparation of condensed consolidated financial statements in accordance with
    generally accepted accounting principles requires management to render estimates
    and assumptions that affect the reported amounts of assets and liabilities
    and disclosure of contingent assets and liabilities at the date of the condensed
    consolidated financial statements and the reported amounts of revenues and
    expenses during the reported period. Actual results could differ from those
    estimates.
  Fiscal
    Year
  The
    Company utilizes a 52-53 week fiscal year ending on the Friday closest to
    March 31. For fiscal year 2005, the second quarter contained 12 weeks, and
    the fiscal year contains 52 weeks. For fiscal year 2004, the second quarter
    contained 12 weeks, and the fiscal year contained 53 weeks.
  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 (loss) and net income (loss) per share
    would have been reduced or increased, as applicable, to the pro forma amounts
    indicated below (in thousands):



12 Weeks Ended
     
     28 Weeks EndedOctober 15,
2004
     
     October 10,
2003
     
     October 15,
2004
     
     October 10,
2003Net income (loss)
     
     
     As reported
     
     
     $(924
        )
     $(1,553
        )
     $33
        
     $(1,823
        )Pro forma
     $(976
        )
     $(2,291
        )
     $(185
        )
     $(2,719
        )Net income (loss) per share - BasicAs reported
     $(0.05
        )
     $(0.08
        )
     $0.00
        
     $(0.11
        )Pro forma
     $(0.05
        )
     $(0.12
        )
     $(0.01
        )
     $(0.17
        )Net income (loss) per share - DilutedAs reported
     $(0.05
        )
     $(0.08
        )
     $0.00
        
     $(0.11
        )Pro forma
     $(0.05
        )
     $(0.12
        )
     $(0.01
        )
     $(0.17
        )Weighted average fair value of options granted    during the year
     $1.73
        
     $1.09
        
     $1.59
        
     $0.89
  The
    fair value of the options used to compute pro forma net income (loss) and
    net income (loss) per share is the estimated present value at grant date using
    the Black-Scholes option-pricing model with the following weighted
    average assumptions for the 12 and 28 weeks ended October 15, 2004 and October
    10, 2003, respectively: no dividend yield; expected volatility of 76.0 and
    56.4 percent; risk free interest rate of 3.6 and 2.0 percent; and expected
    holding periods of 5.0 and 5.0 years.
  Franchise
    Lease Liabilities
  A
    subsidiary of the Company is primarily or contingently liable for many of
    the leases of Tutor Times franchisees (see Note 5 below). The Company
    would be required to pay the related lease obligations in the 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 record any liabilities for any known default if
    the value of the existing franchise operation is greater than the potential
    liability or if the known net worth of the franchisee (or the owner of the
    franchisee, who personally guarantees the related franchise liabilities) is
    greater than the potential liability.
  
  7
  



NOTE
    3  ACCOUNTS RECEIVABLE
  Accounts
    receivable is presented net of an allowance for doubtful accounts. At October
    15, 2004 and April 2, 2004, the allowance for doubtful accounts was $1.0 million
    and $2.0 million, respectively.
  NOTE
    4  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 October
    15, 2004 and April 2, 2004, the aggregate drafts payable were $2.4 million
    and $4.5 million, respectively.
  NOTE
    5  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 aggregate $74.7 million and $9.1 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 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. 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.
  NOTE
    6  PAYMENTS FOR CONSULTING SERVICES
  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. Total consulting
    fees incurred for Jacobson Partners were $135,000 and $135,000 for the 28
    weeks ended October 15, 2004 and October 10, 2003, respectively, and are included
    in General and administrative expenses in the accompanying Condensed Consolidated
    Statements of Operations.
  NOTE
    7  INCOME TAXES
  During
    the 28 weeks ended October 15, 2004, an income tax provision of $0.1 million
    (all related to state income taxes) was recorded on income before income taxes
    and discontinued operations of $0.3 million, compared to an income tax provision
    of $0.0 million on loss before discontinued operations of ($1.5 million) for
    the same period last year. During the 12 weeks ended October 15, 2004, an
    income tax benefit of ($0.1 million) was recorded on loss before discontinued
    operations of ($0.9 million), compared to an income tax provision of $0.0
    million on loss before discontinued
    operations of ($1.4 million) for the same period last year. Income tax expense
    for the 12 and 28 weeks ended October 15, 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 has been recorded.


  
  8
  



NOTE
    8  NET INCOME (LOSS) PER SHARE
  For
    the 12 and 28 weeks ended October 15, 2004 and October 10, 2003, basic income
    (loss) per share has been calculated by dividing earnings available to common
    shareholders by the weighted average number of common shares outstanding for
    the period. The calculation of basic and diluted shares is as follows (in
    thousands):

Calculation on Incremental Shares12 Weeks Ended
     
     28 Weeks EndedOctober 15, 2004
     
     October 10, 2003
     
     October 15, 2004
     
     October 10, 2003Basic Shares (based on weighted average)
     
     
     19,812
        
     19,708
        
     19,810
        
     16,074Stock Options (1)
     
        
     
        
     1,012
        
     Diluted Shares
     19,812
        
     19,708
        
     20,822
        
     16,074
  (1)
    For the 12 weeks ended October 15, 2004, the above calculation does not include
    2,032,124 shares issuable from stock options that have the potential to dilute
    earnings per share in the future. These shares were not included in the above
    calculation of diluted shares because to do so would have been antidilutive.
    For the 28 weeks ended October 15, 2004, the above calculation does not include
    961,769 shares issuable from stock options that have the potential to dilute
    earnings per share in the future. For the 12 and 28 weeks ended October 10,
    2003, the above calculation does not include 1,772,459 and 1,441,463 shares,
    respectively, issuable from stock options that have the potential to dilute
    earnings per share in the future. These shares were not included in the above
    calculation of diluted shares because to do so would have been antidilutive.
  NOTE
    9  EXIT AND CLOSURE EXPENSES AND DISCONTINUED OPERATIONS
  The
    Company has made provisions for closed center lease obligations and discontinued
    operations in connection with the closing of under-performing centers. During
    the 12 and 28 weeks ended October 15, 2004, the Company incurred charges of
    $0.2 million and $0.7 million, respectively, to increase the reserves and
    to provide for other closed centers. The Company made payments related to
    its restructuring reserve of $0.4 million for the 28 weeks ended October 15,
    2004. A summary of the accrual is as follows (in thousands):


Exit and Closure Expenses and Discontinued Operations Accrual AnalysisBeginning
Accrual
April 2, 2004
     
     Expenses
     
     Cash
Payments
     
     Ending
Accrual
October 15,
2004Closed center lease obligations
     
     
     $241
        
     $61
        
     $160
        
     $142Discontinued operations lease obligations
     207
        
     75
        
     210
        
     72Total
     $448
        
     $136
        
     $370
        
     $214
  The
    lease liability for the centers closed during the 28 weeks ended October 15,
    2004 and October 10, 2003 has been recorded at managements estimate
    of the amounts of expected payments.
  
  
  9
  



A
    summary of discontinued operations is as follows (in thousands):


12 Weeks Ended
     
     28 Weeks EndedOctober 15, 2004
     
     October 10, 2003
     
     October 15, 2004
     
     October 10, 2003Revenues, net
     
     
     $9
        
     $326
        
     $75
        
     $1,079Operating expenses of Learning Centers
     26
        
     456
        
     205
        
     1,263Loss from operations
     (17
        )
     (130
        )
     (130
        )
     (184
        )Provision for doubtful accounts
     
        
     4
        
     1
        
     51Depreciation and amortization expenses
     10
        
     6
        
     34
        
     12Exit and closure expenses
     11
        
     27
        
     75
        
     118Loss from discontinued operations before income tax
     (38
        )
     (167
        )
     (240
        )
     (365
        )Income tax provision
     (4
        )
     
        
     
        
     Loss from discontinued operations, net of tax
     $(34
        )
     $(167
        )
     $(240
        )
     $(365
        )NOTE
    10  INTANGIBLE ASSETS AND GOODWILL
  The
    changes in the carrying amounts of goodwill and other intangible assets for
    the 28 weeks ended October 15, 2004 were as follows (in thousands):
  


Balance
April 2, 2004
     
     Additions
     
     Amortization
     
     Balance
October 15, 2004
     
     Useful LifeGoodwill
     
     
     $17,866
        
     $1,245
        
     $
        
     $19,111
        
     IndefiniteFranchise Agreements
     8,320
        
     
        
     245
        
     8,075
        
     20Trade Name and Trademarks
     3,574
        
     
        
     105
        
     3,469
        
     20Curriculum
     304
        
     
        
     49
        
     255
        
     5Total intangible assets, net
     $30,064
        
     $1,245
        
     $399
        
     $30,910
  During
    the period ended October 15, 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. Estimated amortization of intangible
    assets is expected to be $0.7 million for fiscal 2005 and approximately $0.7
    million annually for the next four years.
  NOTE
    11  SEGMENT INFORMATION
  The
    Company has three reportable segments: Childtime, Tutor Time and Franchise
    Operations. Childtime operates childcare centers primarily under the Childtime
    Learning Centers brand name, Tutor Time operates childcare centers under the
    Tutor Time brand name and Franchise Operations licenses and provides developmental
    and administrative support to franchisees 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.

  
  10
  



Information
    about the Companys operating segments is presented below (in thousands):


12 Weeks Ended
    
    28 Weeks EndedOctober 15,
      2004
    
    October 10,
      2003
    
    October 15,
      2004
    
    October 10,
      2003Revenues:Childtime
    
    
    $
    32,963
    
    $
    31,501
    
    $
    78,947
    
    $
    75,451Tutor
      Time
    
    
    
    13,700
    
    
    11,904
    
    
    31,460
    
    
    28,391Franchise
      Operations
    
    
    
    1,540
    
    
    1,376
    
    
    3,874
    
    
    3,236Revenue
      associated with the consolidation of VIEs
    
    
    
    
    
    
    
    
    
    446
    
    
    Total
    
    
    $
    48,203
    
    $
    44,781
    
    $
    114,727
    
    $
    107,078Operating
      income (loss):Childtime
    
    
    $
    2,420
    
    $
    2,247
    
    $
    8,049
    
    $
    7,606Tutor
      Time
    
    
    
    692
    
    
    317
    
    
    1,853
    
    
    820Franchise
      Operations
    
    
    
    1,540
    
    
    1,376
    
    
    3,874
    
    
    3,236Depreciation
      and amortization
    
    
    
    (946
    )
    
    (858
    )
    
    (2,270
    )
    
    (2,095
    )Corporate
      and other
    
    
    
    (4,125
    )
    
    (4,094
    )
    
    (10,014
    )
    
    (9,938
    )Total
    
    
    $
    (419
    )
    $
    (1,012
    )
    $
    1,492
    
    $
    (371
    )Goodwill:Childtime
    
    
    $
    7,215
    
    $
    7,215
    
    $
    7,215
    
    $
    7,215Tutor
      Time
    
    
    
    6,823
    
    
    5,578
    
    
    6,823
    
    
    5,578Franchise
      Operations
    
    
    
    5,073
    
    
    5,073
    
    
    5,073
    
    
    5,073Total
    
    
    $
    19,111
    
    $
    17,866
    
    $
    19,111
    
    $
    17,866All other
      assets:Childtime
    
    
    $
    46,748
    
    $
    46,513
    
    $
    46,748
    
    $
    46,513Tutor
      Time
    
    
    
    10,328
    
    
    10,643
    
    
    10,328
    
    
    10,643Franchise
      Operations
    
    
    
    9,659
    
    
    10,951
    
    
    9,659
    
    
    10,951Assets
      associated with the consolidation of VIEs
    
    
    
    107
    
    
    
    
    
    107
    
    
    Total
    
    
    $
    66,842
    
    $
    68,107
    
    $
    66,842
    
    $
    68,107
  NOTE
    12  FINANCIAL INSTRUMENT
  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 October 15, 2004 and October 10, 2003, 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 October 15, 2004 and
    October 10, 2003, respectively.

  
  11
  



NOTE
    13  CONSOLIDATION OF VARIABLE INTEREST ENTITIES
  During
    the fourth quarter of 2004, the Company implemented FIN 46R. The Company has
    concluded that some of its franchise arrangements represent variable interest
    entities (VIEs) which are subject to the provisions of FIN 46R.
    The Companys variable interest in these entities include royalty fees
    and in some cases lease guarantees and debt due to the Company from the franchisee.
    The Company has analyzed these franchise agreements and has determined that
    two franchises are entities in which the Company is the primary beneficiary.
    As a result, these entities were consolidated as of April 2, 2004. During
    the period ended October 15, 2004, the Company aquired the two franchise entities
    that had previously been consolidated as VIEs. As a result, these entities
    are not considered VIEs
    as of October 15, 2004. The following is a summary of the effect of consolidating
    these entities for 12 and 28 weeks ending October 15, 2004 (in thousands).


12 Weeks
      Ended
      October 15,
      2004
    
    28 Weeks
      Ended
      October 15,
      2004Revenue,
      net of elimination of fees of $23,000
    
    
    $
    
    
    $
    423Cost and
      minority interest, net of elimination of fees of $23,000
    
    
    
    
    
    
    423Net income
    
    
    $
    
    
    $
    The
    Company has not restated prior periods for the above consolidation and there
    was no cumulative effect on the prior years related to the consolidation during
    first quarter 2005.

  NOTE
    14  ACQUISITION OF FRANCHISE CENTERS
  On
    July 30, 2004, the Company acquired the entire equity interests of eight entities
    that each owned a Tutor Time franchise center in the Minneapolis, Minnesota
    area. These entities were delinquent in the payment of amounts due to the
    Company and, in certain instances, under leases guaranteed by the Company.
    The Company decided to purchase these entities in order to cure these delinquencies
    and to allow the Company to take advantage of operating and expansion opportunities
    in the Minnesota market. The Company made a cash payment of $0.3 million and
    assumed liabilities in excess of assets of $1.1 million, resulting in recorded
    goodwill of $1.2 million. Included in the liability of the purchased entities
    was a payable to the Company of $0.8 million, for which the Company had established
    an allowance for doubtful accounts of $0.2 million. The Company is in the
    process of gathering information to finalize the purchase price allocation.
    The results of operations have been included in the Companys operating
    results since the date of acquisition.

  NOTE
    15  SUBSEQUENT EVENT
  On
    November 22, 2004, the Company entered into a Second Amended and Restated
    Credit Agreement, which increases the revolving line of credit from $13.7
    million to $17.5 million and extends the maturity date to July 31, 2006.
  ITEM
    2. Managements Discussion and Analysis
  GENERAL
  The
    information presented herein refers to the 12 weeks (second quarter 2005)
    and the 28 weeks (year to date 2005) ended October 15, 2004, compared to the
    12 weeks (second quarter 2004) and 28 weeks (year to date 2004) ended October
    10, 2003.
  The
    results of Learning Centers opened, acquired or disposed of are included in
    the Companys condensed consolidated financial statements from the date
    of opening or acquisition and through the date of disposition, except for
    those centers treated as discontinued operations in accordance with SFAS 144.
    The timing of such new openings, acquisitions or dispositions could influence
    comparisons of year over year results.
  During
    second quarter 2005, the Company acquired eight Learning Centers from a franchisee
    and a franchisee opened one franchise center. During second quarter 2004,
    the Company closed one Learning Center and franchised one center previously
    operated as a corporate center.
  During
    year to date 2005, the Company acquired eight Learning Centers from a franchisee,
    opened one franchise center, closed three Learning Centers and sold two additional
    Learning Centers to franchisees. During year to date 2004, the Company closed
    four Learning Centers, franchised one center previously operated as a corporate
    center and opened one corporate center.
  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.
  The
    Companys enrollments change over the course of a year, with the highest
    enrollments occurring during the traditional fall back to school,
    and after a calendar year and holidays. Enrollments generally decrease during
    summer months and calendar year-end holidays. As a result, operating results
    change during the quarters and individual quarterly results are not indicative
    of annual operating results.
  
  12
  



RESULTS
    OF OPERATIONS

  Second Quarter 2005 Compared to Second Quarter 2004

12 Weeks
      Ended
      October 15,
      2004
    
    Percent
      of
      Revenues
    
    12 Weeks
      Ended
      October 10,
      2003
    
    Percent
      of
      Revenues
    
    Change
      Amount
      (in Dollars)Revenue
      from Learning Center Operations
    
    
    $
    46,663
    
    
    96.8
    %
    $
    43,405
    
    
    96.9
    %
    $
    3,258Revenue from
      Franchise Operations
    
    
    
    1,540
    
    
    3.2
    %
    
    1,376
    
    
    3.1
    %
    
    164Revenue,
      net
    
    
    
    48,203
    
    
    100.0
    %
    
    44,781
    
    
    100.0
    %
    
    3,422Operating
      expenses of Learning Centers
    
    
    
    42,992
    
    
    89.2
    %
    
    40,597
    
    
    90.7
    %
    
    2,395Gross profit
    
    
    
    5,211
    
    
    10.8
    %
    
    4,184
    
    
    9.3
    %
    
    1,027General and
      administrative expenses
    
    
    
    4,239
    
    
    8.8
    %
    
    4,094
    
    
    9.1
    %
    
    145Depreciation
      and amortization expenses
    
    
    
    946
    
    
    2.0
    %
    
    858
    
    
    1.9
    %
    
    88Gain on sale
      of centers and vacant land
    
    
    
    (135
    )
    
    -0.3
    %
    
    
    
    
    0.0
    %
    
    (135
    )Provision
      for doubtful accounts
    
    
    
    559
    
    
    1.2
    %
    
    244
    
    
    0.5
    %
    
    315Exit and
      closure expenses
    
    
    
    21
    
    
    0.0
    %
    
    
    
    
    
    
    
    21OPERATING
      INCOME
    
    
    $
    (419
    )
    
    -0.9
    %
    $
    (1,012
    )
    
    -2.3
    %
    $
    593
  Revenue,
    net.Net revenue for second quarter 2005 increased
    $3.4 million, or 7.6%, from the same period last year to $48.2 million. Learning
    Center revenues increased $3.3 million. Revenue increases were achieved through
    a combination of increased tuition rates and enrollments. Childtime Learning
    Centers revenues increased $1.2 million, with comparable Childtime center
    revenues (centers opened 18 months or longer) increasing 5.0%. Tutor Time
    Learning Centers revenues increased $2.1 million, with comparable Tutor Time
    center revenues increasing 6.7%.Franchise Operations revenues, which consisted
    primarily of royalties, increased $0.2 million, or 11.9%, from the same period
    last year to $1.5 million.
  Operating
    expenses of Learning Centers.Operating expenses for
    second quarter 2005 increased $2.4 million, or 5.9%, from the same period
    last year to $43.0 million. The increase was a result of an increase in personnel
    expense ($0.9 million), which increased with higher enrollments and general
    wage increases; an increase in occupancy expense ($0.7 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 operating expenses ($0.8 million), which increased with
    higher enrollments and higher food, transportation and utility expenses. Operating
    expenses as a percentage of net revenue decreased to 89.2% for second quarter
    2005, from 90.7% in the same period last year. This decrease is primarily
    a result of a decrease in personnel expenses as a percentage of net revenues,
    resulting from improved labor efficiencies.
  Gross
    profit.Gross profit for second quarter 2005 increased
    $1.0 million, or 24.5%, from the same period last year to $5.2 million. This
    increase consisted of a $0.8 million increase in Learning Center Operations
    gross profit and a $0.2 million increase in Franchise Operations gross profit.
    Gross profit percentages for second quarter 2005 by segment were 8.8% for
    Childtime centers (as compared to 7.4% for 2004), 5.7% for Tutor Time centers
    (as compared to 3.3% for 2004) and 100% for Franchise Operations. The second
    quarter gross profit and gross profit percentage changes were a result of
    the revenue increases and changes in operating expenses described above.
  General
    and administrative expenses.General and administrative
    expenses for second quarter 2005 increased $0.1 million from the same period
    last year to $4.2 million. The increase was primarily a result of general
    wage increases. General and administrative expenses as a percentage of net
    revenue decreased to 8.8% for second quarter 2005 from 9.1% in the same period
    last year. The decrease was a result of revenues increasing by a greater percentage than general and administrative expenses.
  Depreciation
    and amortization expense.Depreciation and amortization
    expense for second quarter 2005 remained unchanged from the same period last
    year at $0.9 million. Depreciation and amortization expense as a percentage
    of net revenue increased to 2.0% for second quarter 2005 from 1.9% in the
    same period last year, primarily as a result of depreciation expense attributable
    to capital expenditures.
  
  13
  



Gain
    on sale of centers and vacant land.Gain on sale of
    centers and vacant land was a result of the sale of vacant land during the
    second quarter 2005. There was not a similar transaction in the same period
    last year.
  Provision
    for doubtful accounts.Provision for doubtful accounts
    for second quarter 2005 increased $0.3 million, or 129%, from the same period
    last year to $0.6 million. This increase was a result of a decline in collection
    experience during the quarter
  Interest
    expense.Interest expense for second quarter 2005
    was $0.5 million, compared to $0.4 million for the same period last year.
    This increase was a result of sale leaseback transactions completed in fourth
    quarter 2004.
  Income
    tax provision.An income tax benefit for second quarter
    2005 of ($0.1 million), all related to state income taxes, was recorded on
    a loss before income taxes and discontinued operations of ($0.9 million),
    compared to an income tax provision of $0.0 million on loss before discontinued
    operations of ($1.4 million) for the same period last year. Income tax expense
    for first quarter 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 has been recorded.
  Discontinued
    operations, net of taxes.Discontinued operations,
    net of taxes, for second quarter 2005 was ($0.0 million) compared to a loss
    of ($0.2 million) for the same period last year. This loss includes operating
    and lease termination costs associated with closed centers.
  Net
    (loss).As a result of the foregoing changes, net
    loss decreased to ($0.9 million) for second quarter 2005, compared to a net
    loss of ($1.6 million) for the same period last year.

  Year to Date 2005 Compared to Year to Date 2004


28 Weeks
      Ended
      October 15,
      2004
    
    Percent
      of
      Revenues
    
    28 Weeks
      Ended
      October 10,
      2003
    
    Percent
      of
      Revenues
    
    Change
      Amount
      (in Dollars)Revenue
      from Learning Center Operations
    
    
    $
    110,853
    
    
    96.6
    %
    $
    103,842
    
    
    97.0
    %
    $
    7,011Revenue from
      Franchise Operations
    
    
    
    3,874
    
    
    3.4
    %
    
    3,236
    
    
    3.0
    %
    
    638Revenue,
      net
    
    
    
    114,727
    
    
    100.0
    %
    
    107,078
    
    
    100.0
    %
    
    7,649Operating
      expenses of Learning Centers
    
    
    
    100,114
    
    
    87.3
    %
    
    94,882
    
    
    88.6
    %
    
    5,232Gross profit
    
    
    
    14,613
    
    
    12.7
    %
    
    12,196
    
    
    11.4
    %
    
    2,417General and
      administrative expenses
    
    
    
    10,636
    
    
    9.3
    %
    
    9,938
    
    
    9.3
    %
    
    698Depreciation
      and amortization expenses
    
    
    
    2,270
    
    
    2.0
    %
    
    2,095
    
    
    2.0
    %
    
    175Gain on sale
      of centers
    
    
    
    (684
    )
    
    -0.6
    %
    
    
    
    
    
    
    
    (684
    )Provision
      for doubtful accounts
    
    
    
    838
    
    
    0.7
    %
    
    534
    
    
    0.5
    %
    
    304Exit and
      closure expenses
    
    
    
    61
    
    
    0.1
    %
    
    
    
    
    
    
    
    61OPERATING
      INCOME
    
    
    $
    1,492
    
    
    1.3
    %
    $
    (371
    )
    
    -0.3
    %
    $
    1,863
  Revenue,
    net.Net revenue for year to date 2005 increased $7.6
    million, or 7.1%, from the same period last year to $114.7 million. Learning
    Center revenues increased $7.0 million. Revenue increases were achieved through
    a combination of increased tuition rates and enrollments. Childtime Learning
    Centers revenues increased $2.7 million, with comparable Childtime center
    revenues (centers opened 18 months or longer) increasing 4.8%. Tutor Time
    Learning Centers revenues increased $4.3 million, with comparable Tutor Time
    center revenues increasing 6.7%. Revenue attributable to the consolidation
    of two franchise arrangements considered variable interest entities (VIEs
    as discussed in Note 13 of the Notes to Condensed Consolidated Financial Statements
    (unaudited) included in this Report under Item 1) accounted for $0.4 million
    of the year to date 2005 Tutor Time Learning Centers increase. Franchise Operations
    revenues, which consisted primarily of royalties, increased $0.6 million,
    or 19.7%, from the same period last year to $3.9 million.
  Operating
    expenses of Learning Centers.Operating expenses year
    to date 2005 increased $5.2 million, or 5.5%, from the same period last year
    to $100.1 million. The increase was a result of an increase in personnel expense
    ($2.3 million), which increased with higher enrollments and general wage increases;
    an increase in occupancy expense ($1.7 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; an increase in center operating
    expenses ($1.2 million), which increased with higher enrollments and higher
    food, transportation and utility expenses; and operating expenses associated
    with the VIEs ($0.4 million). Operating expenses as a percentage of net revenue
    decreased to 87.3% for year to date 2005, from 88.6% in the same period last
    year. 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.
  
  14
  



Gross
    profit.Gross profit for year to date 2005 increased
    $2.4 million, or 19.8%, from the same period last year to $14.6 million. This
    increase consisted of a $1.8 million increase in Learning Center Operations
    gross profit and a $0.6 million increase in Franchise Operations gross profit.
    Gross profit percentages for year to date 2005 by segment were 11.0% for Childtime
    centers (as compared to 10.4% for 2004), 6.4% for Tutor Time centers (as compared
    to 3.3% for 2004) and 100% for Franchise Operations. The second quarter gross
    profit and gross profit percentage changes were a result of the revenue increases
    and changes in operating expenses described above.
  General
    and administrative expenses.General and administrative
    expenses for year to date 2005 increased $0.7 million, or 7.0%, from the same
    period last year to $10.6 million. The increase was a result of increased
    center staff training expenses, general wage increases and increased employee
    bonuses due to operating improvements. General and administrative expenses
    as a percentage of net revenue remained unchanged at 9.3%.
  Depreciation
    and amortization expense.Depreciation and amortization
    expense for year to date 2005 increased $0.2 million, or 8.4%, from the same
    period last year to $2.3 million. The increase was primarily a result of depreciation
    expense attributable to capital expenditures. Depreciation and amortization
    expense as a percentage of net revenue remained unchanged at 2.0%.
  Gain
    on sale of center and vacant lands.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 and the sale
    of vacant land in second quarter 2005. There were not similar transactions
    in the same period last year.
  Provision
    for doubtful accounts.Provision for doubtful accounts
    for year to date 2005 increased $0.3 million, or 60%, from the same period
    last year to $0.8 million. This increase was a result of a decline in collection
    experience during the quarter.
  Interest
    expense.Interest expense for year to date 2005 was
    $1.2 million, compared to $1.1 million for the same period last year. This
    increase was a result of interest on sale leaseback transactions completed
    in fourth quarter 2004.
  Income
    tax provision.Income tax provision for year to date
    2005 of $0.1 million (all related to state income taxes) was recorded on income
    before income taxes and discontinued operations of $0.3 million, compared
    to an income tax provision of $0.0 million on a loss before discontinued operations
    of ($1.5 million) for the same period last year. Income tax expense for year
    to date 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
    has been recorded.
  Discontinued
    operations, net of taxes.Discontinued operations,
    net of taxes, for year to date 2005 was a loss of ($0.2 million), compared
    to a loss of ($0.4 million) for the same period last year. This loss includes
    operating and lease termination costs associated with closed centers.
  Net
    income (loss).As a result of the foregoing changes,
    net income increased to $0.0 million for year to date 2005, compared to a net
    loss of ($1.8 million) for the same period last year.


  
  15
  



LIQUIDITY
    AND CAPITAL RESOURCES
  The
    Companys primary cash requirements currently consist of payment of operating
    expenses, 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. 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 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
    January 31, 2002, the Company entered into an Amended and Restated Credit
    Agreement. This agreement, as further amended, provides a $13.7 million revolving
    line of credit that will mature on June 30, 2005. 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 $9.2 million
    at October 15, 2004, and $5.4 million at April 2, 2004. Outstanding letters
    of credit reduced the availability under the line of credit in the amount
    of $4.1 million at October 15, 2004 and $2.1 million at April 2, 2004. As
    of October 15, 2004 and April 2, 2004, unused amounts available for borrowing
    under this line of credit were $.4 million and $6.2 million, respectively.
    Subsequent to the end of the second quarter 2005, the Company entered into
    a Second Amended and Restated Credit Agreement, which increases the revolving
    line of credit from $13.7 million to $17.5 million and extends the maturity date to July 31, 2006.
  Under
    this agreement, as amended, 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 October
    15, 2004.
  Net
    cash provided (used) by operating activities was $2.0 million for year to
    date 2005, compared to ($2.1 million) for the same period last year. During
    year to date 2005, financing activities totaled ($0.7 million) and consisted
    primarily of repayments under long-term debt and changes in drafts payable
    offset by net borrowings on the line of credit. During year to date 2004,
    financing activities totaled $2.8 million and consisted primarily of the issuance
    of shares net of issuance costs of $12.1 million, the issuance of subordinated
    notes of $3.5 million, and net borrowings on the revolving line of credit
    of $1.6 million, offset by repayments of long-term debt of $15.1 million.
    Investing activities were ($2.4 million) for the year to date 2005. Of this
    $2.8 million was used for capital spending and $0.3 was used to acquire centers
    from a franchisee. This was partially offset by $0.8 million of proceeds from
    asset sales. Investing activities were ($1.3 million) for year to date 2004,
    of which $2.3 million was used for capital spending which was partially offset
    by $1.1 million of proceeds from asset sales.
  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 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, on the Subordinated
    Debt issued to a group of lenders organized by Jacobson Partners (see Related
    Party Transactions below).
  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 October 15, 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. During year to date 2005, the market value of the outstanding interest
    rate contracts increased $0.1 million.
  
  16
  



Contractual
    Obligations and Commitments
  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 aggregate $74.7 million and $9.1 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
    October 15, 2004, 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(In thousands)Franchise Lease Guarantees
     
     
     $9,146
        
     $617
        
     $2,300
        
     $1,397
        
     $4,832Franchise Lease Commitments
     74,703
        
     2,813
        
     19,900
        
     12,030
        
     39,960Total
     $83,849
        
     $3,430
        
     $22,200
        
     $13,427
        
     $44,792
  Related
    Party Transactions
  For
    information regarding related party transactions, see the Companys Annual
    Report on Form 10-K for the fiscal year ended April 2, 2004 (see Item 7, Managements
    Discussion and Analysis of Financial Condition and Results of Operations 
    Related Party Transactions).
  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 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. 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.
  Critical
    Accounting Policies
  The
    preparation of financial statements in conformity with accounting principles
    generally accepted in the United States of America requires that management
    make estimates and assumptions that affect the amounts reported in the financial
    statements and accompanying notes. Predicting future events is inherently
    an imprecise activity and as such requires the use of judgment. Actual results
    may vary from estimates in amounts that may be material to the financial statements.
  For
    a description of the Companys significant accounting policies, see Note
    3, Summary of Significant Accounting Policies, of the Notes to
    Condensed Consolidated Financial Statements (unaudited) included in this Report
    under Item 1. For a more complete description, please refer to the Companys
    Annual Report on Form 10-K for the fiscal year ended April 2, 2004.
  
  17
  



Wage and Benefit
    Increases
  Expenses
    for center-level salaries, wages and benefits represented approximately 50.1%
    of net revenues for second quarter 2005, as compared to approximately 52.2%
    of net revenues in second quarter 2004. Management believes that, through
    increases in tuition rates, the Company can offset any future center-level
    wage increases caused by adjustments 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.
  SAFE
    HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  This
    Form 10-Q Report contains certain forward-looking statements regarding, among
    other things, the anticipated financial and operating results of the Company.
    Investors are cautioned not to place undue reliance on these forward-looking
    statements, which speak only as of the date hereof. The Company undertakes
    no obligation to publicly release any modifications or revisions to these
    forward-looking statements to reflect events or circumstances occurring after
    the date hereof or to reflect the occurrence of unanticipated events. In connection
    with the safe harbor provisions of the Private Securities Litigation
    Reform Act of 1995, the Company cautions investors that future financial and
    operating results may differ materially from those projected in forward-looking
    statements made by, or on behalf of, the Company. Such forward-looking statements
    involve known and unknown risks, uncertainties, and other factors that may
    cause the actual results, performance, or achievements of the Company to be
    materially different from any future results, performance, or achievements
    expressed or implied by such forward-looking statements. Forward-looking statements
    involve a number of risks and uncertainties, including, but not limited to,
    ability to hire, train and retain qualified personnel, continuation of federal
    and state assistance programs, projected exit and closure expenses, pricing,
    competition, insurability, demand for childcare and general economic conditions.
    Accordingly, actual results could differ materially from those projected in
    such forward-looking statements.
  ITEM
    3. Quantitative and Qualitative Disclosures about Market Risks
  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 as of October 15, 2004. The Company has cash
    flow exposure on the revolving line of credit, with an outstanding balance
    of $9.2 million, and its notes payable, with an outstanding balance of $0.1
    million, each as of October 15, 2004. 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 year 2005.
  Foreign
    Currency Exchange Rates.The Companys exposure
    to foreign currency exchange rates is limited to revenues for one company-owned
    center and royalties for 12 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
    4. Controls and Procedures
  Under
    the supervision and with the participation of our 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 the end of the period covered by this quarterly report, and, based on
    their evaluation, our chief executive officer and chief financial officer
    have concluded that these controls and procedures are effective. There were
    no significant changes in our internal control over financial reporting during
    the fiscal quarter ended October 15,
    2004, that has materially affected, or is reasonably likely to materially
    affect, our internal control over financial reporting.

  
  18
  



Disclosure
    controls and procedures are our controls and other procedures that are designed
    to ensure that information required to be disclosed by us in the reports that
    we file or submit under 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 us 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.


  
  19
  



PART
    II  OTHER
    INFORMATION
  ITEM
    1. Legal Proceedings
  Information
    regarding this Item is set forth in Note 5 to the Notes of Condensed Consolidated
    Financial Statements (unaudited) included in Part I, Item 1 of this Report.
  ITEMS
    2 through 4 are not applicable.
  ITEM 5. OTHER INFORMATION
  On November 29, 2004, the Company issued the press release
attached hereto as Exhibit 99.1, announcing its results for the fiscal quarter
and 28 weeks ended October 15, 2004, which press release is incorporated in this Item 5
by reference. The information in this Item 5 and the attached Exhibit 99.1 shall not
be deemed filed for purposed of Section 18 of the Securities Act of 1934,
nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be
expressly stated by specific reference in such filing.
  ITEM
    6. Exhibits and Reports on Form 8-K

(a)
    Exhibits4.1
    Second
        Amended and Restated Credit Agreement dated as of November 22, 2004, between
        Childtime Childcare Inc. and JPMorgan Chase Bank, N.A.31.1
    Rule
        13a-14(a) Certification by William D. Davis, President and Chief Executive
        Officer31.2
    Rule
        13a-14(a) Certification by Frank M. Jerneycic, Treasurer and Chief Financial
        Officer32.1
    Certification
        pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of
        the Sarbanes-Oxley Act of 200232.2
    Certification
        pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of
        the Sarbanes-Oxley Act of 200299.1
    Press
release on November 29, 2004 announcing the Companys results for the fiscal quarter and 28 weeks ended October 15, 2004(b)
    Reports
        on Form 8-K1)
    The
        Company filed a Current Report on Form 8-K on August 18, 2004, announcing
        the results of its Annual Meeting of Shareholders, including the election
        of directors, the approval of amendments to its Restated Articles of Incorporation
        (to change the Companys legal name and to increase the number of
        directors) and the approval of an amendment of the Companys 2003
        Equity Compensation Plan.2)
    The
        Company filed a Current Report on Form 8-K on August 26, 2004, announcing
        the resignation of a member of the Companys board of directors.3)
    The
        Company filed a Current Report on Form 8-K on September 7, 2004, announcing
        the results for the fiscal quarter ended July 23, 2004
  20
  


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

LEARNING
        CARE GROUP, INC.(REGISTRANT)Date:
        November 24, 2004
    By:
          /s/ Frank M. JerneycicFrank
        M. JerneycicChief Financial Officer and Treasurer(Duly Authorized Officer andPrincipal Financial Officer)
  21
  



EXHIBIT
    INDEX

ExhibitNumber
    Description4.1
    Second
        Amended and Restated Credit Agreement dated as of November 22, 2004, between
        Childtime Childcare Inc. and JPMorgan Chase Bank, N.A.31.1
    Rule
        13a-14(a) Certification by William D. Davis, President and Chief Executive
        Officer31.2
    Rule
        13a-14(a) Certification by Frank M. Jerneycic, Treasurer and Chief Financial
        Officer32.1
    Certification
        pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of
        the Sarbanes-Oxley Act of 200232.2
    Certification
        pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of
        the Sarbanes-Oxley Act of 200299.1
    Press
release on November 29, 2004 announcing the Companys results for the fiscal quarter and 28 weeks ended October 15, 2004
  22