|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 JANUARY 7, 2005                                             
|    |                                                                                            
|    | 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 February 4, 2005, was 19,839,010.                                                                                                                                                                                                                          

|
|



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
For the Quarterly Period Ended January 7, 2005
|---------------------------------------------------------------------------------------------------------
|                                                                                                         

|              |         |                       |                                                                                              |       | Page
    Number                                                                                                 
|------------- | ------- | --------------------- | -------------------------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------
|              |         |                       |                                                                                              |       |                                                                                                                 
|PART I.       |         | FINANCIAL INFORMATION |                                                                                             
|              |         |                       |                                                                                              |      
|              | ITEM 1. |                       | Condensed Consolidated Financial Statements                                                  |      
|              |         |                       |                                                                                              |       |                                                                                                                 
|              |         |                       | A.                                                                                           |       | Condensed Consolidated Balance Sheets 
      January 7, 2005 and April 2, 2004                                  
|              |         |                       |                                                                                              |       |                                                                                                                 
|              |         |                       | B.                                                                                           |       | Condensed Consolidated Statements of Operations 12 and 40 weeks ended 
      January 7, 2005 and January 2, 2004
|              |         |                       |                                                                                              |       |                                                                                                                 
|              |         |                       | C.                                                                                           |       | Condensed Consolidated Statements of Cash Flows 40 weeks ended 
      January 7, 2005 and January 2, 2004       
|              |         |                       |                                                                                              |       |                                                                                                                 
|              |         |                       | D.                                                                                           |       | Notes to Condensed Consolidated Financial Statements                                                            
|              |         |                       |                                                                                              |       |                                                                                                                 
|              | ITEM 2. |                       | Managements Discussion and Analysis of Financial Condition and 
      Results of Operations | 12-19
|              |         |                       |                                                                                              |      
|              | ITEM 3. |                       | Quantitative and Qualitative Disclosures about Market Risks                                  | 19   
|              |         |                       |                                                                                              |      
|              | ITEM 4. |                       | Controls and Procedures                                                                      | 19   
|              |         |                       |                                                                                              |      
|PART II.      |         | OTHER INFORMATION     |                                                                                             
|              |         |                       |                                                                                              |      
|              | ITEM 1. |                       | Legal Proceedings                                                                            | 19   
|              |         |                       |                                                                                              |      
|              | ITEM 5. |                       | Other Information                                                                            | 19   
|              |         |                       |                                                                                              |      
|              | ITEM 6. |                       | Exhibits, Reports on Form 8-K                                                                | 19   
|              |         |                       |                                                                                             
|SIGNATURES    | 20     
|              |         |                       |                                                                                             
|EXHIBIT INDEX | 21     
|              |         |                       |                                                                                              |       |                                                                                                                 

|2
|-



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

|                                                                              |   |         |   |  
|----------------------------------------------------------------------------- | - | ------- | - | -
|
|
|
|
|ASSETS                                                                        |   |         |   |  
|CURRENT ASSETS:                                                               |   |         |   |  
|Cash and cash equivalents                                                     | $ | 614     |   | $
|Accounts receivable, net                                                      |   | 9,414   |   |  
|Prepaid expenses and other current assets                                     |   | 5,007   |   |  
|                                                                              |   |         |   |  
|Total current assets                                                          |   | 15,035  |   |  
|                                                                              |   |         |   |  
|LAND, BUILDINGS AND EQUIPMENT:                                               
|Land                                                                          |   | 9,347   |   |  
|Buildings                                                                     |   | 20,668  |   |  
|Leasehold improvements                                                        |   | 13,953  |   |  
|Vehicles, furniture and equipment                                             |   | 15,113  |   |  
|                                                                              |   |         |   |  
|                                                                              |   | 59,081  |   |  
|Less: accumulated depreciation and amortization                               |   | (20,878 | ) |  
|                                                                              |   |         |   |  
|                                                                              |   | 38,203  |   |  
|                                                                              |   |         |   |  
|OTHER NONCURRENT ASSETS:                                                     
|Intangible assets, net                                                        |   | 30,738  |   |  
|Refundable deposits and other                                                 |   | 2,552   |   |  
|                                                                              |   |         |   |  
|                                                                              |   | 33,290  |   |  
|                                                                              |   |         |   |  
|TOTAL ASSETS                                                                  | $ | 86,528  |   | $
|                                                                              |   |         |   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                         
|CURRENT LIABILITIES:                                                         
|Accounts and drafts payable                                                   | $ | 5,169   |   | $
|Accrued wages and benefits                                                    |   | 7,138   |   |  
|Current portion of long-term debt                                             |   | 104     |   |  
|Exit and closure expense accrual                                              |   | 114     |   |  
|Other current liabilities                                                     |   | 9,261   |   |  
|                                                                              |   |         |   |  
|Total current liabilities                                                     |   | 21,786  |   |  
|LONG-TERM DEBT, NET OF CURRENT PORTION                                        |   | 13,572  |   |  
|DEFERRED RENT LIABILITY & MINORITY INTEREST                                   |   | 2,630   |   |  
|OBLIGATIONS UNDER SALE LEASEBACK TRANSACTIONS                                 |   | 10,494  |   |  
|                                                                              |   |         |   |  
|Total liabilities                                                             |   | 48,482  |   |  
|                                                                              |   |         |   |  
|SHAREHOLDERS EQUITY:                                                        
|Common Stock, 40,000,000 shares authorized, no par value; 19,839,010 and     
|19,809,010 issued and outstanding at January 7, 2005 and April 2, 2004        |   | 43,934  |   |  
|Preferred Stock, 100,000 shares authorized, no par value; no shares issued or |   |         |   |  
|outstanding                                                                   |   |        |   |  
|Retained earnings (accumulated deficit)                                       |   | (5,888  | ) |  
|                                                                              |   |         |   |  
|Total shareholders equity                                                    |   | 38,046  |   |  
|                                                                              |   |         |   |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                    | $ | 86,528  |   | $
|                                                                              |   |         |   |  

|                                                                                                   
|---------------------------------------------------------------------------------------------------
|The 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 |        | 40 Weeks Ended |  
|-------------------------------------------------- | -------------- | ------ | -------------- | -
|
|
|
|
|                                                   |                |        |                |  
|Revenue from Learning Center Operations            | $              | 46,386 |                | $
|Revenue from Franchise Operations                  |                | 1,558  |                |  
|                                                   |                |        |                |  
|Revenue, net                                       |                | 47,944 |                |  
|Operating expenses of Learning Centers             |                | 41,305 |                |  
|                                                   |                |        |                |  
|Gross profit                                       |                | 6,639  |                |  
|General and administrative expenses                |                | 4,211  |                |  
|Depreciation and amortization expenses             |                | 976    |                |  
|Gain on sale of centers and vacant land            |                |       |                |  
|Provision for doubtful accounts                    |                | 287    |                |  
|Exit and closure expenses                          |                | 23     |                |  
|                                                   |                |        |                |  
|                                                   |                |        |                |  
|                                                   |                |        |                |  
|OPERATING INCOME (LOSS)                            |                | 1,142  |                |  
|Interest expense, net                              |                | 465    |                |  
|                                                   |                |        |                |  
|INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED
|OPERATIONS                                         |                | 677    |                |  
|Income tax provision                               |                | 14     |                |  
|                                                   |                |        |                |  
|INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS       |                | 663    |                |  
|Discontinued operations, net of taxes              |                | 192    |                |  
|                                                   |                |        |                |  
|NET INCOME (LOSS)                                  | $              | 855    |                | $
|                                                   |                |        |                |  
|INCOME (LOSS) PER SHARE - BASIC:                  
|Income (loss) before discontinued operations       | $              | 0.03   |                | $
|Discontinued operations, net of taxes              |                | 0.01   |                |  
|                                                   |                |        |                |  
|                                                   |                |        |                |  
|                                                   |                |        |                |  
|Net income (loss)                                  | $              | 0.04   |                | $
|                                                   |                |        |                |  
|INCOME (LOSS) PER SHARE - DILUTED:                
|Income (loss) before discontinued operations       | $              | 0.03   |                | $
|Discontinued operations, net of taxes              |                | 0.01   |                |  
|                                                   |                |        |                |  
|Net income (loss)                                  | $              | 0.04   |                | $
|                                                   |                |        |                |  
|Weighted average shares outstanding                |                | 19,828 |                |  
|                                                   |                |        |                |  
|                                                   |                |        |                |  

|The accompanying footnotes are an integral part of the condensed consolidated financial statements.
|---------------------------------------------------------------------------------------------------

|4
|-



|LEARNING CARE GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
|----------------------------------------------------------------------------------------------------

|                                                                                                    |   |       
|--------------------------------------------------------------------------------------------------- | - | ------
|
|
|
|
|
|OPERATING ACTIVITIES:                                                                               |   |       
|Net income (loss)                                                                                   | $ | 887   
|Adjustments to reconcile net income (loss) to cash                                                 
|provided (used) by operating activities:                                                           
|Depreciation and amortization                                                                       |   | 3,164 
|Provision for doubtful accounts                                                                     |   | 1,114 
|Stock option compensation expense                                                                   |   | 89    
|Deferred rent liability                                                                             |   | 718   
|Deferred income taxes                                                                               |   |      
|Minority interest in variable interest entities                                                     |   | (33   
|(Gain) loss on disposal of assets                                                                   |   | (977  
|Changes in operating assets and liabilities:                                                       
|Accounts receivable                                                                                 |   | (1,367
|Prepaid expenses and other current assets                                                           |   | (209  
|Accounts payable, accruals and other current liabilities                                            |   | (219  
|Exit and closure expense accrual                                                                    |   | (334  
|                                                                                                    |   |       
|Net cash provided (used) by operating activities                                                    |   | 2,833 
|                                                                                                    |   |       
|INVESTING ACTIVITIES:                                                                              
|Acquisiton of centers, net of cash                                                                  |   | (314  
|Capital spending                                                                                    |   | (4,587
|Proceeds from sale of assets                                                                        |   | 1,515 
|Payments for refundable deposits and other assets                                                   |   | 89    
|                                                                                                    |   |       
|Net cash used in investing activities                                                               |   | (3,297
|                                                                                                    |   |       
|FINANCING ACTIVITIES:                                                                              
|Net borrowings on revolving line of credit                                                          |   | 4,584 
|Repayments under long-term debt                                                                     |   | (2,633
|Issuance of long-term debt                                                                          |   |      
|Changes in drafts payable                                                                           |   | (2,314
|Proceeds from sale leaseback                                                                        |   |      
|Issuance of common shares (net of issuance costs)                                                   |   | 64    
|                                                                                                    |   |       
|Net cash provided (used) by financing activities                                                    |   | (299  
|                                                                                                    |   |       
|Net decrease in cash and cash equivalents                                                           |   | (763  
|Cash and cash equivalents, beginning of year                                                        |   | 1,377 
|                                                                                                    |   |       
|                                                                                                    |   |       
|Cash and cash equivalents, end of period                                                            | $ | 614   
|                                                                                                    |   |       
|                                                                                                    |   |       
|The 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 January 7, 2005, the Company operated
or franchised a total of 462 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: 263 centers operated by the Company, consisting of:
| | - | -------------------------------------------------------------------------------
| |   |                                                                                

| |        257 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: 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 six Childtime centers under management contracts. 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 50 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.
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 January 7, 2005, and the results of its operations and cash flows for the periods
ended January 7, 2005 and January 2, 2004, 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.

|6
|-



|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 third quarter contained 12 weeks, and the fiscal year contains 52 weeks. For fiscal
year 2004, the third 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 except per share data):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |             |   |      |  |  
|-------------------------------------- | ----------- | - | ---- |  | -
|
|
|
|
|Net income (loss)                      | As reported | $ | 855  |  | $
|                                       | Pro forma   | $ | 855  |  | $
|Net income (loss) per share - Basic   
|                                       | As reported | $ | 0.04 |  | $
|                                       | Pro forma   | $ | 0.04 |  | $
|Net income (loss) per share - Diluted 
|                                       | As reported | $ | 0.04 |  | $
|                                       | Pro forma   | $ | 0.04 |  | $
|Weighted average fair value of options
|granted during the year                |             | $ |     |  | $
|                                       |             |   |      |  |  

|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 40 weeks ended January 7, 2005
and January 2, 2004, respectively: no dividend yield; expected volatility of 76.0 and 37.3 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 January 7, 2005 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 January 7, 2005 and April 2, 2004, the aggregate drafts payable were $3.9
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
$73.4
million and $13.2 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 $187,500 and $342,500 for the
40 weeks ended January 7, 2005 and January 2, 2004, respectively, and are included in General and
administrative expenses in the accompanying Condensed Consolidated Statements of Operations.
NOTE 7  INCOME TAXES
During the 40 weeks ended January 7, 2005, 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 $0.8
million, compared to an income tax provision of $0.0 million on loss before discontinued operations
of ($2.1 million) for the same period last year. During the 12 weeks ended January 7, 2005, an income
tax provision of $0.0 million was recorded on income before income taxes and discontinued operations
of $0.7 million, compared to an income tax provision of $0.0 million on loss before discontinued
operations of ($0.5 million) for the same period last year. Income tax expense for the 12 and 40
weeks ended January 7, 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8
|-



|NOTE 8  NET INCOME (LOSS) PER SHARE
For the 12 and 40 weeks ended January 7, 2005 and January 2, 2004, 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 Shares | 
|---------------------- | --------------------------------- | 
|
|
|
|
|                       |                                   | 
|Basic Shares (based on |                                   | 
|weighted average)      | 19,828                            | 
|Stock Options (1)      | 1,020                             | 
|                       |                                   | 
|Diluted Shares         | 20,848                            | 
|                       |                                   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) For the 12 and 40 weeks ended January 7, 2005, the above calculation does not include 994,053 and
970,124 shares, respectively, issuable from stock options that have the potential to dilute earnings
per share in the future. For the 12 and 40 weeks ended January 2, 2004, the above calculation does
not include 1,995,819 and 1,625,963 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 40 weeks ended January
7, 2005, the Company incurred charges of $0.1 million and $0.2 million, respectively, to increase
the reserves and to provide for other closed centers. The Company made payments related to its restructuring
reserve of $0.2 million and $0.6 million for the 12 and 40 weeks ended January 7, 2005. A summary
of the accrual is as follows (in thousands):

|                                          |   |    
|----------------------------------------- | - | ---
|
|
|
|
|Closed center lease obligations           | $ | 241
|Discontinued operations lease obligations |   | 207
|                                          |   |    
|Total                                     | $ | 448
|                                          |   |    
|                                          |   |    

|                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The lease liability for the centers closed during the 40 weeks ended January 7, 2005 and January 2, 2004 has been recorded at managements estimate of the amounts of expected payments.

|9
|-



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

|                                                             |  |   |      |   |  
|------------------------------------------------------------ |  | - | ---- | - | -
|
|
|
|
|Revenues, net                                                |  | $ | 295  |   | $
|Operating expenses of Learning Centers                       |  |   | 444  |   |  
|                                                             |  |   |      |   |  
|Income (loss) from operations                                |  |   | (149 | ) |  
|Provision for doubtful accounts                              |  |   | 4    |   |  
|Depreciation and amortization expenses                       |  |   | 11   |   |  
|(Gain) on disposal of assets                                 |  |   | (422 | ) |  
|Exit and closure expenses                                    |  |   | 66   |   |  
|                                                             |  |   |      |   |  
|Income (loss) from discontinued operations before income tax |  |   | 192  |   |  
|Income tax provision                                         |  |   |     |   |  
|                                                             |  |   |      |   |  
|Income (loss) from discontinued operations, net of tax       |  | $ | 192  |   | $
|                                                             |  |   |      |   |  

|                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10  INTANGIBLE ASSETS AND GOODWILL
The changes in the carrying amounts of goodwill and other intangible assets for the 40 weeks ended
January 7, 2005 were as follows (in thousands):

|                             |  |   |        |  |   |       |  |   |     |  |  
|---------------------------- |  | - | ------ |  | - | ----- |  | - | --- |  | -
|
|
|Goodwill                     |  | $ | 17,866 |  | $ | 1,245 |  | $ |    |  | $
|Franchise Agreements         |  |   | 8,320  |  |   |      |  |   | 351 |  |  
|Trade Name and Trademarks    |  |   | 3,574  |  |   |      |  |   | 150 |  |  
|Curriculum                   |  |   | 304    |  |   |      |  |   | 70  |  |  
|                             |  |   |        |  |   |       |  |   |     |  |  
|Total intangible assets, net |  | $ | 30,064 |  | $ | 1,245 |  | $ | 571 |  | $
|                             |  |   |        |  |   |       |  |   |     |  |  
|                             |  |   |        |  |   |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. 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 |        | 40 Weeks Ended |  
|------------------------------------------------- | -------------- | ------ | -------------- | -
|
|
|
|Revenues:                                         |                |        |                |  
|Childtime                                         | $              | 32,507 |                | $
|Tutor Time                                        |                | 13,879 |                |  
|Franchise Operations                              |                | 1,558  |                |  
|Revenue associated with the consolidation of VIEs |                |       |                |  
|                                                  |                |        |                |  
|Total                                             | $              | 47,944 |                | $
|                                                  |                |        |                |  
|                                                 
|Operating income (loss):                         
|Childtime                                         | $              | 4,238  |                | $
|Tutor Time                                        |                | 843    |                |  
|Franchise Operations                              |                | 1,558  |                |  
|Depreciation and amortization                     |                | (976   | )              |  
|Corporate and other                               |                | (4,521 | )              |  
|                                                  |                |        |                |  
|Total                                             | $              | 1,142  |                | $
|                                                  |                |        |                |  
|                                                 
|Goodwill:                                        
|Childtime                                         | $              | 7,215  |                | $
|Tutor Time                                        |                | 6,823  |                |  
|Franchise Operations                              |                | 5,073  |                |  
|                                                  |                |        |                |  
|Total                                             | $              | 19,111 |                | $
|                                                  |                |        |                |  
|                                                 
|All other assets:                                
|Childtime                                         | $              | 47,441 |                | $
|Tutor Time                                        |                | 10,290 |                |  
|Franchise Operations                              |                | 9,686  |                |  
|                                                  |                |        |                |  
|Total                                             | $              | 67,417 |                | $
|                                                  |                |        |                |  

|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 January 7, 2005 and January 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 less than $0.1 million is included
in other current liabilities as of January 7, 2005 and January 2, 2004, 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 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 January 7, 2005. The following is a summary of the effect of consolidating these entities
for the period up to the acquisition date (in thousands).
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                              | 40 Weeks
      Ended
      January 7,
      2005 |    
|------------------------------------------------------------- | ------------------------------------------------ | ---
|
|Revenue, net of elimination of fees of $23                    | $                                                | 423
|Cost and minority interest, net of elimination of fees of $23 |                                                  | 423
|                                                              |                                                  |    
|Net 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  CREDIT AGREEMENT
On November 22, 2004, the Company entered into a Second Amended and Restated Credit Agreement, which
increased the revolving line of credit from $13.7 million to $17.5 million and extended the maturity
date to July 31, 2006.
ITEM 2. Managements Discussion and Analysis
GENERAL
The information presented herein refers to the 12 weeks (third quarter 2005) and the 40 weeks (year
to date 2005) ended January 7, 2005, compared to the 12 weeks (third quarter 2004) and 40 weeks (year
to date 2004) ended January 2, 2004.
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 third quarter 2005, a franchisee opened one franchise center and another franchisee closed
one franchise center, and the Company closed four Learning Centers. During the third quarter 2004, the Company opened one Learning Center.

|12
|--



|During year to date 2005, the Company acquired eight Learning Centers from a franchisee, opened two
franchise centers, closed one franchise center, closed six 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 two corporate centers.
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 calendar period year-end 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.
RESULTS OF OPERATIONS
Third Quarter 2005 Compared to Third Quarter 2004
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  |   |        |  |       |   |   |        |   |      
|--------------------------------------- |  | - | ------ |  | ----- | - | - | ------ | - | -----
|
|
|Revenue from Learning Center Operations |  | $ | 46,386 |  | 96.8  | % | $ | 42,546 |   | 96.8 
|Revenue from Franchise Operations       |  |   | 1,558  |  | 3.2   | % |   | 1,418  |   | 3.2  
|                                        |  |   |        |  |       |   |   |        |   |      
|Revenue, net                            |  |   | 47,944 |  | 100.0 | % |   | 43,964 |   | 100.0
|Operating expenses of Learning Centers  |  |   | 41,305 |  | 86.2  | % |   | 37,884 |   | 86.2 
|                                        |  |   |        |  |       |   |   |        |   |      
|Gross profit                            |  |   | 6,639  |  | 13.8  | % |   | 6,080  |   | 13.8 
|General and administrative expenses     |  |   | 4,211  |  | 8.8   | % |   | 4,383  |   | 10.0 
|Depreciation and amortization expenses  |  |   | 976    |  | 2.0   | % |   | 967    |   | 2.2  
|Gain on sale of centers and vacant land |  |   |       |  | 0.0   | % |   |       |   | 0.0  
|Provision for doubtful accounts         |  |   | 287    |  | 0.6   | % |   | 561    |   | 1.3  
|Exit and closure expenses               |  |   | 23     |  | 0.0   | % |   | 220    |   | 0.5  
|                                        |  |   |        |  |       |   |   |        |   |      
|OPERATING INCOME                        |  | $ | 1,142  |  | 2.4   | % | $ | (51    | ) | -0.2 
|                                        |  |   |        |  |       |   |   |        |   |      
|                                        |  |   |        |  |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Revenue, net. Net revenue for third quarter 2005 increased $4.0 million, or 9.0%, from the same period last year
to $47.9 million. Learning Center revenues increased $3.8 million. Revenue increases were achieved
through a combination of increased tuition rates and enrollments as well as through center acquisitions.
Childtime Learning Centers revenues increased $1.9 million, with comparable Childtime center revenues
(centers opened 18 months or longer) increasing 6.3%. Tutor Time Learning Centers revenues increased
$1.9 million, with comparable Tutor Time center revenues increasing 5.4%. Franchise Operations revenues,
which consisted primarily of royalties, increased $0.1 million, or 9.9%, from the same period last
year to $1.6 million.
Operating expenses of Learning Centers. Operating expenses for third quarter 2005 increased $3.4 million, or 9.0%, from the same period last
year to $41.3 million. The increase was a result of an increase in personnel expense ($1.5 million),
which increased with higher enrollments and general wage increases; an increase in center controllable
expenses ($1.2 million), which increased with higher enrollments and increased costs from center
maintenance improvements, food, transportation and utility expenses; and 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. Operating expenses
as a percentage of net revenue remained unchanged at 86.2% for third quarter 2005, with an increase
in center controllable expenses being offset by a reduction in personnel expenses.
Gross profit. Gross profit for third quarter 2005 increased $0.6 million, or 9.2%, from the same period last year
to $6.6 million. This increase consisted of a $0.4 million increase in Learning Center Operations
gross profit and a $0.1 million increase in Franchise Operations gross profit. Gross profit percentages
for third quarter 2005 by segment were 13.0% for Childtime centers (as compared to 14.0% for 2004),
6.1% for Tutor Time centers (as compared to 3.2% for 2004) and 100% for Franchise Operations. The
third quarter gross profit and gross profit percentage changes were a result of the revenue increases
and changes in operating expenses described above.

|13
|--



|General and administrative expenses. General and administrative expenses for third quarter 2005 decreased $0.2 million, or 3.9%, from the
same period last year to $4.2 million. The decrease was a result of a decrease in consulting and
temporary help, partially offset by increases in wages and incentives based on operating improvements.
General and administrative expenses as a percentage of net revenue decreased to 8.8% for third quarter
2005 from 10.0% in the same period last year. The decrease was a result of revenues increasing while
general and administrative expenses decreased.
Depreciation and amortization expense. Depreciation and amortization expense for third quarter 2005 remained unchanged from last year. Depreciation
and amortization expense as a percentage of net revenue decreased to 2.0% for third quarter 2005
from 2.2% in the same period last year. The decrease was a result of revenues increasing while depreciation
and amortization expense remained the same.
Provision for doubtful accounts. Provision for doubtful accounts for third quarter 2005 decreased $0.3 million, or 48.8%, from the
same period last year to $0.3 million. This decrease was a result of improved collection experience
during the quarter.
Interest expense. Interest expense for third 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 provision for third quarter of $0.0 million was recorded on income before income taxes
and discontinued operations of $0.7 million, compared to an income tax provision of $0.0 million
on loss before discontinued operations of ($0.5 million) for the same period last year. Income tax
expense for the 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 had been recorded.
Discontinued operations, net of taxes. Discontinued operations, net of taxes, for third quarter 2005 was $0.2 million compared to a loss
of ($0.1 million) for the same period last year. This income includes gain on the disposal of assets
in one closed center of $0.6 million, offset by operating and lease termination costs associated
with closed centers.
Net income (loss). As a result of the foregoing changes, net income for third quarter 2005 was $0.9 million compared
to a net loss of ($0.6 million) for the same period last year.
Year to Date 2005 Compared to Year to Date 2004
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |   |         |   |       |   |   |         |   |       |  
|--------------------------------------- | - | ------- | - | ----- | - | - | ------- | - | ----- | -
|
|
|Revenue from Learning Center Operations | $ | 155,596 |   | 96.6  | % | $ | 144,849 |   | 96.9  | %
|Revenue from Franchise Operations       |   | 5,432   |   | 3.4   | % |   | 4,654   |   | 3.1   | %
|                                        |   |         |   |       |   |   |         |   |       |  
|Revenue, net                            |   | 161,028 |   | 100.0 | % |   | 149,503 |   | 100.0 | %
|Operating expenses of Learning Centers  |   | 140,046 |   | 87.0  | % |   | 131,412 |   | 87.9  | %
|                                        |   |         |   |       |   |   |         |   |       |  
|Gross profit                            |   | 20,982  |   | 13.0  | % |   | 18,091  |   | 12.1  | %
|General and administrative expenses     |   | 14,847  |   | 9.2   | % |   | 14,321  |   | 9.6   | %
|Depreciation and amortization expenses  |   | 3,219   |   | 2.0   | % |   | 3,035   |   | 2.0   | %
|Gain on sale of centers and vacant land |   | (684    | ) | -0.4  | % |   |        |   | 0.0   | %
|Provision for doubtful accounts         |   | 1,114   |   | 0.7   | % |   | 1,091   |   | 0.7   | %
|Exit and closure expenses               |   | 83      |   | 0.1   | % |   | 230     |   | 0.2   | %
|                                        |   |         |   |       |   |   |         |   |       |  
|OPERATING INCOME                        | $ | 2,403   |   | 1.4   | % | $ | (586    | ) | -0.4  | %
|                                        |   |         |   |       |   |   |         |   |       |  
|                                        |   |         |   |       |  

|14
|--



|Revenue, net. Net revenue for year to date 2005 increased $11.5 million, or 7.7%, from the same period last
year to $161.0 million. Learning Center revenues increased $10.7 million. Revenue increases were
achieved through a combination of increased tuition rates and enrollments. Childtime Learning Centers
revenues increased $5.3 million, with comparable Childtime center revenues (centers opened 18 months
or longer) increasing 5.4%. Tutor Time Learning Centers revenues increased $5.0 million, with comparable
Tutor Time center revenues increasing 6.3%. 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 $0.8 million, or 16.7%, from the same
period last year to $5.4 million.
Operating expenses of Learning Centers. Operating expenses year to date 2005 increased $8.6 million, or 6.6%, from the same period last year
to $140.0 million. The increase was a result of an increase in personnel expense ($3.7 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; an increase in center controllable
expenses ($2.1 million), which increased with higher enrollments and increased costs from center
maintenance improvements, 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 87.0%
for year to date 2005, from 87.9% 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.
Gross profit.Gross profit for year to date 2005 increased $2.9 million, or 16.0%, from the same period last year
to $21.0 million. This increase consisted of a $2.1 million increase in Learning Center Operations
gross profit and a $0.8 million increase in Franchise Operations gross profit. Gross profit percentages
for year to date 2005 by segment were 11.5% for Childtime centers (as compared to 11.6% for 2004),
6.3% for Tutor Time centers (as compared to 3.3% for 2004) and 100% for Franchise Operations. The
third 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 $0.5 million, or 3.7%, from the
same period last year to $14.8 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 decreased to 9.2% for year to date 2005
as compared to 9.6% for year to date 2004, due to the greater rate of increase in net revenue for
the current period.
Depreciation and amortization expense. Depreciation and amortization expense for year to date 2005 increased $0.2 million, or 6.1%, from
the same period last year to $3.2 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 from last year.
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 no similar transactions in the same period last year.
Provision for doubtful accounts. Provision for doubtful accounts for year to date 2005 remained unchanged from the same period last
year at $1.1 million.
Interest expense. Interest expense for year to date 2005 was $1.6 million, compared to $1.5 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 $0.8 million, compared to an
income tax provision of $0.0 million on a loss before discontinued operations of ($2.1 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 had been recorded.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



|Discontinued operations, net of taxes. Discontinued operations, net of taxes, for year to date 2005 was $0.2 million, compared to a loss
of ($0.3 million) for the same period last year. This income includes gain on the disposal of assets
in one closed center of $0.6 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 $0.9 million for year to date 2005,
compared to a net loss of ($2.4 million) for the same period last year.
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 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 $10.0 million at January 7, 2005, and $5.4 million at
April 2, 2004. Outstanding letters of credit reduced the availability under the line of credit in
the amount of $4.0 million at January 7, 2005 and $2.1 million at April 2, 2004. As of January 7,
2005 and April 2, 2004, unused amounts available for borrowing under this line of credit were $3.5
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
January 7, 2005.
Net cash provided (used) by operating activities was $2.8 million for year to date 2005, compared to
($1.5 million) for the same period last year. During year to date 2005, financing activities totaled
($0.3 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
$3.5 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 $2.3 million, offset by repayments of long-term debt of $15.1 million. Investing activities were
($3.3 million) for the year to date 2005. Of this, $4.6 million was used for capital spending and
$0.3 was used to acquire centers from a franchisee. This was partially offset by $1.5 million of
proceeds from asset disposals. Investing activities were ($3.1 million) for year to date 2004, of
which $3.3 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. 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 January 7, 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 year to date 2005, the market value of the outstanding interest rate contracts increased
$0.1 million.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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
$73.4
million and $13.2 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 January 7, 2005, aggregate potential payments on leases and guarantees over the next five fiscal
years and thereafter are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            |   |        |  |   |       |  |   |        |  |  
|--------------------------- | - | ------ |  | - | ----- |  | - | ------ |  | -
|
|
|
|
|Franchise Lease Guarantees  | $ | 13,170 |  | $ | 654   |  | $ | 3,212  |  | $
|Franchise Lease Commitments |   | 73,448 |  |   | 1,558 |  |   | 19,900 |  |  
|                            |   |        |  |   |       |  |   |        |  |  
|Total                       | $ | 86,618 |  | $ | 2,212 |  | $ | 23,112 |  | $
|                            |   |        |  |   |       |  |   |        |  |  
|                            |   |        |  |   |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
Wage and Benefit Increases
Expenses for center-level salaries, wages and benefits represented approximately 48.1% of net revenue
for third quarter 2005, as compared to approximately 51.4% of net revenue in third quarter 2004.
Management believes that, through increases in tuition rates, the Company can offset any future center-level
wage increases caused by

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|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 January 7, 2005. The Company has cash flow exposure on the revolving
line of credit, with an outstanding balance of $10.0 million, and its notes payable, with an outstanding
balance of $0.1 million, each as of January 7, 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 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 January 7, 2005, that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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.
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 February 22, 2005, the Company issued the press release attached hereto as Exhibit 99.1, announcing
its results for the fiscal quarter and 40 weeks ended January 7, 2005, 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) | Exhibits |      |  |                                                                                                                                                                                          
|--- | -------- | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |          |      |  |                                                                                                                                                                                          
|    |          | 10.1 |  | Specimen form of Stock Option Agreement with respect to options granted to officers and key employees under the Companys 1995 Stock Incentive Plan for Key Employees, as amended.       
|    |          |      |  |                                                                                                                                                                                          
|    |          | 10.2 |  | Specimen form of Stock Option Agreement with respect to options granted to officers and key employees under the Companys 2003 Equity Compensation Plan, as amended.                     
|    |          |      |  |                                                                                                                                                                                          
|    |          | 10.3 |  | Specimen form of Stock Option Agreement with respect to options granted to directors under the Companys 2003 Equity Compensation Plan, as amended.                                      
|    |          |      |  |                                                                                                                                                                                          
|    |          | 10.4 |  | Specimen form of Performance Share Rights Agreement with respect to performance share rights granted to executive officers under the Companys 2003 Equity Compensation Plan, as amended.
|    |          |      |  |                                                                                                                                                                                          
|    |          | 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                                                                                 
|    |          |      |  |                                                                                                                                                                                          
|    |          | 99.1 |  | Press release on February 22, 2005 announcing the Companys results for the fiscal quarter and 40 weeks ended January 7, 2005                                                            
|    |          |      |  |                                                                                                                                                                                          

|    |                     |                                                                                                                                                                                                                                          |  | 
|--- | ------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(b) | Reports on Form 8-K
|    |                     |                                                                                                                                                                                                                                          |  | 
|    | 1)                  | The Company filed a Current
Report on Form 8-K on November 2, 2004, announcing the dismissal of PricewaterhouseCoopers LLP, and the engagement of Deloitte & Touche LLP, as the Companys independent registered public accounting firm.

|19
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| | 2) | The Company filed a Current Report
on Form 8-K on December 13, 2004, announcing a change in the entity acting as an independent registered public accounting firm for the Childtime Childrens Centers 401(k) Savings & Retirement Plan, from Follmer Rudzewicz PLC to UHY LLP, a separate legal entity joined by the partners of Follmer Rudzewicz PLC.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20
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|SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                    

| |                         |  | LEARNING CARE GROUP, INC.                                                                                                         
| | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
| |                         |  |                                                                                                                                   
| |                         |  | (REGISTRANT)                                                                                                                      
| |                         |  |                                                                                                                                   
| | Date: February 22, 2005 |  | By: /s/ Frank M. Jerneycic                                                                                                        
| |                         |  |                                                                                                                  
| |                         |  | Frank M. Jerneycic
      Chief Financial Officer and Treasurer
      (Duly Authorized Officer and
    Principal Financial Officer)

|21
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|EXHIBIT INDEX       
|--------------------
|                    
|Exhibit
      Number
|                    
|                    
|10.1                
|                    
|10.2                
|                    
|10.3                
|                    
|10.4                
|                    
|31.1                
|                    
|31.2                
|                    
|32.1                
|                    
|32.2                
|                    
|99.1                

|22
|--