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 JULY 23, 2004 OR |_|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM______TO______ COMMISSION
    FILE NUMBER: 0-27656 LEARNING
CARE GROUP, INC. (Exact Name Of Registrant As Specified In Its Charter) MICHIGAN
  
  38-3261854(State or other jurisdiction of incorporation)
  
  (I.R.S. Employer Identification No.) 21333 Haggerty
    Road, Suite 300
    Novi, Michigan 48375
(Address of principal executive offices) (248) 697-9000
(Registrants telephone number, including area code) Indicate by check mark
whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing required for the past 90
days. Yes |X| No |_| Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes |_| No |X| The number of shares of
Registrants Common Stock, no par value per share, outstanding at August 24,
2004, was 19,809,010.   LEARNING
CARE GROUP, INC. AND SUBSIDIARIES
FORM
10-Q
INDEX
For
the Quarterly Period Ended July 23, 2004

Page
        NumberPART
        I. FINANCIAL INFORMATIONITEM
        1. Condensed Consolidated Financial StatementsA.
    Condensed
        Consolidated Balance Sheets July 23, 2004 and April 2, 2004
    
    3B.
    Condensed
        Consolidated Statements of Operations 16 weeks ended July 23, 2004 and
        July 18, 2003
    
    4C.
    Condensed
        Consolidated Statements of Cash Flows 16 weeks ended July 23, 2004 and
        July 18, 2003
    
    5D.
    Notes
        to Condensed Consolidated Financial Statements
    
    6-12ITEM
        2. Managements Discussion and Analysis of Financial
        Condition and Results of Operations
    
    13-17ITEM
        3. Quantitative and Qualitative Disclosures about Market
        Risks
    
    17ITEM
        4. Controls and Procedures
    
    17PART
        II. OTHER INFORMATIONITEM
        1. Legal Proceedings
    
    18ITEM
        6. Exhibits, Reports on Form 8-K
    
    18SIGNATURES
    
    18EXHIBIT
        INDEX
    
    192

PART I: FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements

LEARNING
CARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

July 23,
        2004
    
    April 2,
        2004(Unaudited)(In
        thousands)ASSETSCURRENT
        ASSETS:Cash
        and cash equivalents
    
    $
    472
    
    $
    1,377Accounts
        receivable, net
    
    
    10,692
    
    
    9,379Prepaid
        expenses and other current assets
    
    
    6,861
    
    
    5,435Total
        current assets
    
    
    18,025
    
    
    16,191LAND,
        BUILDINGS AND EQUIPMENT:Land
    
    
    9,347
    
    
    9,347Buildings
    
    
    20,463
    
    
    20,443Leasehold
        improvements
    
    
    13,703
    
    
    12,462Vehicles,
        furniture and equipment
    
    
    13,745
    
    
    13,59957,258
    
    
    55,851Less:
        accumulated depreciation and amortization
    
    
    (20,009
    )
    
    (19,128
    )37,249
    
    
    36,723OTHER
        NONCURRENT ASSETS:Intangible
        assets, net
    
    
    29,836
    
    
    30,064Refundable
        deposits and other
    
    
    2,665
    
    
    2,64132,501
    
    
    32,705TOTAL
        ASSETS
    
    $
    87,775
    
    $
    85,619LIABILITIES
        AND SHAREHOLDERS EQUITYCURRENT
        LIABILITIES:Accounts
        and drafts payable
    
    $
    5,651
    
    $
    6,810Accrued
        wages and benefits
    
    
    6,707
    
    
    7,531Current
        portion of long-term debt
    
    
    8,600
    
    
    3,328Exit
        and closure expense accrual
    
    
    357
    
    
    448Other
        current liabilities
    
    
    12,382
    
    
    10,016Total
        current liabilities
    
    
    33,697
    
    
    28,133LONG-TERM
        DEBT, NET OF CURRENT PORTION
    
    
    3,661
    
    
    8,397DEFERRED
        RENT LIABILITY & MINORITY INTEREST
    
    
    2,170
    
    
    1,945OBLIGATIONS
        UNDER SALE LEASEBACK TRANSACTIONS
    
    
    10,254
    
    
    10,138Total
        liabilities
    
    
    49,782
    
    
    48,613SHAREHOLDERS
        EQUITYCommon
        Stock, 40,000,000 shares authorized, no par value; 19,809,010
        issued and outstanding at July 23, 2004 and April 2, 2004
    
    
    43,810
    
    
    43,781Preferred
        Stock, 100,000 shares authorized, no par value; no shares issued or outstanding
    
    
    
    
    
    Retained
        earnings (accumulated deficit)
    
    
    (5,817
    )
    
    (6,775
    )Total shareholders equity
    
    
    37,993
    
    
    37,006TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    87,775
    
    $
    85,619The accompanying footnotes
are an integral part of the condensed consolidated financial statements.


3

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

16 Weeks EndedJuly 23,
  2004
  
  July 18,
  2003(In thousands, except per share data)Revenue from Learning Center Operations
  
  
  $
  64,190
  
  
  
  $
  60,436Revenue from Franchise Operations
  
  
  
  2,335
  
  
  
  
  1,860Revenue, net
  
  
  
  66,525
  
  
  
  
  62,296Operating expenses of Learning Centers
  
  
  
  57,123
  
  
  
  
  54,285Gross profit
  
  
  
  9,402
  
  
  
  
  8,011General and administrative expenses
  
  
  
  6,397
  
  
  
  
  5,844Depreciation and amortization expenses
  
  
  
  1,324
  
  
  
  
  1,237Gain on sale of centers
  
  
  
  (549
  )
  
  
  
  Provision for doubtful accounts
  
  
  
  279
  
  
  
  
  290Exit and closure expenses
  
  
  
  40
  
  
  
  
  OPERATING INCOME
  
  
  
  1,911
  
  
  
  
  640Interest expense, net
  
  
  
  644
  
  
  
  
  712INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED
  OPERATIONS
  
  
  
  1,267
  
  
  
  
  (72
  )Income tax provision
  
  
  
  104
  
  
  
  
  INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
  
  
  
  1,163
  
  
  
  
  (72
  )Discontinued operations, net of taxes
  
  
  
  (206
  )
  
  
  
  (198
  )NET INCOME (LOSS)
  
  
  $
  957
  
  
  
  $
  (270
  )INCOME (LOSS) PER SHARE - BASIC:Income (loss) before discontinued operations
  
  
  $
  0.06
  
  
  
  $
  (0.01
  )Discontinued operations, net of taxes
  
  
  
  (0.01
  )
  
  
  
  (0.01
  )Net income (loss)
  
  
  $
  0.05
  
  
  
  $
  (0.02
  )INCOME (LOSS) PER SHARE - DILUTED:Income (loss) before discontinued operations
  
  
  $
  0.06
  
  
  
  $
  (0.01
  )Discontinued operations, net of taxes
  
  
  
  (0.01
  )
  
  
  
  (0.01
  )Net income (loss)
  
  
  $
  0.05
  
  
  
  $
  (0.02
  )Weighted average shares outstanding
  
  
  
  19,809
  
  
  
  
  13,347The accompanying
footnotes are an integral part of the condensed consolidated financial
statements.


4


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

16 Weeks EndedJuly 23, 2004
  
  July 18, 2003(In thousands)OPERATING ACTIVITIES:Net income (loss)
  
  
  $
  957
  
  
  
  $
  (270
  )Adjustments to reconcile net income (loss) to cash
  provided (used) by operating activities:Depreciation and amortization
  
  
  
  1,297
  
  
  
  
  1,240Provision for doubtful accounts
  
  
  
  280
  
  
  
  
  337Stock option compensation expense
  
  
  
  29
  
  
  
  
  Deferred rent liability
  
  
  
  205
  
  
  
  
  164Minority interest in variable interest entities
  
  
  
  20
  
  
  
  
  Gains (loss) on sale of assets
  
  
  
  (610
  )
  
  
  
  87Changes in operating assets and liabilities:Accounts receivable
  
  
  
  (1,592
  )
  
  
  
  (2,262
  )Prepaid expenses and other current assets
  
  
  
  (1,426
  )
  
  
  
  (752
  )Accounts payable, accruals and other current
  liabilities
  
  
  
  3,503
  
  
  
  
  (1,775
  )Exit and closure expense accrual
  
  
  
  (91
  )
  
  
  
  (298
  )Net cash provided (used) by operating activities
  
  
  
  2,572
  
  
  
  
  (3,529
  )INVESTING ACTIVITIES:Capital spending
  
  
  
  (1,691
  )
  
  
  
  (1,457
  )Proceeds from sale of assets
  
  
  
  706
  
  
  
  
  836Payments for refundable deposits and other assets
  
  
  
  (24
  )
  
  
  
  (18
  )Net cash used in investing activities
  
  
  
  (1,009
  )
  
  
  
  (639
  )FINANCING ACTIVITIES:Net borrowings on revolving line of credit
  
  
  
  2,919
  
  
  
  
  2,094Repayments under long-term debt
  
  
  
  (2,383
  )
  
  
  
  (14,723
  )Issuance of long-term debt
  
  
  
  
  
  
  
  
  3,500Changes in drafts payable
  
  
  
  (3,004
  )
  
  
  
  963Issuance of common shares (net of issuance costs)
  
  
  
  
  
  
  
  
  11,626Net cash provided (used) by financing activities
  
  
  
  (2,468
  )
  
  
  
  3,460Net decrease in cash and cash equivalents
  
  
  
  (905
  )
  
  
  
  (708
  )Cash and cash equivalents, beginning of year
  
  
  
  1,377
  
  
  
  
  2,499Cash and cash equivalents, end of period
  
  
  $
  472
  
  
  
  $
  1,791The 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 July 23, 2004,
the Company operated or franchised a total of 465 centers system-wide under
three major lines of business and had system-wide licensed capacity capable of
serving over 50,000 children. The Companys three lines of business are:


  Childtime Learning Centers:267
  centers operated by the Company, consisting of: 
  258 Childtime centers and 
  9 Childtime-branded centers operated for third parties;
  Tutor Time Learning Centers:61
  Tutor Time centers operated by the Company; and
  Tutor Time Franchise:royalties
  and other fees received from 137 franchised Tutor Time centers.Childtime and Tutor Time
corporate centers are located throughout the United States (in 25 states) and
Canada (one location). The vast majority of these centers are operated on
leased premises, with typical lease terms ranging from 1 to 25 years.
Thirty-eight of the Childtime centers are operated on Company-owned premises.
The Company operates nine
Childtime centers under management contracts. Located throughout the U.S.,
these centers serve hospitals, corporations and the federal government. Under
these contracts, the Company receives an annual operating fee and, in some
cases, is eligible to receive incentives for improving revenues and/or managing
costs. These contracts are typically up for renewal on an annual basis.

Tutor Time franchise
centers are also predominantly located in the U.S., with 125 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 53 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 July 23, 2004, and the results of its
operations and cash flows for the periods ended July 23, 2004 and July 18,
2003, respectively, and are of a normal and recurring nature. The results of
operations for interim periods are not necessarily indicative of the operating
results to be expected for the full year.


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 first quarter contained 16 weeks, and the fiscal year contains
52 weeks. For fiscal year 2004, the first quarter contained 16 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):



16 Weeks EndedJuly 23,
  2004
  
  July 18,
  2003Net income (loss)
  As reported
  
  $
  957
  
  $
  (270
  )Pro forma
  
  $
  790
  
  $
  (420
  )Net income (loss) per share - BasicAs reported
  
  $
  0.05
  
  $
  (0.02
  )Pro forma
  
  $
  0.04
  
  $
  (0.03
  )Net income (loss) per share - DilutedAs reported
  
  $
  0.05
  
  $
  (0.02
  )Pro forma
  
  $
  0.04
  
  $
  (0.03
  )Weighted average fair value of options granted
  during the year
  
  $
  1.22
  
  $
  0.45The 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 16
weeks ended July 23, 2004 and July 18, 2003, respectively: no dividend yield;
expected volatility of 78.4 and 56.4 percent; risk free interest rate of 3.4
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 July 23, 2004 and April
2, 2004, the allowance for doubtful accounts was $1.3 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 July 23, 2004 and April 2, 2004, the
aggregate drafts payable were $1.5 million and $4.5 million, respectively.
NOTE 5 
COMMITMENTS & 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 $76.4 million and $15.4 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 has taken over
operations for a center previously operated by a franchisee as a result of a
default under the franchisees lease and intends to continue to operate this
center. Additionally, the Company has been notified by the landlords of four
locations that the franchisee is in default and the approximate liability for
these defaults is $0.2 million. Subsequent to the end of the quarter, the
Company entered into a transaction to purchase these centers for $1.4 million,
adjusted for certain assets and liabilities. 
Other than with respect to the foregoing locations, 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 $77,000 and $77,000 for the 16 weeks ended July 23, 2004 and July
18, 2003, respectively, and are included in General and administrative expenses
in the accompanying Condensed Consolidated Statements of Operations.
NOTE 7 -
INCOME TAXES
  During first quarter 2005,
    an income tax provision of $0.1 million (all related to state income taxes)
    was recorded on income before discontinued operations of $1.3 million, compared
    to an income tax provision of $0.0 million on income before discontinued operations
    of ($0.1) for the same period last year.  Income tax expense for first
    quarter 2005 varied from the U.S. statutory rate of 34% due primarily to the
    utilization of net operating loss carryforwards for which a valuation allowance
    has been recorded.
  NOTE 8  NET INCOME
    (LOSS) PER SHARE
  For the 16 weeks ended
    July 23, 2004 and July 18, 2003, basic income (loss) per share has been calculated
    by dividing earnings available to common shareholders by the weighted average
    number of common shares outstanding for the period. The calculation of basic
    and diluted shares is as follows (in thousands):


8


Calculation on Incremental Shares
  16 Weeks EndedJuly 23, 2004
  
  July 18, 2003Basic Shares (based on weighted average)
  
  
  19,809
  
  
  
  13,347Stock Options (1)
  
  
  239
  
  
  
  Diluted Shares
  
  
  20,048
  
  
  
  13,347(1)  For the 16 weeks ended July 23, 2004 the
above calculation does not include 1,187,203 shares issuable from stock options
that have the potential to dilute earnings per share in the future.  For the 16 weeks ended July 18, 2003, the
above calculation does not include 1,299,486 shares issuable from stock options
that have the potential to dilute earnings per share in the future. These
shares were not included in the above calculation of diluted shares because to
do so would have been antidilutive.
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 16 weeks ended July 18, 2003,
the Company incurred no additional charges to provide reserves for other closed
centers. During the 16 weeks ended July 23, 2004, the Company incurred charges
of $0.1 million 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 $0.4 million for the 16 weeks ended July 23, 2004 and July 18,
2003, respectively. A summary of the accrual is as follows (in thousands):




  Exit and Closure Expenses and Discontinued Operations Accrual
          AnalysisBeginning
          Accrual
          April 2, 2004
      
      Expenses
      
      Cash
          Payments
      
      Ending
          Accrual
          July 23, 2004Closed
          center lease obligations
      
      
      $
      241
      
      
      
      $
      40
      
      
      
      $
      87
      
      
      
      $
      194Discontinued
          operations lease obligations
      
      
      
      207
      
      
      
      
      64
      
      
      
      
      108
      
      
      
      
      163Total
      
      
      $
      448
      
      
      
      $
      104
      
      
      
      $
      195
      
      
      
      $
      357The lease liability for
the centers closed during the 16 weeks ended July 23, 2004 and July 18, 2003
has been recorded at managements estimate of the amounts of expected payments.
A summary of discontinued
operations is as follows (in thousands):




16 Weeks EndedJuly 23, 2004
  
  July 18, 2003Revenues, net
  
  
  $
  66
  
  
  
  $
  753Operating expenses of Learning Centers
  
  
  
  179
  
  
  
  
  807Loss from operations
  
  
  
  (113
  )
  
  
  
  (54
  )Provision for doubtful accounts
  
  
  
  1
  
  
  
  
  47Depreciation and amortization expenses
  
  
  
  24
  
  
  
  
  6Exit and closure expenses
  
  
  
  64
  
  
  
  
  91Loss from discontinued operations before income tax
  
  
  
  (202
  )
  
  
  
  (198
  )Income tax provision
  
  
  
  4
  
  
  
  
  Loss from discontinued operations, net of tax
  
  
  $
  (206
  )
  
  
  $
  (198
  )9



NOTE 10
- INTANGIBLE ASSETS AND GOODWILL
The changes in the
carrying amounts of goodwill and other intangible assets for the 16 weeks ended
July 23, 2004 were as follows (in thousands):




Balance
  4/2/04
  
  Amortization
  
  Balance
  7/23/04
  
  Useful LifeGoodwill
  
  
  $
  17,866
  
  
  
  $
  
  
  
  
  $
  17,866
  
  
  
  IndefiniteFranchise Agreements
  
  
  
  8,320
  
  
  
  
  140
  
  
  
  
  8,180
  
  
  
  20Trade Name and Trademarks
  
  
  
  3,574
  
  
  
  
  60
  
  
  
  
  3,514
  
  
  
  20Curriculum
  
  
  
  304
  
  
  
  
  28
  
  
  
  
  276
  
  
  
  5Total intangible assets, net
  
  
  $
  30,064
  
  
  
  $
  228
  
  
  
  $
  29,836Estimated 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.


10


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.

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



16 Weeks EndedJuly 23
  2004
  
  July 18,
  2003Revenues:Childtime
  
  $
  45,984
  
  $
  43,949Tutor Time
  
  
  17,760
  
  
  16,487Franchise Operations
  
  
  2,335
  
  
  1,860Revenue associated with the
  consolidation of VIEs
  
  
  446
  
  
  Total
  
  $
  66,525
  
  $
  62,296Operating income (loss):Childtime
  
  $
  5,628
  
  $
  5,358Tutor Time
  
  
  1,161
  
  
  503Franchise Operations
  
  
  2,335
  
  
  1,860Depreciation and
  amortization
  
  
  (1,324
  )
  
  (1,237
  )Corporate and other
  
  
  (5,889
  )
  
  (5,844
  )Total
  
  $
  1,911
  
  $
  640Goodwill:Childtime
  
  $
  7,215
  
  $
  7,215Tutor Time
  
  
  5,578
  
  
  5,578Franchise Operations
  
  
  5,073
  
  
  5,073Total
  
  $
  17,866
  
  $
  17,866All other assets:Childtime
  
  $
  48,408
  
  $
  46,172Tutor Time
  
  
  11,290
  
  
  10,163Franchise Operations
  
  
  10,104
  
  
  11,023Assets associated with the
  consolidation of VIEs
  
  
  107
  
  
  Total
  
  $
  69,909
  
  $
  67,358NOTE 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 July 23, 2004 and
July 18, 2003, contracts representing $5.0 million of notional amount were
outstanding with maturity dates of November 2005 and January 2006. These
contracts provide for the Company to pay interest at an average fixed rate of
2.98% in return for receiving interest at a floating rate of three month LIBOR,
which is reset in three month intervals. The fair value of interest rate swap
agreements is subject to changes in value due to changes in interest rates, and
the fair value of $0.0 million and ($0.1) million is included in other current
liabilities as of July 23, 2004 and July 18, 2003, respectively.


11


NOTE 13
- NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB
issued FIN 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin
(ARB) 51. FIN 46 addresses the consolidation of entities for which
control is achieved through means other than through voting rights (variable
interest entities or VIE) by clarifying the application of ARB No. 51, Consolidated Financial Statements,to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 provides guidance on how to determine when
and which business enterprise (the primary beneficiary) should consolidate
the VIE. In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make additional
disclosures. On December 23, 2003, the FASB issued FIN 46R, which replaced FIN
46. Among other things, FIN 46R clarified and changed the definition and
application of a number of provisions of FIN 46 including de facto agents,
variable interests and variable interest entities. FIN 46R also expanded
instances when FIN 46 should not be applied. FIN 46R was effective for the
Companys reporting period ended April 2, 2004 (see Note 14).
NOTE 14
- 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 have been consolidated as of April 2,
2004.  The following is a summary of the
effect of consolidating these entities in first quarter 2005.




16 Weeks
  Ended
  July 23, 2004Revenue, net of elimination
  of fees of $23,000
  
  
  $
  423Cost and minority interest,
  net of elimination of fees of $23,000
  
  
  
  423Net income
  
  
  $
  Total Assets
  
  
  $
  107Total Liabilities
  
  
  
  54Minority interest
  
  
  $
  53The
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 15
- SUBSEQUENT EVENT

On July 30, 2004, the
Company purchased eight Tutor Time centers from a franchisee for $1.4 million,
adjusted for certain assets and liabilities. 
These centers will be operated as Company centers.


12


ITEM 2. Managements Discussion and Analysis
GENERAL
The information presented
herein refers to the 16 weeks (first quarter 2005) ended July 23, 2004,
compared to the 16 weeks (first quarter 2004) ended July 18, 2003.
The results of Learning
Centers opened, acquired or disposed of are included in the Companys condensed
consolidated financial statements from the date of opening or acquisition and
through the date of disposition, except for those centers treated as
discontinued operations in accordance with SFAS 144. The timing of such new
openings, acquisitions or dispositions could influence comparisons of year over
year results.
During first quarter
2005, the Company closed three Learning Centers and sold two additional
Learning Centers to franchisees. During first quarter 2004, the Company closed
three Learning 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.
RESULTS
OF OPERATIONS
16 Weeks
  Ended
  July 23, 2004
  
  Percent
  of
  Revenues
  
  16 Weeks
  Ended
  July 18, 2003
  
  Percent
  of
  Revenues
  
  Change
  Amount
  (in Dollars)Revenue from Learning Center Operations
  
  
  $
  64,190
  
  
  
  
  96.5
  %
  
  
  $
  60,436
  
  
  
  
  97.0
  %
  
  
  $
  3,754Revenue from Franchise
  Operations
  
  
  
  2,335
  
  
  
  
  3.5
  %
  
  
  
  1,860
  
  
  
  
  3.0
  %
  
  
  
  475Revenue, net
  
  
  
  66,525
  
  
  
  
  100.0
  %
  
  
  
  62,296
  
  
  
  
  100.0
  %
  
  
  
  4,229Operating expenses of
  Learning Centers
  
  
  
  57,123
  
  
  
  
  85.9
  %
  
  
  
  54,285
  
  
  
  
  87.1
  %
  
  
  
  2,838Gross profit
  
  
  
  9,402
  
  
  
  
  14.1
  %
  
  
  
  8,011
  
  
  
  
  12.9
  %
  
  
  
  1,391Provision for doubtful
  accounts
  
  
  
  279
  
  
  
  
  0.4
  %
  
  
  
  290
  
  
  
  
  0.5
  %
  
  
  
  (11
  )General and administrative
  expenses
  
  
  
  6,397
  
  
  
  
  9.6
  %
  
  
  
  5,844
  
  
  
  
  9.4
  %
  
  
  
  553Depreciation and
  amortization expenses
  
  
  
  1,324
  
  
  
  
  2.0
  %
  
  
  
  1,237
  
  
  
  
  2.0
  %
  
  
  
  87Gain on sale of centers
  
  
  
  (549
  )
  
  
  
  -0.8
  %
  
  
  
  
  
  
  
  
  0.0
  %
  
  
  
  (549
  )Exit and closure expense
  
  
  
  40
  
  
  
  
  0.1
  %
  
  
  
  
  
  
  
  
  0.0
  %
  
  
  
  40OPERATING INCOME
  
  
  $
  1,911
  
  
  
  
  2.9
  %
  
  
  $
  640
  
  
  
  
  1.0
  %
  
  
  $
  1,271Revenue,
net. Net revenue for first quarter 2005 increased $4.2
million, or 6.8%, from the same period last year to $66.5 million. Learning
Center revenues increased $3.7 million. 
Revenue increases were achieved through a combination of increased
tuition rates and enrollments. 
Childtime Learning Centers revenues increased $2.0 million, with
comparable Childtime center revenues (centers opened 18 months or longer)
increasing 5.0%.  Tutor Time Learning
Centers revenues increased $1.7 million, with comparable Tutor Time center
revenues increasing 6.8%.  Revenue
attributable to the consolidation of two franchise arrangements considered
variable interest entities (VIEs as discussed in Note 14 of the Notes to
Condensed Consolidated Financial Statements (unaudited) included in this Report
under Item 1) accounted for $0.4 million of the first quarter 2005 Tutor Time
Learning Centers increase.  Franchise
Operations revenues, which consisted primarily of royalties, increased $0.5
million, or 25.5%, from the same period last year to $2.3 million.
Operating
expenses of Learning Centers.Operating expenses for first
quarter 2005 increased $2.8 million, or 5.2%, from the same period last year to
$57.1 million. The increase was a result of an increase in personnel expense
($1.2 million), which increased with higher enrollments and general wage
increases; an increase in occupancy expense ($0.9 million), which was primarily
a result of rent on new center openings and increased insurance and other
occupancy costs for existing centers; an increase in center operating expenses
($0.3 million), which increased with higher enrollments and higher food and
utility expenses; and operating expenses associated with the VIEs ($0.4
million). Operating expenses as a percentage of net revenue decreased to 85.9%
for first quarter 2005, from 87.1% in the same
period last year.


13


This decrease reflects 
the 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 first quarter 2005 increased $1.4
million, or 17.4%, from the same period last year to $9.4 million. This
increase consisted of a $0.9 million increase in Learning Center Operations
gross profit and a $0.5 million increase in Franchise Operations gross
profit.  Gross profit percentages for
first quarter 2005 by segment were 12.7% for Childtime centers (as compared to
13.0% for 2004), 6.8% for Tutor Time centers (as compared to 3.4% for 2004) and
100% for Franchise Operations. The first quarter gross profit and gross profit
percentage changes were a result of the revenue increases and changes in
operating expenses described above.
Provision
for doubtful accounts. Provision for doubtful accounts for
first quarter 2005 remained unchanged from the same period last year at $0.3
million.
General
and administrative expenses. General and administrative
expenses for first quarter 2005 increased $0.6 million, or 9.5%, from the same
period last year to $6.4 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 increased to 9.6%
for first quarter 2005 from 9.4% in the same period last year, primarily as a
result of increased training and bonus incentives.
Depreciation
and amortization expense. Depreciation and amortization
expense for first quarter 2005 increased $0.1 million, or 7.0%, from the same
period last year to $1.3 million.  The
increase was primarily a result of depreciation expense attributable to capital
expenditures.  Depreciation and
amortization expense as a percentage of net revenue remained unchanged from the
same period last year at 2.0%.

Gain on
sale of centers.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.  There
was not a similar transaction in the same period last year.

Interest
expense. Interest expense for first quarter 2005 was $0.6
million, compared to $0.7 million for the same period last year. This decrease
was a result of a reduction of indebtedness that occurred with the completion
of the issuance of common shares during first quarter 2004, partially offset by
interest on sale leaseback transactions completed in fourth quarter 2004.

Income
tax provision Income tax provision for first quarter 2005 of
$0.1 million (all related to state income taxes) was recorded on income before
discontinued operations of $1.3 million, compared to an income tax provision of
$0.0 million on income before discontinued operations of ($0.1) for the same
period last year.  Income tax expense
for first quarter 2005 varied from the U.S. statutory rate of 34% due primarily
to the utilization of net operating loss carryforwards for which a valuation
allowance has been recorded.

Discontinued
operations, net of taxes.Discontinued operations, net of
taxes, for first quarter 2005 was a loss of ($0.2 million), compared to a loss
of ($0.2 million) for the same period last year.  This loss includes operating and lease termination costs
associated with closed centers.

Net
income (loss). As a result of the foregoing changes, net
income increased to $1.0 million for first quarter 2005, compared to a net loss
of ($0.3 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.


14


On January 31, 2002, the
Company entered into an Amended and Restated Credit Agreement.  This agreement, as further amended, provides
a $13.7 million revolving line of credit that will mature on June 30,
2005.  It is collateralized by the
Companys receivables, equipment and real estate, with interest payable at a
variable rate, at the Companys option, based on either the prime rate or the
Eurodollar rate. There were outstanding borrowings of $8.3 million at July 23,
2004, and $5.4 million at April 2, 2004. Outstanding letters of credit reduced
the availability under the line of credit in the amount of $4.2 million at July
23, 2004 and $2.1 million at April 2, 2004. 
As of July 23, 2004 and April 2, 2004, unused amounts available for
borrowing under this line of credit were $1.2 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 July 23, 2004.
Net cash provided (used)
by operating activities was $2.6 million for first quarter 2005, compared to
($3.5 million) for the same period last year. During first quarter 2005,
financing activities totaled ($2.5 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 first quarter 2004, financing activities totaled $3.5 million and
consisted primarily of the issuance of shares net of issuance costs of $11.6
million, the issuance of subordinated notes of $3.5 million, and net borrowings
on the revolving line of credit of $2.1 million, offset by repayments of
long-term debt of $14.7 million. 
Investing activities were $1.0 million for the first quarter 2005, of
which $1.7 million was used for capital spending which was partially offset by
$0.7 million of proceeds from asset sales. 
Investing activities were $0.6 million for first quarter 2004, of which
$1.5 million was used for capital spending which was partially offset by $0.8
million of proceeds from asset sales. 
Net accounts receivable increased to $10.7 million at July 23, 2004,
from $9.4 million at April 2, 2004. 
This increase was primarily due to the slower collection of receivables
from various state child-care assistance agencies.

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 July 23, 2004,
contracts representing $5.0 million of notional amount were outstanding with
maturity dates of November 2005 and January 2006. These contracts provide for
the Company to pay interest at an average fixed rate of 2.98% in return for
receiving interest at a floating rate of three month LIBOR, which is reset in
three month intervals. The fair value of interest rate swap agreements is
subject to changes in value due to changes in interest rates. During first
quarter 2005, the market value of the outstanding interest rate contracts
increased $0.1 million.
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 $76.4 million and $15.4 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 has taken over
operations for a center previously operated by a franchisee as a result of a
default under the franchisees lease and intends to continue to operate this
center. Additionally, the Company has been notified by the landlords of four
locations that the franchisee is in default and the approximate liability for
these defaults is $0.2 million. Subsequent to the end of the quarter, the
Company entered into a transaction to purchase these centers for $1.4 million,
adjusted for certain assets and liabilities. 
Other than with respect to the foregoing locations, 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.


15


At July 23, 2004,
aggregate potential payments on leases and guarantees over the next five fiscal
years and thereafter are as follows:



Total
  
  Less Than
  1 Year
  
  1-3
  Years
  
  4-5
  Years
  
  After
  5 Years(In thousands)Franchise Lease Guarantees
  
  $
  15,386
  
  
  $
  1,240
  
  
  $
  3,397
  
  $
  2,128
  
  $
  8,621Franchise Lease Commitments
  
  
  76,391
  
  
  
  4,501
  
  
  
  19,900
  
  
  12,030
  
  
  39,960Total
  
  $
  91,777
  
  
  $
  5,741
  
  
  $
  23,297
  
  $
  14,158
  
  $
  48,581Related
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.
New
Accounting Pronouncements
In January 2003, the FASB
issued FIN 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin
(ARB) 51. FIN 46 addresses the consolidation of entities for
which control is achieved through means other than through voting rights
(variable interest entities or VIE) by clarifying the application of ARB
No. 51, Consolidated Financial
Statements,to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 provides
guidance on how to determine when and which business enterprise (the primary
beneficiary) should consolidate the VIE. In addition, FIN 46 requires that
both the primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. On December 23, 2003,
the FASB issued FIN 46R, which replaced FIN 46. Among other things, FIN 46R
clarified and changed the definition and application of a number of provisions
of FIN 46 including de facto agents, variable interests and variable interest
entities. FIN 46R also expanded instances when FIN 46 should not be applied.
FIN 46R was effective for the Companys reporting period ended April 2, 2004
(see Note 14 of the Notes to Condensed Consolidated Financial Statements
included in this Report under Item 1).
Wage
Increases

  Expenses for center-level
    salaries, wages and benefits represented approximately 51% of net revenues
    for first quarter 2005, as compared to approximately 52% of net revenues in
    first quarter 2004.  Management believes that, through increases in tuition
    rates, the Company can offset any future center-level wage increases caused
    by adjustments to the federal, state or county minimum wage rates or other
    market adjustments. However, no assurance can be given that rates can be increased
    sufficiently to cover such increased costs. The Company continually evaluates
    its wage structure and may implement changes at targeted local levels.


16


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 July 23, 2004. The Company has cash flow exposure on the
revolving line of credit, with an outstanding balance of $8.3 million, and its
notes payable, with an outstanding balance of $0.1 million, each as of July 23,
2004.  These exposures have been
partially offset by the Company entering into $5.0 million notional amount of
interest rate swap contracts. Accordingly, a 2% (200 basis points) change in
the LIBOR rate or the prime rate would have resulted in interest expense
changing by approximately $0.2 million for first quarter 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 July
23, 2004, 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 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.


17


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 5 are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits3(i)
  Restated Articles of Incorporation of Learning Care
  Group, Inc. as amended31.1
  Rule 13a-14(a) Certification by William D. Davis,
  President and Chief Executive Officer31.2
  Rule 13a-14(a) Certification by Frank M. Jerneycic,
  Treasurer and Chief Financial Officer32.1
  Certification pursuant to 18 U.S.C. §1350, as
  adopted pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
  Certification pursuant to 18 U.S.C. §1350, as
  adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002(b) Reports on Form 8-K1)
  The Company filed a Current Report on Form 8-K on
  July 1, 2004, announcing its operating results for the fiscal year 2004.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:
  September 3, 2004
  By:   /s/ Frank M. JerneycicFrank M. JerneycicChief Financial Officer and Treasurer(Duly Authorized Officer and
  Principal Financial Officer)18


EXHIBIT INDEX
Exhibit
  Number
  
  Description3(i)
  
  
  Restated Articles of Incorporation of Learning Care
  Group, Inc. as amended31.1
  
  
  Rule 13a-14(a) Certification by William D. Davis,
  President and Chief Executive Officer31.2
  
  
  Rule 13a-14(a) Certification by Frank M. Jerneycic,
  Treasurer and Chief Financial Officer32.1
  
  
  Certification pursuant to 18 U.S.C. § 1350, as
  adopted pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
  
  
  Certification pursuant to 18 U.S.C. § 1350, as
  adopted pursuant to §906 of the Sarbanes-Oxley Act of 200219