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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark one)

For the Quarterly Period Ended July 19, 2002

Commission File Number 0-27656

CHILDTIME LEARNING CENTERS, INC.
(Exact name of registrant as specified in its charter)

38345 West 10 Mile Road, Suite 100, Farmington Hills, Michigan 48335-2883
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (248) 476-3200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

As of August 20, 2002, there were 5,416,210 outstanding shares of Common Stock, no par value per share, of the registrant.

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES

FORM 10-Q

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Part I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

The accompanying footnotes are an integral part of the consolidated financial statements

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

The accompanying footnotes are an integral part of the consolidated financial statements

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

The accompanying footnotes are an integral part of the consolidated financial statements

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements

Note 1 – Description of Business

Childtime Learning Centers, Inc. and subsidiaries (“Childtime” or the “Company”) began operations in 1967, and operates for-profit childcare centers in 23 states and the District of Columbia. On July 19, 2002, the Company acquired substantially all of the assets of Tutor Time Learning Systems, Inc., a Florida corporation (“Tutor Time”), for an aggregate purchase price of approximately $22,400,000, excluding acquisition costs of approximately $2.4 million, plus the assumption of certain liabilities. The acquisition was consummated pursuant to an asset purchase agreement dated as of June 28, 2002, approved by the U.S. Bankruptcy Court, Southern District of Florida and closed on July 19, 2002. The assets acquired by the Company consisted of substantially all of the operating assets and contract rights used by Tutor Time in its child care operations, which were comprised of 198 company-owned and franchised child care centers operating in 23 states and internationally, and were purchased to improve its product offering and to enter the childcare franchise business. The Tutor Time centers are on average newer and larger than Childtime’s centers, and Tutor Time is the largest franchisor in the childcare industry. Additionally, the Company gained access to approximately 34 sites that are in the development pipeline and are expected to open as either franchise or corporate centers over the next 18 months. As of July 19, 2002, Childtime operated 343 Company owned centers and franchised an additional 129 centers with an aggregate licensed capacity for over 50,000 children.

Note 2 – Acquisition and Pro Forma Information

As previously mentioned, on July 19, 2002, the Company acquired substantially all of the assets of Tutor Time Learning Systems, Inc., a Florida corporation (“Tutor Time”), for an aggregate purchase price of approximately $22,400,000, excluding acquisition costs of approximately $2.4 million, plus the assumption of certain liabilities. In consideration for the provision of investment advisory services with respect to the acquisition (including related post-closing services), Jacobson Partners was paid an advisory fee consisting of a cash payment of $333,336 and the issuance of 175,438 shares. Jacobson Partners is the management and financial consultant to the Company of which Benjamin R. Jacobson, a director of the Company is the managing general partner, James J. Morgan, the Company’s Chairman of the Board, is a partner, and George A. Kellner, the Company’s Vice Chairman of the Board, is a special advisor.

The Tutor Time acquisition was financed, in part, by Bank One, NA through its secured credit facility with Childtime Childcare, Inc., a wholly-owned subsidiary of the Company, as amended by the Second Amendment to Amended and Restated Credit Agreement (“Second Amendment”) dated as of July 19, 2002.

Subordinated loans (the “Subordinated Notes”) in the aggregate amount of $14 million were provided by a group of lenders organized by Jacobson Partners to fund the balance of the Tutor Time acquisition purchase price and to provide related working capital. The Subordinated Notes are subject to a Subordination Agreement in favor of Bank One, NA, mature December 31, 2004 and bear interest at 15% of which 7% is payable in cash, with the balance payable in kind by the issuance of additional subordinated notes (the “Additional Subordinated Notes”) with interest

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and principal payable on the earlier of December 31, 2004 or such date on or after March 31, 2003, on which the Company is in compliance with the Senior Debt to EBITDA covenant of the Second Amendment, provided that the Company has consummated the Rights Offering (defined below) and received net cash proceeds (and/or cancelled Subordinated Notes) of at least $7,500,000 from the issuance of Common Stock in such Rights Offering (the “Minimum Equity Agreement”). If the Rights Offering is not consummated and the Minimum Equity Amount is not received on or before July 19, 2003, then until the earlier of December 31, 2004 or the date on which the Company consummates the Rights Offering and receives the Minimum Equity Amount, all interest on the Subordinated Notes will be payable by the issuance of Additional Subordinated Notes. Although Jacobson Partners received no consideration for arranging this financing, lenders included JP Acquisition Fund II, L.P. and JP Acquisition Fund III, L.P., entities controlled and managed by affiliates of Jacobson Partners (for an aggregate of $10,536,432), and three directors of the Company (Mr. Jacobson, Mr. Morgan and Mr. Kellner) and trusts for the benefit of their adult children (for an aggregate of $307,472).

In connection with the Tutor Time acquisition, JP Acquisition Fund II, L.P., JP Acquisition Fund III, L.P., and certain of their co-investors (collectively, the “Optionees”), including Messrs. Jacobson, Morgan and Kellner, agreed to arrange for the Company to obtain a standby purchase commitment in connection with the Company’s proposed rights offering contemplated for the purpose of refinancing the subordinated debt incurred by the Company in connection with the Tutor Time acquisition (the “Rights Offering”). As consideration for obtaining such commitment, a Special Committee of the Board of Directors approved, subject to shareholder approval, the grant to the Optionees of options to purchase, in the aggregate, up to 400,000 shares of Common Stock, until July 19, 2006, at an exercise price of $5.00 per share. All shares acquired by the Optionees would be subject to registration rights, pursuant to which, until July 6, 2007, the Optionees would have the right to cause the Company to register, at the Company’s expense, their shares of Common Stock, whenever the Company is otherwise registering shares (except in certain circumstances). This option grant was approved by shareholders at the Company’s 2002 Annual Meeting of Shareholders held August 15, 2002.

The Rights Offering is expected to take place prior to December 31, 2002 and will refinance the subordinated debt incurred by the Company in connection with the Tutor Time acquisition. As currently contemplated, each Rights Offering unit (“Unit”) will consist of 30 shares of common stock, valued at $3.50 per share, and a $35 subordinated debenture, giving an aggregate value to each Unit of $140. Subject to certain shareholder ownership requirements, all common shareholders as of the Rights Offering record date will be able to participate in the offering and will be allowed to acquire Units on a pro rata basis. The subordinated debentures will bear interest at 15%, have a five-year maturity, and be redeemable by the Company at any time at par, subject to restrictions under its senior lending agreements. As indicated above, JP Acquisition Fund II, L.P., JP Acquisition Fund III, L.P., and certain of their co-investors, including Messrs. Jacobson, Morgan and Kellner, have provided a commitment to purchase all Units not subscribed for in the Rights Offering.

The acquisition of Tutor Time is reflected in the consolidated balance sheet of the Company as of July 19, 2002 and has been accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No 141, Business Combinations. None of the results of operations of Tutor Time is included in the Company’s results of operation for any periods presented. The purchase price has been tentatively allocated as follows:

The purchase price allocation is preliminary and has not been finalized since the Company has not yet completed a valuation of Tutor Time. The Company is currently evaluating the extent of amortizable intangibles acquired and, for purposes of the pro forma results has estimated that approximately $12,000,000 of the purchase price will be amortizable intangibles (primarily trademarks, proprietary curriculum, franchise agreements and proprietary software). This amount will be finalized upon completion of the valuation. Such estimated amortizable intangibles are amortized over 10 years in the quarterly pro forma data shown below. As the amount of amortizable intangibles and the amortization periods are estimates, the final amounts may vary from the amounts presented below.

Pro forma information for the Company and Tutor Time follows:
(In thousands, except per share data)

In connection with the Tutor Time Learning Systems, Inc. bankruptcy proceedings, Tutor Time, at the request of the Company was able to reject numerous leases and franchise agreements. The accompanying pro forma information includes only the revenues and costs from those Tutor Time centers and franchises that were not rejected as part of the bankruptcy proceedings. No pro forma adjustments were made to the historical Tutor Time corporate overhead expenses ($2,030,000 and $3,559,000 for the quarters ended July 19, 2002 and July 20, 2001, respectively). Additional interest expense was included in the pro forma results based upon the additional debt incurred to finance the Tutor Time acquisition.

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Note 3 – Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Childtime Learning Centers, Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles and, accordingly, include all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the periods represented to fairly state the Company’s financial condition, results of operations and its cash flows, for the interim periods presented.

These statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the 52 weeks ended March 29, 2002. The results for the 16 weeks ended July 19, 2002, are not necessarily indicative of results for the entire year.

USE OF ESTIMATES

The preparation of 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 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 years 2002 and 2003, the first quarter contained 16 weeks, and the fiscal years contain 52 weeks.

Note 4 – Accounts Receivable

Accounts receivable is presented net of an allowance for doubtful accounts. At July 19, 2002, and March 29, 2002, the allowance for doubtful accounts was $0.7 million and $0.7 million, respectively.

Note 5 – Reimbursable Construction Costs

In connection with certain build-to-suit centers to be leased, the Company enters into arrangements, whereby the Company accumulates costs during the construction process and is then reimbursed by the developer. The Company has various legal remedies available pursuant to the construction agreements to minimize the risk of nonreimbursement. For the 16 weeks ended July 19, 2002, and the year ended March 29, 2002, the Company financed construction costs of $0.0 million and $0.9 million, respectively, while related repayments received under reimbursement agreements were $0.0 million and $2.0 million, respectively.

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Note 6 – 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 19, 2002, and March 29, 2002, the aggregate drafts payable are $2.0 million and $4.0 million, respectively.

Note 7 – Financing Arrangements

On January 31, 2002, the Company amended and restated its revolving line of credit agreement by entering into a new $17.5 million revolving line of credit agreement with its existing lender. The new credit agreement, as amended on July 19, 2002, will mature on September 30, 2004, and is secured by the Company’s receivables, equipment and certain 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 $11.0 million at July 19, 2002, and outstanding borrowings of $2.5 million at March 29, 2002. Outstanding letters of credit reduced the availability under the line of credit in the amount of $2.3 million at July 19, 2002 and $2.5 million at March 29, 2002.

Note 8 – Contingencies

During fiscal 2002, the Company decided not to pursue opening three new build-to-suit centers after leases for these centers had been signed with the developer of the centers. The Company was subsequently sued by the developer for breach of contract. This case was settled at the end of fiscal 2002, and a current liability was recorded on the balance sheet as of March 29, 2002 in the amount of $800,000, which was paid during the quarter ended July 19, 2002. The Company remains contingently liable for approximately $1.0 million for subleases negotiated in connection with certain lease terminations (See Note 12).

Various legal actions and other claims are pending or could be asserted against the Company. 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.

Note 9 – Option Grants for Consulting Services and Related Party Transactions

In July 2000, the Company retained Jacobson Partners, of which Benjamin R. Jacobson, a director of the Company, is the managing general partner, to provide management and financial consulting services. As part of the consideration to be paid to, and to add further incentive for such services, Jacobson Partners was granted stock options to purchase 557,275 shares. As of March 29, 2002, Jacobson Partners has exercised options totaling 294,117 shares at a cost of $2,500,000. The remaining 263,158 shares expired in July 2002. Additionally, Jacobson Partners receives an annual consulting fee in the amount of $250,000, plus reimbursement of reasonable out-of-pocket expenses. In connection with the Tutor Time acquisition, Jacobson Partners was paid an advisory fee consisting of $333,336 and the issuance of 175,438 shares, and options were granted to certain related parties to acquire up to 400,000 shares of the Company’s common stock (see Note 2 “Acquisition and Pro Forma Information”). Total expenses incurred for Jacobson Partners (exclusive of the Tutor Time fee) were $77,000 and $77,000 for the quarters ended July 19, 2002 and July 20, 2001, respectively, and are included in General and

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Administrative expense in the accompanying Consolidated Statement of Operations.

The Company’s current Chairman of the Board was granted 60,000 options in January 2001. As initially granted, the options have a $7.00 exercise price, vest at the rate of 10,000 per month and expire January 2003. After the executive was appointed Chairman of the Board in August 2001, these options were extended to expire in September 2006. At that time, he was also granted an additional 50,000 options. These additional options have an $11.00 exercise price, vest after one year and expire in September 2006.

Note 10 – Income Taxes

The Company provides for income taxes in accordance SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Note 11 – Earnings (Loss) Per Share

For the 16 weeks ended July 19, 2002, and July 20, 2001, basic earnings (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. Diluted earnings (loss) per share has been calculated by dividing earnings (loss) available to common shareholders by the weighted average number of common shares outstanding for the period and the assumed conversion of all potentially dilutive stock options. There were no dilutive stock options outstanding during the 16 weeks ended July 19, 2002 and 9 dilutive options outstanding on July 20, 2001. The calculation of basic and diluted shares is as follows (in thousands):

Note 12 – Restructuring Charges

The Company instituted a restructuring program in fiscal 2001 and incurred a charge of $4,000,000 in March 2001. In this regard, the Company closed all 10 of its Oxford Learning Centers of America and identified 19 under-performing centers to be closed in fiscal 2002. As of July 19, 2002, all but one of the under-performing centers have been closed. Approximately 200 employees were involuntarily terminated in connection with the closures of Oxford Learning Centers of America and the 19 under-performing Childtime centers. The Company expects to complete its plan during fiscal 2003. For the quarter ended July 19, 2002, the Company recorded restructuring expenses of $512,000. Of this amount, $200,000 is related to the closure of one additional center, not included in the 2001 restructuring program. The remaining $312,000 is to increase reserves related to the 2001 restructuring program. This increase is necessary as a result of current real estate market conditions.

A summary of the restructuring reserve is as follows (in thousands):