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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		 3
             
      B.   Condensed Consolidated Statements of Operations 12 and 40 weeks ended
January 7, 2005 and January 2, 2004		 4
             
      C.   Condensed Consolidated Statements of Cash Flows 40 weeks ended
January 7, 2005 and January 2, 2004		 5
             
      D.   Notes to Condensed Consolidated Financial Statements 6-12
           
  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

         
January 7,
2005		   April 2,
2004		  
 
 
 
(Unaudited)        
(In thousands)  
ASSETS        
CURRENT ASSETS:            
       Cash and cash equivalents $ 614   $ 1,377  
       Accounts receivable, net   9,414     9,379  
       Prepaid expenses and other current assets   5,007     5,435  
              Total current assets   15,035     16,191  
LAND, BUILDINGS AND EQUIPMENT:
       Land   9,347     9,347  
       Buildings   20,668     20,443  
       Leasehold improvements   13,953     12,462  
       Vehicles, furniture and equipment   15,113     13,599  
    59,081     55,851  
       Less: accumulated depreciation and amortization   (20,878 )   (19,128 )
    38,203     36,723  
OTHER NONCURRENT ASSETS:
       Intangible assets, net   30,738     30,064  
       Refundable deposits and other   2,552     2,641  
    33,290     32,705  
              TOTAL ASSETS $ 86,528   $ 85,619  
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
       Accounts and drafts payable $ 5,169   $ 6,810  
       Accrued wages and benefits   7,138     7,531  
       Current portion of long-term debt   104     3,328  
       Exit and closure expense accrual   114     448  
       Other current liabilities   9,261     10,016  
              Total current liabilities   21,786     28,133  
LONG-TERM DEBT, NET OF CURRENT PORTION   13,572     8,397  
DEFERRED RENT LIABILITY & MINORITY INTEREST   2,630     1,945  
OBLIGATIONS UNDER SALE LEASEBACK TRANSACTIONS   10,494     10,138  
       Total liabilities   48,482     48,613  
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     43,781  
       Preferred Stock, 100,000 shares authorized, no par value; no shares issued or            
           outstanding    —       —   
       Retained earnings (accumulated deficit)   (5,888 )   (6,775 )
              Total shareholders’ equity   38,046     37,006  
              TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 86,528   $ 85,619  
 
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  
 
 
 
January 7,
2005		   January 2,
2004		   January 7,
2005		   January 2,
2004		  
 
 
 
 
 
(In thousands, except per share data)  
                         
Revenue from Learning Center Operations $ 46,386   $ 42,546   $ 155,596   $ 144,849  
Revenue from Franchise Operations   1,558     1,418     5,432     4,654  
 
 
 
 
 
Revenue, net   47,944     43,964     161,028     149,503  
Operating expenses of Learning Centers   41,305     37,884     140,046     131,412  
 
 
 
 
 
   Gross profit   6,639     6,080     20,982     18,091  
General and administrative expenses   4,211     4,383     14,847     14,321  
Depreciation and amortization expenses   976     967     3,219     3,035  
Gain on sale of centers and vacant land   —     —     (684 )   —  
Provision for doubtful accounts   287     561     1,114     1,091  
Exit and closure expenses   23     220     83     230  
 
 
 
 
 
                         
     OPERATING INCOME (LOSS)   1,142     (51 )   2,403     (586 )
Interest expense, net   465     447     1,631     1,523  
 
 
 
 
 
     INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED
        OPERATIONS   677     (498 )   772     (2,109 )
Income tax provision   14     —     68     —  
 
 
 
 
 
     INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS   663     (498 )   704     (2,109 )
Discontinued operations, net of taxes   192     (54 )   183     (266 )
 
 
 
 
 
     NET INCOME (LOSS) $ 855   $ (552 ) $ 887   $ (2,375 )
 
 
 
 
 
INCOME (LOSS) PER SHARE - BASIC:
     Income (loss) before discontinued operations $ 0.03   $ (0.03 ) $ 0.03   $ (0.12 )
     Discontinued operations, net of taxes   0.01     (0.00 )   0.01     (0.02 )
 
 
 
 
 
                         
     Net income (loss) $ 0.04   $ (0.03 ) $ 0.04   $ (0.14 )
 
 
 
 
 
INCOME (LOSS) PER SHARE - DILUTED:
     Income (loss) before discontinued operations $ 0.03   $ (0.03 ) $ 0.03   $ (0.12 )
     Discontinued operations, net of taxes   0.01     (0.00 )   0.01     (0.02 )
 
 
 
 
 
     Net income (loss) $ 0.04   $ (0.03 ) $ 0.04   $ (0.14 )
 
 
 
 
 
Weighted average shares outstanding   19,828     19,769     19,815     17,182  
 
 
 
 
 
                 
The 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)
  
40 Weeks Ended  
 
 
January 7,
2005		   January 2,
2004		  
 
 
 
(In thousands)  
OPERATING ACTIVITIES:        
Net income (loss) $ 887   $ (2,375 )
Adjustments to reconcile net income (loss) to cash
provided (used) by operating activities:
   Depreciation and amortization   3,164     3,092  
   Provision for doubtful accounts   1,114     1,147  
   Stock option compensation expense   89     —  
   Deferred rent liability   718     456  
   Deferred income taxes   —     1,762  
   Minority interest in variable interest entities   (33 )   —  
   (Gain) loss on disposal of assets   (977 )   6  
   Changes in operating assets and liabilities:
     Accounts receivable   (1,367 )   (3,922 )
     Prepaid expenses and other current assets   (209 )   (3,113 )
     Accounts payable, accruals and other current liabilities   (219 )   2,238  
     Exit and closure expense accrual   (334 )   (753 )
 
 
 
   Net cash provided (used) by operating activities   2,833     (1,462 )
 
 
 
INVESTING ACTIVITIES:
   Acquisiton of centers, net of cash   (314 )   —  
   Capital spending   (4,587 )   (3,299 )
   Proceeds from sale of assets   1,515     218  
   Payments for refundable deposits and other assets   89     (54 )
 
 
 
   Net cash used in investing activities   (3,297 )   (3,135 )
 
 
 
FINANCING ACTIVITIES:
   Net borrowings on revolving line of credit   4,584     2,307  
   Repayments under long-term debt   (2,633 )   (15,121 )
   Issuance of long-term debt   —     3,500  
   Changes in drafts payable   (2,314 )   (99 )
   Proceeds from sale leaseback   —     835  
   Issuance of common shares (net of issuance costs)   64     12,089  
 
 
 
   Net cash provided (used) by financing activities   (299 )   3,511  
 
 
 
Net decrease in cash and cash equivalents   (763 )   (1,086 )
Cash and cash equivalents, beginning of year   1,377     2,499  
 
 
 
             
Cash and cash equivalents, end of period $ 614   $ 1,413  
 
 
 
         
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):

   
12 Weeks Ended   40 Weeks Ended