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| SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| FORM 10-K |
| x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
year ended April 1, 2005 |
| o | 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 | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 21333 Haggerty Road, Suite 300, Novi, Michigan 48375 | |
| (Address of principal executive offices) (Zip Code) | |
Registrant’s telephone number, including area code: (248) 697-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value |
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| (Title of Class) | |
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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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x The aggregate market value of voting Common Stock held by non-affiliates of the registrant as of October 15, 2004, computed by reference to the last sale price for such stock on that date as reported on The Nasdaq SmallCap Market, was approximately $18,673,000. At June 21, 2005, the number of shares outstanding of the registrant’s Common Stock, no par value, was 19,839,610. Portions of the registrant’s Proxy Statement for its 2005 Annual Meeting of Shareholders have been incorporated by reference in Part III of this Annual Report on Form 10-K. |
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“Safe Harbor” Statement Under Private Securities Litigation Reform Act of 1995 Statements included herein which are not historical facts are forward-looking statements pursuant to the safe harbor provisions of the Private/Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, including, but not limited to, continuation of federal and state assistance programs, demand for child care, general economic conditions as well as pricing, competition and insurability. Learning Care Group, Inc. cautions that actual results could differ materially from those projected forward-looking statements. Item 1. Business General Learning Care Group, Inc. is one of the largest publicly traded, for-profit providers of early childhood care and educational services in the United States. Learning Care Group, Inc. conducts business through its wholly-owned subsidiaries, Childtime Childcare, Inc., and Tutor Time Learning Centers, L.L.C. (collectively, the “Company”). The Company and its predecessors began operations in 1967. 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 Child Care/Learning Centers (“Tutor Time”). As of April 1, 2005, the Company operated or franchised a total of 459 centers system-wide under three major lines of business, and had system-wide licensed capacity capable of serving over 69,000 children. The Company’s three lines of business are: |
| • | Childtime Learning Centers: 262 centers operated by the Company, consisting of: | |
| — 256 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 Operations: 128 franchised Tutor Time centers. |
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The Childtime and Tutor Time brands operate in largely distinct market segments. Childtime centers are, on average, smaller and less standardized in construction. They appeal to parents who are looking for a “homey” feel and more intimate experience for their child. Tutor Time centers are larger, more standardized in layout, and designed to appeal to parents who value a more structured educational and developmental experience. Both brands place emphasis on educational quality and content, with the Company’s Education Department developing proprietary content distinct to each brand. With their larger size, Tutor Time centers generally deliver the potential for higher economic returns per center. However, Tutor Time centers also require higher investment and are typically fitted with more expensive equipment and supplies (e.g., telephones, intercoms and security cameras in each room, and children’s computers). The Company’s primary objective is to maximize the development and preparation of children for school. To ensure achievement of this goal, the Company provides high quality child care and a proprietary curriculum, based on developmentally appropriate practices that align with nationally recognized, early childhood educational standards. With over 7,500 employees, the quality, skills, and motivation of the Company’s center staff is of paramount importance. The Company places a great deal of emphasis on the recruitment, selection and ongoing training of its child care center directors and area managers. Childtime and Tutor Time corporate centers are located throughout the United States (in 25 states). The vast majority of these centers are operated on leased premises, with typical lease terms ranging from 1 to 25 years. Thirty-six of the Childtime centers are operated on Company-owned premises. The Company operates six Childtime centers under management contracts serving 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. |
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Tutor Time franchise centers are also predominantly located in the U.S., with 117 centers operating in 15 states. An additional 11 centers are operated in Hong Kong, Indonesia, and the Philippines, mostly under master franchise agreements. The Company is currently the primary obligor or guarantor on leases for 49 of its franchise centers. Tutor Time is currently one of the largest franchisors of child care services based in the United States. The Company utilizes a 52 to 53 week fiscal year (generally comprised of 13 four-week periods) ending on the Friday closest to March 31. The fiscal year ended April 1, 2005 contained 52 weeks. The fiscal year ended April 2, 2004 contained 53 weeks and the fiscal year ended March 28, 2003 contained 52 weeks. The first quarter for each of fiscal 2005, 2004 and 2003 contained 16 weeks, while the second and third quarters contained 12 weeks. The fourth quarter of fiscal 2005 contained 12 weeks, while the fourth quarter of fiscal 2004 contained 13 weeks and the fourth quarter of fiscal 2003 contained 12 weeks. All significant inter-company transactions have been eliminated. Mission, Vision, Values Mission We are an international leader in child education and family solutions, which impact and inspire lifelong learning. Vision To develop innovative learning care solutions which enable us to grow the number of children and families served, and to be recognized as the premier child and family education corporation in the world. Through our leadership and passion, we will: |
| • | Provide a secure, caring and enriched environment that promotes learning and the development of the
whole child. | |
| • | Develop lifelong relationships, create family solutions, and enhance the quality of life for our families. | |
| • | Provide a fun, challenging work environment that fosters teamwork, inspires professional excellence,
and encourages contribution by all team members. | |
| • | Leverage technology to develop innovative learning products and solutions. | |
| • | Provide superior levels of support and service to our franchisees. | |
| • | Achieve the best financial performance in the industry, allowing us to fulfill our mission. |
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Values Honesty, Trust, Passion for Excellence, Love of Learning and Innovation. |
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Business Strategy |
| Increase system wide revenues and deliver annual EBITDA growth through: | |
| (1) | Increasing center utilization |
| (2) | Creating unique and innovative curricula |
| (3) | Utilizing technology to create points of differentiation |
| (3) | Leveraging our corporate infrastructure to provide value-added support to Tutor Time franchisees |
| (4) | Creating the infrastructure to support new franchise school growth goals |
| (5) | Further improving the Company’s hiring, training, and retention capabilities |
Management believes that focus in these areas will help create value in the near-term, and position
the Company for profitable growth in the medium to long-term. | |
| Increasing Center Utilization | |
Providing a superior quality product is critical to increasing net enrollments in existing centers.
Happy children, satisfied parents, and positive word-of-mouth are the most critical tests of how
well the Company is delivering on its quality promise and its ability to capture a price premium.
Based on experience, the most important factors that create a superior quality product include: the
skills, and often, the longevity of center directors and staff; the differentiation and quality of
the educational offering; the condition and the operations of the facility, and the degree to which
the Company is perceived as service-oriented and values-driven. | |
While the focus on hiring, training and retaining the right people as well as the Company’s new
developments in curricula are discussed in subsequent paragraphs, it is important to note that management
is also targeting increased utilization via many other initiatives including improvements in the
quality and quantity of support materials and directives. For example, the Company is continuing
its focus on providing timely and responsive customer service, and on delivering a top-quality product
to every customer at all times, whether they are children, parents, center staff, Center Directors,
Area Managers, or the corporate or franchise operations team. The Company has developed and implemented
standards for service delivery and a service environment that can be measured and tracked via center
evaluation tools. Other initiatives include the development of new on-line operational manuals to
standardize best practices, ongoing analysis of under-performing centers to determine the reasons
for poor performance with appropriate action plans to turn around each center or remove it from the
portfolio, and an intense focus on driving enrollments and pricing appropriate to each market. In
addition to the centralization of purchasing and facilities management in order to maximize buying
power, reduce costs, and improve the quality of centers, the Company is also centralizing its federal
food billing process in order to accomplish the same goals. | |
Streamlining processes, clarifying goals and objectives, focusing on delivering superior customer service,
and driving a performance culture are key objectives for the Operations department in delivering
an increase in utilization. | |
| Creating Unique and Innovative Curricula | |
In order to differentiate the brands from one another and to establish Learning Care Group, Inc. as
the leader in early education, the Company has developed a new and proprietary curricular direction
for both Childtime and Tutor Time schools. Each curriculum was designed by early childhood experts
and follows the guidelines for developmentally appropriate practices as outlined by the National
Association for the Education of Young Children (NAEYC). | |
Targeting the specific needs of Childtime customers, the Education Department developed The Empowered Child™ curriculum. Using Creative Curriculum™ as a framework for child developmental assessment, the Company’s The Empowered Child™ curriculum is inspired by the Reggio Emilia approach to learning which began in Italy 50 years ago
and is now the fastest growing method in the field of early childhood education. Emphasizing home-like
nurturing environments, this curriculum provides the three components of quality early | |
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childhood education: developmentally appropriate activities,
a comfortable learning environment and quality teacher-child interactions. | ||
The Tutor Time brand has always had a strong academic emphasis and the new LifeSmart™ curriculum builds upon that foundation to nurture and educate the whole child – cognitively,
physically, socially and emotionally. The LifeSmart™ curriculum is designed around the principle that children are smart in many different ways, which
have been classified as the eight Tutor Time “Smarts”. | ||
| Word Smart | Body Smart | |
| Math Smart | Nature Smart | |
| Design Smart | People Smart | |
| Music Smart | Me Smart | |
Grounded in the latest research and understanding on early childhood education, the LifeSmart™ curriculum provides children with the foundations that prepare them for elementary school and beyond. | ||
Each of these new curricula will be implemented in the Company’s Pre-K and Preschool classrooms
this fall with further curriculum updates coming for other age groups over the next few years. A
more detailed explanation of educational offerings appears below under “Educational Programs”. | ||
| Utilizing Technology to Create Points of Differentiation | ||
In order to improve performance, the right systems and people must be in place to ensure quality, create
excellence, and maximize productivity. In an effort to improve the timeliness and accuracy of information,
as well as to streamline workload at the center level, the Company has installed a new financial
reporting system, a new HR management system, and has developed a new center-level application to
track leads, attendance, billing, and cash that will be installed in all centers by the end of fiscal
2006. | ||
| Leveraging our Corporate Infrastructure to Provide Value-added Support to Tutor Time Franchisees | ||
Franchising represents an important component of the Company’s current Tutor Time business and
is a primary growth opportunity for the Company going forward. The Company is focused on further
strengthening franchise relations by providing superior support to franchisees through its franchise
district management team, with additional support from key roles in the regional management structure,
including regional training and human resource managers, and marketing support. In addition, the
Education, Technology and Marketing Departments have improved their value delivery and support infrastructures,
and continue to bolster their respective contributions to the Company’s franchisees. Support
has also been expanded by providing products and services to franchisees at the corporate rates.
Additionally, the Franchise Operations group is expanding its role to include business advisory and
performance benchmarking in order to help franchisees improve their individual results. | ||
| Creating the Infrastructure to Support New Franchise School Growth Goals | ||
The Company is in the process of creating the tools and infrastructure necessary to fuel future franchise
growth. This growth is anticipated to be due to a combination of adding schools for existing franchisees
and finding new franchisees to join our system. To that end, the Company has developed and is successfully
executing a comprehensive marketing plan to attract new franchisee prospects. | ||
| Further Improving the Company’s Hiring, Training, and Retention Capabilities | ||
Understanding the significant impact that a Center Director has on the quality and performance of a
center, the Company has developed sophisticated selection tools to identify desirable candidates.
In addition, a complete training program has been created based on the required competencies to improve
the skills of current and future directors. Retaining valuable employees at all levels is also critical
to the success of a center and can play a key role in retaining current customers, as well as ensuring
the quality of our product. To that end, the Company has developed a comprehensive strategy to reduce
center staff turnover through improved hiring processes, new training programs, improved compensation
and benefit programs and better management. | ||
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Growth Strategy |
The following table illustrates the number of centers in operation (acquired or otherwise opened) as well as those which were closed during the periods indicated. Figures include Tutor Time franchise centers. |
| Childtime | Tutor Time | Franchise | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 28, 2003 | ||||||||||||
| Beginning of period | 286 | — | — | 286 | ||||||||
| Acquisitions | — | 58 | 124 | 182 | ||||||||
| New center openings | — | 5 | 16 | 21 | ||||||||
| Closures and sales | (10 | ) | — | (8 | ) | (18 | ) | |||||
| End of period | 276 | 63 | 132 | 471 | ||||||||
| April 2, 2004 | ||||||||||||
| Beginning of period | 276 | 63 | 132 | 471 | ||||||||
| New center openings | — | 2 | 4 | 6 | ||||||||
| Franchising of Corporate centers | — | (1 | ) | 1 | — | |||||||
| Closures and sales | (7 | ) | — | (3 | ) | (10 | ) | |||||
| End of period | 269 | 64 | 134 | 467 | ||||||||
| April 1, 2005 | ||||||||||||
| Beginning of period | 269 | 64 | 134 | 467 | ||||||||
| Acquisitions | — | 8 | (8 | ) | — | |||||||
| New center openings | — | 1 | 5 | 6 | ||||||||
| Franchising of Corporate centers | — | (3 | ) | 3 | — | |||||||
| Closures and sales | (7 | ) | (1 | ) | (6 | ) | (14 | ) | ||||
| End of period | 262 | 69 | 128 | 459 | ||||||||
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In fiscal 2005, the Company opened five new franchise centers and one new corporate Tutor Time center.
The Company acquired eight franchise centers from franchise owners and converted them to corporate
Tutor Time centers and transferred three corporate Tutor Time centers to franchise owners. The Company
converted one Childtime center to a corporate Tutor Time center and converted one corporate Tutor
Time center to a Childtime center (this change is not reflected on the chart). During the year, the
Company chose to discontinue operations for seven of its corporate Childtime locations that were
not performing or whose contracts expired and sold one corporate Tutor Time center located in Canada.
Six franchise centers were also closed during 2005.
In addition to the current development pipeline, which is comprised of additional sites for existing Tutor Time franchisees, the Company is actively seeking new franchisees, as well as new sites to satisfy the demand from current franchise owners. Current plans are to open sites within existing franchise and corporate geographies. The Company will prioritize adding units in its existing markets in order to increase market concentration and to leverage administrative and advertising expenses. The Company continues to experience a number of inquiries from qualified candidates interested in franchise opportunities, as well as ongoing demand from its existing base of franchisees. The Company will also entertain growth in its Childtime portfolio through viable acquisitions, and will continue to research sites for additional corporate Tutor Time centers. In choosing locations for new centers, the Company considers a number of factors, emphasizing suburban neighborhoods with growing populations of young families. Management looks for sites in proximity to newly developed or developing residential areas on heavily traveled local streets. The Company performs a detailed analysis of the demographics of the area surrounding the proposed site and focuses on several site selection criteria including: the percentage of children under age six; the population density within a three-mile radius surrounding a proposed site; and the average household income. The Company also analyzes the percentage of the population consisting of college-educated, dual-income families, as well as the average home value in the target area. In addition to acquiring or building centers in residential areas, the Company obtains contracts with employers and office complex managers to operate centers in at-work locations. Historically, public agencies and hospitals have been the principal employers providing or otherwise arranging for child care services for their employees. A number of private sector employers also offer this benefit, as they recognize that reduction of employee absenteeism due to a lack of reliable and available child care can significantly offset the offering of such benefits. The Company’s expansion activity is limited to child care centers in market areas showing strong growth potential, and to sites which the Company believes can conform to its standard facility and educational format. The Company utilizes prototype building designs in its build-to-suit centers. |
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The Company continuously reviews its existing center portfolio in an effort to ensure all centers meet minimum performance standards. Centers become candidates for closure when they fail to meet certain demographic or financial criteria. Going forward, there are no assurances that the Company will be able to continue to develop or acquire new sites in a manner that will meet its requirements. Educational Programs The Company’s educational programs are based on the early education principle that children learn best when actively involved in constructing knowledge through self-directed activities. The Company’s staff is trained to support the learning process by providing children with opportunities to solve problems, investigate questions and creatively use materials in safe and secure settings; activities that build a true understanding of math, science and literacy concepts. A proprietary educational curriculum, combined with ongoing parent-staff dialogue, helps the Company foster all aspects of a child’s development: cognitive, physical, social and emotional. Tutor Time centers use a proprietary curriculum administered by Richard Cohen. Grounded in the latest research and understanding of early childhood education, the curriculum incorporates self-directed learning investigations with specially focused large group activities. This approach provides children with the foundations that prepare them for elementary school and set them on a path of life-long learning. When a child reaches preschool, he or she is introduced to Tutor Time LifeSmart™, an innovative curriculum based on the work of respected child development/early education theorists Jean Piaget, Erik Erikson, Lev Vygotsky and Howard Gardner. Childtime centers also use a proprietary curriculum administered by Mr. Richard Cohen, M.A. Inspired by the Reggio Emilia approach to learning and following guidelines set forth by the National Association for the Education of the Young Child (“NAEYC”), the curriculum focuses on three components of quality early childhood education: developmentally appropriate activities, a comfortable learning environment and quality teacher-child interactions. The Childtime curriculum empowers children to acquire skills to become responsible members of the community, creative problem-solvers, and life-long learners. In preschool, students are introduced to The Empowered Child™ curriculum, a new addition to Childtime’s curricular offerings. The Company’s educational offerings are the core of the product and are the key differentiators for each of the Company’s brands. Further, the innovative TutorTime LifeSmart™ curriculum and Childtime’s new The Empowered Child™ curriculum position the Company as an educational leader in the industry. Children in the Company’s care are grouped according to age and developmental stage. Learning goals, established by early education specialists, provide a guide by which staff members structure daily activities. Because children construct their knowledge at different paces, in different ways, daily activities may vary for individual students. Generally speaking, the Company’s classrooms under both brands are organized in seven levels following the sequential process of growth and development, from infancy through school-age, with each level supplemented by a summer program: Infants (six weeks — twelve months) |
Warm, secure settings and experienced, comforting caregivers foster each infant’s sense of trust,
while growing his or her independence and self-esteem. Daily routines and sensory experiences promote
listening and language skills. Play activities and interactions focus on the development of large
muscles for sitting, crawling, standing and walking, and small muscles for grasping, reaching and
holding. |
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Young Toddler (1 — 2 years) |
Classroom space and materials are organized to support a young toddler’s need to explore, investigate,
discover and play. Caregivers provide plenty of time for play, incorporating fun, hands-on activities
that help children learn about their body, communicate with words and solve problems. And the use
of stories, pictures and books in small group activities encourages literacy. Children’s continued
participation in daily routines further develops self-help skills and self-esteem. |
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Toddler (2 — 3 years) |
Classroom space and materials are organized to support the older toddler’s increased need for
independence. This organization provides opportunities for toddlers to make simple decisions, engage
in pretend play and cooperate with other children while practicing listening and speaking skills. Indoor and |
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outdoor activities strengthen large and small
muscles, and aid in the development of hand-eye coordination. Caregivers support self-help skills
and encourage voluntary participation in daily routines, teaching sequence of events and fostering
self-esteem. |
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Preschool (3 — 4 years) |
Classroom space and materials are organized to support preschoolers’ need to test their independence
and discover the world in a safe and secure way. Caregivers provide opportunities to solve problems,
investigate questions and create unique works of art. Because our society places a strong emphasis
on these skills, play activities are structured to increase children’s understanding of numbers
and literacy. Portions of the day include self-directed exploration time that builds critical thinking
skills and self esteem, while lessons on character education, physical fitness, science and a variety
of curricular themes create a rounded educational experience. An increasingly structured environment
works to ensure each child is well-prepared for elementary school, and life. |
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Pre-Kindergarten (4 — 5 years) |
Classroom organization and daily scheduling provides pre-kindergarteners’ countless opportunities
to investigate, while preparing them for the distinctive differences of a kindergarten classroom.
Skilled teachers foster children’s rapidly advancing social, emotional and educational growth
and incorporate numerous activities that spur literacy development and support emerging writing skills.
Because children learn best when actively involved in constructing their own knowledge, much time
is dedicated to playful exploration, in rich stimulating environments, monitored by caring, encouraging
adults. Self-directed investigations build problem-solving and critical thinking skills and foster
self-esteem while nurturing a love of learning. Group activities incorporate lessons on science,
nature, mathematics and the arts while stressing the importance of communication and teamwork. |
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Kindergarten (5 — 6 years) |
Kindergarten programs are designed to successfully transition children to first grade, and are aligned
with local school district goals and assessment requirements. Classroom organization, materials and
activities build children’s skills in mathematics, visual and performing arts, social studies,
science and language while encouraging play, peer interaction and family involvement. Individual
and group activities provide opportunities for sharpening observation skills, exploring cause and
effect, sharing and playing with others, and planning and carrying out tasks. Other scenarios teach
children how to follow directions, recall and sequence events, understand measurement, think creatively
to solve problems and improve coordination. Low student to teacher ratios allow staff members to
nurture and encourage children in a familiar, comfortable and secure environment. |
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School-age (6 — 12 years) |
School-age programs are designed to support children’s need for independence while providing outlets
for their increasing educational and social interests in safe, supervised environments. Sports, art,
music and more are incorporated into a variety of group and individual activities. Teachers offer
academic support and mentoring, helping children set goals and manage tasks. Before or after school
care provides a positive environment in which children can interact with peers, and have fun. |
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Summer Camp (All Ages) |
During the months when school is not in session, summer camp programs fill parents’ needs for
a safe, supervised, educational environment for their children, and children’s needs for an
engaging, entertaining way to spend their summer break. Yearly themes guide the structure of weekly
activities and fieldtrips. Trained counselors lead experiences that allow children to see and learn
things in new ways. |
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The Company continually assesses the quality of its brands. Recently, the Education Department, led by Mr. Richard Cohen, completed an evaluation of each brand’s curriculums versus major competitors. The process involved surveying all stakeholders, consulting with industry experts, and creating education committees. Results were gathered and considered during the development of the new preschool and pre-kindergarten curriculums. Parents and franchisees are informally and formally surveyed on a regular basis to assess the quality of our facilities, services and franchise support. The results of these surveys are forwarded to management for review and future planning. |
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The Company continues to focus its efforts on obtaining accreditation for many of its centers by the NAEYC or the National Early Childhood Program Accreditation (“NECPA”). NAEYC and NECPA are national organizations that have established comprehensive criteria for providing quality child care. Centers which earn such national accreditation status demonstrate a commitment to excellence by operating centers of the highest quality for the children they serve. The Company believes that the process of earning accreditation assists in the Company’s efforts to continually improve its programs, training and facilities. The Company shares NAEYC’s and NECPA’s commitment to provide the highest quality child care and, thus, continues to pursue an aggressive accreditation schedule. Products and Services General. The Company’s corporate centers are under the leadership of a Vice President of Corporate Operations and are organized into four regions based on geography. Each region is managed by a Regional Operations Manager and is supported by a team that includes a Regional Facilities Manager, a Regional Human Resource Manager and a Regional Training Manager. The regions are further divided into areas headed by an Area Manager who is responsible for ten to 16 centers. Each individual center has a dedicated Center Director and a staff generally ranging from 15 to 30 persons. The centers operate year-round, five days per week, generally opening at 6:30 a.m. and remaining open until 6:30 p.m. A child may be enrolled in any of a variety of program schedules, from a full-time, five-day-per-week plan to as little as two or three half-days a week. A child attending full-time typically spends approximately ten hours a day, five days per week, at a center. The Company’s current weekly tuition for full-day service typically ranges from approximately $100 to $400 depending on the location of the center, the age of the child, and whether it is a Childtime or Tutor Time center. Tuition is generally paid in advance on a weekly basis. The Company also charges additional registration and materials fees, which vary by brand and location. The Company generally reviews its tuition rates on a regular basis to determine whether rates at a particular center should be changed in light of that center’s competitive environment and financial results. The Company’s franchise operations are headed by a Vice President of Franchise Operations. The Vice President oversees Franchise District Managers, who in turn are the main point of contact between franchisees and the Company. The Franchise District Managers provide support and training to franchisees and their center staff, and also ensure that franchisee operations are in compliance with Company standards through the use of a comprehensive evaluation tool. Both the regional corporate operations teams and the Franchise District Managers can draw on additional resources within the Company to bring in expert advice on specific topics including marketing, curriculum, human resources, training, technology, finance and business management, licensing, new center openings, state and federal grants, government relations, real estate and facilities management. Center Operations. Each center is managed by a Director who is supervised by an Area Manager. The Company places a great deal of emphasis on the recruitment, selection and ongoing training of Center Directors. Center Directors are hired by their respective Area Manager and Regional HR Manager from a pool of candidates who have undergone an initial psychological profile screen, a reference check, and a criminal background check. In addition, candidates are screened for the appropriate skills and abilities necessary for success in the position. All Center Directors are required by state regulations to have some minimum level of training, which is typically in the form of credit hours from a state approved training agency or an accredited educational institution. The Company prefers that potential Directors have a bachelor’s degree in early childhood education, child development or a health-related field plus a minimum of two years experience in a licensed child care facility. Many Directors are recruited from within the Company and have served as teachers or Assistant Directors in one of the Company’s centers. A Center Director has overall responsibility for the operations of a center including: ensuring that the center is operated in accordance with Company and state licensing standards and operating procedures; providing an educational, caring and safe environment for children and their parents; marketing the Company to parents and otherwise promoting the positive image of the Company in the community. The Center Directors receive a salary and bonus tied to the financial and operating performance of their center. Each Center Director is also responsible for hiring his or her staff, including teachers. The Center Director assesses and collects tuition and fees. All funds received by each center are deposited in an account established by the Company in a local bank. All payroll and most other center expenses are paid directly by the Company’s corporate office. Basic supplies are purchased by the centers pursuant to national vendor contracts negotiated by the corporate office to take advantage of volume buying discounts and to retain financial controls. Direct expenditures by the centers are limited to miscellaneous operating expenses. Training. The Company believes that the skills and expertise of the Director and staff at each center are among the most significant factors for parents selecting center-based child care programs. In order to enhance the quality of the staff at each center, the Company provides both externally and internally developed training |
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programs for its personnel. It has developed training materials and manuals for its staff and conducts seminars for its Area Managers and Center Directors on such subjects as interpersonal and business skills, curriculum, health and safety, basic financial concepts and marketing. All management personnel (including Area Managers, Center Directors and Assistant Directors) participate in periodic training programs or meetings and must comply with applicable state and local licensing regulations. Center staff are required to participate in orientation and training sessions. The Company divides operations into regions, each of which has an on-site Regional Training Manager to assist in the development and implementation of its training programs. These training programs are designed to prepare and enhance the skills of its teachers to meet the Company’s internal standards and applicable state licensing requirements. All new Center Directors participate in a two-week training program immediately upon hire, followed by three-and-a-half days spent in our Director Academy within their first 120 days. Safety. The Company is committed to the health and safety of the children in its care. To prevent unauthorized persons from entering the center, virtually all centers are equipped with front door security systems requiring card keys, security codes, or other forms of access control. In addition, most centers use a double door entrance and have a centrally monitored security system to protect the center after hours. Each day, children must be signed in and out by parents, legal guardians or an authorized designee of the parent or guardian. All centers have at least one staff member trained in first aid and CPR. Center staff members are trained to detect child neglect and abuse, and are required by law and Company policy to immediately report all suspected instances. In the rare event that an employee is accused of child neglect or abuse, it is the Company’s policy to place the employee on administrative leave pending the results of an independent state agency investigation, in which the Company cooperates fully. No assurances can be made that allegations of child neglect or abuse will not be made in the future. However, allegations of child neglect or abuse against an employee are rare and, in most cases, covered by the Company’s general liability insurance. Since these incidents fall within the insurance policy limits, it is the Company’s position that such occurrences will not materially affect the financial position, results of operations, or cash flow of the Company. The Company maintains general liability insurance and appropriate umbrella policies in adequate amounts, as described under “Insurance”. Financial Planning, Budgeting and Cost Control. The Company has a program of financial planning and cost control which seeks to maximize operational profit without sacrificing quality child care. This goal is accomplished by actively engaging the Area Managers and Center Directors in the formulation and implementation of the budget for each center. Directors are then responsible for implementing the approved budget and become primarily responsible for the financial performance of the center. In order to encourage profitable performance, the Company has a financial incentive program for meeting or exceeding pre-approved budget goals. Facilities. Most of the Company’s centers are freestanding structures leased or owned by the Company. When new centers are constructed, the Company utilizes prototype buildings designed specifically for each state emphasizing energy efficiencies, lower maintenance costs and enhanced appearance. Childtime centers average 6,800 square feet. Tutor Time centers are typically larger with an average of over 10,000 square feet. The interiors primarily consist of closed classrooms bordering a central hallway. This design allows children the freedom to explore their environment as well as the staff’s need to be able to monitor activities in the classroom. The Company’s centers contain classrooms, recreational areas, a kitchen and bathroom facilities and are designed to accommodate the grouping of children by age or development level. Two unique features of Tutor Time centers are the Tutor Towne Village™ and self-contained classrooms. The Tutor Towne Village™ is a common room outfitted with a child-sized post office, firehouse, and other facades that create a play and learning environment imitating a small town. Use of the room is purposefully integrated into the Tutor Time curriculum in a way that enables staff to teach children through guided socio-dramatic play. Each classroom is self-contained, with its own areas for play, learning, eating, crafts and diaper changing. Teachers and children do not need to leave the room, except for other special activities such as use of playgrounds or the Tutor Towne Village™. Childtime centers do not have the same level of standardization of features due to the varying age of centers and the fact that many were acquired. However, most centers have unique and appealing features in line with the educational and developmental philosophy of the Company. As of April 1, 2005, the Company operated 331 Company-owned centers and franchised 128 centers. Aggregate licensed capacity for these centers was over 69,000 children. The capacity of centers differs from state to state because of various licensing requirements. |
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Management Contracts. As of April 1, 2005, the Company also had contracts to manage six child care centers. Most of these centers are located on or near the premises of a specific employer and involve varying degrees of involvement from the employer, such as ownership of the premises, minimum enrollment guarantees, the assumption of financial responsibility for the ongoing operations of the center, other management arrangements, or any combination of the above. Historically, public agencies and hospitals have been the principal employers providing or otherwise arranging for child care services for their employees. Marketing The Company believes that the quality of a center’s director, staff and center location, supported by consistent national and localized marketing and sales efforts, are the key components to a successful, profitable center. The Marketing Department is responsible for implementing two separate marketing strategies to support both the individual development of the Childtime and Tutor Time brands, as well as providing marketing and sales training and support for both corporate and franchise centers. The core marketing strategy for the Company is to focus on developing cost-efficient programs that drive enrollments, especially during the peak periods of Back to School, Summer Camp, and Winter Enrollment. The Company’s primary year-long advertising strategy is Yellow Pages, a top source of new enrollments each year. Other year-long marketing initiatives include: media relations, community events, customer referrals, collateral material development and Internet marketing. Peak enrollment period advertising strategies consist of using several mediums in each center’s area to saturate the marketplace during a set time period and may consist of: direct mail, Val-Pak, ADVO, and ads in local publications. All marketing materials are customized with the nearest centers information as well as a toll-free number and Website address where interested customers can obtain more information about the Company or their nearest center. Seasonality Generally, the Company’s accounting periods are organized into 13 four-week periods, with 4 four-week periods comprising the first fiscal quarter and 3 four-week periods comprising each of the second, third and fourth fiscal quarters. Consequently, the Company’s revenues, gross profit and operating results for the first quarter are favorably impacted by the additional four weeks included in that quarter. Periodically, as was the case in fiscal 2004, the Company will have five weeks in the thirteenth period of its fiscal year due to the Company’s closing the fiscal year on the Friday closest to March 31. Due to the impact of summer vacation, in July and August of each year (the last month of the Company’s first fiscal quarter and the first month of the Company’s second fiscal quarter), the Company has historically experienced an enrollment decline. In addition, the Company typically experiences revenue declines in the months of November and December due to the impact of several major holidays. To partially offset these declines, the Company has successfully implemented and marketed both a summer camp program with a new theme and focus each year, as well as a December holiday camp. New enrollments are generally highest in September and January; accordingly, August and December are traditionally the best months to open new centers. Total enrollments (and, accordingly, the Company’s results) are typically the strongest in the fourth quarter (which include the months of January, February and March). Competition The child care and preschool education industry is highly fragmented and competitive and has historically been dominated by small, local nursery schools and child care centers. The Company’s competition consists principally of local nursery schools and child care centers (many of which are non-profit, including church-affiliated centers), providers of services that operate out of homes, and other proprietary multi-unit child care center providers, some of which are larger and may have substantially greater financial resources than the Company. Among the larger providers of for-profit child care and preschool education are Knowledge Learning Corporation, La Petite Academy, Inc., and Nobel Learning Communities, Inc. Bright Horizons Family Solutions, Inc. is the largest competitor in the at-work/management contract segment. Major competitors in the franchise segment include Goddard School, Primrose Schools, and Kiddie Academy. The Company believes it is able to compete favorably with these providers by offering a high quality level of child care services. This is especially true in competing against local nursery schools, child care centers and in-home providers where the Company is often at a price disadvantage, because these providers generally charge less for their services than the Company charges. Many church-affiliated and other non-profit child care centers have lower occupancy costs than the Company and may receive donations or other funding to cover operating expenses. Consequently, operators of such centers may charge tuition rates that are less than the Company’s rates. In addition, fees for home-based and not-for-profit care are normally lower than fees for center-based care, because these providers are often not regulated and, thus, not required to satisfy the same health, safety, insurance or state regulations as the Company’s centers. |
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The Company competes by hiring and training quality Center Directors and by offering professionally-planned educational and recreational programs, well-equipped facilities, and trained staff and supervisory personnel. In addition, the Company provides a range of enrichment programs, including foreign language, dance, music and karate. The Company also provides drop in service, as well as transportation between the Company’s child care centers and schools of children enrolled in the Company’s before and after school program. Personnel As of April 1, 2005, the Company employed approximately 7,500 persons (including part-time and substitute caregivers), of which 87 are employed at the corporate headquarters in Michigan, 23 are employed at regional offices and 34 are employed as Area Managers or Franchise District Managers. The remainder are employed at the Company’s child care centers. Center employees include Center Directors, Assistant Directors, full-time and part-time teachers, caregivers, substitute caregivers, aides and other staff, including cooks and van drivers. All Center Directors, Regional Managers, Area Managers and most corporate supervisory personnel are salaried; all other employees are paid on an hourly basis. The Company does not have an agreement with any labor union and believes that its relations with its employees are favorable. Regulation Child care centers are subject to numerous state and local regulations and detailed state licensing requirements. Although these regulations vary from jurisdiction to jurisdiction, government agencies generally review, among other things, the adequacy of buildings and equipment, licensed capacity, the ratio of staff to children, staff training, record keeping, the dietary program, the daily curriculum and health and safety standards. In most jurisdictions, these agencies conduct scheduled and unscheduled inspections of centers, and licenses must be renewed periodically. In a few jurisdictions, new legislation or regulations have been enacted or are being considered which establish requirements for employee background checks or other clearance procedures for new employees of child care centers. Repeated failures by a center to comply with applicable regulations can subject it to state sanctions, which might include fines, corrective orders, being placed on probation or, in more serious cases, suspension or revocation of the center’s license to operate. Management believes the Company is in substantial compliance with all material regulations applicable to its business. For the fiscal year ended April 1, 2005, approximately 22% of the Company’s revenues were generated from federal and state child care assistance programs, primarily the Child Care and Development Block Grant and At-Risk Programs. These programs are typically designed to assist low-income families with child care expenses and are administered through various state agencies. Although no federal license is required at this time, there are minimum standards that must be met to qualify for participation in certain federal programs. There is no assurance that funding for such federal and state programs will continue at current levels and a significant reduction in such funding may have an adverse impact on the Company. There are certain tax incentives for parents utilizing child care programs. Section 21 of the Internal Revenue Code provides a federal income tax credit ranging from 20% to 35% of certain child care expenses for “qualifying individuals” (as defined therein). The fees paid to the Company for child care services by eligible taxpayers qualify for the tax credit, subject to the limitations of Section 21. For 2003, 2004 and 2005, the tax credit ranged from 20% to 35% of qualifying child care expenses and was limited to $3,000 for one child and $6,000 for two or more children. Therefore, the maximum credits ranged from $600 to $1,050 for one child and $1,200 to $2,100 for two or more children. Tax incentives provided under the Internal Revenue Code are subject to change. The Company must also comply with the Americans with Disabilities Act (“ADA”), which prohibits discrimination on the basis of disability in public accommodations and employment. Costs incurred to date by the Company to comply with the ADA have not been significant. A determination that the Company is not in compliance with the ADA, however, could result in the imposition of fines or an award of damages to private litigants, and could require significant expenditures. The Company believes that the majority of its centers are substantially in compliance with all material ADA requirements. Insurance The Company’s insurance program currently includes the following types of policies: workers compensation, commercial general and automobile liability, commercial property, director and officer liability, flood coverage in applicable locations, excess “umbrella” liability, and a medical payment program for accidents which provides secondary coverage for each child enrolled in a Company center. The policies provide for a variety of coverages and are subject to various limits and deductibles. For fiscal 2005 and 2003, the Company’s policies for workers compensation had per occurrence deductibles of $100,000 and $250,000 respectively. For fiscal 2004, the workers |
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compensation did not have a deductible. The commercial general liability policy has a $1,000,000 limit per occurrence, with a $3,000,000 general aggregate limit per location. There is a separate limit for sexual abuse and molestation coverage of $1,000,000 for each occurrence and $3,000,000 in the aggregate, with defense limits of $1,000,000 per occurrence and $3,000,000 in the aggregate. The Company also has excess “umbrella” coverage, relating to general liabilities (exclusive of sexual/physical abuse claims) in the amount of $20,000,000 per year. Management believes the Company’s current insurance coverages are adequate to meet its needs. Item 2. Properties The following table shows the locations of the Company’s centers, including those operated under management contracts, as of April 1, 2005 (the numbers reflect the number of centers in that state or country): |
| Tutor Time | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Childtime | Corporate | Franchise | Total | |||||||||||||
| Arizona | 20 | 0 | 18 | 38 | ||||||||||||
| California | 34 | 5 | 31 | 70 | ||||||||||||
| Connecticut | 0 | 1 | 5 | 6 | ||||||||||||
| Delaware | 0 | 2 | 1 | 3 | ||||||||||||
| Florida | 12 | 2 | 9 | 23 | ||||||||||||
| Georgia | 15 | 0 | 2 | 17 | ||||||||||||
| Illinois | 6 | 10 | 2 | 18 | ||||||||||||
| Iowa | 3 | 0 | 0 | 3 | ||||||||||||
| Kansas | 0 | 2 | ||||||||||||||