<PAGE> 1
================================================================================
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 3, 1998
[ ] 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
------------------------
CHILDTIME LEARNING CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MICHIGAN 38-3261854
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
38345 WEST 10 MILE ROAD, SUITE 100, FARMINGTON HILLS, MICHIGAN 48335
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (248) 476-3200
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
(TITLE OF CLASS)
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 [ ]
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. [X]
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant as of June 15, 1998, computed by reference to the last sale price
for such stock on that date as reported on the NASDAQ National Market System,
was approximately $44,121,000.
At June 15, 1998, the number of shares outstanding of the registrant's
Common Stock, without par value, was 5,429,655.
Portions of the registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders have been incorporated by reference in Part III of this Annual
Report on Form 10-K.
================================================================================
<PAGE> 2
PART I
"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,
identification and availability of quality acquisition or new development
targets, continuation of federal and state assistance programs, demand for child
care, general economic conditions as well as pricing, competition and
insurability. Childtime Learning Centers, Inc. cautions that actual results
could differ materially from those projected forward-looking statements.
ITEM 1. BUSINESS
GENERAL
Childtime Learning Centers, Inc. conducts business through its wholly owned
subsidiary Childtime Childcare, Inc. Unless the context otherwise requires,
references in this Report to the "Company" will be deemed references to
Childtime Learning Centers, Inc. and Childtime Childcare, Inc.
The Company provides for-profit child care through 242 child care centers
as of April 3, 1998 located in 17 states and the District of Columbia.
Center-based child care and preschool educational services are provided five
days a week throughout the year to children between the ages of six weeks and
twelve years. At April 3, 1998, the Company had approximately 26,000 children
enrolled (full and part-time) nationwide. Substantially all of the Company's
child care centers are operated under the "Childtime Children's Centers" name.
The Company's centers are primarily located on free-standing sites in suburban
residential areas with substantial preschool populations. Included among the
Company's 242 child care centers at April 3, 1998, were 42 "at-work" sites
providing child care for working parents at various business enterprises, office
complexes, shopping centers and hospitals.
The Company's strategy is to offer an independently developed, nationally
recognized educational curriculum within a stimulating environment in order to
provide high quality child care and to maximize development and preparation of
children for school. The Company places a great deal of emphasis on the
recruitment, selection and ongoing training of its child care center directors.
Within a framework of centralized financial and quality controls, the Company
grants significant authority over center operations to its center directors and
rewards its center directors on an incentive basis tied to individual center
performance.
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 years
ended March 29, 1996, and March 28, 1997, contained 52 weeks while the fiscal
year ended April 3, 1998, contained 53 weeks. For the 1998 53 week fiscal year,
the fourth quarter final period contains 5 weeks.
BUSINESS STRATEGY
The Company's business strategy is to (i) develop and acquire new centers
in areas which meet its specific demographic requirements; (ii) maintain and
enhance profitability through a program of financial planning, budgeting and
cost control; (iii) continue to invest in its centers to maintain and improve
quality; (iv) emphasize its sales and marketing programs aimed at increasing new
enrollments and promoting customer loyalty; (v) offer programs to better utilize
its centers on year-round basis; and (vi) continue to improve the quality of its
staff through recruitment, training and incentive programs.
Set forth below are certain key elements of the Company's business
strategy:
Standardized Operations. The Company has a consistent overall approach
in providing child care services in its centers. Other than at certain
employer-sponsored sites, all centers operate under the "Childtime
Children's Centers" name in suburban communities or at-work locations which
have similar demographic characteristics. Each center utilizes an
independently developed, nationally recognized
2
<PAGE> 3
educational curriculum. All center facilities are well-maintained,
similarly equipped and utilize the closed classroom concept. The company
has two prototype designs to be used in its build-to-suit centers.
Center Entrepreneurship. Within a framework of centralized financial
and quality controls, each center director is empowered to customize the
center's programs, dietary menus and other features to adapt to local
market requirements. Each director is also involved in the budgeting and
financial planning process with regard to his or her center. The Company
believes that its directors are given more autonomy than are directors of
other child care centers enabling them to better market their center while
meeting the child care objectives of local customers. The Company trains
its center directors to fulfill these additional responsibilities through a
series of internally and externally prepared training programs designed to
enhance interpersonal and business skills, basic financial concepts and
marketing. Center directors are compensated, in part, through an incentive
program based on the performance of the center under their supervision.
Balanced Growth Strategy. The Company's strategy for growth consists
of a combination of acquisitions of existing child care centers and
development of new build-to-suit centers. Other large multi-unit operators
often rely solely on acquisitions or, alternatively, new center
construction. In addition to acquiring or building centers in residential
areas, the Company also actively pursues contracts with employers and
office complex managers to operate centers in at-work locations. The
Company believes that its ability to grow both through the acquisition of
existing child care centers and development of build-to-suit centers
affords it greater flexibility to sustain its controlled growth strategy in
various geographic markets. See "Growth Strategy" below.
GROWTH STRATEGY
The Company has a strategy to expand its business through a combination of
acquisitions and the development of new "build-to-suit" centers. The following
table sets forth the numbers of child care centers acquired or otherwise opened,
as well as closed, during the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
NUMBER OF CENTERS:
Beginning of period......................................... 211 174 148
Additions during period:
Acquisitions and other................................. 26 29 21
New builds and new leases.............................. 9 8 6
--- --- ---
Total additions........................................... 35 37 27
Closings during period.................................... (4) 0 (1)
--- --- ---
End of period............................................... 242 211 174
=== === ===
</TABLE>
The Company expects to add 32 to 37 new centers in fiscal 1999 through both
residential sites and at-work sites. In making its expansion decisions, the
Company strives to add units in its existing markets in order to increase market
concentration and to leverage administrative and advertising expenses. Entry
into new markets is also considered, but only if these markets can eventually
support a minimum of ten centers. The Company's decision whether to add a new
center by acquisition or by opening a new location is based on which alternative
best meets its needs and objectives.
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: an above-average
concentration in the percentage of children under age six; a minimum population
density of 25,000 people within a three-mile radius surrounding a proposed site,
and an average household
3
<PAGE> 4
income in excess of $50,000. 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. The Company believes that parents in more
affluent areas are more willing to pay a slight premium for higher quality child
care services.
In addition to acquiring or building centers in residential areas, the
Company also actively pursues 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 have begun to 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 cost to employers in offering such benefits. The
Company expects to capitalize on this trend by actively pursuing contracts with
employers, as well as selectively acquiring existing at-work centers.
The Company's acquisition activity is limited to child care centers in
market areas showing strong growth potential and to sites which the Company
believes it can conform to its standard facility and educational format.
Historically, the Company has targeted its acquisition activities on less
profitable centers which meet its demographic criteria. The Company believes
that it can continue to acquire centers on terms which compare favorably with
the costs and risks of establishing new facilities. Management is continually
reviewing possible acquisition candidates (including, from time to time,
multi-unit child care operations consisting of more than ten centers), although
there are no assurances that the Company will be able to continue acquiring
acceptable centers. In addition, the Company has accelerated its development
activities over the past few years. In an effort to standardize its
build-to-suit centers, the Company has developed building prototypes which
accommodate 120 to 180 children. Although the Company engages in an active new
site selection process, there are no assurances that it will be able to continue
to acquire and develop new sites in an economic manner.
EDUCATIONAL PROGRAMS
The Company's educational programs stress the process of learning and
discovery. Staff are trained to support children in their active explorations
and to help them to become self-confident, independent and inquisitive learners.
The Company believes in fostering all aspects of a child's development: social,
emotional, physical and intellectual. The two primary means of meeting this goal
are the use in each center of a nationally recognized educational curriculum
developed by independent educators and the center's ongoing dialogue with
parents in providing a learning environment for their children which meets or
exceeds their expectations as customers.
In each center, the Company utilizes The Creative Curriculum(R) For Early
Childhood, a nationally recognized educational curriculum published by Teaching
Strategies, Inc. and written by Diane Trister Dodge (a member of the Governing
Board of the National Association for the Education of Young Children from 1990
to 1994) and Laura J. Colker. The Company believes that its use of a curriculum
prepared by independent educators with expertise in the education of young
children enables it to take advantage of professional expertise that is not
otherwise available to it or other child care center operators. In addition, an
externally developed curriculum typically emphasizes educational objectives over
cost and other financial objectives. The Company trains its center directors and
other caregivers to utilize The Creative Curriculum(R).
Children enrolled at a center are placed into groups, according to their
emotional, physical, intellectual and social maturity, rather than merely the
child's age. Each care group has specific learning goals which enable the staff
to develop planning activities and daily programs and to assess each child's
growth and development. Although all centers utilize the same educational
curriculum, the staff at each center is responsible for developing daily lesson
plans and activities appropriate for each of its developmental groups and for
its locale. At designated times during the year, an informal developmental
assessment is prepared for each child and reviewed with the child's parents.
4
<PAGE> 5
The Company's classrooms are organized in seven levels following the
sequential process of growth and development, from infancy through school-age:
INFANTS (SIX WEEKS - TWELVE MONTHS)
A homelike environment and positive caregiver interactions foster the
infant's sense of trust and self-esteem. Daily routines (feeding, diapering
and rocking) and sensory experiences are used to promote listening and
language skills and to help infants learn about the world around them. Play
activities and interactions focus on the development of large muscles for
sitting, crawling, standing and walking and small muscles for grasping,
reaching, holding and picking up objects.
YOUNG TODDLER (1 - 2 YEARS)
Classroom space and materials are organized to support the young
toddler's need to physically explore and discover and to be independent.
Caregivers provide comforting words and lap time to help toddlers deal with
separation from parents. Toddlers are encouraged to participate in daily
routines to develop self-help skills and self-esteem. Play activities
provide repeated opportunities with sensory experiences to help develop
large and small muscles and thinking skills, and to promote communication
skills. Stories, pictures and books are introduced to help toddlers
experience reading as a pleasurable activity. Caregivers reinforce positive
behaviors, set limits and are consistently available as a "homebase" to
support the toddler's conflicting need for independence and comfort.
TODDLER (2 - 3 YEARS)
Classroom space and material are organized to support the older
toddler's increased need for independence in making simple decisions,
engaging in pretend play and playing cooperatively with other children.
Toddlers are supported in their self-help skills (dressing, feeding and
toileting) and encouraged to help with daily routines to become familiar
with the sequence of routines and foster their self-esteem. Play activities
provide opportunities to practice skills, increase communication about
sensory experiences and promote listening and speaking skills. Indoor and
outdoor activities focus on helping toddlers strengthen small muscles,
develop eye-hand coordination and develop large muscles.
PRESCHOOL 1 (3 - 4 YEARS)
Classroom space and materials are organized in distinct interest
centers to support young preschoolers' initiative to practice and test
their new skills and express their ideas and feelings. These centers are
set up to encourage preschoolers to select play activities, engage in
hands-on exploration and pretend play, and develop the ability to play
cooperatively. Small muscles and eye-hand coordination continue to be
strengthened through art activities, sand and water play and work with
manipulative toys and blocks. The daily schedule includes many activities
for large muscle development. Stories and books are used daily to increase
familiarity with the meaning of letters and words (emergent literacy) and
to foster reading as a pleasurable activity.
PRESCHOOL 2 (4 - 5 YEARS)
Classroom organization and the daily schedule provide increased
opportunities for independent and small group play in interest centers.
Such group play supports older preschoolers' developing ability to organize
their own play, assign roles and tasks, and work towards a common goal.
Activities provide hands-on experiences. Caregiver interaction focuses on
helping preschoolers organize the information they gather, develop an
understanding of number concepts, reasoning and problem solving skills
(matching, classifying and sequencing), and expand listening and speaking
skills. Independent and group activities with books and stories promote
reading readiness. Caregivers create a print rich environment (signs,
labels and charts) and provide opportunities for children to draw, paint
and engage in writing activities. Children are increasingly involved in
helping to set limits for positive and caring behaviors.
5
<PAGE> 6
FIVE YEAR OLD OR KINDERGARTNER (5 - 6 YEARS)
Classroom organization, materials and activities support the five
year-old's increased ability to understand written symbols (letters,
numbers and some words) and interest in writing. Educational interest
centers continue to provide opportunities for hands-on exploration to
sharpen observation skills, explore cause and effect, share and play
cooperatively with others, plan and carry out a task and engage in
independent or group play for an extended period of time. Materials are
provided to encourage representation and symbolic play and to practice
drawing and writing. Activities are planned to help children learn to
follow directions, recall and sequence events, understand measurement,
recognize how materials can change, think creatively to solve problems,
improve their coordination skills, and use their bodies in challenging
outdoor play tasks. Centers which offer a kindergarten program for
transitioning children into first grade, follow the school district's
specific goals and assessment requirements.
SCHOOL-AGES (6 - 12 YEARS)
Classroom space, equipment and materials are organized to support
school-agers' sense of industry and competence and to accommodate the wide
range of interests and abilities of six to twelve year-olds. The program
provides opportunities for school-agers to pursue their interest, perfect
coordination of large and small muscles and perceptual motor coordination,
and to learn to work with others. The environment is designed to engage
children in activities (arts and crafts, cooking, dramatize play, music,
dance, games and sports) they can pursue independently, with a friend, or
as a group project. Caregiver integration focuses on helping children set
reasonable goals and manageable tasks, guiding them to think about the
consequences of their words and actions so as to foster a sense of
community.
Through parent surveys, the Company continually assesses the quality of its
education curriculum. These surveys provide the Company with feedback on parent
satisfaction with their child's developmental growth and with the Company's
curriculum, center director and overall quality of the center. Center directors
also conduct both formal and informal parent interviews in order to ascertain
parent satisfaction levels and address any concerns. Information gained from
these interviews is forwarded to the Company's management for review. The
Company also endeavors to provide an exit-survey to parents who stop utilizing
the Company's services.
The Company continues to focus its efforts to accredit many of its centers
by the National Association for the Education of Young Children ("NAEYC") or the
National Child Care Association ("NCCA"). The NAEYC and NCCA are national
organizations which have established comprehensive criteria for providing
quality child care. NAEYC and NCCA have developed and implemented a child care
center accreditation process through which child care providers can receive
formal, national recognition of their child care program. The Company believes
that the review process leading toward accreditation assists the Company in its
efforts to continually improve its programs and facilities. Currently, industry
accreditation is at approximately 5% while Childtime Learning Centers, Inc. is
at approximately 15%. The Company further believes that accreditation by the
NAEYC or NCCA of a significant number of its centers would provide the Company
with a marketing advantage.
PRODUCTS AND SERVICES
General. The Company's child care operations consist of an Eastern Region
and a Western Region, each headed by a Regional Vice President. These two
regions are further divided into 19 areas, each of which is managed by an area
manager. Area managers are generally responsible for the operation and
performance of eight to seventeen centers. Each individual center has a
dedicated center director and a staff 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 9 hours a day, five days per week, at a center.
The Company's current weekly tuition for full-day service typically ranges
from $78 to $157, depending on the location of the center and the age of the
child. Tuition is generally paid, in advance, on a weekly basis.
6
<PAGE> 7
In addition, parents currently pay an annual registration fee ranging from $25
to $150. The Company generally reviews its tuition rates at least once each year
to determine whether rates at a particular center should be changed in light of
that center's competitive environment and financial results.
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 from a pool of candidates
who have undergone an initial psychological profile screen, reference check and
criminal background check. All center directors are required by state law 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 licensed child care. Many directors
are recruited from within the Company and have served as caregivers 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 performance of their center.
Each center director is also responsible for hiring his or her staff, including
caregivers.
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.
Area Supervision. An area manager hires the director of each of his or her
centers and is supervised by one of the two Regional Vice Presidents. Area
managers also work very closely with other corporate staff members, such as the
Director of Real Estate, Vice President-Marketing or Vice President of Human
Resources, on such issues as center acquisition and marketing, personnel actions
and financial planning. Additional duties of area managers are to facilitate
communications between center directors and the corporate officers, as well as
among center directors, and to monitor cost control and revenue generation
efforts and licensing compliance. Area managers typically spend 80% of their
work time in the centers they supervise. The Company's area managers have all
served as center directors with the Company or within other segments of the
child care industry. Area managers receive a salary and bonus tied to the
performance of the centers under their supervision.
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 programs for its personnel. It has developed
training materials and manuals for its staff on such subjects as interpersonal
and business skills, basic financial concepts and marketing, and regularly
conducts seminars for its area managers and directors. 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. All center staff are required to participate in
orientation and training sessions. In addition, the Company has developed and
implements, on an ongoing basis, extensive training programs to prepare and
enhance the skills of its caregivers to meet the Company's internal standards
and applicable state licensing requirements.
Safety. The Company is committed to the care and safety of the children
enrolled in its centers. Each center has at least one staff member trained in
first-aid. Furthermore, all members of a center's staff are trained to be
protective of the security of each child. Precautions are taken to ensure the
safety and well-being of all children, and children must be signed in or out of
a center only by a parent or other guardian or by a person authorized by the
parents or other guardian. The Company has received isolated allegations
relating to physical or sexual child abuse by its employees. It is the Company's
policy, and State law requires, that the
7
<PAGE> 8
Company and its staff report any allegation of abuse to the appropriate
authorities for investigation. Additionally, the Company's policy is to place
any accused employee on paid administrative leave pending investigation of the
alleged misconduct. Although the Company's procedures are designed to prevent
incidents of child abuse, no assurances can be made that allegations of child
abuse will not occur in the future.
Management believes that all pending cases of allegations of physical or
sexual child abuse by its employees would be fully covered under the Company's
insurance policy limits and would not materially affect the financial position,
operations, or cash flow position of the Company. The Company maintains general
liability insurance, as well as an umbrella policy, as described under
"Insurance", covering these risks.
Financial Planning; Budgeting and Cost Control. The Company has implemented
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 manager and center director in the
formulation and implementation of the budget for each center. Under this
budgeting process, budgets are initially developed at the center level, with
center directors taking an active role in developing and submitting the budget
for their respective centers through their area manager and on to the Company's
corporate management for approval. 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 implemented a financial incentive program for
meeting or exceeding pre-approved budget goals.
Facilities. Most of the Company's centers are free-standing structures
owned or leased by the Company. The Company utilizes two prototype designs which
emphasize efficiency, lower maintenance costs and enhanced appearance. Depending
on the size of the site, these prototype designs contain either 7,900 or 6,400
square feet in a one story, air-conditioned building. The interiors primarily
consist of closed classrooms bordering on open area in the middle of the center.
Such a design accommodates the desire to allow 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 typically laid out to accommodate the
grouping of children by age or development. Room materials are chosen for their
educational value, quality and versatility. The infant/young toddler room
features separate, sanitary diaper changing areas. Each facility has a
playground designed to accommodate the full range of children attending the
center, including an area specifically for infants and toddlers. The whole
playground is fenced for security and organized to provide adequate supervision
for every age group. Each center is equipped with a variety of audio-visual
aids, educational supplies, games, toys and indoor and outdoor play equipment.
In addition, some of the centers are equipped with personal computers and
software which is specially designed for preschoolers. Virtually all of the
centers are also equipped with Company-owned or leased vehicles for the
transportation of children to and from elementary school and for field trips.
Licensed capacity for the same size building varies from state to state
because of different licensing requirements. A 6,400 square foot center is
typically licensed for 120 to 140 children, and a 7,900 square foot center is
typically licensed for 120 to 180 children. The aggregate licensed capacity of
the Company's centers (including those under management contracts) at April 3,
1998 was 29,536 children (or an average of 122 children per center).
At-Work Sites. In addition to operating residential child care centers, the
Company also operated, at April 3, 1998, 42 child care centers in at-work
locations, making it one of the largest providers of at-work child care
services. Many of these centers, including those for Prudential Insurance
Company, Schering Plough (a division of the Schering Corporation), Blue Cross
Blue Shield of Mississippi and Henry Ford Hospital, 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. Other
at-work centers are located in office complexes or shopping centers.
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 have begun to 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 cost to employers of offering
such benefits. The Company expects to capitalize on this
8
<PAGE> 9
trend by actively pursuing contracts with employers, as well as acquiring
centers that serve particular employers.
MARKETING
The Company believes that the quality of a center's director and staff,
center location and consistent advertising and marketing are the key components
to a successful center. The Company relies heavily on recommendations from
current customers as a source of new enrollments. To encourage recommendations,
the Company offers a referral bonus to parents and employees of the Company who
successfully recommend the Company to others. In addition, the Company
advertises through a variety of database direct marketing programs which target
parents within a specified radius of each center. The advertising budget is
largely spent in the summer months in anticipation of the back-to-school
enrollment in new centers. The Company also advertises through direct mail
distribution of promotional material in residential areas surrounding a center
and through listings in the Yellow Pages. The Company expects to continue to
promote its safe and secure facilities, qualified staff and respected curriculum
through direct marketing campaigns timed around peak enrollment periods or to
support specified programs.
SEASONALITY
Generally, the Company's accounting periods are organized into 13 four-week
periods, with four four-week periods comprising the first fiscal quarter and
three four-week periods comprising each of the second, third and fourth fiscal
quarters. Consequently, the Company's quarterly revenues and gross profit
results for the first quarter are favorably impacted by the additional four
weeks included in such period. Periodically, due to the Company's closing the
fiscal year on the Friday closest to March 31, the Company will have a five week
period in the thirteenth period of its fiscal year. Such was the case for the
thirteenth period of the fiscal year ended April 3, 1998. Consequently, the 1998
fiscal year was comprised of four four-week periods in the first fiscal quarter,
three four-week periods in each of the second and third fiscal quarters, and two
four-week periods and a five-week period in the fourth fiscal quarter.
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. To offset this
decline, the Company has successfully implemented and marketed a summer camp
program with a new theme and focus each year. As a result of such programming
and the timing of the quarters, average weekly revenues by quarter during fiscal
1998 and 1997 were very consistent and not adversely impacted by the normal
summer enrollment decline. In addition, new enrollments are generally highest in
September and January; accordingly, August and December are traditionally the
best months to open new centers. However, with the exception of spring, the
Company has demonstrated an ability to successfully open centers throughout the
year because of enhanced pre-opening marketing efforts. Total enrollments (and,
accordingly, the Company's results) are typically the strongest in the fourth
quarter (which includes the months of January, February and March).
9
<PAGE> 10
The following table shows certain unaudited financial information for the
Company for the interim periods indicated as restated and discussed on page 20.
Quarterly results may vary from year to year depending on the timing and amount
of revenues and costs associated with new center development and acquisitions,
as well as certain other costs.
QUARTERLY DATA
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------------------------------------
12 WEEKS ENDED 12 WEEKS ENDED 16 WEEKS ENDED
13 WEEKS ENDED JANUARY 2, 1998 OCTOBER 10, 1997 JULY 18, 1997
APRIL 3, 1998 (AS RESTATED) (AS RESTATED) (AS RESTATED)
-------------- --------------- ---------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................ $26,216 $21,545 $21,524 $28,543
Gross profit........................ $ 4,216 $ 2,836 $ 2,904 $ 4,440
Income before extraordinary item.... $ 1,545 $ 687 $ 745 $ 1,369
Earnings per share -- Basic &
Diluted........................... $ 0.28 $ 0.13 $ 0.14 $ 0.25
Net income.......................... $ 1,545 $ 687 $ 745 $ 1,369
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
-----------------------------------------------------------------------
12 WEEKS ENDED 12 WEEKS ENDED 12 WEEKS ENDED 16 WEEKS ENDED
MARCH 28, 1997 JANUARY 3, 1997 OCTOBER 11, 1996 JULY 19, 1996
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenues............................ $20,298 $17,622 $17,458 $23,256
Gross profit........................ $ 3,350 $ 2,361 $ 2,421 $ 4,065
Income before extraordinary item.... $ 1,141 $ 1,183 $ 669 $ 1,326
Earnings per share -- Basic &
Diluted........................... $ 0.21 $ 0.22 $ 0.12 $ 0.24
Net income.......................... $ 1,141 $ 1,183 $ 669 $ 1,326
</TABLE>
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
effect on its results of operations during the past two years.
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 (some 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.
The largest providers of for-profit child care and preschool education are
KinderCare Learning Centers, Inc. and La Petite Academy, Inc. The Company
believes it is able to compete favorably with these providers by offering a
higher 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 rental
costs, if any, than the Company and may receive donations or other funding to
cover operating expenses. Consequently, operators of such centers often charge
tuition rates that are less than the Company's rates. In addition, fees for
home-based care are normally lower than fees for center-based care because
providers of home care are not always required to satisfy the same health,
safety, insurance or operational regulations as the Company's centers. The
Company competes by hiring and training quality center directors and by offering
professionally-planned educational and recreational programs, modern,
well-equipped facilities, trained staff and supervisory personnel, and a range
of services, including infant and toddler care, drop in service and the
transportation of older children enrolled in the Company's before and after
school program between the Company's child care centers and schools.
10
<PAGE> 11
PERSONNEL
As of April 3, 1998, the Company employed approximately 4,750 persons
(including part-time and substitute caregivers), of whom 40 are employed at
corporate headquarters, 20 are area managers and the remainder are employed at
the Company's child care centers or as local field support personnel. Center
employees include center directors and assistant directors, regular full-time
and part-time caregivers, substitute caregivers and aides, and other staff,
including cooks and van drivers. All center directors and 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 good.
The Company is also subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime compensation and working conditions. A
portion of the Company's personnel (estimated to be less than 5% as a percentage
of total payroll expense) are paid at the Federal minimum wage.
REGULATION
Child care centers are subject to numerous state and local regulations and
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 compliance with 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 3, 1998, approximately 14% of the Company's
revenues were generated from federal 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 which must be met to
qualify for participation in certain federal programs. In addition, the Company
participates in the Georgia Prekindergarten Program which provides services for
eligible four-year-old children and their families. This resulted in
approximately $1,200,000 of revenue during the fiscal year ended April 3, 1998.
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 30% 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. The amount of the qualifying child care expenses is
limited to $2,400 for one child and $4,800 for two or more children and,
therefore, the maximum credit ranges from $480 to $720 for one child and from
$960 to $1,440 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 by the Company to bring the Company's centers into compliance with
the ADA.
11
<PAGE> 12
INSURANCE
The Company's insurance program currently includes the following types of
policies: workers' compensation, commercial general and automobile liability,
property, 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. The workers' compensation policy requires
contributions to a self-insured deduction fund. For fiscal 1997 and 1998, the
Company's policies for workers' compensation had a deductible of $250,000 per
occurrence. The commercial general liability policy includes coverage for
physical and sexual child abuse claims, with an annual limit of $1,000,000 per
location (including all general liability claims except product liability
claims), $1,000,000 per occurrence and $2,000,000 in the aggregate. The Company
also has excess "umbrella" coverage, relating to general liabilities including
physical and sexual child abuse claims, in the amount of $20,000,000 per year.
Management believes that 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 3, 1998 (the numbers in
the parentheses reflect the number of centers in that state):
<TABLE>
<S> <C>
Arizona (28) New Jersey (7)
California (26) New York (28)
Florida (11) Ohio (17)
Georgia (15) Oklahoma (11)
Illinois (6) Pennsylvania (1)
Maryland/DC (14) Texas (35)
Michigan (18) Virginia (13)
Mississippi (1) Washington (10)
Wisconsin (1)
</TABLE>
As of April 3, 1998, the Company operated 242 centers, 182 of which were
leased, 54 of which were owned and 6 of which were operated under management
contracts. The leases have terms ranging from one to 25 years, often with
renewal options, with most leases having an initial term of five to 20 years.
The leases typically require the Company to pay utilities, maintenance,
insurance and property taxes and some provide for contingent rentals if the
center's revenues exceed a specified base level.
As of April 3, 1998, the Company had leases with initial terms (including
renewal options) expiring as follows:
<TABLE>
<CAPTION>
NUMBER OF
FISCAL YEAR LEASES EXPIRING
----------- ---------------
<S> <C>
1999-2000................................................... 26
2001-2002................................................... 21
2003-2006................................................... 40
2007 and later.............................................. 95
</TABLE>
The Company also owns five undeveloped sites acquired prior to 1990 when
the Company was owned by Gerber Products Company. These sites are carried on the
Company's books at an estimated realizable value aggregating $512,450. Most of
these properties no longer fit within the Company's long-term growth strategy
and will be disposed of over the next few years.
The Company currently leases approximately 10,120 square feet for its
corporate offices in Farmington Hills, Michigan.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation arising out
of the ordinary course of its business, most of which is covered by insurance.
In management's opinion, none of the litigation in which the Company is
currently involved will have a material effect on its financial condition,
results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers of the Company contained in
Item 10 of this Report as it appears in Part III of this Report is incorporated
herein by reference.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is regularly quoted on the NASDAQ National
Market System under the symbol CTIM. The following table sets forth, for the
fiscal years ended April 3, 1998 and March 28, 1997, the high and low closing
sale prices for the Company's Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
SALE PRICES
----------------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998:
1st Quarter............................................... $10.50 $ 8.75
2nd Quarter............................................... $13.00 $ 9.13
3rd Quarter............................................... $14.50 $ 9.50
4th Quarter............................................... $16.75 $14.06
Fiscal 1997:
1st Quarter............................................... $12.63 $ 6.25
2nd Quarter............................................... $13.00 $ 6.75
3rd Quarter............................................... $13.25 $ 8.50
4th Quarter............................................... $10.00 $ 8.38
</TABLE>
The Company has not paid dividends on shares of Common Stock and has no
intention of declaring or paying any such dividends in the foreseeable future.
The Company is not currently subject to any contractual restrictions on its
ability to pay dividends. Nonetheless, the Company intends to retain its
earnings, if any, to finance the growth and development of its business,
including future acquisitions.
As of June 15, 1998, there were approximately 1,087 holders of the
Company's Common Stock (including individual participants in security position
listings).
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected data
from the Company's financial statements. This table and subsequent discussions
should be read in conjunction with the Consolidated Financial Statements and
related Notes appearing elsewhere in this Report.
The Company's financial statements have been restated to reflect a
liability that existed for straight-line rent expense related to scheduled
dollar increases of lease payments pursuant to SFAS No. 13 "Accounting for
Leases."
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
<TABLE>
<CAPTION>
APRIL 3, MARCH 28, MARCH 29, MARCH 31, APRIL 1,
1998 1997 1996 1995 1994
-------- --------- --------- --------- --------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Revenues.............................. $97,828 $78,634 $65,623 $55,339 $48,068
Cost of revenues...................... 83,432 66,437 53,951 44,717 38,504
------- ------- ------- ------- -------
Gross profit................... 14,396 12,197 11,672 10,622 9,564
Marketing expenses.................... 1,265 1,161 1,038 929 939
General and administrative expenses... 6,193 5,393 5,139 5,072 4,643
Revaluation of land held for
disposal............................ -- -- 612 -- --
------- ------- ------- ------- -------
Operating income............... 6,938 5,643 4,884 4,621 3,982
Interest expense...................... 287 160 1,800 2,135 1,888
Interest (income)..................... (226) (189) (39) -- (2)
Other (income), net................... (34) (399) (331) (386) (368)
------- ------- ------- ------- -------
Income before income taxes and
extraordinary item.......... 6,911 6,071 3,453 2,872 2,464
Income tax provision.................. 2,565 1,751 1,326 1,092 51
------- ------- ------- ------- -------
Net income before extraordinary
item........................ 4,346 4,320 2,127 1,780 2,413
Extraordinary item, gain on
extinguishment of debt, net of
tax................................. -- -- 148 -- --
------- ------- ------- ------- -------
Net income..................... $ 4,346 $ 4,320 $ 2,275 $ 1,780 $ 2,413
======= ======= ======= ======= =======
Earnings per share -- Basic........... $ 0.80 $ 0.80 $ 0.60 $ 0.46 $ 0.63
======= ======= ======= ======= =======
Earnings per share -- Diluted......... $ 0.80 $ 0.80 $ 0.60 $ 0.46 $ 0.63
======= ======= ======= ======= =======
SELECTED BALANCE SHEET DATA:
Total assets.......................... $58,232 $50,286 $44,688 $40,967 $40,037
Total debt............................ 3,062 2,272 1,236 19,424 21,910
Total shareholders' equity............ $41,287 $35,489 $31,109 $ 9,529 $ 7,807
SELECTED OPERATING DATA:
Number of centers (at end of
period)............................. 242 211 174 148 128
Center capacity (at end of
period)(1).......................... 28,911 24,280 19,922 16,836 14,531
Average utilization(1)................ 62.5% 63.4% 66.5% 67.2% 66.4%
</TABLE>
- -------------------------
(1) Average utilization is calculated by dividing total child days for a period
by the total capacity of the Company's centers (excluding the capacity of
those centers managed by the Company pursuant to management contracts) at
the end of such period. Child days are calculated based upon the Company's
standard hours by program (e.g., full-time, before and after, etc.).
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Childtime Learning Centers, Inc. in February, 1996 became a publicly traded
company with its 1,930,000 share offering on the NASDAQ National Market System
(the "Offering"). Proceeds from the offering netted $19.2 million and exceeded
the amount required to pay off the Company's aggregate bank and subordinated
debt of approximately $17.4 million.
During the past four fiscal years, the Company has increased the number of
centers from 128, at the beginning of fiscal year 1995, to 242 at fiscal year
end 1998. The Company has achieved this growth through a combination of
acquisitions, "build-to-suit" centers, and leases. Additionally, the Company has
continued to increase the number of centers in both "at-work" and residential
locations.
Fiscal year 1998 growth consisted of 35 centers. The additions included 24
acquisitions/leases, 2 management contracts, 1 new lease, and 8 "build-to-suit"
leased centers. The Company also closed 4 centers.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from "Selected Consolidated Financial Data" expressed as a percentage of
revenues and the percentage change in the dollar amounts of such items compared
to the prior period:
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
PERCENTAGE OF REVENUE (DECREASE)
FISCAL YEAR ENDED ----------------------
---------------------------------- FISCAL 98 FISCAL 97
APRIL 3, MARCH 28, MARCH 29, OVER OVER
1998 1997 1996 FISCAL 97 FISCAL 96
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues........................................ 100.0% 100.0% 100.0% 24.4% 19.8%
Cost of revenues................................ 85.3% 84.5% 82.2% 25.6% 23.1%
----- ----- ----- ----- -----
Gross profit.................................. 14.7% 15.5% 17.8% 18.0% 4.5%
Marketing expenses.............................. 1.3% 1.5% 1.6% 9.0% 11.8%
General and administrative expenses............. 6.3% 6.9% 7.8% 14.8% 4.9%
Revaluation of land held for disposal........... -- -- 0.9% * *
----- ----- ----- ----- -----
Operating income.............................. 7.1% 7.2% 7.4% 22.9% 15.6%
Interest expense................................ 0.3% 0.2% 2.7% 79.4% (91.1)%
Interest income................................. (0.2)% (0.2)% -- 19.6% *
Other income, net............................... -- (0.5)% (0.5)% (91.7)% 20.5%
----- ----- ----- ----- -----
Income before income taxes and extraordinary
item....................................... 7.1% 7.7% 5.3% 13.8% 75.8%
Income tax provision............................ 2.6% 2.2% 2.0% 46.5% 32.1%
----- ----- ----- ----- -----
Income before extraordinary item.............. 4.4% 5.5% 3.2% 0.6% 103.1%
Extraordinary item: gain, net of tax............ -- -- 0.2% * *
----- ----- ----- ----- -----
Net income.................................... 4.4% 5.5% 3.5% 0.6% 87.9%
===== ===== ===== ===== =====
</TABLE>
- -------------------------
* percentage increase (decrease) is not meaningful information
FISCAL 1998 COMPARED TO FISCAL 1997. Revenues increased to $97.8 million in
fiscal 1998 from $78.6 million in fiscal 1997, a 24.4% increase. Of that
increase, 21.0% came from centers added during fiscal 1998 and from the full
year impact of centers opened in fiscal 1997. The remaining 3.4% came from
comparable center revenue growth (revenues from centers operating during all of
fiscal 1998 and fiscal 1997). Comparable center revenue growth was 4.2%, or $3.0
million over last year's comparable center revenues. This growth in comparable
center revenues resulted primarily from increases in tuition rates and to a
lesser extent, increases in center utilization. In addition, the Company
benefited from an additional week of revenue in fiscal 1998 as a result of the
Company's policy to utilize a 52 -- 53 week fiscal year ending on the Friday
closest to March 31.
16
<PAGE> 17
Gross profit increased to $14.4 million in fiscal 1998 from $12.2 million
in fiscal 1997, an increase of 18.0%. As a percentage of revenues, gross profit
decreased to 14.7% in fiscal 1998 from 15.5% in fiscal 1997. This decrease in
margin was primarily due to the Company continuing to add new centers, which
early in their operations will experience initial start up costs, operating
losses and/or low margins. In addition, the Company benefited from an additional
week of gross profit in fiscal 1998 as a result of the Company's policy to
utilize a 52 -- 53 week fiscal year ending on the Friday closest to March 31.
Marketing expenses increased to $1.3 million in fiscal 1998 from $1.2
million in fiscal 1997, a 9.0% increase. The increase was primarily due to the
additional marketing expenses relating to the opening or acquisition of 35 new
centers in fiscal 1998 as well as a full year of expense for the 37 new centers
opened or acquired in fiscal 1997. As a percentage of revenues, however,
marketing expenses decreased to 1.3% in fiscal 1998 from 1.5% in fiscal 1997,
due primarily to operating leverage provided by higher revenues.
General and administrative expenses increased to $6.2 million in fiscal
1998, from $5.4 million in 1997, a 14.8% increase. As a percentage of revenues,
however, general and administrative expenses decreased to 6.3% in fiscal 1998
from 6.9% in fiscal 1997, due primarily to operating leverage provided by higher
revenues.
Interest expense increased to $0.3 million in fiscal 1998 from $0.2 million
in fiscal 1997. As a percentage of revenues, interest expense increased to 0.3%
in fiscal 1998 from 0.2% in fiscal 1997.
Other income decreased to $0.03 million in fiscal 1998 from $0.4 million in
fiscal 1997, a 91.7% decrease. This decrease is principally due to the
expiration of a $400,000 annual lease subsidy which had been in effect for five
years.
The provision for income tax increased to $2.6 million (an effective rate
of 37.1%) in fiscal 1998 from $1.8 million (an effective rate of 28.8%) in
fiscal 1997. The increase in the effective tax rate was principally due to the
$600,000 tax credit (a 9.4% impact) realized in the third quarter of fiscal 1997
as a result of the settlement with the IRS regarding the deductibility of
certain acquisition costs. See Note 9 of the Notes to the Consolidated Financial
Statements included as part of Item 14 of this Report.
As a result of the foregoing changes, the Company's net income was $4.3
million, or 4.4% of revenues, in fiscal 1998 as compared to $4.3 million, or
5.5% of revenues, in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996. Revenues increased to $78.6 million in
fiscal 1997 from $65.6 million in fiscal 1996, a 19.8% increase. Of that
increase, 17.7% came from centers added during fiscal 1997 and from the full
year impact of centers opened in fiscal 1996. The remaining 2.1% came from
comparable center revenue growth (revenues from centers operating during all of
fiscal 1996 and fiscal 1997). Comparable center revenue growth was 2.2%, or $1.4
million over last year's comparable center revenues. This growth in comparable
center revenues resulted primarily from increases in tuition rates and was
partially offset by lower center utilization attributable to the impact of the
softer than expected fall enrollments in certain regional markets.
Gross profit increased to $12.2 million in fiscal 1997 from $11.7 million
in fiscal 1996, an increase of 4.5%. As a percentage of revenues, gross profit
decreased to 15.5% in fiscal 1997 from 17.8% in fiscal 1996. This decrease in
margin was primarily due to the Company continuing to add new centers, which
early in their operations will experience initial start up costs, operating
losses and/or low margins, and to a lessor extent, a slight decrease in the
continuing centers' margins due to the impact of the soft fall enrollments in
certain regional markets. Also, the Company continues to add exclusively leased
facilities which typically produce lower margins than the Company's owned
facilities due to the additional rent expense.
Marketing expenses increased to $1.2 million in fiscal 1997 from $1.0
million in fiscal 1996, a 11.8% increase. The increase was primarily due to the
additional marketing expenses relating to the opening or acquisition of 37 new
centers in fiscal 1997 as well as a full year of expense for the 27 new centers
opened or acquired in fiscal 1996. As a percentage of revenues, however,
marketing expenses decreased to 1.5% in fiscal 1997 from 1.6% in fiscal 1996 .
17
<PAGE> 18
General and administrative expenses increased to $5.4 million in 1997 from
$5.1 million in fiscal 1996, a 4.9% increase. As a percentage of revenues,
however, general and administrative expenses decreased to 6.9% in fiscal 1997
from 7.8% in fiscal 1996, due primarily to operating leverage provided by higher
revenues.
Interest expense decreased to $0.2 million in fiscal 1997 from $1.8 million
in fiscal 1996. This decrease was due to repayment in February and March 1996 of
approximately $17.4 million of the Company's outstanding indebtedness with net
proceeds from the Offering, partially offset by new indebtedness incurred with
the acquisition of centers. As a percentage of revenues, interest expense
decreased to 0.2% in fiscal 1997 from 2.7% in fiscal 1996.
The provision for income tax increased to $1.8 million (an effective rate
of 28.8%) in fiscal 1997 from $1.3 million (an effective rate of 38.4%) in
fiscal 1996. The decrease in the effective tax rate was principally due to the
$600,000 tax credit (a 9.4% impact) realized in the third quarter of fiscal 1997
as a result of the settlement with the IRS regarding the deductibility of
certain acquisition costs. See Note 9 of the Notes to the Consolidated Financial
Statements included as part of Item 14 of this Report.
As a result of the foregoing changes, the Company's net income increased to
$4.3 million, or 5.5% of revenues, in fiscal 1997 from $2.3 million, or 3.5% of
revenues, in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements during fiscal 1998 and 1997 were
new center expansion (through development of build-to-suit centers, new leases
and acquisitions), maintenance of existing centers and the repayment of debt and
related interest. The Company's primary cash requirements for fiscal 1999 will
be its new center expansion program and maintenance of existing centers. The
Company believes that operating cash flows, together with amounts available
under a $10 million unsecured revolving line of credit facility will be
sufficient to satisfy the Company's anticipated cash requirements on both a
long-term and short-term basis. The line of credit bears annual interest at
either the prime rate or an adjusted Eurodollar based rate, at the Company's
option.
Cash balances of $5.5 million and debt of $3.1 million at April 3, 1998,
allow the Company to continue its growth strategy. Net cash provided by
operations was $8.4 million during fiscal 1998 and $5.6 million during fiscal
1997. During the fiscal 1998 period, cash provided by operations, together with
proceeds from the sale of assets ($0.1 million), was principally used to add 35
centers and to make capital improvements to existing centers (aggregating $5.7
million), to repay current installments due on acquisition debt ($0.9 million),
and to increase cash balances ($1.8 million). During fiscal 1998, and at April
3, 1998, no borrowings were incurred under the Company's line of credit.
Net accounts receivable increased to $2.5 million at April 3, 1998, from
$1.9 million at March 28, 1997. This increase was principally due to increased
participation in federal child care assistance programs, the timing of agency
payment receipts and general growth in revenues. Reimbursable construction costs
increased to $0.9 million at April 3, 1998, from $0.02 million at March 28,
1997. This increase was due to construction and development costs incurred by
the Company for new build centers, as described below.
The Company from time to time enters into contractual arrangements with
general contractors for the construction of build-to-suit centers. The Company's
Director of Real Estate Development and staff oversee the design and
construction of the new build centers and pay the periodic contractual
construction draws to the general contractor as well as other developmental
costs incurred. The Company then periodically throughout the construction phase
requests reimbursement for the construction draws and development costs from the
property owner/landlord with whom the Company has a contractual lease back
arrangement. The Company has various legal remedies available pursuant to
construction agreements to minimize the risk of non-reimbursement as well as
holding a security interest in the building during the construction phase.
Accrued wages and payroll taxes increased to $3.5 million at April 3, 1998,
from $1.9 million at March 28, 1997. This increase was primarily due to having a
three week accrual at April 3, 1998, as compared to a two week accrual at March
28, 1997, as a result of the Company's policy to utilize a 52 -- 53 week fiscal
year ending on the Friday closest to March 31.
18
<PAGE> 19
During fiscal 1998, the Company opened or acquired 35 centers, consisting
of 9 build-to-suit centers or new leases, with the balance coming from
acquisitions. The average cash required to open a build-to-suit center,
consisting of capital expenditures for lease improvements and initial start-up
costs, was approximately $80,000 for fiscal 1998, with each center experiencing
additional cash requirements of $8,000 to $20,000 during its first six to nine
months of operation. The costs for the Company's acquisitions vary considerably
depending, in part, upon the profitability and maturity of the centers to be
acquired, as well as their size and number. The Company has historically
targeted an acquisition price ranging from $100,000 to $250,000 per center and
provides for cash down payments generally ranging from 30% to 70% of the
acquisition price. On occasion, the Company has been required to invest an
additional $10,000 to $50,000 to bring certain acquired centers up to the
Company's standards.
During fiscal year 1999, the Company estimates opening or acquiring 32 to
37 centers. While the financial impact of acquired centers will vary with the
economic impact and size of each transaction, the Company's build-to-suit cash
requirements per center should not change substantially from prior years. The
Company's estimated total cash requirements for center expansion and ongoing
maintenance of existing centers should approximate $6.1 million in fiscal 1999.
An acquisition of a larger multi-unit operator could increase these cash
requirements.
YEAR 2000 DATE CONVERSION
Management has implemented measures to ensure that the Company's
information systems and applications will recognize and process information
pertaining to the Year 2000. The measures being conducted utilize both internal
and external resources and are directed at identifying systems and applications
effected, corrections or adjustments necessary to existing systems, acquisition
of new systems and applications, and testing of the systems and applications for
Year 2000 compliance.
Management does not expect that the cost of the measures necessary to
attain Year 2000 compliance will be material to the Company's business,
financial position or results of operations. Although the Company could be
effected by the systems of other companies with which it does business,
management does not believe that the Company's systems will be materially or
adversely effected by the Year 2000 compliance efforts of third parties.
Management expects that the Company will be Year 2000 compliant by the end of
1999.
EFFECT ON INFLATION
The Company does not believe that inflation has had a material effect on
the results of its operations in the past three fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
included in the Consolidated Financial Statements set forth on pages F-1 through
F-16, attached hereto and found following the signature page of this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harold A. Lewis.................................... 52 President and Chief Executive Officer
Michael M. Yeager.................................. 39 Vice President, Chief Financial Officer,
Secretary and Treasurer
Deborah D. Ludwig.................................. 44 Vice President -- Eastern Region
Taylor V. Ward..................................... 44 Vice President -- Western Region
William H. Van Huis................................ 41 Vice President -- Marketing
Kathryn C. Peel.................................... 48 Vice President -- Human Resources
</TABLE>
Six of the executive officers of the Company have held the positions with
the Company set forth above since the Company's incorporation in November 1995.
Kathryn C. Peel was appointed as an executive officer in August 1997. In
addition, each has served in the following positions:
Harold A. Lewis has been the President and Chief Executive Officer and a
director of Childtime Childcare, Inc. since August 1991. From 1990 to 1991, he
was Chief Operating Officer International Operations of U.S. Travel Systems,
Inc., a national, multi-unit travel company headquartered in Rockville,
Maryland. From 1989 to 1990, Mr. Lewis was Chief Operating Officer of U.S.
Travel Systems, Inc. Mr. Lewis' previous experience includes 14 years with The
Dun & Bradstreet Corporation in New York, most recently as President of one of
its subsidiaries, Thomas Cook Travel USA, a national multi-unit travel company.
Mr. Lewis serves on the Dean's Executive Council at the Frank G. Zarb School of
Business at Hofstra University. Mr. Lewis holds an M.B.A. from New York
University.
Michael M. Yeager has served as Chief Financial Officer, Secretary and
Treasurer of Childtime Childcare, Inc. since April 1991. From 1987 until he
joined the Company, Mr. Yeager held various executive level positions, including
Chief Financial Officer and Director of International Operations and Regional
Controller, for Domino's Pizza Distribution Corporation, located in Ann Arbor,
Michigan, a multi-unit food manufacturer and distributor. Mr. Yeager, a
certified public accountant, has a B.A. from Albion College.
Deborah D. Ludwig has been the Vice President-Eastern Region of Childtime
Childcare, Inc. since June 1992 and served as Executive Vice President and
General Manager of Childtime Childcare, Inc. from July 1990 to June 1992. Ms.
Ludwig also served as a director of Childtime Childcare, Inc. from July 1990
until November 1995. She has a 23-year career in child care, 18 of which are
with the Company and its predecessor, GCC. Ms. Ludwig has an Associates Degree
from Mott Community College in Early Childhood Development and a B.A. from the
University of Michigan.
Taylor V. Ward has been the Vice President-Western Region of Childtime
Childcare, Inc. since June 1992. From 1982 until joining the Company, Ms. Ward
served as a District Manager for KinderCare Learning Centers in the Texas,
California and Nevada areas. Ms. Ward holds degrees in Accounting from Wichita
State University and in Early Childhood Development from Southwest Texas State
University, and she has substantially completed her course work for a Masters of
Science in Communications from Southwest Texas State University.
William H. Van Huis has been the Vice President of Marketing of Childtime
Childcare, Inc. since November 1990. In addition to supervising the marketing
and advertising of the Company's centers, Mr. Van Huis is also responsible for
developing employer-sponsored child care locations. From 1986 to 1990, Mr. Van
Huis was National Marketing Manager for Ziebart International Corporation/TKD
North America, an automotive aftermarket firm located in Troy, Michigan. He
holds a B.A. from Michigan State University.
20
<PAGE> 21
Kathryn C. Peel has been the Vice President of Human Resources of Childtime
Childcare, Inc. since April 1997. She joined Childtime in May 1993 as Director
of Human Resources. From 1989 to 1993, Ms. Peel was Director of Corporate Human
Resource Services for Mercy Health Services in Michigan. From 1984 to 1989 she
was Assistant Administrator at Egleston Hospital for Children in Atlanta,
Georgia. She has 20 years experience in human resources and communications. She
holds a B.S. in Journalism from The George Washington University and a M.S. in
Human Resources from Troy State University.
Additional information required by this Item will be contained in the 1998
Proxy Statement of the Company under the caption, "Election of Directors," and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be contained in the 1998 Proxy
Statement of the Company under the captions, "Executive Compensation,"
"Compensation Committee Interlocks and Insider Participation," "Committees of
the Board of Directors" and "Director Compensation," and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item will be contained in the 1998 Proxy
Statement of the Company under the captions, "Election of Directors" and
"Principal Shareholders," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be contained in the 1998 Proxy
Statement under the caption, "Certain Transactions," and is incorporated herein
by reference.
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements filed with this Report are listed on page
F-1.
2. FINANCIAL STATEMENTS SCHEDULE
The financial statement schedule filed with this Report is listed on
page F-1. Other financial statement schedules, for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission, are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
3. EXHIBITS
The exhibits filed with this Report are listed on the "Exhibit Index"
on pages E-1 through E-2.
(b) REPORTS ON FORM 8-K
No current Reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended April 3, 1998.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on June 26, 1998.
CHILDTIME LEARNING CENTERS, INC.
Dated: June 29, 1998 By: /s/ HAROLD A. LEWIS
------------------------------------
Harold A. Lewis,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated on June 26, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ HAROLD A. LEWIS President, Chief Executive Officer and Director
- --------------------------------------------- (Principal Executive Officer)
Harold A. Lewis
/s/ MICHAEL M. YEAGER Vice President and Chief Financial Officer
- --------------------------------------------- (Principal Financial and Accounting Officer)
Michael M. Yeager
/s/ MILTON H. DRESNER Director
- ---------------------------------------------
Milton H. Dresner
/s/ JAMES W. GEISZ Director
- ---------------------------------------------
James W. Geisz
/s/ GEORGE A. KELLNER Director
- ---------------------------------------------
George A. Kellner
/s/ LEONARD C. TYLKA Director
- ---------------------------------------------
Leonard C. Tylka
/s/ JASON K. FELD Director
- ---------------------------------------------
Jason K. Feld
/s/ BENJAMIN R. JACOBSON Director
- ---------------------------------------------
Benjamin R. Jacobson
</TABLE>
23
<PAGE> 24
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Childtime Learning
Centers, Inc. are referred to in Item 8:
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Consolidated Balance Sheet................................ F-3
Consolidated Statement of Income.......................... F-4
Consolidated Statement of Changes in Common Stock Purchase
Warrant and Shareholders' Equity....................... F-5
Consolidated Statement of Cash Flows...................... F-6
Notes to Consolidated Financial Statements................ F-7 - F-16
The following consolidated financial statement schedule of Childtime
Learning Centers, Inc. is included herein:
Schedule II - Valuation and qualifying accounts........... S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
F-1
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Childtime Learning Centers, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Childtime
Learning Centers, Inc. and Subsidiary as of April 3, 1998 and March 28, 1997,
and the related consolidated statements of income, changes in common stock
purchase warrant and shareholders' equity, and cash flows for each of the three
fiscal years in the period ended April 3, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Childtime
Learning Centers, Inc. and Subsidiary as of April 3, 1998 and March 28, 1997,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended April 3, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 3, the accompanying financial statements have been
restated to reflect the recognition of scheduled rent increases on a
straight-line basis over the term of the related lease.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
June 8, 1998
F-2
<PAGE> 26
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
1998 1997
-------- ---------
(AS RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,541,122 $ 3,733,174
Accounts receivable, less allowance for doubtful accounts
of $225,000 and $185,000, respectively.................. 2,485,811 1,941,059
Reimbursable construction costs........................... 930,688 15,046
Prepaid expenses and other................................ 1,853,812 1,412,273
Deferred income taxes..................................... 945,000 904,000
----------- -----------
Total current assets............................... 11,756,433 8,005,552
----------- -----------
Land, buildings and equipment:
Land...................................................... 10,220,000 10,220,000
Buildings................................................. 19,640,018 19,504,681
Vehicles, furniture and equipment......................... 8,783,584 7,161,356
Leasehold improvements.................................... 5,674,308 5,296,298
----------- -----------
44,317,910 42,182,335
Less accumulated depreciation and amortization.......... (9,359,509) (8,125,974)
----------- -----------
34,958,401 34,056,361
Land held for disposal.................................... 512,450 594,450
----------- -----------
35,470,851 34,650,811
----------- -----------
Other noncurrent assets:
Intangible assets, net.................................... 10,179,240 7,039,602
Refundable deposits and other............................. 711,146 590,472
----------- -----------
Total assets....................................... $58,117,670 $50,286,437
=========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt...................... $ 818,781 $ 686,453
Accounts payable.......................................... 1,535,590 1,271,001
Accrued wages and payroll taxes........................... 3,492,206 1,940,409
Accrued vacation.......................................... 913,835 807,729
Other current liabilities................................. 3,108,890 2,568,012
----------- -----------
Total current liabilities.......................... 9,869,302 7,273,604
Long-term debt.............................................. 2,242,790 1,585,599
Deferred rent liability..................................... 1,400,000 1,000,000
Deferred income taxes....................................... 3,319,000 3,498,000
----------- -----------
Total liabilities.................................. 16,831,092 13,357,203
----------- -----------
Common stock purchase warrant............................... -- 1,440,000
Commitments and contingencies............................... -- --
SHAREHOLDERS' EQUITY
Common stock, 10,000,000 shares authorized, no par value;
5,429,322 and 5,227,811 issued and outstanding,
respectively.............................................. 30,811,877 29,363,816
Preferred stock, 1,000,000 shares authorized, no par value;
no shares issued or outstanding........................... -- --
Subscriptions receivable.................................... -- (3,441)
Retained earnings........................................... 10,474,701 6,128,859
----------- -----------
Total shareholders' equity......................... 41,286,578 35,489,234
----------- -----------
Total liabilities and shareholders' equity......... $58,117,670 $50,286,437
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 27
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
APRIL 3, MARCH 27, MARCH 29,
1998 1997 1996
-------- --------- ---------
(AS RESTATED)
<S> <C> <C> <C>
Revenues............................................... $97,827,659 $78,633,673 $65,623,027
Cost of revenues....................................... 83,431,931 66,436,784 53,951,106
----------- ----------- -----------
Gross profit...................................... 14,395,728 12,196,889 11,671,921
Marketing expenses..................................... 1,265,356 1,161,049 1,037,449
General and administrative expenses.................... 6,192,608 5,392,966 5,139,408
Revaluation of land held for disposal.................. -- -- 611,568
----------- ----------- -----------
Operating income.................................. 6,937,764 5,642,874 4,883,496
Interest expense....................................... 286,514 159,927 1,800,116
Interest income........................................ (226,375) (188,564) (38,669)
Other income, net...................................... (33,217) (399,153) (331,223)
----------- ----------- -----------
Income before income taxes and extraordinary
item............................................ 6,910,842 6,070,664 3,453,272
Income tax provision................................... 2,565,000 1,751,000 1,326,000
----------- ----------- -----------
Income before extraordinary item.................. 4,345,842 4,319,664 2,127,272
Extraordinary item, net gain on early retirement of
debt,
net of income taxes of $93,000....................... -- -- 148,000
----------- ----------- -----------
Net income........................................ $ 4,345,842 $ 4,319,664 $ 2,275,272
=========== =========== ===========
Earnings per share:
Basic:
Before extraordinary item......................... $ 0.80 $ 0.80 $ 0.56
Extraordinary item................................ -- -- 0.04
----------- ----------- -----------
After extraordinary item.......................... $ 0.80 $ 0.80 $ 0.60
=========== =========== ===========
Diluted:
Before extraordinary item......................... $ 0.80 $ 0.80 $ 0.56
Extraordinary item................................ -- -- 0.04
----------- ----------- -----------
After extraordinary item.......................... $ 0.80 $ 0.80 $ 0.60
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 28
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK PURCHASE WARRANT
AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
----------------------------------------------------------------------
COMMON RETAINED
STOCK COMMON STOCK EARNINGS
PURCHASE ------------------------ SUBSCRIPTIONS (ACCUMULATED
WARRANT SHARES AMOUNT RECEIVABLE DEFICIT) TOTAL
-------- ------ ------ ------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31,
1995.................... $ 1,440,000 3,297,811 $10,144,916 $(150,160) $ (196,077) $ 9,798,679
Prior period adjustment
(Note 3)................ -- -- -- -- (270,000) (270,000)
----------- --------- ----------- --------- ----------- -----------
Balances, March 31, 1995,
as restated............. 1,440,000 3,297,811 10,144,916 (150,160) (466,077) 9,528,679
Issuance of shares........ -- 1,930,000 19,218,900 -- -- 19,218,900
Collection of
subscriptions
receivable.............. -- -- -- 85,989 -- 85,989
Net income................ -- -- -- -- 2,275,272 2,275,272
----------- --------- ----------- --------- ----------- -----------
Balances, March 29,
1996.................... 1,440,000 5,227,811 29,363,816 (64,171) 1,809,195 31,108,840
Collection of
subscriptions
receivable.............. -- -- -- 60,730 -- 60,730
Net income................ -- -- -- -- 4,319,664 4,319,664
----------- --------- ----------- --------- ----------- -----------
Balances, March 28,
1997.................... 1,440,000 5,227,811 29,363,816 (3,441) 6,128,859 35,489,234
Collection of
subscriptions
receivable.............. -- -- -- 3,441 -- 3,441
Exercise of purchase
warrant................. (1,440,000) 201,511 1,448,061 -- -- 1,448,061
Net income................ -- -- -- -- 4,345,842 4,345,842
----------- --------- ----------- --------- ----------- -----------
Balances, April 3, 1998... -- 5,429,322 $30,811,877 -- $10,474,701 $41,286,578
=========== ========= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 29
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
-------- --------- ---------
(AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $4,345,842 $4,319,664 $ 2,275,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 2,393,689 1,855,533 1,575,769
Deferred rent liability........................... 400,000 325,000 225,000
Deferred income taxes............................. (220,000) (1,087,000) (235,000)
Interest expense on subordinated note............. -- -- 200,000
(Gain) losses and provisions for losses on land,
buildings, equipment and land held for
disposal........................................ (8,454) 8,048 601,255
Lease subsidy income.............................. -- -- (200,000)
Changes in assets and liabilities providing
(consuming) cash:
Accounts receivable............................. (544,752) (220,911) (412,706)
Prepaid expenses and other assets............... (441,539) (237,787) (557,696)
Accounts payable, accruals, and other current
liabilities.................................. 2,463,370 659,544 234,858
---------- ---------- ------------
Net cash provided by operating activities......... 8,388,156 5,622,091 3,706,752
---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for land, buildings and equipment....... (2,464,472) (1,968,524) (2,211,405)
Expenditures for reimbursable construction costs..... (4,174,674) (2,764,817) (748,711)
Acquisition of intangible assets..................... (2,312,408) (1,767,621) (1,899,990)
Proceeds from sales of land, buildings and
equipment......................................... 118,717 173,076 1,247,700
Payments for refundable deposits and other assets.... (120,674) (108,215) (210,290)
---------- ---------- ------------
Net cash used in investing activities............. (8,953,511) (6,436,101) (3,822,696)
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt........................... (897,231) (583,098) (18,188,211)
Repayments of reimbursable construction costs........ 3,259,032 2,758,305 1,092,987
Deferred financing costs............................. -- (2,222) (20,664)
Issuance of shares, net of subscriptions
receivable........................................ 11,502 60,730 19,304,889
---------- ---------- ------------
Net cash provided by financing activities......... 2,373,303 2,233,715 2,189,001
---------- ---------- ------------
Net increase in cash and cash equivalents.............. 1,807,948 1,419,705 2,073,057
Cash and cash equivalents, beginning of year........... 3,733,174 2,313,469 240,412
---------- ---------- ------------
Cash and cash equivalents, end of year................. $5,541,122 $3,733,174 $ 2,313,469
========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 30
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION AND CORPORATE ORGANIZATION:
The consolidated financial statements as of April 3, 1998 and March 28,
1997 include the accounts of Childtime Learning Centers, Inc. and its wholly
owned subsidiary, Childtime Childcare, Inc. ("Childtime") (together referred to
as the "Company"). All significant intercompany transactions have been
eliminated. The Company began operations in 1967. Childtime Learning Centers,
Inc. was incorporated on November 2, 1995 and completed its initial public
offering on February 2, 1996. The Company provides for-profit child care through
242 child care centers located in 17 states and the District of Columbia as of
April 3, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. FISCAL YEAR: The Company utilizes a 52-53 week fiscal year (comprised of
13 four-week periods), ending on the Friday closest to March 31. The fiscal year
ended April 3, 1998 contained 53 weeks, while fiscal years ended March 28, 1997,
and March 29, 1996 contained 52 weeks.
b. LAND, BUILDINGS AND EQUIPMENT: Land, buildings and equipment are
recorded at cost. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets (generally 40 years for buildings and
between 3 and 15 years for vehicles, furniture and equipment). Leasehold
improvements are recorded at cost and amortized on a straight-line basis over
the lesser of the estimated useful life of the leasehold improvement or the life
of the lease. Gains and losses on sales and retirements are included in the
determination of the results of operations. Maintenance and repair costs and
preopening costs for new centers are charged to operating expense in the period
incurred.
c. DEFERRED FINANCING COSTS: Costs related to the issuance of debt are
deferred and amortized over the life of the underlying indebtedness. Accumulated
amortization at April 3, 1998 and March 28, 1997 was $17,134 and $11,563,
respectively.
d. INTANGIBLE ASSETS: Intangible assets represent principally the
unamortized excess of the cost of acquiring Childtime (by the predecessor of
Childtime Learning Centers, Inc.) and other acquisitions of existing child care
facilities over the fair values of the companies' net tangible assets at the
dates of acquisition. The intangible assets are being amortized using a
straight-line method over various periods up to 20 years with such amortization
expense included in cost of revenues. Accumulated amortization at April 3, 1998
and March 28, 1997 was $2,190,788 and $1,336,843, respectively.
e. IMPAIRMENT OF LONG-LIVED ASSETS: The Company periodically assesses the
recoverability of the unamortized cost of acquired assets in excess of fair
value based on a review of projected undiscounted cash flows of the related
centers. These cash flows are prepared and reviewed by management in connection
with the Company's annual long-range planning process.
f. INCOME TAXES: The Company provides for income taxes for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. 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.
g. CASH AND CASH EQUIVALENTS: The Company considers all temporary
investments with original maturities of three months or less at time of purchase
to be cash equivalents.
h. FINANCIAL INSTRUMENTS: In management's opinion, the carrying values of
cash and cash equivalents, accounts receivable and payable, and accrued
liabilities approximate fair value due to the short-term maturities of these
instruments. The carrying values of long-term debt approximate fair value based
on the current borrowing rates for similar instruments.
i. RISK CONCENTRATION: Accounts receivable is the principal financial
instrument which subjects the Company to concentration of credit risk.
Concentration of credit risk is somewhat limited due to the
F-7
<PAGE> 31
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Company's large number, diversity and dispersion of customers. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable.
Revenues from federal child care assistance programs represent a
significant portion of total revenues. For fiscal 1998, 1997 and 1996, federal
assistance revenues were approximately $13,200,000 (14 percent), $8,800,000 (11
percent) and $5,900,000 (9 percent), respectively.
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.
j. COMMON STOCK PURCHASE WARRANT: The common stock purchase warrant was
initially recorded at its estimated fair value at the date of issuance, July 9,
1990. The Company's policy was to record changes in the estimated fair value of
the common stock purchase warrant only to the extent it exceeded the carrying
value for the periods in which the former lender had the right to "put" the
common stock purchase warrant to the Company. During fiscal 1998, the former
lender exercised its right to require the Company to convert the warrant to
201,511 common shares represented by this warrant. In addition, the former
lender has the right to require the Company to register these shares under the
Securities Exchange Act of 1934.
k. COMMON STOCK AND EARNINGS PER SHARE: The Company has adopted the
provisions of SFAS No. 128, "Earnings Per Share" for the fiscal year ended April
3, 1998. SFAS No. 128 replaces the presentation of primary earnings per share
("EPS") and fully diluted EPS with the presentation of basic EPS and diluted
EPS, respectively. All prior period EPS data has been restated to conform to
SFAS No. 128. The common stock purchase warrant (201,511 shares) is treated as a
common stock equivalent prior to exercise and, accordingly, has been included in
common shares outstanding for all periods presented. The adoption of this new
accounting standard did not have a material impact on the Company's reported EPS
amounts. A reconciliation of the denominators used in the basic and diluted EPS
calculation follows:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Denominator:
Weighted average shares outstanding EPS, basic.......... 5,429,322 5,429,322 3,783,855
Incremental shares from assumed conversion of options... 21,063 -- --
--------- --------- ---------
Weighted average shares outstanding EPS, diluted..... 5,450,385 5,429,322 3,783,855
========= ========= =========
</TABLE>
l. REVENUE RECOGNITION: Substantially all of the Company's revenues are
derived from providing child care services through residential and at-work
centers. All revenues are recognized as the service is provided. For services
provided to employers under short-term (1-5 years) management contract
arrangements where the employer assumes financial responsibility for the ongoing
operations, only the management fee is recorded as revenue. Management contracts
generally call for reimbursement of all operational costs of the center plus a
management fee, negotiated based on center size, as well as various operational
and financial considerations.
m. PRE-OPENING COSTS: Pre-opening costs are expensed as incurred.
n. ADVERTISING EXPENSES: Yellow pages advertising is paid in advance and
recorded as a prepaid expense which is amortized over the one year publication
period. Direct mailing costs are incurred at various times during the fiscal
year and are expensed over the period in which revenues are generated and
recognized (generally measured in months and less than one year). All other
marketing costs are treated as period expenses and, accordingly, are directly
expensed in the period incurred.
F-8
<PAGE> 32
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
o. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
p. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS: In June, 1997 the FASB
issued SFAS No. 130 "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components,
amending various prior SFAS. Management believes that the adoption of SFAS No.
130 in fiscal 1999 will not have a significant impact on results of operations
or financial position.
Also in June, 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public enterprises report information about operating segments
in annual financial statements and requires selected information in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers, superseding SFAS No. 14. Management believes that the adoption of
SFAS No. 131 in fiscal 1999 will not have a significant impact on results of
operations or financial position.
q. RECLASSIFICATIONS: Certain amounts for the fiscal years ended March 28,
1997 and March 29, 1996 have been reclassified to conform to the presentation
adopted in fiscal 1998.
3. PRIOR PERIOD ADJUSTMENT:
The Company's financial statements have been restated to reflect the
recognition of scheduled dollar rent increases on a straight-line basis over the
term of the related lease pursuant to SFAS No. 13, "Accounting for Leases."
Previously, the Company recognized scheduled dollar rent increases in the
consolidated financial statements as the increases became effective. The effect
of the restatement is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 28, 1997 YEAR ENDED MARCH 29, 1996
---------------------------- ---------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Balance sheet:
Other long-term liabilities.............. -- $ 1,000,000 -- $ 675,000
Deferred income taxes.................... $ 3,898,000 3,498,000 $ 4,571,000 4,301,000
Retained earnings........................ 6,728,859 6,128,859 2,214,195 1,089,195
Statement of income:
Cost of revenues......................... 66,111,784 66,436,784 53,726,106 53,951,106
Income tax expense....................... 1,881,000 1,751,000 1,416,000 1,326,000
Net income............................... 4,514,664 4,319,664 2,410,272 2,275,272
Earnings per share, basic and diluted.... 0.83 0.80 0.64 0.60
</TABLE>
In addition, a $270,000 adjustment was recorded to retained earnings as of
March 31, 1995.
4. INITIAL PUBLIC OFFERING:
On February 2, 1996 and March 1, 1996, the Company sold 1,700,000 shares
and 230,000 shares, respectively, of common stock, no par value, for $11.00 per
share to the public and received net proceeds aggregating $19,218,900 after
deducting underwriting discounts and commissions, and offering expenses.
Approximately $17,400,000 of the net proceeds were used to retire debt.
F-9
<PAGE> 33
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INITIAL PUBLIC OFFERING -- (CONTINUED)
During the 1996 fiscal year, in connection with the retirement of this
indebtedness, the Company negotiated a $300,000 reduction in the subordinated
note payable and wrote-off $59,000 of unamortized deferred financing costs. The
$148,000 gain, net of income taxes of $93,000, is reflected as an extraordinary
item in the accompanying consolidated statement of income.
5. ACQUISITIONS:
The Company completed 24 center acquisitions during fiscal 1998 from
various independent child care providers for an aggregate of $2,645,000 in cash
and $1,687,000 in seller-financed debt. The Company completed 23 center
acquisitions during fiscal 1997 from various independent child care providers
for an aggregate of $2,036,000 in cash and $1,619,000 in seller-financed debt.
The results of operations of the acquired centers have been included in the
consolidated results of the Company (accounted for under the purchase method)
from their respective acquisition dates.
The following unaudited pro forma information assumes that all fiscal 1998
and 1997 acquisitions occurred at the beginning of fiscal 1997. Pro forma
information is based upon certain assumptions and estimates, including interest
expense on debt assumed (ranging from 8.5 percent to 10.95 percent);
depreciation and amortization charges based on the new accounting basis for
assets acquired; and the related income tax effect and do not necessarily
represent results which would have occurred if the acquisitions had taken place
as assumed above, nor are they indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 3, 1998 YEAR ENDED MARCH 28, 1997
--------------------------- --------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.................................. $97,828,659 $102,810,000 $78,633,673 $94,177,000
Net income............................... 4,345,842 4,342,000 4,319,664 4,315,000
Earnings per share....................... $0.80 $0.80 $0.80 $0.79
</TABLE>
6. OTHER CURRENT ASSETS AND LIABILITIES:
Other current assets and liabilities are composed of the following:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
1998 1997
-------- ---------
<S> <C> <C>
Prepaid expenses and other current assets:
Prepaid rent.............................................. $ 935,007 $ 610,728
Other..................................................... 918,805 801,545
---------- ----------
$1,853,812 $1,412,273
========== ==========
Other current liabilities:
Unearned revenue.......................................... $ 736,791 $ 440,298
Accrued workers' compensation expense (net of $392,260 of
advance deposits held by insurance company at April 3,
1998).................................................. 539,224 731,740
Other..................................................... 1,802,875 1,395,974
---------- ----------
$3,078,890 $2,568,012
========== ==========
</TABLE>
7. LAND HELD FOR DISPOSAL:
From July 9, 1990 to March 31, 1995, land held for disposal was carried at
its estimated fair market value which was based on the carrying values provided
by the seller. In fiscal 1996, the carrying value of land held
F-10
<PAGE> 34
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LAND HELD FOR DISPOSAL -- (CONTINUED)
for disposal was determined on a parcel-by-parcel basis based upon independent
appraisals less costs to sell. As a result, a $611,568 loss is included in the
accompanying consolidated statement of income for the fiscal year ended March
29, 1996 as revaluation of the property to its appraised value less estimated
costs to sell.
8. FINANCING ARRANGEMENTS:
Financing arrangements consist of the following:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
1998 1997
-------- ---------
<S> <C> <C>
Note payable to a corporation, interest at prime (8.5
percent at April 3, 1998 and March 28, 1997) plus 1
percent, quarterly principal payments of $34,000, plus
interest, remaining principal balance payable October
2001...................................................... $ 476,000 $ 612,000
Note payable to a corporation, interest at 8 percent per
year, quarterly principal payments of $16,752, plus
interest, remaining principal balance payable January
2004...................................................... 385,295 452,303
Note payable to an individual, interest at prime (8.5
percent at April 3, 1998), but not below 8.25 percent,
quarterly principal payments of $11,437, plus interest,
remaining principal balance payable July 2007............. 423,153 --
Notes payable to various entities and individuals, interest
at various fixed rates ranging from 7.9 to 10.95 percent
and variable rates ranging from prime (8.5 percent at
April 3, 1998 and March 28, 1997) to prime plus 1 percent,
various payment terms with original maturities ranging
from two to six years..................................... 1,777,123 1,207,749
---------- ----------
3,061,571 2,272,052
Less current maturities of long-term debt................. 818,781 686,453
---------- ----------
$2,242,790 $1,585,599
========== ==========
</TABLE>
At April 3, 1998, aggregate principal payments due on the long-term debt
over the next five years are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 818,781
2000........................................................ 605,012
2001........................................................ 609,085
2002........................................................ 548,730
2003 and thereafter......................................... 479,963
----------
$3,061,571
==========
</TABLE>
At April 3, 1998, the Company's revolving line of credit is unsecured and
provides for borrowings up to $10,000,000, with interest payable monthly at a
variable rate, at the Company's option, based on either the prime rate (8.5
percent at April 3, 1998) or the Eurodollar rate. There were no outstanding
borrowings under the line of credit at April 3, 1998 and March 28, 1997. The
availability under the line of credit was reduced by outstanding letters of
credit in the amount of $1,249,573 at April 3, 1998 and $900,000 at March 28,
1997. Under this agreement, the Company is required to maintain certain
financial ratios and other financial conditions, the most restrictive of which
requires the Company to maintain certain debt-to-equity ratios, a minimum fixed
charge coverage and a minimum amount of tangible net worth. In addition, there
are restrictions on the incurrence of additional indebtedness, disposition of
assets and transactions with affiliates.
F-11
<PAGE> 35
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. FINANCING ARRANGEMENTS -- (CONTINUED)
In connection with obtaining original acquisition financing in 1990, the
Company issued a common stock purchase warrant to the former lender which
entitled the former lender to purchase 201,511 shares of common stock. A fair
value of $806,044 was originally ascribed to the common stock purchase warrant.
Until January 5, 1996, the former lender had the right to "put" the common stock
purchase warrant to the Company at a price equal to the fair value or book value
of the common stock purchase warrant as defined in the Agreement. The Company
also had the right to call the common stock purchase warrant under similar
terms. During fiscal 1998, the former lender exercised its right to require the
Company to convert the warrant to 201,511 common shares represented by this
warrant. In addition, the former lender has the right to require the Company to
register these shares under the Securities Exchange Act of 1934.
9. INCOME TAXES:
The income tax provision on income before income taxes and extraordinary
item reflected in the consolidated statement of income consists of the
following:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
-------- --------- ---------
(AS RESTATED)
<S> <C> <C> <C>
CURRENT:
Federal................................................ $2,366,000 $ 2,395,000 $1,270,000
State and local........................................ 419,000 443,000 291,000
---------- ----------- ----------
2,785,000 2,838,000 1,561,000
---------- ----------- ----------
DEFERRED:
Federal................................................ (213,000) (914,000) (188,000)
State and local........................................ (7,000) (173,000) (47,000)
---------- ----------- ----------
(220,000) (1,087,000) (235,000)
---------- ----------- ----------
$2,565,000 $ 1,751,000 $1,326,000
========== =========== ==========
</TABLE>
Differences between the income tax provision on income before income taxes
and extraordinary item reflected in the statement of income and that computed by
applying the statutory federal income tax rate are attributable to the
following:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
-------- --------- ---------
(AS RESTATED)
<S> <C> <C> <C>
Income tax provision at the statutory federal rate........ $2,350,000 $2,064,000 $1,174,000
State and local taxes, net of federal tax benefit......... 272,000 178,000 161,000
Internal Revenue Service settlement....................... -- (600,000) --
Other..................................................... (57,000) 109,000 (9,000)
---------- ---------- ----------
$2,565,000 $1,751,000 $1,326,000
========== ========== ==========
</TABLE>
The Internal Revenue Service ("IRS") had challenged the deductibility of
certain costs incurred by KD Acquisition Corporation (the predecessor of
Childtime Learning Centers, Inc.) in connection with its acquisition of the
Company and had issued a Statutory Notice of Deficiency for the tax years
1991-1994. Accordingly, prior to March 29, 1996, the Company had not recognized
for financial statement purposes the income tax benefit of approximately
$900,000 associated with these deductions.
F-12
<PAGE> 36
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
During fiscal 1997, legislation was enacted by Congress which clarified
certain provisions of the Internal Revenue Code related to the deductibility of
such expenses. As a result of the enacted legislation, the Company and the IRS
reached an agreement which resulted in a settlement at an amount substantially
below that originally claimed. Accordingly, the accompanying consolidated
statement of income includes a $600,000 credit in the income tax provision to
reflect the settlement of this issue with the IRS.
Temporary differences and carryforwards which give rise to deferred tax
assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------
DEFERRED DEFERRED DEFERRED
ASSET ASSET ASSET
(LIABILITY) (LIABILITY) (LIABILITY)
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
----------- ----------- -----------
(AS RESTATED)
<S> <C> <C> <C>
Basis and depreciation differences of property........ $(3,859,000) $(3,898,000) $(3,671,000)
Provision for estimated expenses...................... 945,000 904,000 620,000
Straight-line rent.................................... 540,000 400,000 270,000
Other................................................. -- -- (900,000)
----------- ----------- -----------
$(2,374,000) $(2,594,000) $(3,681,000)
=========== =========== ===========
</TABLE>
10. LEASES:
The Company leases certain land and buildings, primarily children's centers
and vehicles, under noncancelable operating leases with original terms ranging
from 1 to 25 years. Certain leases contain purchase and renewal options, impose
restrictions upon making certain payments and incurring additional debt, and may
provide for rental increases at specified intervals and contingent rents based
upon a specified percentage of the gross revenues derived from operating a
business at the lease facility. Rental expense, as restated, for the years ended
April 3, 1998, March 28, 1997 and March 29, 1996 was $12,081,613, $9,062,000 and
$6,942,452, respectively. These amounts included contingent rental expense of
$390,573, $304,209 and $277,966 for the years ended April 3, 1998, March 28,
1997 and March 29, 1996, respectively.
Future minimum rental commitments at April 3, 1998 for all noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1,999....................................................... $11,494,905
2,000....................................................... 11,009,809
2,001....................................................... 10,499,666
2,002....................................................... 9,999,458
2,003....................................................... 9,425,575
Thereafter.................................................. 66,470,791
</TABLE>
The Company was party to a lease subsidy agreement with Gerber Products
Company, which required semiannual payments of $200,000 to be made to the
Company through March 31, 1997. Through October 1, 1995, the payments were in
the form of dollar-for-dollar non cash reductions of the amounts owed by the
Company to Gerber. Subsequent payments were paid directly to the Company. The
payments were contingent upon the Company meeting certain conditions as set
forth in the subsidy agreement. These conditions were met and $400,000 has been
reflected as other income in the statement of income, for each of the fiscal
years ended March 28, 1997 and March 29, 1996.
F-13
<PAGE> 37
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASES -- (CONTINUED)
In connection with certain build-to-suit centers leased under operating
leases, the Company financed construction costs of $4,174,674, $2,764,817 and
$748,711 for the years ended April 3, 1998, March 28, 1997 and March 29, 1996,
respectively. Related repayments received under reimbursement agreements were
$3,259,032, $2,758,305 and $1,092,987 for the years then ended.
11. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Savings and Retirement Plan (the "Plan") covering
substantially all of its full-time employees. The Company matches 25 percent of
employee contributions up to 4 percent of compensation. Employees may contribute
up to 15 percent of compensation to the Plan. Amounts expensed for the years
ended April 3, 1998, March 28, 1997 and March 29, 1996 were $91,055, $71,795 and
$59,824, respectively.
12. STOCK OPTIONS:
In November 1995, the Company adopted the 1995 Stock Incentive Plan for Key
Employees (the "Stock Option Plan"). The Stock Option Plan became effective,
February 2, 1996, concurrent with the effectiveness of the registration
statement relating to the Company's initial public offering of Common Stock. The
aggregate number of shares which may be issued pursuant to the Stock Option
Plan, is 300,000 shares. Options may be granted, or restricted stock awarded at
the discretion of the Company's compensation committee from time to time at a
range of 75 percent to 110 percent of the market value of the stock on the date
on which such option is granted as defined in the Stock Option Plan. Each option
granted under the plan shall expire in five to ten years from the date of grant,
as defined in the Stock Option Plan. Restrictions on sale or transfer of stock
awarded under the Stock Option Plan, if any, range from six months to five
years. Vesting requirements are determined by the committee at the time of the
grant, provided, however, no stock option may be exercisable prior to the
expiration of six months from the date of grant, unless the Participant dies or
becomes disabled prior thereto. All options granted during fiscal 1998 (109,000)
and 1996 (65,000) vest evenly over a three-year period.
In addition, the Company adopted the Director Stock Option Plan, effective
February 2, 1996, providing for annual grants of stock options to nonemployee
directors to purchase common stock at fair value as of the date of such grant.
The aggregate number of shares which may be issued pursuant to the Director
Stock Option Plan, is 75,000 shares. Each option grant under the plan shall
expire in five years from the date of grant. Options vest in full on the first
anniversary of the date of grant, 15,000 options were granted under the plan
during both fiscal 1998 and 1996.
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
F-14
<PAGE> 38
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK OPTIONS -- (CONTINUED)
under those plans consistent with the methodology of SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
---------- ---------- ----------
(AS RESTATED)
<S> <C> <C> <C> <C>
NET INCOME:
Before extraordinary item.................. As reported $4,345,842 $4,319,664 $2,127,272
Pro forma $4,150,803 $4,391,884 $2,106,835
After extraordinary item................... As reported $4,345,842 $4,319,664 $2,275,272
Pro forma $4,150,803 $4,391,884 $2,254,835
EARNINGS PER SHARE, BASIC AND DILUTED:
Before extraordinary item.................. As reported $0.80 $0.80 $0.56
Pro forma $0.76 $0.77 $0.56
After extraordinary item................... As reported $0.80 $0.80 $0.60
Pro forma $0.76 $0.77 $0.60
Weighted average fair value of options
granted during the year.................... $4.23 $-- $5.89
========== ========== ==========
</TABLE>
The fair value of the options used to compute pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using the "Black-Scholes" option-pricing model with the following weighted
average assumptions for 1998, 1997 and 1996: no dividend yield; expected
volatility of 64.7 percent; a risk free interest rate of 5.2 percent and an
expected holding period of four years. Presented below is a summary of the
status of the stock options held by employees of the Company as of April 3,
1998, March 28, 1997 and March 29, 1996:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
APRIL 3, 1998 MARCH 28, 1997 MARCH 29, 1996
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of 79,250 $11.00 80,000 $11.00 --
period................................
Granted................................. 124,000 9.41 -- -- 80,000 $11.00
Exercised............................... -- -- -- -- -- --
Forfeited/expired....................... (5,167) 9.60 (750) 11.00 --
------- ------ ------ ------ ------ ------
Options outstanding at end of period.... 198,083 $10.04 79,250 $11.00 80,000 $11.00
======= ====== ====== ====== ====== ======
Options exercisable..................... 57,169 $11.00 36,418 $11.00 -- --
======= ====== ====== ====== ====== ======
</TABLE>
The weighted average remaining contractual life of obligations outstanding
at April 3, 1998 is 4.8 years at exercise prices ranging from $9.19 to $11.00.
13. RELATED PARTY TRANSACTIONS:
During fiscal 1996, the Company incurred, pursuant to agreements which
terminated on February 2, 1996, $250,000 per year for financial consulting and
business management services provided by certain shareholders of the Company.
F-15
<PAGE> 39
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CONTINGENCIES:
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.
15. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28, MARCH 29,
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
CASH PAYMENTS DURING THE YEAR FOR:
Interest............................................... $ 289,429 $ 164,469 $1,532,441
Income taxes........................................... $2,772,527 $2,633,380 $1,770,342
</TABLE>
In connection with the acquisition of certain assets, the Company incurred
debt of $1,686,750, $1,619,433 and $1,085,000 in 1998, 1997 and 1996,
respectively.
F-16
<PAGE> 40
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS CHARGED TO
BALANCE AT -------------------- BALANCE AT
BEGINNING COST AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- -------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fiscal year ended March 29, 1996, reserve for
doubtful accounts and claims................ $ 99 $264 $0 $(238) $125
==== ==== == ===== ====
Fiscal year ended March 28, 1997, reserve for
doubtful accounts and claims................ $125 $325 $0 $(265) $185
==== ==== == ===== ====
Fiscal year ended April 3, 1998, reserve for
doubtful accounts and claims................ $185 $330 $0 $(290) $225
==== ==== == ===== ====
</TABLE>
S-1
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
3.1 -- Restated Articles of Incorporation of the Registrant, filed
as Exhibit 3.2 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-99596), are incorporated
herein by reference.
3.2 -- Restated Bylaws of the Registrant, filed as Exhibit 3.4 to
the Registrant's Form S-1 Registration Statement
(Registration No. 33-99596), are incorporated herein by
reference.
4.1 -- Common Stock Purchase Warrant between Security Pacific
Business Credit Inc. ("SPBC") and Acquisition, filed as
Exhibit 4.1 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-99596), is incorporated
herein by reference.
4.2 -- Credit Agreement between Childtime Childcare, Inc.
("Childtime") and NBD Bank dated as of February 1, 1996,
filed as Exhibit 4 to the Registrant's Form 10-Q for the
quarter ended January 5, 1996, is incorporated herein by
reference.
4.3 -- Shareholders Agreement between the Company, Childcare
Associates, KD Partners II, GCC Partners, Ltd., Lenard B.
Tessler and James W. Geisz dated as of July 9, 1990,
together with amendments thereto dated January 4, 1993 and
as of July 7, 1995, filed as Exhibit 4.3 to the Registrant's
Form S-1 Registration Statement (Registration No. 33-99596),
is incorporated herein by reference.
4.4 -- First Amendment to Common Stock Purchase Warrant between
SPBC and Acquisition dated as of December 28, 1995, filed as
Exhibit 4.4 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-99596), is incorporated
herein by reference.
9 -- Voting Agreement between Harold A. Lewis and George A.
Kellner dated January 8, 1996, filed as Exhibit 9 to the
Registrant's Form S-1 Registration Statement (Registration
No. 33-99596), is incorporated herein by reference.
10.1 -- Director Stock Option Plan, filed as Exhibit 10.1 to the
Registrant's Form S-1 Registration Statement (Registration
No. 33-99596), is incorporated herein by reference.
10.2 -- 1995 Stock Incentive Plan for Key Employees, filed as
Exhibit 10.2 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-99596), is incorporated
herein by reference.
10.3 -- Employment Agreement between Childtime and Harold A. Lewis
dated January 8, 1996, filed as Exhibit 10.8 to the
Registrant's Form S-1 Registration Statement (Registration
No. 33-99596), is incorporated herein by reference.
21 -- List of Subsidiaries, filed as Exhibit 21 to the
Registrant's Form S-1 Registration Statement (Registration
No. 33-99596), is incorporated herein by reference.
23 -- Consent of Coopers & Lybrand, LLP, dated June 30, 1998.
27 -- Financial Data Schedule
</TABLE>
E-1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Childtime Learning Centers, Inc. on Form S-8 (File Nos. 333-38325
and 33-33741) of our report dated June 8, 1998 on our audits of
the consolidated financial statements and financial statement schedule of
Childtime Learning Centers, Inc. and Subsidiary as of April 3, 1998 and March
28, 1997 and for each of the three fiscal years in the period ended April 3,
1998, which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand, LLP
Detroit, Michigan
June 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CHILDTIME LEARNING CENTERS, INC FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 3,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> APR-03-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> APR-03-1998
<CASH> 5,541
<SECURITIES> 0
<RECEIVABLES> 3,641
<ALLOWANCES> 225
<INVENTORY> 0
<CURRENT-ASSETS> 11,756
<PP&E> 44,318
<DEPRECIATION> 9,360
<TOTAL-ASSETS> 58,118
<CURRENT-LIABILITIES> 9,869
<BONDS> 0
0
0
<COMMON> 30,812
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 58,118
<SALES> 0
<TOTAL-REVENUES> 97,828
<CGS> 0
<TOTAL-COSTS> 90,890
<OTHER-EXPENSES> (260)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 287
<INCOME-PRETAX> 6,911
<INCOME-TAX> 2,565
<INCOME-CONTINUING> 4,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,346
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
</TABLE>
