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Highly educated parents spend more on childcare. The increasing number of college graduates in the U.S. and abroad will support continued expenditures on ECE. In 2001, 70% of children with college-educated mothers attended childcare programs, while only 38% of children whose mothers had less than a high school degree attended childcare programs. A recent report by the U.S. Department of Commerce reveals that families with college degrees spent an average of $92.67 per week (per child) on childcare in 2000, whereas parents without a high school degree only spent an average of $59.70 per week per child.26

Increasing demand for Employer-Sponsored Centers. With increased levels of employment, corporations are witnessing growing demand for ECE services. Companies benefit from offering childcare services to their employees as (i) it often reduces employee absenteeism; (ii) serves as a perquisite, which differentiates the employer's compensation package; and (iii) tends to lower turnover rates. ECE services contribute to a stable and consistent workforce.

Favorable tax incentives. Certain tax incentives are available to parents utilizing childcare programs. Specifically, Section 21 of the Internal Revenue Code provides a federal income tax credit (Child and Dependent Care Credit) ranging from 20% to 35% (increased in 2003) of certain childcare expenses for "qualifying individuals." The Economic Growth and Tax Relief Reconciliation Act of 2001 created a Federal Employer Tax Credit for certain childcare expenses beginning in 2002. Employers can receive a credit of 25% of their spending on the construction or rehabilitation of a child care facility or on contracts with a third party child care facility to provide child care services to employees. Corporations also benefit from tax incentives of up to $150,000 per year.

8.3.2 Industry Characteristics

The ECE sector has a number of favorable operating characteristics. First, well-run school operators enjoy high returns on capital, predictable revenue streams and strong free cash flows, with students generally paying in advance of services delivered. Second, industry data shows that tuition rates have increased by approximately 7%, a rate which has exceeded inflation.27 The current outlook suggests no change in this dynamic. Third, government regulation and licensing standards represent notable barriers to entry.

Given that education is a universally accepted product, management believes that our business model is highly scalable. The basic center model is expected to be essentially repeatable and transferable to new markets and locations. With labor representing approximately 50% of the total operating cost structure, companies within this sector tend to benefit from a variable cost structure, which allows them to reduce costs as economic and market conditions change.

Often the demanding requirements for the selection of school directors and teachers can limit the pool of qualified employees for the industry. Low pay also tends to result in high turnover rates of approximately 50% annually within the industry.

8.3.3 Competitive Landscape: Early Childhood Education

The ECE sector is highly fragmented with the top six providers representing approximately 5% of all organized ECE centers. The Company's primary competitors are (i) local nursery schools and child care centers, some of which are non-profit (including religious-affiliated centers), (ii) providers of services that operate out of their homes and (iii) other for-profit companies which may operate a number of centers. Local nursery schools and ECE centers generally charge less for their services. Many religious-affiliated and other non-profit child care centers have no or lower rental costs than for-profit chains, may receive donations or other funding to cover operating expenses and may utilize volunteers for staffing. Consequently, tuition rates at these centers are commonly lower than the Company's rates.

26 Source: Harris Nesbitt Research, Education and Training, September 2005.
27 Source: The National Economic Impacts of the Child Care Sector, 2002.

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