Key Items to Watch out for in the THE LEARNING EXPERIENCE SYSTEMS LLC 2019 FDD
Please consider the following RISK FACTORS before you buy this franchise: *1. THE FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH US BY LITIGATION ONLY IN THE JUDICIAL DISTRICT WHERE WE HAVE OUR PRINCIPAL PLACE OF BUSINESS (CURRENTLY IN DEERFIELD BEACH, FLORIDA) WHEN THE DISPUTE RESOLUTION PROCEDURES ARE BEGUN. OUT-OF-STATE LITIGATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO LITIGATE WITH US IN FLORIDA THAN IN YOUR OWN STATE. *2. THE FRANCHISE AGREEMENT STATES THAT FLORIDA LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 3. FROM 2003 THROUGH DECEMBER 31, 2018, WE HAVE GRANTED 507 FRANCHISES; 145 SUCH GRANTS WERE REFUNDED DUE TO LACK OF SITE LOCATION AND/OR WERE TERMINATED PRIOR TO OPENING, LEAVING A NET GRANT OF 362 FRANCHISES (INCLUDING MULTIPLE UNIT GRANTS). OF THIS AMOUNT, 286, OR 79%,HAVE OPENED A CENTER, 55, OR 15%, ARE UNDER DEVELOPMENT AND CURRENTLY IN THE PROCESS OF OPENING A CENTER, AND 21, OR 6%, ARE IN THE PROCESS OF IDENTIFYING A SUITABLE SITE LOCATION FOR A CENTER. YOU SHOULD CONSIDER THIS WHEN MAKING YOUR DECISION TO PURCHASE A FRANCHISE. 4. YOU WILL RECEIVE A PROTECTED TERRITORY WITHIN WHICH WE WILL NOT ESTABLISH OR OPERATE A CENTER OR PERMIT OTHERS TO DO SO. HOWEVER, YOUR TERRITORY WILL NOT BE EXCLUSIVE; WE AND OTHERS MAY ENGAGE IN CERTAIN ACTIVITIES WITHIN YOUR TERRITORY INCLUDING, UNDER CERTAIN CIRCUMSTANCES, THE OPERATION OF CHILDCARE CENTERS LOCATED WITHIN CORPORATE OFFICES THAT OFFER CHILDCARE SERVICES ONLY TO EMPLOYEES. TO DATE, WE HAVE NOT OPENED ANY CHILDCARE CENTERS AT CORPORATE OFFICES WITHIN ANY FRANCHISEE’S PROTECTED TERRITORY. 5. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE. * Local law may supersede these agreement provisions. Certain states require the superseding provisions to appear in an addendum to this disclosure document (see Exhibit D).
We may use the services of one or more FRANCHISE BROKERS or referral sources to assist us in selling our franchise. If one of our Zone Developers (as defined in Item 1) assists us in selling our franchise to you, that Zone Developer will be acting in the same manner as a FRANCHISE BROKER. A franchise broker or referral source represents us, not you. We pay this person a fee for selling our franchise or referring you to us. You should be sure to do your own investigation of the franchise.
Item 5: Initial Fees
Franchise Fee The franchise fee (“Franchise Fee”) for each Center is $60,000 and must be paid in full in cash or other form of immediate payment thatis acceptable to us upon execution of our Franchise Agreement. There is no discount from the Franchise Fee unless you and we enter intoa Multiple Franchise Center Addendum (“MFC Addendum”), which is discussed below. We will refund the Franchise Fee that you have paid only if each of the following pre-conditions are fully satisfied: (i) you have executed the Site Development Service Charge Addendum (the “SDSC Addendum”); (ii) we have failed to satisfy our site location obligationto you as described in the SDSC Addendum; and (iii) you have complied with the notice obligations and executed a termination and release agreement substantially in the form attached as Exhibit O to this Disclosure Document. If all of these conditions are satisfied, you will receive a refund of the Franchise Fee and any monies paid under the SDSC Addendum in 12 monthly installments. In our last fiscal year, the Franchise Fee was uniform for all franchisees who acquired a New Center (as defined below); the Franchise Fee charged to franchisees who acquired an Existing Center (as defined below), either from us or fromanother franchisee, varied.
Other Payments to Us or our Affiliates Prior to Opening a Center In addition to the Franchise Fee, you must also pay us the feesand charges described below. You must pay us a fee of $2,399 to set up the Center’s computerhardware and software for the Safe ‘N Secure Package. This Package consists of Childcare Manager, Show ‘N Tell (mobile reporting and parent engagement tool), and MyTLE. Thefee does not include MicrosoftOffice or hardware. You must sign an Addendum with respect to the location and construction of your Center.You have the choice of: (a) having us provideyou with a turnkey Center through your execution of a Site Development Service Charge Addendum, attached as Exhibit F (“SDSC Addendum”); or (b) selecting and building your own Center with our approval through your execution of the SiteCoordination Addendum, attached as Exhibit I (“SC Addendum”). Please refer to Item 11 under the subheading “Site Selection” for a more detailed description of the services provided under each Addendum.
Site Development Service Charge. If you elect to have us find you a site, you must pay us a Site Development Service Charge (“SDSC”) and execute an SDSC Addendum. Under this Addendum, we will perform certain Site Development Services, including: (i) locate a third party developer landlord, who will be responsible to deliver to you a build-to-suit “Turnkey” childcare facility (“New Center”); (ii) coordinate the design of your New Center and Playground with the landlord;(iii) arrange for the landlord to engage a third-party architect (subject to our approval) to prepare architectural plans for your New Center in accordance with our plans and specifications; (iv) offer guidance to the landlord regarding zoning and site plan approval for your Center; (v) provide to the landlord a list of vendors to deliver supplies, furniture, fixtures and equipment (“FF&E”) to your New Center that we, in our sole discretion, deem necessary for at least seven classrooms, including at least one infant classroom; and (vi) provide consultation to the landlord with respect to obtaining governmental approvals necessary for the construction and development of your New Center, including without limitation site plan approval, zoning approval, building permit, and Certificate of Occupancy. These obligations, taken together, constitute the Site Development Services. In a number of cases, we may be required to provide some form of contingent liability under a lease for the Center. In any case, you will sign: (a) an Assignment and Assumption of Lease Agreement to assume the lease or the tenancy, which is attached as Exhibit H to this Disclosure Document; or (b) a lease or sublease directly with us or our Affiliate. Executing the SDSC Addendum and paying the SDSC does not grant you any possessory rights in your New Center. Possessory rights are granted to you through an assignment or sublease of the Lease. If we or any of our affiliates do guaranty the lease obligations or otherwise retain anyfinancial obligations under the Lease, you will pay us or our Affiliate a Lease Administration Fee in an amount equal to the greater of: (a) eight percent of your annual base rent under the lease; or (b) $1.50 per square foot of the Center each year during the term of the lease or any renewal, payable in prorated monthly payments each month during the term of the lease. Under the SDSC Addendum, you will be responsible for the payment of a minimum SDSC of $185,000 for the first 9,000 square feet of the Center developed for you, plus $25.00 per each additional square foot. The square footage of a Center is, on average, 10,000 square feet, resulting in an average SDSC of $210,000. The SDSC is payable upon the occurrence of following events, regardless of their order: (a) Initial deposit of $30,000, due at the time you execute your Franchise Agreement and earned at the time you are Matched to a Site (defined in Item 11); (b) $30,000, due and earned upon your Matched Site obtaining site plan approval (or similar local equivalent) from the local municipality; (c) $30,000, due and earned upon the substantial completion ofconstruction drawings for your New Center; (d) $60,000, due and earned upon the issuance of a site permit or a building permit for your New Center; and (e) Balance due upon the issuance of Certificate of Occupancy (“CO”) (or Temporary Certificate of Occupancy (“TCO”), if applicable) for your New Center, but in all cases prior to delivery of FF&E to your Center and/or you taking occupancy of your Center. In the event that you obtain financing for the SDSC through a Small Business Association (“SBA”) loan, we may, in our sole discretion, elect to delay the payment due upon the issuance of a site permit or a building permit (under part (d) above) until the date that the CO or TCOis issued and/or your financing closes, whichever is earlier. If you have executed an SDSC Addendum, and you have elected to accept a New Center that may be in a later stage of development, we will accelerate the above fee schedule to match the stage of development completed at time of your acceptance of the Center. You will be required to pay all fees due up to the stage of development applicable to the New Center you are acquiring upon your execution of the Franchise Agreement. We have the right to prohibit you from occupying your New Center, or to terminate your Franchise Agreement and sell or retain the New Center selected by you, if you default in any payments due under the SDSC Addendum. We will refund the SDSC that you have paid only if each of the following pre-conditions are fully satisfied: (i) we have failed to satisfy our site location obligation to you as described in the SDSC Addendum, and (ii) you have complied with the notice obligations and executed a termination and release agreement substantially in the form attached as Exhibit O to this Disclosure Document. If all of these conditions are satisfied, you will receive a refund of the any monies paid under the SDSC Addendum in 12 monthly installments. In fiscal year 2018, the majority of New Centers each paid $210,000 to us under the SDSC Addendum. Five Centers paid in excess of $210,000, based on the square footage of the Centers, and the highest amount paid to us under an SDSC Addendum was $272,500.
Assignor Security Deposit. If you have executed an SDSC Addendum, our Affiliate, as the original tenant under the Lease, may assign or sublease the Lease to you. At the time of the assignment, you will be required to post a security deposit with that Affiliate in an amount equal to the greater of: (a) any security deposit required under the Lease; or (b) two month’s Base Rent under the Lease. This “Assignor Security Deposit” will be held by our Affiliate, without interest, until the expiration of the term of the Lease. The Assignor Security Deposit shall be in addition to any security deposit that may be required to be paid to the Landlord under the Lease.
Site Coordination Fee. If you choose not to execute an SDSC Addendum and instead elect to locate and acquire a real estate location for your own Center, you must pay us a Site Coordination Fee (“Site Coordination Fee”) and execute an SC Addendum, which is attached as Exhibit I to this Disclosure Document. The Site Coordination Fee of $50,000 is due in full at the time you execute the SC Addendum and is in consideration for our advising you in regard to the approvals and design with your professionals of the site in accordance with our specifications applicable toall Centers. The Site Coordination Fee is site specific for each site approved by us. The Site Coordination Fee is not refundable. Among the expenses that you will have under the SC Addendum, are: (a) costs of approximately $30,000, payable to an approved supplier, to purchase and install Make Believe Boulevard prior to the opening of your Center; and (b) payments to a licensed architectural firm (architectural fees are described in Item 7 of this Disclosure Statement). The expenses described in (a) and (b) do not include your costs in acquiring real property on which to build your Center or the leasing of space for your Center, as applicable, or the costs of furniture, fixtures, equipment (“FF&E”) and proprietary supplies from us or our approved suppliers. We estimate that the costs of constructing your Center to our specifications will range from approximately $185 to $225 per square foot (this figure includes Make Believe Boulevard and playground equipment) and approximately $8.50 per square foot to acquire the other FF&E and supplies from us or our approved suppliers that you needto open your Center. You wouldnot pay the fees outlined in this and the following paragraph if you executed an SDSC Addendum. If you enter into an SC Addendum, there will be additional fees for operating software, including Microsoft software for Windows and Office (latest version), MicroStrategy, QuickBooks, and Childcare Manager based on then current pricing from these third party vendors. These costs range from $2,500 to $3,000 as outlined in Item 7, below. In addition, you must pay us the one-time fee of $2,399 for the setup of the hardware and software (as noted above). This includes the Safe ‘N Securesoftware, but does not include Microsoft Officeor hardware setup. If you enter into an SC addendum, you will also be required to pay us before opening for our “Proprietary Products” (including t-shirts, uniforms, aprons, brochures, flyers, toys and games bearing our Marks). These fees and costs depend upon the number of staff and ages and numbers of children enrolled at your Center. In the average Centerof 10,000 square feet, we would expect your initial purchases of Proprietary Products and other supplies to range from $50,000 to $100,000, most of which is payable to approved suppliers. You can purchase certain of the Proprietary Products from our approved vendors. Your purchase of Proprietary Products will be on-going. In fiscal year 2018, one Center was opened under an SC Addendum.
Acquiring an Existing Center from Us (if and when available). If you acquire an existing Center from us (“Existing Center”), you must also pay an acquisition fee (“Acquisition Fee”). The Acquisition Fee is determined in our sole discretion based upon several factors, which may include enrollment, tuitions, lease term and market conditions. The estimated initial investment range for an Existing Center (excluding purchase of real estate) is set forth in Item 7, but it can exceed $2,000,000 (for leased premises), depending on one or more of the factors discussed above. During the fiscal year preceding this Disclosure Document, one Existing Center was purchased.
Multiple Franchise Centers. On occasion we may offer, under certain circumstances and criteria decided by us in our sole discretion, a Multiple Franchise Center Addendum (“MFC Addendum”). Under the MFC Addendum, you will have the right to operate four new Centers as a franchisee at a discount of the standard Royalties for the term of your franchise. This right and the terms for the operation of multiple franchised Centers are described in the MFC Addendum, annexed to this Disclosure Document as Exhibit L. Upon signing the MFC Addendum, youmust pay the Franchise Fee for all four Centers and the respective service election fees (that is, Site Development or Site Coordination) for the first Center. In addition, you must pay the respective service election fee when you sign the respective service election addendums for the second, third and fourth Centers. If you execute an SDSC Addendum, the Franchise Fees paid under the MFC Addendum are only refundable as follows: if we fail to fulfill our Site Location Obligation as defined in the SDSC Addendum for your first Center, and you elect to terminate the Franchise Agreement, then the termination will also apply to the MFC Addendum, and all monies paid to us will be refunded in accordance with the terms of the SDSC Addendum; if we fail to fulfill our Site Location Obligation for your second Center, you may not terminate the Franchise Agreement, but you may elect to terminate the MFCAddendum and receive a refund of the $180,000 Franchise Fee paid for your three additional Centers, as well as any monies paid in accordance with the SDSC Addendums for those three Centers, after which you will no longer maintain any licensing rights as a multiple franchisee, but the Franchise Agreement will continue in full force and effect with respect to your first Center. If we fail to fulfill our Site Location Obligation for your third or fourth Center, as the case may be, you may not terminate the Franchise Agreement or the MFC Addendum but you may elect to terminate the SDSC Addendum; if you do so, you will receive a refund of the $60,000 or $120,000 Franchise Fee paid, depending on whether the third or fourth Center is being cancelled, as well as any monies paid in accordance with the SDSC Addendum for that Center. Then, the MFCAddendum and the Franchise Agreement will continue in full force and effect for those Centers open and operating. If you execute an SC Addendum, no part of the Franchise Fees paid under the MFC Addendum are refundable.
Co-Membership Agreement. On limited occasions we may offer, under certain circumstances and criteria decided by us in our sole discretion, a Co-Membership Agreement(“Co-Membership Agreement”). Under the Co-Membership Agreement, our parent, TLEC, will form a limited liability company (the “Operating Company”) and have the Operating Company execute a Franchise Agreementto become the franchise owner of a Site. You will have the right to become aco-member (“Co-Member”) in that Operating Company, with TLEC being the other member. TLEC willserve as the Managing Member of the Operating Company and you will serve as either the Center Director or the Business Manager under an employment agreement. At all times the Operating Company will be the franchisee and own the franchise. As such, you will not be a franchisee; you will only own a membership interest in the franchisee entity and your rights will be governed entirely by a Limited Liability Company Operating Agreement. To become a Co-Member, you will be required to make an initial investment in the Operating Company in an amount that we may determine in our sole discretion.
Item 8: Restrictions on Sources of Products and Services
To ensure that the highest degree of quality and service is maintained, you must operate the Center in strict conformity with the standards and specifications that we prescribe in the Manual or otherwise in writing. You must not: (a) deviate from our standards and specificationswithout our prior written consent; or (b) otherwise operate in any manner that reflects adversely on our Marks or the System. We may change our standards and specifications when, in our reasonable discretion, change is needed. You must promptly conform to the modified standards and specifications at your own expense. Changes may require you to purchase equipment, supplies, furnishings or other goods, put your employees through additional training, or incur other costs.
You may use, offer and sell only those products, services and related supplies that we expressly approve in writing for use and sale by Centers (the “Approved Products and Services”). You may not use or sell any other products or services without our prior written consent. We may designate Approved Products and Services as required or optional. You must use and sell required Approved Products and Services and may use and sell optional Approved Products and Services. We may revise the Approved Products and Services at any time, in our sole discretion. If we revoke our approval of any products or services, you must stop offering those products or services within 30 days after our written notice to you. You may charge less than the suggested resale prices set by us.
You must purchase and install at the Center, at your expense, all fixtures, furnishings, equipment, d?cor, signs, upgrades and other items we reasonably direct from time to time in the Manual or otherwise in writing, and must not install anything that does not meet our standards and specifications. You must maintain your Center in a manner consistent with the condition and appearance of other Centers. To do so, you must use a cleaning or janitorial vendor (which we reserve the right to approve) to clean the premises in accordance with System standards.
To the extent that we have selected approved suppliers, you must purchase all products, equipment, supplies, and materials used or sold by the Center solely from such suppliers (including manufacturers, wholesalers and distributors). We may select approved suppliers based on factors such as their ability to meet our reasonable standards and specifications for such items; whether they possess adequate quality controls and capacity to supply your needs promptly and reliably; that approval will not jeopardize the availability of special pricing or other benefits offered by existing suppliers based on systemwide purchases; and the supplier’s agreement to sign our current form of supplier agreement for products and services. If you wish to purchase products or services from other than approved suppliers, you must submit to us a written request to approve the proposed supplier, together with such evidence of conformity with our supplier-approval policies as we may reasonably require, or must ask the supplier itself to do so. We will have the right to inspect and evaluate the supplier’s products or services to be supplied, and you must pay all of our reasonable expenses incurred in so doing. Although the Franchise Agreement does not require us to notify you of our approval or disapproval of a supplier within a specified time, we estimate that we may notify you within 30 days after our receipt of your written request. We may from time to time reevaluate the products and/or services of any approved supplier and revoke our approval of particular products or services or suppliers if we determine, in our sole discretion, that their products or services or suppliers no longer meet our standards. Upon receipt of written notice of such revocation, you must cease to use or sell any disapproved products or services and cease to purchase from any disapproved supplier. As a condition of approving a supplier of any products that bears our Mark(s), the supplier must sign our License Agreement or other agreements in form and content satisfactory to us or that we, in our sole discretion, may require.
We will provide you, in the Manual or otherwise in writing, with a list of names and addresses of suggested suppliers of goods and services that currently meet our standards and specifications. However, we do not guarantee the products and services of such suppliers and do not accept any liability or responsibility to you or any third party for any such suppliers’ failure to continue to meet such standards and specifications. In addition, we expressly disclaim any warranties or representations as to the condition of the goods or services sold by such suppliers, including, without limitation, express or implied warranties as to merchantability or fitness for any particular purpose. You must look solely to the manufacturer of goods or the supplier of services for the remedy for any defect in the goods or services.
We may, in our sole discretion, establish one or more strategic alliances or preferred vendor programs with one or more suppliers who are willing to supply all or some Centers with some or all of the Proprietary Products and/or other products and services that Centers are authorized to offer to the public. Any such programs may limit and/or require you to use suppliers other than those that you would otherwise use, and/or limit the number of approved suppliers with whom you maydo business. Our Proprietary Products are an integral part of our System andprovide a strong identity, methodology, and curriculum. We may restrict your ability to purchase Proprietary Products as well as other current and future products, supplies, or services to: (a) us; (b) one of our Affiliates; or (c) one or more third party suppliers that we have designated or approved. Use or sale of any substitute product or service for the Proprietary Products is strictlyprohibited. We may apply and you must pay the full purchase price of any Proprietary Products you purchase, plus an 18% licensing fee and the actual cost of any shipping, freight, insurance and applicable sales or use tax, as specified by us and applicable law, together with each order of Proprietary Products.
As of April 1, 2019, our designated supplier for most of our Proprietary Products is All-Star Engraving, Inc., a Florida corporation, which is authorized to supply the products under a license agreement with TLEC. TLEC receives a license fee based upon the gross sales of Proprietary Products to Centers. We reserve the right to sell the Proprietary Products directly to you and/or to designate other suppliers to do so. The training of teachers, sales personnel and administrative staff and the development of advertising and marketing promotions are based in large part on these products developed by MWR and licensed to us and through us to you. We pay MWR a license fee in order to provide to you the right to use our licensed material, including the curriculum, L.E.A.P., and products bearing our Marks or copyrights in the operation of your Center.
We and/or our Affiliates may from time to time sell to you programs that we have produced. Because we are not generally offering fungible commodities but instead areproviding services and the use of licensed materials, including trademarks and curriculum that take years to develop, we cannot provide you with the basis for the value that we have attributed to these services and licensed materials. These services and the licensed material are not resold and as a result, we cannot determine their fair market value or any markup. As we and our Affiliates have our own staff writing the curriculum, developing the artwork and creating the copy, it is difficult to attribute value to the employee time, research, drafting, trademark value, beta testing and the like, all of which may take years to develop and many years to recapture based upon the number of Centers operating in the System. As such we will establish a reasonable cost for these products and services.
You must purchase the curriculum from our approved vendors. The curriculum has been developed under a licensing agreement with MWR, and the printed materials and books currently cost between $3.40 and $7.98 per child per month for Fun with Phonics, and between $0.87 and $7.98 per child per month for L.E.A.P. curriculum (that amount is estimated to be less than 1% of your Center’s total expenditures). The fees differ for the Charlie Choo enrichment programs. For public relations and marketing plans, Stir Communications is authorized to work with you pursuant to a license agreement with our Affiliate. In the interest of disclosure, TLEC and the owners of Stir Communications are partners in a joint media and production venture centered around TLE’s mascot, Bubbles the Elephant.
Service Election You will also be required to use the services we supply for your choice of the Site Development or Site Coordination services described in this Disclosure Document. The SDSC is a minimum of $185,000, representing between 18% and 37% of your total initial expenditures. Our Site Coordination Service, costing $50,000, may represent between 1% and 4% of your total expenditures, based on the charts above of initial startup investment. The actual percentage of your total expenditures may be higher or lower than the percentages referred to in this paragraph, depending upon your total expenditures for your Center. Additionally, in the event you execute the SDSC Addendum, you will also be required to use ComRealty, our Affiliate, as the broker locating suitable sites. Althoughyou will not pay any fees to ComRealty, the landlord will likely pay a commission to ComRealty, and that commission is typically factored into your rent. If you elect to develop your own site in accordance with the SCAddendum, you must, at your expense, submit prototype plans drawn by a licensed architect (who has been approved by us) for the design and construction of your Center including, among other matters, dimensions, exterior design, interior layout, building materials, equipment, signs, and color scheme. These plans must be submitted to us for our review and approval. Our approval of plans will indicate that you have complied with our standards, but it will not mean that you have complied with any other governmental or regulatory bodies’ requirements, such as local building codes and state requirements for childcare centers. You also must submit for our approval any subsequent modifications to these plans. You are solely responsible for ensuring that your Center, its physical plant, operation, curriculum, enrollment and staff, comply with all applicable laws and regulatory requirements that may be imposed by local, state or federal agencies. Although the standards of our Franchise System are solely established by us at our sole discretion, we have the right but not the obligation to establish a Standard ReviewBoard (“SRB”) to investigate, evaluate and seek to informally resolve certain issues relating to Centers’ compliance with designated System standards. The organization, membership, scope of responsibilities, powers, resources, and operational procedures of the SRB will be developed by us and described in the Manual, and are subject to periodic revision, in our sole discretion. If you have executed an SC Addendum, you must purchase the Make Believe Boulevard facade for approximately $30,000 from Playtime LLC, who is currently our approved supplier, and which amount is a one-time cost during construction of the Center. We do not receive any payment from Playtime for your purchase from that company, although we reserve the right to receive such payments in the future. Also, if you have executed an SC Addendum, you must use an architect approved by us (and who has executed our then-current form of Architect License Agreement) to prepare architectural plans. As of April 1, 2019, we have approved two architects for this purpose: Jarmel Kizel Architects and Engineers, Inc. and Rogue Architecture. These firms are either licensed, or work with subcontractor architects who are licensed, in all states where we do business. The architects will charge you a fee to prepare architectural construction plans that we anticipate may range from $35,000 to$65,000. These amounts are a one-time cost during construction of the Center and may be higher or lower for you, depending on the size of the Center. You may only use approved architects for the design ofyour Center. This does not count any costs which you may be required to incur in connection with any site plan approvals, pursuant to local codes and laws.
Computer System We have contracted with certainthird parties to be the only approved suppliers of the business software and related updates and enhancementsthat you are required to use under the Franchise Agreement. The source code of the computer programs is a trade secret of the softwarecreator or us and we do not permit any other suppliers to provide you with this business software. Based onour experience with our owned Centers, the cost of the software and the software licenses amounts to less than one percent of the Estimated Initial Investment for your Center, and a small percentage of the cost to operate your Center. You must purchase required computer hardware and software before you open your Center, as well as during the operation of your Center. Franchisees that sign the SDSC Addendum will receive the preopening computer hardware and software from us at no additionalcharge; franchisees that sign the SC Addendum must purchase the computer hardware and software from an approved supplier. To implement the L.E.A.P. Interactive program at your Center, you must purchase the required hardware from approved suppliers and pay an initial setup fee. The costof the required hardware and the setup fee as currently configured is approximately $5,000 per whiteboard;however, this amount is subject to change if the program is modified over time and with expected improvements and advances in technology, as well as future changes in installation costs, manufacturer price increases, taxes, and other variables. Upon implementation of the L.E.A.P. Interactive program at your Center, you will also be required to pay us a monthly software update fee of $149 per Center, regardless of how many whiteboards are installed at your Center. To implement the Show N Tell system, you will be required to purchase certain hardware, including without limitation TLE-approved Wireless Access Points, mobile devices and mobile device accessories. The cost of the required hardware, as currently configured, ranges from approximately $3,000 to approximately $10,000, depending on whether yourCenter was pre-wired during construction. This amount is subject to change as the program is modified over time and with expected improvements and advances in technology, as well as future changes in installation costs, manufacturer price increases, taxes, and other variables. You are not required to pay any continuing fees to us in connectionwith the Show N Tell system.
Insurance You must purchase and maintain in full force and effect during the term of the Franchise Agreement, at your sole expense, general business and liability insurance policies with commercially reasonable deductibles, insuring and protecting you and, insuring as additional insureds, our Affiliates, us and our respective officers, directors, partners and employees from andagainst any loss or liability for personal and/or bodily injury, death, or property damage or expense arising from or in connection with your Center. Where a Center is providing care under the Corporate Childcare Program or any other corporate-sponsored program, that corporation must also be named as additional insured to the extent the corporation has an insurable interest. All policies must provide that all of the additional insureds will receive notice of your default in payment of any premium and thirty days prior written notice of termination, cancellation, expiration or alteration to provide less coverage or any other such notice provided to the insured from the insurance company. The coverage may not be limited in any way by reason of any insurance maintained by us. You may also be required to obtain insurance on your Center under the Lease Your insurer must be rated “A” or higher by A.M. Best. Our minimum requirements for all insurance policies are described in Attachment 2 to the Franchise Agreement. We may from time to time require that additional coverage be purchased or that minimum limits be increased as reasonably necessary for your and our protection or, based upon negotiations, the landlord of theCenter may require more coverage. We have negotiated, on our own behalf and that of our Affiliates, insurance policies that meet our specifications. You may purchase this insurance directly from the brokers that represent these carriers, or if you wish, you may purchase insurance coverage elsewhere thatmeets the specifications described above. However, in the event that you choose to use a different insurance broker, you must submit the proposed policy to us for review and pay us an insurance review fee, which is currently $1,500. If we review the policy in-house, the fee is retained by us. If, however, the policy is reviewed by an outside insurance broker, the review fee will be paid to the outside consultant. This fee reimburses us for the cost of the consultant’s review and we retain, as a fee for our services in coordinatingsuch review, any amounts remaining after paying the consultant. You must submit one or more certificates to us showing that youhave purchased the required insurance at the earliest of: (a) when landlord requests under Lease; (b) delivery of FF&E to the Center; (c) the issuance of your Certificate of Occupancy; or (d) the opening of your Center. You must submit evidence annually to us of the renewal or extension of the policies. If you failto purchase and maintain any required insurance coverage or furnish satisfactory evidence of coverage to us, inaddition to our other remedies (including without limitation declaring you in default of your Franchise Agreement), we may, but are not obligated to, purchase the insurance coverage for you. If we do purchase insurance on your behalf,you must pay us on our demand the amount of any premiums and reasonable expenses that we incur in obtaining the insurance plus an administration charge of 18% of these costs or the highest rate allowed by applicable law on all monies expended to remedy this default until such amounts are paid in full, as providedfor in the Franchise Agreement. The failure to maintain insurance coverage at any time is a material default under the Franchise Agreement.
General During our fiscal year ending December 31, 2018, we had revenues of $22,501,599, none of which amount represented franchisee purchases or leases of goods and services from us. During the same period, our Affiliates had revenues from franchisees’ purchases or leases of goods and services as follows: 5.0% (or $2,976,666) of TLEC’s total consolidated revenues. None of our officers own an equity interest in any non-Affiliate suppliers to our franchisees. Although we attempt to negotiate advantageous purchasing or service arrangements with suppliers for you, we are not obligated to do so under the Franchise Agreement. We are not obligated to establish, and have not established, any purchasing or distribution cooperatives. Our decision to renew your franchise or to grant you additionalfranchises, if you are already the owner of a Center, is not based on the magnitude of supplies that you order from approved suppliers or on your use of approved suppliers. We do not provide material benefits to a franchisee based upon a franchisee’s purchase of particular products or services or use of particular suppliers. We receive payments from some of the vendors who sell goods andservices to our franchisees. We reserve the right to negotiate and collect rebates, commissions, promotional allowances, volume discounts and other payments and/or benefits from all current and future suppliers of goods and services to our franchisees. We have the right to retain payments and benefits that we receive,including those based on purchases from franchisees. Currently, a number of our vendors participate in a referral fee program, under which we receive 2.5% of the contract, excluding freight/shipping/tax. The typical aggregate fee we receive per newly constructed Center location isapproximately $5,120. This referral fee program is only for new construction locations. These fees are not from services to franchisees. Currently, we do not receive fees for any work provided by the vendors directly to franchisees, but we reservethe right to do so in the future. We estimate that: (a) if you sign our SDSC Addendum, under which we will locate a landlord/developer to construct and provide you with a turnkey Center, your purchasesfrom approved suppliers will represent approximately 100% of your totalpurchases and leases in establishing your Center; and (b) if you sign our SC Addendum, under which you are responsible for establishing your Center, your purchases from approved suppliers will represent approximately 20% to 40% of your total purchases and leases in establishing your Center. We estimate that your purchases fromapproved suppliers will represent 2% to 5% of the continuing operation of your Center. We estimate that your purchases in accordance with our specifications where we have not appointed approved suppliers will approximately 95% of your total purchases and leases in establishing your Center, and 95% of your total purchases and leases in its continuing operation.
Item 10: Financing
We do not offer direct or indirect financing. We do not guarantee your note, lease or other obligation, except that if we assign the Lease for your Center to you, yourlandlord may insist that we provide a limited guaranty.
Item 12: Territory
The specific location for the franchise granted to you will be identified in either Attachment 1 to the Franchise Agreement or an addendum to the Franchise Agreement once a site has been approved. Upon your agreement to be matched to a specific location, you will execute the Site Acceptance Form (“Site Acceptance Form”) attached as Exhibit E to this Disclosure Document. You willhave the license to operate a Center within your protected territory (“Protected Territory”). We do not impose any restrictions on your ability to solicit business outside of your Protected Territory, and if you do so, you may use other channels of distribution, such as the Internet, catalogue sales, telemarketing or other direct marketing. You may not open another childcare Center outside the Protected Territory. You may relocate your existing Center within the Protected Territory with our prior written consent, which consent will not be unreasonably withheld.
Your Protected Territory will be a circle having a diameter of 2.5 miles (1.25 miles from all exterior walls) from a central point (that is, from the exterior walls of your Center building), except for “Cities,” which we define as urban areas with a population in excess of 500,000 people. The Protected Territory of a single franchise in Cities will be a smaller defined geographic area that we establish, in our sole discretion. Purchasers of several franchises at one time will be granted anadditional Protected Territory for each unit that they develop. The Protected Territory and Approved Location will be designated in a written addendum to the Franchise Agreement, signed by both parties, at the time that your Approved Location is secured through a lease or purchase agreement.
Except as described below, we agree not to establish or operate or permit an affiliate or franchisee to establish or operate a Center at any location within the Protected Territory. Except as described in the preceding sentence, the franchise is non-exclusive. We and ourAffiliates retain the right, among others, in any manner and on any terms and conditions that we deem advisable, and regardless of the proximity to, or financial impact on, your Center:(a) to own, acquire, establish and/or operate, and license others to establish and/or operate, Centers outside the Protected Territory; (b) toown, acquire, establish and/or operate, and license others to establish and/or operate, any businesses other than a Center at any location within or outside the Protected Territory under other Marks or other systems, and regardless of whether such businesses are the same, similar or different from the Center or may compete with the Center; and (c) to sell or distribute, at retail or wholesale, directly or indirectly, or license others to sell or distribute, any services or products (including Proprietary Products) which bear any trademarks, including the Marks, whether within or outside the Protected Territory, and through any distribution channel or venue other than a Center.
Also, we have the right to operate an on-site corporate childcare center for a corporation located within your Protected Territory. “Corporate childcare center” is defined as a private program available only to employees of the corporation and not to the general public. Ifwe do so, we will pay you 20% of the tuition you lose from students who were actually enrolled and paying tuition at your Center but who subsequently enroll at the corporate childcare center as a direct result of the opening and operation of the corporate childcare center, for as long as each previously enrolled student remains enrolled in the corporate childcare center. We will not reimburse you for any speculative or unsupported losses. We may acquire a competing childcare system or Center in your Protected Territory. If we do so, we will offer you a first right to acquire the competing center under the same terms that we acquired it and the Center will be subject to the terms of your Franchise Agreement. If you pass on this opportunity, we must sell the competing Center to a third party or close the competing business.
Unless you enter an MFC Addendumwith us, you will not have anyother right of first refusal or option or similar rights to acquire additional franchises at any other location within your Protected Territory or contiguous geographic area. There are no other circumstances under which we may modify your Protected Territory as long as the Franchise Agreement remains in effect and you are not in default of your Franchise Agreement or any addendum. To the extent that we have the right to conduct business in your Protected Territory, we reserve the right to use alternative channels of distribution, including the Internet, catalogue sales, telemarketing or other direct marketing, within your Protected Territory under the same trademarks that we permit you to use, as well as under different trademarks.
You may relocate your Center within your Protected Territory only with our prior written consent, which will be granted only if: (a) you and your Affiliates are in Good Standing; (b) you plan, construct, equip (including fixtures), and decorate your new Center at your soleexpense so that the premises fully meet the standards of appearance and function applicable to the premisesof new Centers at the time of relocation; (c) you have presented to us complete information regarding theproposed site that is compliant with our guidelines, including the site demographics of the new locationand the terms and conditions of the new lease agreement or controlling real estate agreement, and after reviewing these materials, we give our written approval; (d) you execute and deliver to us a general release, substantially in the form as attached as Exhibit O to this Disclosure Document, that releases us and our Affiliates, and indemnifies and holds us and our Affiliates harmless with respect to the existing lease and all other claims arising through and from you up to the date of approval; (e) the new location does not infringe upon the Protected Territory of another Center; and (f) the geographic area comprising the Protected Territory will remain the same as the Protected Territory of the original Center location, regardless of where the new Center is located. You may not relocate your Center to a location outside your Protected Territory.
Neither we, you, any other franchisee, or any of our Affiliatesis restricted from soliciting customers or business from any geographic area including your Protected Territory, and no compensation is paid by or to you based upon such sales, other than your normal payment obligations under the Franchise Agreement that arise from revenues received by your Center. Except as may be described elsewhere in this Disclosure Document, neither we nor any of our Affiliates has established or presently intends to establish other franchises or Company- or Affiliate-owned Centers, offering similar goods or services under a different trade name or trademark. However, we and our Affiliates reserve the right to do so in the future.
While franchisees will receive the territorial protections described in this Item, because we have reserved certain rights described above, a franchisee will not receive an “exclusive territory.” You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control. Except as described above: (a) the continuation of a franchisee’s Protected Territory is not dependent upon the achievement of a certain sales volume, market penetration, or other contingency; (b) there are no contractual provisions that provide for the alteration of a Protected Territory; and (c) a franchisee is not granted any options, rights of first refusal, or similar rightsto acquire additional franchises.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
We recommend that you devote substantial time to supervising the operations of your Center to ensure its compliance with the Franchise Agreement and state and local laws and regulations. We do not require that your Center Director own an equity interest in the franchise. You must require the Center Director and all other staff involved in the management of your Center to sign our then-current form of non-disclosure agreement for Center Management. Each of your Affiliates, as well as each of the principals of the entity you establish for your Center, must also sign the Non-Disclosure, Non-Interference and Non-Competition Agreement in the form annexed as Attachment 3 to the Franchise Agreement.
You must keep us informed as to the identity of your Center Director. If your Center Director ceases active management or employment at your Center, then you must appoint a successor within thirty days or earlier if required by applicable law. Any successor must successfully complete the next available training conducted by us, which will in no event be more than sixty daysfrom the start of his/her/your employment. Any additional training of your Center Director must be at yourown expense. In the event there is no training scheduled or available within that sixty day period, we will, at our earliest possible opportunity, provide your Center Director with an on-site training program at your facility, at a cost to you not to exceed $1,500 per week, which cost includes all of our travel, lodgingand other expenses, provided, however that we are not obligated to provide this service more than once every 2 years. Any person or entity owning more than 10% of your entity’s interest will be obligated to sign the Franchise Agreement and sign the Non-Disclosure, Non-Interference, and Non-Compete Agreement attached as Attachment 3 to the Franchise Agreement
We require that the entity you form to operate your franchised Center sign the Franchise Agreement and all of that entity’s principal owners personally guarantee the entity’s obligations under the Franchise Agreement.
Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
You must offer and sell all of the Approved Products and Services that we designate as required. You may offer and sell Approved Products and Services we designate as optional. You must offer and sell only those products and services that we haveauthorized you to provide. You may not sell anything else.
You must operate your Center in complete compliance with the standards and specifications set out in the Manual, the Franchise Agreement, other agreements and instructions we provide and the requirements of the laws of the location in which the Center is situated. We are entitled to make changes in our standards and specifications, when, in our reasonable discretion, change is needed as a result of the market and for development of the System. These changes may require your purchase of equipment, supplies, furnishings or other goods, completion of additional training by your employees, or other cost to you. We cannot predict the future costs to you of such items. You must promptly conform to the modified standards and specifications at your own expense. In addition, we will, from time to time, send you promotional materials, new curricula, and bulletins on new systems and new sales and marketing developments and techniques. You must promptly implement and/or use the ideas and implement the changes described in these materials within your Center in a commercially reasonable manner.
We have no restrictions on our right to change the types of authorized goods and services other than the fundamental condition that the change may not alter the terms of the Franchise Agreement. There is no restriction as to which customers that you may serve, other than you cannot violate applicable laws.
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