<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 15, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________TO____________________
COMMISSION FILE NUMBER 0-17098
KINDERCARE LEARNING CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0941966
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
2400 PRESIDENTS DRIVE
MONTGOMERY, ALABAMA 36116
(Address of principal executive offices)
(334) 277-5090
(Registrant's telephone number, including area code)
NONE
(Former name, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing required for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
The number of shares of Registrant's Common Stock $.01 par value per
share, outstanding at January 5, 1996 was 19,489,540.
- --------------------------------------------------------------------------------
<PAGE> 2
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Numbers
------------
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
Consolidated Balance Sheets as of December 15, 1995 and
June 2, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the twelve weeks
ended December 15, 1995 and December 16, 1994 and the
twenty-eight weeks ended December 15, 1995 and
December 16, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
twenty-eight weeks ended December 15, 1995 and
December 16, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 9
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 15, JUNE 2,
ASSETS 1995 1995
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,561 $ 14,237
Accounts receivable:
Tuition (net of allowance for
doubtful accounts of $1,377 at
December 15, 1995 and $873
at June 2, 1995) 12,793 9,913
Other 722 1,156
Prepaid expenses and supplies 10,670 8,282
--------- ---------
Total current assets 34,746 33,588
Property and equipment 532,337 497,690
Less accumulated depreciation and amortization 76,317 55,244
--------- ---------
Net property and equipment 456,020 442,446
--------- ---------
Investments -- 1,981
Other assets 22,424 23,263
--------- ---------
$ 513,190 $ 501,278
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 4
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND DECEMBER 15, JUNE 2,
SHAREHOLDERS' EQUITY 1995 1995
------------ ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,749 $ 12,639
Bank overdrafts 15,988 7,021
Current portion of long-term debt 828 889
Accrued expenses and other liabilities 43,955 45,926
--------- ---------
Total current liabilities 70,520 66,475
Long-term debt 159,028 159,505
Self-insurance liabilities 19,993 17,927
Other noncurrent liabilities 18,426 13,133
--------- ---------
Total liabilities 267,967 257,040
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding -- --
Common stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding
19,489,540 and 20,119,818 shares at
December 15, 1995 and June 2, 1995,
respectively 194 200
Additional paid-in capital 196,863 203,890
Retained earnings 48,232 40,116
Cumulative foreign currency translation (66) 32
--------- ---------
Total shareholders' equity 245,223 244,238
--------- ---------
$ 513,190 $ 501,278
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 5
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------------------- --------------------------------
DECEMBER 15, DECEMBER 16, DECEMBER 15, DECEMBER 16,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ 124,079 $ 116,765 $ 285,392 $ 268,267
--------- --------- --------- ---------
Other operating expenses:
Salaries, wages and
benefits 65,003 59,553 150,814 140,404
Rent expense 6,032 5,852 14,367 13,641
Depreciation 7,864 7,048 18,053 15,736
Provision for allowance
for doubtful accounts 1,030 632 1,792 1,777
Other operating expenses 32,928 32,286 79,022 74,963
Litigation settlement and
restructuring costs, net -- -- (1,019) --
--------- --------- --------- ---------
Total operating
expenses 112,857 105,371 263,029 246,521
--------- --------- --------- ---------
Operating income 11,222 11,394 22,363 21,746
Interest expense, net 3,761 3,945 9,058 9,187
--------- --------- --------- ---------
Earnings before income taxes 7,461 7,449 13,305 12,559
Income tax expense 2,910 2,938 5,189 4,957
--------- --------- --------- ---------
Net earnings $ 4,551 $ 4,511 $ 8,116 7,602
========= ========= ========= =========
Earnings per share $ 0.23 $ 0.22 $ 0.40 $ 0.37
========= ========= ========= =========
Weighted average common
shares outstanding 19,939 20,592 20,285 20,827
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 6
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
-----------------------------------
DECEMBER 15, DECEMBER 16,
1995 1994
------------ ------------
<S> <C> <C>
Cash flow from operations:
Net earnings $ 8,116 $ 7,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18,053 15,736
Writedown of KID'S CHOICE(TM) property and equipment 5,312 --
Gain on sales of property and equipment (1,178) --
Cash flows from changes in operating assets and liabilities:
Accounts receivable (2,446) 4,056
Prepaid expenses and supplies (2,388) (643)
Other assets (119) 3,217
Accounts payable, accrued expenses and other liabilities 1,393 609
Other, net 84 210
-------- --------
Net cash provided by operating activities $ 26,827 $ 30,787
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 7
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
-----------------------------------
DECEMBER 15, DECEMBER 16,
1995 1994
------------ ------------
<S> <C> <C>
Cash flow from investing activities:
Purchases of property and equipment $ (38,933) $ (29,293)
Proceeds from sale of property and equipment 3,366 2,195
Proceeds from sale of investments 3,396 --
Proceeds from collection of notes receivable 2,029 --
Other net -- 14
--------- ---------
Net cash used by investing activities (30,142) (27,084)
--------- ---------
Cash flow from financing activities:
Payments on long-term borrowings (538) (8,695)
Bank overdrafts 8,970 --
Purchase and retirement of treasury stock (10,000) --
Warrants and options exercised 1,207 1,050
--------- ---------
Net cash used by financing activities (361) (7,645)
--------- ---------
Increase (decrease) in cash and cash equivalents (3,676) (3,942)
Cash and cash equivalents at the beginning of the period 14,237 10,877
--------- ---------
Cash and cash equivalents at the end of the period $ 10,561 $ 6,935
========= =========
Supplementary cash flow information:
Interest paid $ 7,601 $ 7,062
========= =========
Income taxes paid $ 2,134 $ 1,880
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 8
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements of KinderCare Learning Centers,
Inc. (the "Company") are unaudited and, in the opinion of management, include
all adjustments necessary to fairly state the Company's financial condition and
results of operations for the interim period. The results of operations for
the twenty-eight weeks ended December 15, 1995 are not necessarily indicative
of the results to be expected for the full year. These statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Form 10-K for the year ended June 2, 1995.
(2) FISCAL YEAR
The Company's fiscal year ends on the Friday closest to May 31. The
first quarter is 16 weeks long and the second, third, and fourth quarters are
each twelve weeks long. The 1996 and 1995 fiscal years are each 52 weeks long.
(3) BANK OVERDRAFTS
Bank Overdrafts represent checks issued to vendors and employees not
yet presented for payment.
(4) LITIGATION SETTLEMENT AND RESTRUCTURING, NET
On July 3, 1995, the Company received a cash distribution of $11.3
million from The Enstar Group, Inc. ("Enstar"), the Company's former parent,
in connection with a settlement of the Company's claim against Enstar in the
U.S. Bankruptcy Court in Montgomery.
On June 15, 1995, the Board of Directors appointed Dr. Sandra Scarr,
Chairman of the Board, to be Chief Executive Officer ("CEO"), replacing the
former CEO whose resignation was effective on the same date. Subsequent to
this appointment the Company made substantial changes to its field operations
management and support functions and systems in an effort to improve future
operating effectiveness and efficiencies as well as to improve the quality of
services. As a result of these changes, the Company charged $4.0 million of
restructuring costs against fiscal 1996 earnings during the first quarter
ending September 22, 1995 ("first quarter 1996"). These costs primarily relate
to severance agreements.
New management has limited KID'S CHOICE(TM) development to contracts
in process until the concept is more fully developed, and recorded an impairment
loss of $6.3 million in first quarter 1996, consisting of a writedown of $5.3
million for the recoverability of long lived assets, primarily leasehold
improvements, and $1.0 million for anticipated KID'S CHOICE(TM) lease
termination costs.
7
<PAGE> 9
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS - (CONTINUED)
(UNAUDITED)
(5) COMPUTATION OF INCOME PER SHARE
Income per share amounts are computed based on the weighted average
number of shares actually outstanding for the twelve weeks ended December 15,
1995, plus the shares that would be outstanding assuming the exercise of
dilutive stock options and warrants, all of which are considered common stock
equivalents. The number of shares that would be issued from the exercise of
the stock options and the warrants has been reduced by the number of shares
that could have been purchased from the proceeds at the average market price
(period end market price, if higher, for fully diluted computations) of the
Company's stock. A reconciliation of the actual weighted average shares to the
number of shares used in the computation of earnings per share for the periods
indicated is as follows (in thousands):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------------------ -------------------------------
DECEMBER 15, DECEMBER 16, DECEMBER 15, DECEMBER 16,
1995 1994 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 19,504 20,114 19,781 20,073
Dilutive effect of common stock equivalents 435 478 504 754
--------------------------------------------------------------------
Primary shares outstanding 19,939 20,592 20,285 20,827
Fully dilutive effect ofcommon stock equivalents -- -- -- --
--------------------------------------------------------------------
Fully diluted shares outstanding 19,939 20,592 20,285 20,827
====================================================================
</TABLE>
(6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current presentation.
8
<PAGE> 10
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The twelve weeks and the twenty-eight weeks ended December 15, 1995
("second quarter 1996" and "year-to-date fiscal 1996", respectively) compared
to the twelve weeks and the twenty-eight weeks ended December 16, 1994 ("second
quarter 1995" and "year-to-date fiscal 1995", respectively).
The following tables show the comparative operating results of the
Company for the second quarter and for the year-to-date (dollars in thousands):
<TABLE>
<CAPTION>
Twelve Weeks Ended
------------------------------------------------------------------------------
Change
---------------------
December 15, Percent of December 16, Percent of Percent of
1995 Revenues 1994 Revenues Amount Revenues
------------ ---------- ------------ ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $124,079 100% $ 116,765 100% 7,314 --%
-------- ---- --------- ---- ------ ----
Operating expenses:
Salaries, wages and benefits 65,003 52.4 59,553 51.0 (5,450) (1.4)
Rent expense 6,032 4.9 5,852 5.0 (180) 0.1
Depreciation 7,864 6.3 7,048 6.0 (816) (0.3)
Other operating expenses 33,958 27.4 32,918 28.2 (1,040) 0.8
-------- ---- --------- ---- ------ ----
Total operating expense 112,857 91.0 105,371 90.2 (7,486) (0.8)
-------- ---- --------- ---- ------ ----
Operating income $ 11,222 9.0% $ 11,394 9.8% (172) (0.8)%
======== ==== ========= ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Twenty-Eight Weeks Ended
------------------------------------------------------------------------------
Change
---------------------
December 15, Percent of December 16, Percent of Percent of
1995 Revenues 1994 Revenues Amount Revenues
------------ ---------- ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 285,392 100% $ 268,267 100% $ 17,125 --%
--------- ---- --------- ---- -------- ----
Operating expenses:
Salaries, wages and benefits 150,814 52.9 140,404 52.3 (10,410) (0.6)
Rent expense 14,367 5.0 13,641 5.1 (726) 0.1
Depreciation 18,053 6.3 15,736 5.9 (2,317) (0.4)
Other operating expenses 80,814 28.3 76,740 28.6 (4,074) 0.3
Litigation settlement and restructuring costs, net (1,019) (0.3) -- -- 1,019 0.3
--------- ---- --------- ---- -------- ----
Total operating expense 263,029 92.2 246,521 91.9 (16,508) (0.3)
--------- ---- --------- ---- -------- ----
Operating income $ 22,363 7.8% $ 21,746 8.1% $ 617 (0.3)%
========= ==== ========= ==== ======== ====
Centers open at the end of each quarter 1,142 1,147 (5)
========= ========= ========
</TABLE>
9
<PAGE> 11
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Operating revenues - Operating revenues increased $7.3 million, or 6.3%, and
$17.1 million or 6.4% for the second quarter and year-to-date fiscal 1996,
respectively, over the comparable periods in fiscal 1995. The increase in
revenues is attributable to a 4.2% weighted average tuition increase
implemented in the fall of 1995 and new centers opened or acquired during
fiscal 1995 and the first two quarters of fiscal 1996. The tuition increase is
comparable to the prior year weighted average increase of 4.4%, which was
previously disclosed as a simple average of 5.5%. The increase in operating
revenues was partially offset by center closings during fiscal 1995 and early
fiscal 1996 and a slight decline in center occupancy during the first two
quarters of fiscal 1996 as compared with the first two quarters of fiscal 1995.
Same center revenues, defined as revenues from centers in operation during both
full periods were up 4.0% and 4.3% for second quarter 1996 and year-to-date
fiscal 1996, respectively, over the comparable periods in fiscal 1995. Total
Company occupancy decreased 1.1% and 1.2% to 75.7% and 75.9% for the second
quarter and year-to-date fiscal 1996, respectively. Same center occupancy
decreased 0.6% to 76.6% for the quarter and 0.4% to 76.8% year-to-date fiscal
1996. Although occupancy is below last year, management believes that the
decrease appears favorable in light of heavy competitor promotional activities
in certain markets and some expected disruption caused by the recent management
changes.
During year-to-date fiscal 1996, the Company has opened 11 new
community centers, 4 KINDERCARE AT WORK(R) centers and 6 KID'S CHOICE(TM)
centers for a total of 21 new centers. During the same period last year, the
Company opened 13 new community centers, 3 KINDERCARE AT WORK(R) centers and 6
KID'S CHOICE(TM) centers for a total of 22 new centers. One community center
was converted to a KID'S CHOICE(TM) in year-to-date fiscal 1996, and two
community centers were converted to the KID'S CHOICE(TM) format in the first
two quarters of fiscal 1995. Since the end of the second quarter 1995, the
Company has opened or acquired a total of 43 new centers with an average
building capacity of 155 children and has closed 48 centers with an average
building capacity of 120 children. Consequently, total center capacity has
increased from approximately 137,000 at the end of second quarter fiscal 1995
to approximately 138,000 at the end of second quarter fiscal 1996.
Salaries, wages and benefits - Salaries, wages and benefits increased, as a
percentage of operating revenues, by 1.4% and 0.6% for the second quarter 1996
and year-to-date fiscal 1996, respectively, compared to the corresponding
periods in fiscal 1995. During the second quarter 1995, the Company recorded
favorable adjustments to its employee medical costs due to new program
roll-outs and management focus on medical cost containment. As this adjustment
resulted from the reversal of an accrual recorded in the first quarter of the
prior year, year-to-date results were not affected, and are comparable with the
current year. This accounted for about one half of the quarterly variance.
Rent Expense - Rent expense decreased 0.1%, as a percentage of revenues, for
the second quarter and year-to-date fiscal 1996 versus the corresponding
periods in fiscal 1995. These decreases were due to the closing of 19 leased
facilities since the end of the second quarter 1995.
Depreciation - Depreciation expense for the second quarter 1996 increased $0.8
million from second quarter 1995, and $2.3 million year-to-date fiscal 1996
versus the same period in the prior year. The majority of this increase was
due to the purchase of computers for children's educational programs which were
installed in centers during the last half of fiscal 1995. The
10
<PAGE> 12
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
remaining increase was due to depreciation on new centers opened after the
second quarter 1995, offset partially by centers closed.
Other operating expenses - Other operating expenses decreased, as a percentage
of revenues, 0.8% and 0.3% for the second quarter and year-to-date fiscal 1996,
respectively. These improvements are mostly due to a decrease in insurance
costs from improving experience and gains on the sales of assets of
approximately $0.3 million and $1.2 million for the quarter and year-to-date
fiscal 1996, respectively.
Litigation Settlement and Restructuring, net
Litigation settlement - On July 3, 1995, the Company received a cash
distribution of $11.3 million from The Enstar Group, Inc. ("Enstar"), the
Company's former parent, in connection with a settlement of the Company's claim
against Enstar in U.S. Bankruptcy Court in Montgomery.
Restructuring - On June 15, 1995, the Board of Directors appointed Dr.
Sandra Scarr, Chairman of the Board, to be Chief Executive Officer ("CEO"),
replacing the former CEO whose resignation was effective on the same date.
Subsequent to this appointment, the Company made substantial changes to its
field operations management and support functions and is evaluating certain
other support functions and systems in an effort to improve future operating
effectiveness and efficiencies as well as to improve the quality of services.
As a result of these changes, the Company charged $4.0 million of restructuring
costs, primarily severance agreements, against fiscal 1996 earnings during the
quarter ending September 22, 1995 ("first quarter 1996").
New management has limited KID'S CHOICE(TM) development to contracts
in process, until the concept is more fully developed, and recorded an
impairment loss of $6.3 million in first quarter 1996, consisting of a
writedown of $5.3 million for the recoverability of long lived assets,
primarily leasehold improvements, and $1.0 million for anticipated lease
termination costs.
Operating income - For the second quarter 1996, operating income of $11.2
million was slightly below the comparable quarter in fiscal 1995; and,
operating margin of 9.0% was 0.8% below the prior year. Operating income
year-to-date increased $0.6 million to $22.4 million from $21.8 million.
However, year-to-date fiscal 1996 operating income of $21.3 million before
litigation settlement and restructuring costs decreased $0.4 million, and
operating margin of 7.5% decreased 0.6% from the comparable period in the prior
year. This decrease is primarily attributable to increases in salaries and
benefits and depreciation on newly acquired assets.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for the second quarter 1996 increased $0.5
million to $19.1 million from $18.6 million for the second quarter 1995, but as
a percentage of operating revenues, decreased to 15.4% from 15.9%. EBITDA for
year-to-date fiscal 1996 increased $2.8 million to $40.6
11
<PAGE> 13
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
million, or 14.2% of operating revenues, from $37.8 million, or 14.1% of
operating revenues for the comparable period in 1995. Year-to-date EBITDA,
before litigation settlement and restructuring costs, was $39.6 million, an
increase of $1.8 million over the comparable period in the prior year. As a
percentage of revenues, year-to-date EBITDA, before litigation settlement and
restructuring costs, decreased 0.2% to 13.9% from 14.1%. EBITDA does not
necessarily indicate that cash flow is sufficient to fund all of the Company's
cash needs nor does it represent cash flow from operations as defined by
generally accepted accounting principles.
Interest expense, net - Net interest expense decreased $0.1 million to $3.8
million for second quarter 1996 from $3.9 million in second quarter 1995.
Year-to-date net interest expense decreased to $9.1 million in fiscal 1996 from
$9.2 million in fiscal 1995. The second quarter decrease is attributable to a
decrease in average long-term debt obligations during the respective quarters
partially offset by a $0.2 million reduction in interest income. The Company's
weighted average interest rate on its long-term debt including amortization of
debt issuance costs, was 11.2% for second quarter 1996 versus 10.3% for second
quarter 1995 and 10.9% for year-to-date fiscal 1996 versus 10.3% for
year-to-date fiscal 1995.
Income tax expense - Income tax expense for the second quarter 1996 and
year-to-date fiscal 1996 of $2.9 million and $5.2 million, respectively, are in
excess of amounts computed by applying statutory Federal income tax rates to
income before taxes due primarily to state income taxes. Any tax benefits
recognized subsequent to April 2, 1993, the effective date from which the
Company emerged from bankruptcy, relating to the valuation allowance for
deferred taxes at April 2, 1993 are recorded as direct additions to additional
paid-in capital. Additional paid-in capital was increased by approximately $1.3
million and $1.8 million for tax benefits recognized in the second quarter 1996
and year-to-date fiscal 1996, respectively.
LIQUIDITY & CAPITAL RESOURCES
New enrollments are generally highest in September and January, with
attendance declining during July and August and the year-end holiday season.
To prepare centers for new, increased fall enrollments, the Company seeks
during the summer months to open new centers, accelerate renovations and
improvements to existing facilities, and accelerate purchases of equipment.
Consequently, the combination of decreased attendance and escalated capital
activity during the summer months and during the year-end holiday period may
result in decreased liquidity during these periods. The Company's consolidated
net cash flow from operations for the second quarter 1996 was $26.8 million,
compared to $30.8 million for the second quarter 1995. The ratio of current
assets to current liabilities was .49 to 1 at December 15, 1995 versus .51 to 1
at June 2, 1995. Management believes that the combination of cash provided
from operations and funds available under the Company's revolving credit
facility are adequate to meet the Company's working capital needs.
On July 3, 1995, the Company received a cash distribution of $11.3
million from The Enstar Group, Inc., the Company's former parent, in connection
with a settlement of the Company's claim against Enstar in U.S. Bankruptcy
Court in Montgomery.
12
<PAGE> 14
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
During first quarter 1996, the Company repurchased 205,000 shares of
its common stock for $2.7 million. On September 29, 1995, the Company
repurchased an additional 540,883 shares of its common stock for $7.3 million
completing the Company's $10.0 million stock buy-back program. A total of
745,883 shares were repurchased at a $13.41 average cost per common share.
Treasury stock purchased under the buy-back program was retired in October
1995.
During first quarter 1996, the Company received $1.9 million in cash
from the repayments of notes receivable related to the sales of centers in
prior years. In addition, the Company also received $2.2 million in cash from
the sale of assets during the first quarter 1996 and $1.2 million in cash from
the sale of assets during the second quarter 1996.
Capital Expenditures
In connection with the restructuring, management is continuing to
reorganize its real estate and center development functions. As a result,
management has reduced its estimate for new openings for fiscal year 1996, and
anticipates opening between 35 and 40 new centers, consisting of 22 to 25
community centers, four to five KINDERCARE AT WORK(R) centers, and 9 to 10
KID'S CHOICE(TM) centers. The fiscal year 1996 new center openings reflect a
slow-down in the development of the Company's KID'S CHOICE(TM) format as
current management does not believe the new format concept is meeting its full
potential and needs further refinement. The Company also is experiencing
delays in acquiring and receiving all required permits for new community center
locations. New community center development typically takes 18 to 24 months
and KID'S CHOICE(TM) centers typically require four to nine months to develop.
Frequently, new site negotiations are delayed or canceled, or construction
delayed for a variety of reasons, many outside the control of management. No
assurance can be given by management that it will be able to successfully
negotiate and acquire properties, or meet targeted deadlines.
Management plans to continue to renovate, upgrade and improve existing
centers for such items as improved playgrounds, computers, educational
materials, and infant suites. At present, approximately 50% of the centers are
equipped with computers for children's educational programs.
Capital expenditures year-to-date fiscal 1996, amounted to
approximately $38.9 million. Approximately $8.1 million was spent on
renovations and improvements to existing facilities, approximately $6.6 million
on equipment purchases and the remaining $24.2 million on new center
development. Capital expenditures for year-to-date fiscal 1995 amounted to
approximately $29.2 million, of which approximately $9.7 was spent on
renovations and improvements to existing facilities, approximately $5.1 million
on equipment purchases and the remaining $14.4 million on new center
development.
13
<PAGE> 15
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Management believes that cash on hand, borrowings under the revolving
credit facility, cash provided by operating activities and funds from permitted
additional financing will adequately provide for its working capital and debt
service needs and will be sufficient to fund the Company's expected capital
expenditures over the next several years. Although no assurance can be given
that such sources will be sufficient, the capital expenditure program has
substantial flexibility and is subject to revision based on various factors,
including but not limited to, business conditions, changing time constraints,
cash flow requirements, debt covenants, competitive factors, and seasonality of
openings. If the Company experiences a lack of working capital, it is in a
position to cut back its capital expenditures. In the near term, if the
Company were to reduce substantially or postpone its capital expenditures,
management believes there would be no substantial impact on current operations
and it is likely that more cash would be available for working capital needs
and debt servicing. In the long term, if these expenditures were substantially
reduced, in management's opinion, its operating business and ultimately its
cash flow would be adversely impacted.
14
<PAGE> 16
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, the Company was a co-defendant to a
stockholder suit filed in the Circuit Court of Montgomery County, Montgomery,
Alabama. The suit was for $20 million in compensatory damages and $20 million
in punitive damages in each of seven counts. The Company was named as a
defendant in five of those seven counts. In December 1995, the other
defendants settled with the shareholders. The plaintiffs have dismissed all
charges against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on
November 13, 1995 at which time the following matters were brought
before and voted upon by the shareholders.
1. The election of the following to the Board of Directors to
serve until the 1996 Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
Sandra W. Scarr, Ph.D. 17,970,163 23,779 -0-
Thomas E. Bronson 17,970,854 23,088 -0-
M. Taylor Dawson, Jr. 17,970,384 23,558 -0-
Mark Dickstein 17,197,599 796,343 -0-
Jeffrey S. Halis 17,972,443 21,449 -0-
Malcolm T. Hopkins 17,972,552 21,390 -0-
Bruce A. Karsh 17,972,503 21,439 -0-
Geraldine B. Laybourne 17,972,936 21,006 -0-
Ken Miller 17,274,824 719,118 -0-
</TABLE>
2. To ratify the selection of KPMG Peat Marwick LLP for fiscal
year ending May 31, 1996 as the Company's independent auditors:
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C>
17,964,288 22,887 6,767
</TABLE>
Item 6. Exhibits and reports on Form 8-K
Exhibit 27 - Financial Data Schedule (for SEC use only)
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINDERCARE LEARNING CENTERS, INC.
------------------------------------
(Registrant)
Date: January 19, 1996 /s/ Sandra W. Scarr
------------------------------------
Sandra W. Scarr
Chairman and Chief Executive Officer
Date: January 19, 1996 /s/ Philip L. Maslowe
------------------------------------
Philip L. Maslowe
Executive Vice-President,
Chief Financial Officer, and
Treasurer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-03-1995
<PERIOD-END> DEC-15-1995
<CASH> 10,561
<SECURITIES> 0
<RECEIVABLES> 14,892
<ALLOWANCES> 1,377
<INVENTORY> 0
<CURRENT-ASSETS> 34,746
<PP&E> 532,337
<DEPRECIATION> 76,317
<TOTAL-ASSETS> 513,190
<CURRENT-LIABILITIES> 70,520
<BONDS> 159,028
0
0
<COMMON> 194
<OTHER-SE> 245,029
<TOTAL-LIABILITY-AND-EQUITY> 513,190
<SALES> 0
<TOTAL-REVENUES> 285,392
<CGS> 0
<TOTAL-COSTS> 262,256
<OTHER-EXPENSES> (1,019)
<LOSS-PROVISION> 1,792
<INTEREST-EXPENSE> 9,058
<INCOME-PRETAX> 13,305
<INCOME-TAX> 5,189
<INCOME-CONTINUING> 8,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,116
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
