<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 MARCH 8, 1996
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 April 5, 1996 was 19,760,850.
================================================================================
<PAGE> 2
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Numbers
------------
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
Consolidated Statements of Operations for the twelve weeks
ended March 8, 1996 and March 10, 1995, and the forty weeks
ended March 8, 1996 and March 10, 1995 . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheets as of March 8 1996, and
June 2, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
forty weeks ended March 8, 1996 and
March 10, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 9
Part II OTHER INFORMATION: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED FORTY WEEKS ENDED
------------------------------------- ------------------------------------
MARCH 8, MARCH 10, MARCH 8, MARCH 10,
1996 1995 1996 1995
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues $ 123,641 $ 115,696 $ 409,033 $ 383,963
---------------- ---------------- -------------- ---------------
Other operating expenses:
Salaries, wages and
benefits 65,417 60,464 216,231 200,868
Rent expense 6,062 6,299 20,429 19,940
Depreciation 7,373 6,204 25,427 21,940
Provision for allowance
for doubtful accounts 556 903 2,348 2,680
Other operating expenses 30,719 30,594 109,955 105,556
(Gain) loss on litigation
settlements, net of
restructuring costs -- (888) (1,019) (888)
---------------- ---------------- -------------- ---------------
Total operating
expenses 110,127 103,576 373,371 350,096
---------------- ---------------- -------------- ---------------
Operating income 13,514 12,120 35,662 33,867
Net investment income 27 1,170 403 1,466
Interest expense 3,921 4,198 13,140 13,681
---------------- ---------------- -------------- ---------------
Income before income
taxes 9,620 9,092 22,925 21,652
Income tax expense 3,752 3,488 8,941 8,445
---------------- ---------------- -------------- ---------------
Net income $ 5,868 $ 5,604 $ 13,984 $ 13,207
================ ================ ============== ===============
Income per share $ .30 $ .28 $ .69 $ $ .64
================ ================ ============== ===============
Weighted average common
shares outstanding 19,759 20,351 20,133 20,659
================ ================ ============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 8, JUNE 2,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,861 $ 14,237
Accounts receivable:
Tuition, net of allowances of
$1,143 (1996) and $873 (1995) 14,089 9,913
Other 736 1,156
Prepaid expenses and supplies 10,559 8,282
---------- ----------
Total current assets 35,245 33,588
Property and equipment 543,213 497,690
Less accumulated depreciation and
amortization 83,735 55,244
---------- ----------
Net property and equipment 459,478 442,446
---------- ----------
Investments -- 1,981
Other assets 22,081 23,263
---------- ----------
$ 516,804 $ 501,278
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND MARCH 8, JUNE 2,
SHAREHOLDERS' EQUITY 1996 1995
----------------- ---------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 8,708 $ 12,639
Bank overdrafts 10,707 7,021
Current portion of long-term debt 841 889
Accrued expenses and other liabilities 48,241 45,926
----------------- --------------
Total current liabilities 68,497 66,475
Long-term debt 153,767 159,505
Self-insurance liabilities 21,377 17,927
Other noncurrent liabilities 19,986 13,133
----------------- --------------
Total liabilities 263,627 257,040
----------------- --------------
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
19,672,800 and 20,119,818 shares at
March 8, 1996 and June 2, 1995,
respectively 196 200
Additional paid-in capital 198,964 203,890
Retained earnings 54,101 40,116
Cumulative foreign currency translation (84) 32
----------------- --------------
Total shareholders' equity 253,177 244,238
----------------- --------------
$ 516,804 $ 501,278
================= ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 6
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
-------------------------------------------
MARCH 8, MARCH 10,
1996 1995
------------------- -------------------
<S> <C> <C>
Cash flow from operations:
Net income $ 13,984 $ 13,207
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,427 21,940
Writedown of KID'S CHOICE(TM) property and
equipment 5,312 --
Gains on sales of property and equipment (1,359) --
Change in operating assets and liabilities:
Trade receivables (2,661) 2,262
Prepaid expenses and supplies (2,893) 6,963
Other assets 199 1,091
Accounts payable, accrued expenses and
other liabilities 7,720 4,965
Other, net 786 (519)
------------- --------------
Net cash provided by operating activities $ 46,515 $ 49,909
------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 7
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
------------------------------------------
MARCH 8, MARCH 10,
1996 1995
-------------------- ------------------
<S> <S> <S>
Cash flow from investing activities:
Purchases of property and equipment
$ (50,653) $ (40,612)
Proceeds from sale of property and
equipment 3,697 4,487
Proceeds from redemption of investments 3,396 1,100
Proceeds from collection of notes receivable 2,042 --
Other net -- (16)
------------------ -----------------
Net cash used by investing activities (41,518) (35,041)
------------------ -----------------
Cash flow from financing activities:
Payments on long-term borrowings (5,786) (15,806)
Bank overdrafts 3,688 5,158
Warrants and options exercised 2,725 1,057
Purchase and retirement of treasury stock (10,000) --
------------------ -----------------
Net cash used by financing activities (9,373) (9,591)
------------------ -----------------
Increase (decrease) in cash and cash equivalents (4,376) 5,277
Cash and cash equivalents at the beginning of the period 14,237 11,963
------------------ -----------------
Cash and cash equivalents at the end of the period $ 9,861 $ 17,240
================== =================
Supplementary cash flow information:
Interest paid $ 8,010 $ 8,546
================== =================
Income taxes paid $ 3,497 $ 2,022
================== =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<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 forty weeks ended March 8, 1996 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 OVERDRAFT
Bank overdrafts represent checks, issued to vendors and employees, not
yet presented for payment.
(4) GAINS ON LITIGATION SETTLEMENTS, NET OF RESTRUCTURING COSTS
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
related 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.
<PAGE> 9
In third quarter 1995, the Company received approximately $0.9 million in
connection with litigation settlements with Enstar and KinderCare's former
Chairman of the Board.
(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 and forty weeks ended
March 8, 1996, 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 FORTY WEEKS ENDED
---------------------------------------------------------------------
MARCH 8, MARCH 10, MARCH 8, MARCH 10,
1996 1995 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 19,584 20,115 19,722 20,086
Dilutive effect of common
stock equivalents 175 236 411 573
--------------------------------------------------------------------
Primary shares outstanding 19,759 20,351 20,133 20,659
Fully dilutive effect of
common stock equivalents -- 35 -- --
--------------------------------------------------------------------
Fully diluted shares
outstanding 19,759 20,386 20,133 20,659
====================================================================
</TABLE>
(6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current presentation.
<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 forty weeks ended March 8, 1996 ("third
quarter 1996" and "year-to-date fiscal 1996", respectively) compared to the
twelve weeks and the forty weeks ended March 10, 1995 ("third quarter 1995" and
"year-to- date fiscal 1995", respectively).
The following tables show the comparative operating results of the
Company for third quarter 1996 and 1995 and for year-to-date 1996 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
Twelve Weeks Ended
---------------------------------------------------------------------------
Change
----------------------
March 8, Percent of March 10, Percent of Percent of
1996 Revenues 1995 Revenues Amount Revenues
--------- ---------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 123,641 100.0% $115,696 100.0% $ 7,945 --%
--------- ----- -------- ----- ------- ----
Operating expenses:
Salaries, wages and benefits 65,417 52.9 60,464 52.3 (4,953) (0.6)
Rent expense 6,062 4.9 6,299 5.4 237 0.5
Depreciation 7,373 6.0 6,204 5.4 (1,169) (0.6)
Other operating expenses 31,275 25.3 31,497 27.2 222 1.9
(Gain) loss on litigation settlements,
net of restructuring costs -- -- (888) (0.8) (888) (0.8)
--------- ----- ------- ----- ------- ----
Total operating expense 110,127 89.1 103,576 89.5 (6,551) .4
--------- ----- -------- ----- ------- ----
Operating income 13,514 10.9% $ 12,120 10.5% 1,394 .4%
========= ===== ======== ===== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Forty Weeks Ended
---------------------------------------------------------------------------
Change
----------------------
March 8, Percent of March 10, Percent of Percent of
1996 Revenues 1995 Revenues Amount Revenues
--------- ---------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $409,033 100.0% $383,963 100.0% $ 25,070 --%
-------- ----- -------- ----- -------- ----
Operating expenses:
Salaries, wages and benefits 216,231 52.8 200,868 52.3 (15,363) (0.5)
Rent expense 20,429 5.0 19,940 5.2 (489) 0.2
Depreciation 25,427 6.2 21,940 5.7 (3,487) (0.5)
Other operating expenses 112,303 27.5 108,236 28.2 (4,067) 0.7
(Gain) loss on litigation settlements,
net of restructuring costs (1,019) (0.2) (888) (0.2) 131 0.0
-------- ----- -------- ----- -------- ----
Total operating expense 373,371 91.3 350,096 91.2 (23,275) (0.1)
-------- ----- -------- ----- -------- ----
Operating income 35,662 8.7% $ 33,867 8.8% 1,795 (0.1)%
======== ===== ======== ===== ======== ====
Centers open at the end of
each quarter 1,146 1,147 (1)
======== ======== ========
</TABLE>
<PAGE> 11
Operating revenues - Operating revenues increased $7.9 million, or
6.9%, and $25.1 million or 6.5% for third quarter and year-to-date fiscal 1996,
respectively, over the comparable periods in fiscal 1995. Same center revenues,
defined as revenues from centers in operation during both full periods, were up
4.1% and 4.2% for third quarter 1996 and year-to-date fiscal 1996,
respectively, over the comparable periods in fiscal 1995. The increase in
total revenues is attributable to a 4.2% weighted average tuition increase
implemented in the fall of 1995 and new center openings, offset by a slight
decline in same center occupancy and center closings. The tuition increase is
slightly less than the prior year weighted average increase of 4.4%, which was
previously disclosed as a simple average of 5.5%.
Total company occupancy decreased 0.7% and 0.6% to 73.6% and 75.2% for
third quarter and year-to-date fiscal 1996, respectively. Total occupancy is
lower due to a slight decline in same center occupancy and lower than average
center occupancy on new centers opened less than one year. New center
occupancy generally builds and matures over a twelve to 30 month period based
on location and time of year opened. Same center occupancy decreased 0.3% to
74.5% for the quarter and 0.4% to 76.1% year-to-date fiscal 1996. Although
same center occupancy is below last year, management believes that the decrease
appears favorable in light of tuition increases, heavy competitor promotional
activities in certain markets, and some expected disruption caused by
management changes made during the year.
Center format count data for the third quarter and year-to-date are as
follows:
<TABLE>
<CAPTION>
Third Quarter Third Quarter Year-to-date Year-to-date
1996 1995 Fiscal 1996 Fiscal 1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Beginning of period 1,142 1,147 1,137 1,132
------------- ------------- ------------ ------------
Additions:
Community 4 3 15 16
KCAW 2 0 6 3
Kid's Choice 2 1 8 7
------------ ------------- ------------ ------------
8 4 29 26
Closings (4) (4) (20) (11)
------------ ------------- ------------ ------------
End of reporting period 1,146 1,147 1,146 1,147
============ ============= ============ ============
</TABLE>
Since the end of the third quarter 1995, the Company has opened or acquired a
total of 45 new centers with an average building capacity of 159 children and
has closed 46 centers with an average building capacity of 111 children.
Consequently, total center capacity has increased from approximately 137,000 at
the end of third quarter fiscal 1995 to approximately 139,000 at the end of
third quarter fiscal 1996.
Salaries, wages and benefits - Salaries, wages and benefits increased,
as a percentage of operating revenues, by 0.6% and 0.5% for third quarter 1996
and year-to-date fiscal 1996, respectively, compared to the corresponding
periods in fiscal 1995. The increase is attributable to increased hours and
wage rates since third quarter 1995 offset partially by improvements in field
overhead and administrative costs due to management reorganization. Management
continues to assess and evaluate its field organization and expects to initiate
additional changes in the near future. These changes will be initiated to
capture additional management operating effectiveness and efficiencies, and to
focus and improve the overall quality of services. Reorganization costs
associated with these future changes are not presently determinable, but
management believes the long-term benefits of these future changes will more
than offset the potential one-time reorganization costs.
<PAGE> 12
Rent Expense - Rent expense decreased 0.5% and 0.2%, as a percentage
of revenues, for third quarter 1996 and year-to-date fiscal 1996, respectively,
versus the corresponding periods in fiscal 1995. These decreases were due to
the closing of 13 leased facilities since the end of third quarter 1995.
Depreciation - Depreciation expense for third quarter 1996 increased
$1.2 million from third quarter 1995, and $3.5 million year-to-date fiscal 1996
versus the same period in the prior year. The majority of this increase was
due to depreciation on computers purchased for children's educational programs
which were installed in centers during the third and fourth quarters of fiscal
1995. The remaining increase was due to depreciation on new centers opened
after third quarter 1995, offset partially by centers closed.
Other operating expenses - Other operating expenses decreased, as a
percentage of revenues, 1.9% and 0.7% for the third 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.
Gains on Litigation Settlements, Net of Restructuring Costs
Litigation settlements - 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 US Bankruptcy Court in Montgomery.
In third quarter 1995, the Company received approximately $0.9 million
in connection with litigation settlements with Enstar and Enstar's former
Chairman of the Board.
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 - Third quarter operating income of $13.5 million was
$1.4 million, or 11.5%, higher than operating income for the comparable quarter
in fiscal 1995; and, year-to-date fiscal 1996 operating income of $35.7 million
increased $1.8 million, or 5.3%, from the comparable period in the prior year.
Third quarter operating margin of 10.9% was 0.4%, as a percentage of operating
revenues, above the comparable quarter in fiscal 1995; and, year-to-date
operating margin of 8.7% decreased 0.1%, as a percentage of operating revenues,
from 8.8% for year-to-date 1995. This decrease is primarily attributable to
increases in salaries and benefits and depreciation on newly acquired assets.
The comparability to prior year results for the quarter and the year-to-date
periods are also affected by litigation settlements received in third quarter
1995
<PAGE> 13
and first quarter 1996 (see Note 4 to the financial statements). Before gains
on litigation settlements, net of restructuring costs, third quarter 1996
operating income of $13.5 million was $2.3 million, or 20.3%, higher than
operating income for the comparable quarter in fiscal 1995; and, year-to-date
fiscal 1996 operating income of $34.6 million increased $1.7 million, or 5.0%,
from the comparable period in the prior year. The operating margin, before
gains on litigation settlements, net of restructuring costs, for third quarter
1996 of 10.9% was 1.2%, as a percentage of operating revenues, above the
comparable quarter in fiscal 1995; and, the year-to-date operating margin of
8.5% decreased 0.1%, as a percentage of operating revenues, from the comparable
period in the prior year.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for third quarter 1996, increased $1.4 million
to $20.9 million from $19.5 million for the comparable period in the prior
year; and, as a percentage of operating revenues, increased 0.1% to 16.9% from
16.8%. EBITDA for year-to-date fiscal 1996 increased $4.2 million to $61.5
million, or 15.0% of operating revenues, from $57.3 million, or 14.9% of
operating revenues, for the comparable period in 1995. Before gains on
litigation settlements, net of restructuring costs, EBITDA for third quarter
1996, increased $2.3 million to $20.9 million from $18.6 million for third
quarter 1995, and as a percentage of operating revenues, increased 0.8% to
16.9% from 16.1%. Before gains on litigation settlements, net of restructuring
costs, year-to-date EBITDA, was $60.5 million, an increase of $4.1 million over
the comparable period in the prior year and, as a percentage of revenues,
increased 0.1% to 14.8% from 14.7%. 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.
Net investment income - Net investment income was nil for third
quarter 1996 compared to $1.2 million for third quarter 1995 and $0.4 million
year-to-date 1996 compared to $1.5 million year-to-date 1995, primarily due to
the sale of certain investments during third quarter 1995.
Interest expense - Interest expense decreased $0.3 million to $3.9
million for third quarter 1996 from $4.2 million in third quarter 1995.
Year-to-date interest expense decreased to $13.1 million in fiscal 1996 from
$13.7 million in fiscal 1995. The third quarter 1996 decrease is attributable
to a decrease in average long-term debt obligations outstanding during the
respective quarters. The Company's weighted average interest rate on its
long-term debt, including amortization of debt issuance costs, was 10.7 % for
third quarter 1996 versus 10.8% for third quarter 1995 and 10.7% for
year-to-date fiscal 1996 versus 10.5% for year-to-date fiscal 1995.
Income tax expense - Income tax expense for third quarter 1996 and
year-to-date fiscal 1996 of $3.8 million and $8.9 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 additions to additional paid-in
capital. Additional paid-in capital was increased by approximately $0.4
million and $2.1 million for tax benefits recognized in third 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
<PAGE> 14
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 forty weeks ended March 8,
1996 was $46.5 million, compared to $49.9 million for the comparable period in
1995. The ratio of current assets to current liabilities was .51 to 1 at March
8, 1996 and 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.
During first quarter 1996, 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 US
Bankruptcy Court in Montgomery.
During first quarter 1996, the Company repurchased 205,000 shares of
its common stock for $2.7 million. During second quarter 1996, 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 second
quarter 1996.
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, $1.2 million in cash from the
sale of assets during the second quarter 1996, and $0.3 million in cash from
the sale of assets during third 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 37 and 40 new centers, consisting of 22 to 25
community centers, six KINDERCARE AT WORK(R) centers, and nine to ten 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 has also experienced
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 is
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. By the end of
June 1996, most centers will be equipped with computers.
Capital expenditures year-to-date fiscal 1996, amounted to
approximately $50.7 million. Approximately $11.6 million was spent on
renovations and improvements to existing facilities, approximately $8.0 million
on equipment purchases and the remaining $31.1 million on new center
development. Capital expenditures for year-to-date fiscal 1995 amounted to
approximately
<PAGE> 15
$40.6 million, of which approximately $13.8 million was spent on renovations
and improvements to existing facilities, approximately $7.0 million on
equipment purchases and the remaining $19.8 million on new center development.
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.
<PAGE> 16
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and reports on Form 8-K
a) Exhibit Index
10(l-4) Fourth Amendment to the Credit Agreement dated April 5, 1996
27 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K - None
<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: April 12, 1996 /s/ Sandra W. Scarr .
---------------------------------------------------
Sandra W. Scarr
Chairman and Chief Executive Officer
Date: April 12, 1996 /s/ Philip L. Maslowe .
---------------------------------------------------
Philip L. Maslowe
Executive Vice-President, Chief Financial Officer
and Treasurer
<PAGE> 1
EXHIBIT 10(1-4)
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT, dated as of April 5, 1996
(the "Amendment"), among KINDERCARE LEARNING CENTERS, INC., a Delaware
corporation (the "Borrower"); THE TORONTO-DOMINION BANK, acting through its
Houston Agency, as the issuer of certain letters of credit (in such capacity,
the "Facing Bank"); THE TORONTO-DOMINION BANK, GENERAL ELECTRIC CAPITAL
CORPORATION, FIRST ALABAMA BANK, UNITED STATES NATIONAL BANK OF OREGON,
ABN*AMRO BANK N.V., ACTING THROUGH ITS ATLANTA AGENCY, NATIONSBANK, N.A.
(SOUTH) (SUCCESSOR-BY-MERGER TO NATIONSBANK OF GEORGIA, NATIONAL ASSOCIATION),
and SOUTHTRUST BANK OF ALABAMA, N.A. (collectively, the "Lenders"), and TORONTO
DOMINION (TEXAS), INC., as agent for the Lenders and the Facing Bank (in such
capacity, the "Agent");
W I T N E S S E T H:
WHEREAS, the Borrower, the Facing Bank, the Agent and the Lenders are
parties to that certain Credit Agreement dated June 2, 1994, as amended by that
certain First Amendment to Credit Agreement dated as of October 6, 1994, that
certain Second Amendment to Credit Agreement dated as of January 6, 1995, and
that certain Third Amendment to Credit Agreement dated as of May 24, 1995 (as
hereafter amended, supplemented and modified from time to time, the "Credit
Agreement"), pursuant to which the Facing Bank, the Lenders and the Agent have
established a $149,648,813 revolving loan and letter of credit facility in
favor of the Borrower; and
WHEREAS, the Borrower desires (a) to expand its rights under the
Credit Agreement to purchase shares of its Capital Stock and to purchase issued
and outstanding warrants and options to acquire shares of its Capital Stock,
(b) to have the right to pay cash dividends on its Capital Stock, and (c) to
use proceeds from the Loans for such purposes, as more particularly set forth
hereinbelow; and
WHEREAS, the Borrower also desires to expand its right to engage in
certain transactions not otherwise permitted under the terms of the Credit
Agreement, including specifically its right to make Investments in its non-U.S.
Subsidiaries; and
WHEREAS, the Lenders, the Facing Bank and the Agent are willing to
permit the Borrower to do so, subject to the terms, conditions and limitations
hereinafter set forth;
NOW, THEREFORE, in consideration of these premises, the covenants and
agreements hereinafter set forth, and other good and valuable consideration,
the receipt and sufficiency of which
<PAGE> 2
are hereby acknowledged, the Agent, the Facing Bank, the Lenders and the
Borrower agree that capitalized terms herein shall have the meanings ascribed
thereto in the Credit Agreement except as otherwise defined or limited herein,
and further agree as follows:
1. Amendment to Section 6.9. Section 6.9 of the Credit
Agreement, Use of Proceeds, is hereby amended by deleting the second sentence
in Section 6.9(a) thereof in its entirety, and by substituting the following
sentence in lieu thereof:
"In addition, the Borrower may use proceeds of Advances made under
Facility A for (i) the payment of dividends and distributions on
shares of the Borrower's Capital Stock, and (ii) making Purchases (as
that term is defined in Section 8.7 hereof), all in accordance with
and subject to the provisions of Section 8.7 hereof."
2. Amendment to Section 8.2. Section 8.2 of the Credit
Agreement, Investments, is hereby amended by deleting subsection (a) thereof in
its entirety and by substituting the following language in lieu thereof:
"(a) Investments in any Wholly Owned
Subsidiary other than a non-U.S. Subsidiary; provided,
however, that such Investments must be in Permitted Businesses
as described in clause (a) of the definition of the term
'Permitted Business' herein;".
3. Amendment to Section 8.7. Section 8.7 of the Credit
Agreement, Restricted Payments and Restricted Purchases, is hereby amended by
deleting said Section in its entirety, and by substituting the following
language in lieu thereof as a new Section 8.7 of the Credit Agreement:
"Section 8.7 Restricted Payments and Restricted Purchases.
The Borrower will not, and will not permit any Subsidiary to, directly
or indirectly:
"(a) declare or pay any dividend on, or make any
distribution to holders of, any outstanding shares of the Borrower's
Capital Stock (other than dividends or distributions payable solely in
shares of its Qualified Capital Stock or in options, warrants or other
rights to acquire such Qualified Capital Stock), subject to the
further provisions of this Section 8.7;
"(b) purchase, redeem or otherwise acquire or
retire for value, directly or indirectly, any shares of the Capital
Stock of the Borrower or any Affiliate of the Borrower or options,
warrants or other rights to acquire
-2-
<PAGE> 3
such Capital Stock (in each case, for purposes of this Section, a
'Purchase'), subject to the further provisions of this Section 8.7;
"(c) make any principal payment on, or repurchase,
redeem, defease, retire or otherwise acquire for value, prior to any
scheduled principal payment, sinking fund or maturity, any
Subordinated Indebtedness; or
"(d) declare or pay any dividend or distribution
on any Capital Stock of any Subsidiary to any Person (other than the
Borrower or any of its Wholly Owned Subsidiaries) or purchase, redeem
or otherwise acquire or retire for value any Capital Stock of any
Subsidiary held by any Person; provided, however, that a Subsidiary of
the Borrower which is a permitted partnership or joint venture
pursuant to Section 8.5(a) hereof may declare and make distributions
to its partners or joint venturers from time to time if no Event of
Default then exists and no Default or Event of Default would be caused
thereby.
Notwithstanding anything to the contrary contained in subsections (a)
or (b) of this Section 8.7, the Borrower may declare and pay dividends
on, or make distributions to holders of, any shares of the Borrower's
Capital Stock, and make Purchases, in each case so long as (and only
so long as):
(i) no Event of Default shall have occurred and
is then continuing, and no Event of Default shall be created
thereby;
(ii) immediately after giving effect to each
Purchase, the aggregate number of shares of the Borrower's
issued and outstanding Capital Stock purchased, redeemed or
otherwise acquired or retired for value after December 1, 1994
pursuant to this Section 8.7 shall not exceed four million
(4,000,000) shares;
(iii) with respect to each Purchase of outstanding
Stock Options, the Borrower shall not pay any Separated
Employee more than the Option Price Differential, if any, to
purchase Stock Options held by such Separated Employee; and
(iv) immediately after giving effect to each such
dividend, distribution or Purchase (as the case may be), the
sum of (1) the aggregate dividends and distributions declared
or paid on shares of the Borrower's Capital Stock (other than
dividends or
-3-
<PAGE> 4
distributions payable solely in shares of its Qualified
Capital Stock or in options, warrants or other rights to
acquire such Qualified Capital Stock) after December 1, 1994,
plus (2) the aggregate gross purchase price of all Purchases
after December 1, 1994, shall not exceed the lesser of (A)
$35,000,000, or (B) the sum of (I) $15,000,000 plus (II) an
amount equal to fifty percent (50%) of the aggregate
cumulative Consolidated Net Income accrued on a cumulative
basis during the period beginning on June 4, 1994, and ending
on the last day of the Borrower's last fiscal quarter ending
prior to the date of such dividend, distribution or Purchase
(as applicable)."
4. Amendment to Section 8.20. Section 8.20 of the Credit
Agreement, Basket Indebtedness, Investments, Liens, Guaranties and Preferred
Stock, is hereby amended by deleting said Section in its entirety and by
substituting the following paragraph in lieu thereof:
"Section 8.20 Basket Indebtedness, Investments,
Liens, Guaranties and Preferred Stock. Notwithstanding the
provisions of Sections 8.1, 8.2, 8.3, 8.6 or 8.21 hereof, so
long as no Event of Default then exists and no Default would
be caused thereby, the Borrower and its Subsidiaries may enter
into any of the transactions otherwise prohibited by said
Sections, provided that (i) the aggregate amount of all such
transactions included under this Section 8.20 entered into
after June 3, 1994, does not exceed $25,000,000, (ii) no more
than $20,000,000 of such amount may be used for Investments
not permitted under Section 8.2 hereof, and (iii) of such
$20,000,000 sub-line for Investments, (A) no more than
$15,000,000 may relate to Investments in any non-U.S.
Subsidiary, partnership, joint venture or business, and (B) no
more than $2,000,000 may relate to Investments which are not
Permitted Businesses. In no event, however, shall this
Section 8.20 operate or be construed to permit Indebtedness or
Liens in connection with any External Financing, Acquired
Indebtedness, secured Pari Passu Indebtedness not incurred in
the ordinary course of business or guaranties of any of the
foregoing."
5. No Other Amendment. Except for the amendments set forth or
referred to above, the text of the Credit Agreement shall remain unchanged and
in full force and effect. The Borrower acknowledges and expressly agrees that
the Agent, the Facing Bank and the Lenders reserve the right to, and do in
fact, require strict compliance with all terms and provisions of the Credit
Agreement.
-4-
<PAGE> 5
6. Representations and Warranties. The Borrower hereby
represents and warrants in favor of the Agent, the Facing Bank and each Lender,
as follows:
(a) Each representation and warranty set forth in Article
5 of the Credit Agreement is hereby restated and affirmed as true and correct
in all material respects as of the date hereof, except to the extent previously
fulfilled in accordance with the terms of the Credit Agreement, as amended
previously or hereby, and to the extent relating specifically to the Closing
Date or otherwise inapplicable;
(b) The Borrower has the corporate power and authority to
enter into this Amendment and to do all acts and things as are required or
contemplated hereunder to be done, observed and performed by it;
(c) This Amendment has been duly authorized, validly
executed and delivered by Authorized Signatories, and this Amendment
constitutes the legal, valid and binding obligation of the Borrower enforceable
against it in accordance with its terms, subject, as to enforcement of
remedies, to the following qualifications: (i) an order of specific
performance and an injunction are discretionary remedies and, in particular,
may not be available where damages are considered an adequate remedy at law,
and (ii) enforcement may be limited by bankruptcy, insolvency, liquidation,
reorganization, reconstruction and other similar laws affecting enforcement of
creditors' rights generally (insofar as any such law relates to the bankruptcy,
insolvency or similar event of the Borrower);
(d) the execution and delivery of this Amendment and the
Borrower's performance hereunder do not and will not require the consent or
approval of any regulatory authority or governmental authority or agency having
jurisdiction over the Borrower, nor be in contravention of or in conflict with
the certificate of incorporation or the by-laws of the Borrower, or the
provision of any statute, judgment, order, indenture, instrument, agreement, or
undertaking to which the Borrower is party or by which the Borrower's assets or
properties are or may become bound; and
(e) Schedule 6(e) attached to this Amendment and incorporated
herein by this reference, sets forth, as of the date hereof, (i) the aggregate
number of shares of Capital Stock of the Borrower, the aggregate number of
warrants for the right to acquire shares of Capital Stock of the Borrower and
the aggregate number of Stock Options purchased by the Borrower since Decem-
ber 1, 1994, (ii) the gross purchase price paid for each of the shares,
warrants and Stock Options purchased during such period, and (iii) the
aggregate gross purchase price paid by the Borrower
-5-
<PAGE> 6
for the shares, warrants and Stock Options referred to in clause (i) of this
paragraph.
7. Counterparts. This Amendment may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one and the same agreement.
8. Loan Documents. Each reference in the Credit Agreement or any
other Loan Document to the term "Credit Agreement" shall hereafter mean and
refer to the Credit Agreement as amended hereby or as the same may hereafter be
amended.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
10. Construction of Amendment. Each party acknowledges that it
has participated in the negotiation of this Amendment, and no provision of this
Amendment shall be construed against or interpreted to the disadvantage of any
party hereto or thereto by any court or other governmental or judicial
authority by reason of such party having or being deemed to have structured,
dictated or drafted such provision; that the Borrower at all times has had
access to an attorney in the negotiation of the terms of and in the preparation
and execution of this Amendment, and the Borrower has had the opportunity to
review and analyze this Amendment for a sufficient period of time prior to the
execution and delivery hereof; that all of the terms of this Amendment were
negotiated at arm's-length, and that this Amendment was prepared and executed
without fraud, duress, undue influence or coercion of any kind exerted by any
of the parties upon the others; and that the execution and delivery of this
Amendment is the free and voluntary act of the Borrower and each other party
hereto.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused their respective
duly authorized officers or representatives to execute, deliver and seal this
Amendment as of the day and year first above written, to be effective as to the
day and year first above written.
BORROWER: KINDERCARE LEARNING CENTERS, INC.
By:_____________________________
Title:
[CORPORATE SEAL]
Attest:_________________________
Title:
AGENT: TORONTO DOMINION (TEXAS), INC., as
Agent for the Lenders
By:___________________________
Title:
FACING BANK: THE TORONTO-DOMINION BANK, acting
through its Houston Agency, as
Facing Bank
By:_____________________________
Title:
LENDERS: THE TORONTO-DOMINION BANK
By:_____________________________
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By:______________________________
Title:
-7-
<PAGE> 8
NATIONSBANK, N.A. (SOUTH) (SUCCESSOR
-BY-MERGER TO NATIONSBANK OF GEORGIA,
NATIONAL ASSOCIATION)
By:______________________________
Title:
ABN*AMRO BANK N.V., acting through
its Atlanta Agency
By:______________________________
Title:
FIRST ALABAMA BANK
By:______________________________
Title:
UNITED STATES NATIONAL BANK OF OREGON
By:______________________________
Title:
SOUTHTRUST BANK OF ALABAMA, N.A.
By:______________________________
Title:
[Fourth Amendment to
Credit Agreement for
KinderCare Learning
Centers, Inc.]
<PAGE> 9
SCHEDULE 6(E) TO
FOURTH AMENDMENT TO CREDIT AGREEMENT
FOR KINDERCARE LEARNING CENTERS, INC.
Purchases of Shares of Capital Stock
745,883 shares of common stock at a $13.41 average cost per common share
Purchases of Warrants
NONE
Purchases of Employee Stock Options
NONE
Aggregate Purchase Price for Capital Stock,
warrants and Stock Options purchased by
Borrower since December 1, 1994: $ 10,000,000.00
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-03-1995
<PERIOD-END> MAR-08-1996
<EXCHANGE-RATE> 1
<CASH> 9,861
<SECURITIES> 0
<RECEIVABLES> 15,968
<ALLOWANCES> 1,143
<INVENTORY> 0
<CURRENT-ASSETS> 35,245
<PP&E> 543,213
<DEPRECIATION> 83,735
<TOTAL-ASSETS> 516,804
<CURRENT-LIABILITIES> 68,497
<BONDS> 153,767
0
0
<COMMON> 196
<OTHER-SE> 252,981
<TOTAL-LIABILITY-AND-EQUITY> 516,804
<SALES> 0
<TOTAL-REVENUES> 409,033
<CGS> 0
<TOTAL-COSTS> 372,042
<OTHER-EXPENSES> (1,019)
<LOSS-PROVISION> 2,348
<INTEREST-EXPENSE> 12,737
<INCOME-PRETAX> 22,925
<INCOME-TAX> 8,941
<INCOME-CONTINUING> 13,984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 13,984
<EPS-PRIMARY> .69
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