<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 SEPTEMBER 20, 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 October 18, 1996 was 19,268,675.
================================================================================
<PAGE> 2
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Numbers
------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Consolidated Statements of Operations for the sixteen weeks
ended September 20, 1996 and September 22, 1995 .......... 2
Consolidated Balance Sheets as of September 20, 1996
and May 31, 1996 ......................................... 3
Consolidated Statements of Cash Flows for the
sixteen weeks ended September 20, 1996 and
September 22, 1995 ....................................... 5
Notes to Consolidated Financial Statements ................ 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 10
PART II. OTHER INFORMATION ......................................... 16
Signatures ............................................................ 17
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIXTEEN WEEKS ENDED
---------------------------------
SEPTEMBER 20, SEPTEMBER 22,
1996 1995
---------- ----------
<S> <C> <C>
Operating revenues $ 171,427 $ 161,313
---------- ----------
Salaries, wages and benefits 93,340 85,812
Depreciation 11,857 10,189
Rent expense 8,650 8,335
Provision for doubtful accounts 1,040 762
Other operating expenses 46,789 46,093
Litigation settlement and
restructuring costs, net -- (1,019)
---------- ----------
Operating income 9,751 11,141
Net investment income 71 111
Interest expense 4,940 5,408
---------- ----------
Income before income taxes and extraordinary item 4,882 5,844
Income taxes 1,904 2,279
---------- ----------
Income before extraordinary item 2,978 3,565
---------- ----------
Extraordinary loss due to early extinguishment
of debt, net of income tax benefit (1,229) --
---------- ----------
Net income $ 1,749 $ 3,565
========== ==========
Income per share:
Income before extraordinary item $ .15 $ .17
Extraordinary item - loss on early
extinguishment of debt (.06) --
---------- ----------
Net income $ .09 $ .17
========== ==========
Weighted average common shares 20,039 20,517
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 4
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 20, MAY 31,
1996 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,557 $ 15,597
Accounts receivable:
Tuition (net of allowance for
doubtful accounts of $2,084 at
September 20, 1996 and $1,884
at May 31, 1996) 14,743 14,566
Other 576 563
Prepaid expenses and supplies 11,344 9,116
Deferred income taxes 4,664 4,664
-------- --------
Total current assets 42,884 44,506
Property and equipment 568,442 561,189
Less accumulated depreciation and
amortization 96,515 92,664
-------- --------
Net property and equipment 471,927 468,525
-------- --------
Deferred income taxes 4,427 4,422
Other assets 7,248 8,023
-------- --------
$526,486 $525,476
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 5
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 20, MAY 31,
LIABILITIES AND 1996 1996
SHAREHOLDERS' EQUITY ---------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,987 $ 14,330
Bank overdrafts 10,635 9,768
Current portion of long-term debt 1,137 853
Accrued expenses and other liabilities 44,479 51,163
-------- --------
Total current liabilities 68,238 76,114
Long-term debt 163,138 145,764
Self-insurance liabilities 19,160 17,652
Other noncurrent liabilities 22,488 20,488
-------- --------
Total liabilities 273,024 260,018
-------- --------
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 19,144,131
and 19,981,807 shares at September 20,
1996 and May 31, 1996, respectively;
outstanding 19,144,131 and 19,946,807 at
September 20, 1996 and May 31, 1996,
respectively 191 199
Additional paid-in capital 189,745 204,003
Retained earnings 63,548 61,799
Cumulative foreign currency translation (22) (20)
Treasury stock, at cost (35,000 shares
at May 31, 1996) -- (523)
-------- --------
Total shareholders' equity 253,462 265,458
-------- --------
$526,486 $525,476
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 6
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIXTEEN WEEKS ENDED
------------------------------------------
SEPTEMBER 20, SEPTEMBER 22,
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operations:
Net income $ 1,749 $ 3,565
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 11,857 10,189
Writedown of KID'S CHOICE(TM)
property and equipment -- 5,312
Gains on sales of property and equipment (42) (885)
Cash flows from changes in operating
assets and liabilities:
Accounts receivable 158 (892)
Prepaid expenses and supplies (2,121) (4,386)
Other assets 427 (343)
Accounts payable, accrued expenses and
other liabilities (5,203) 2,387
Other, net (301) (28)
-------- --------
Net cash provided by operating activities $ 6,524 $ 14,919
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 7
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
SIXTEEN WEEKS ENDED
--------------------------------------------
SEPTEMBER 20, SEPTEMBER 22,
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from investing activities:
Purchases of property and equipment $ (16,059) $ (24,964)
Proceeds from sales of property and
equipment 704 2,158
Proceeds from collection of notes receivable 10 1,936
---------- ---------
Net cash used by investing activities (15,345) (20,870)
---------- ---------
Cash flows from financing activities:
Revolving credit facility borrowings 48,000 --
Payments on long-term borrowings (30,342) (6,383)
Bank overdrafts 866 11,145
Purchases of Treasury stock (14,251) (2,666)
Warrants and options exercised 508 89
---------- ---------
Net cash provided by financing activities 4,781 2,185
---------- ---------
Decrease in cash and cash equivalents (4,040) (3,766)
Cash and cash equivalents, beginning of period 15,597 14,237
---------- ---------
Cash and cash equivalents, end of period $ 11,557 $ 10,471
========== =========
Supplemental cash flow information:
Interest paid $ 7,106 $ 841
========== =========
Income taxes paid $ 743 $ 1,016
========== =========
</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 sixteen weeks ended September 20, 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 May 31, 1996.
(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 1997 and 1996 fiscal years are each 52 weeks long.
(3) AGREEMENT AND PLAN OF MERGER
On October 3, 1996, the Company entered into an Agreement and Plan of
Merger whereby, on the effective date, ownership of approximately 85% of the
Company will be acquired by an entity organized at the direction of Kohlberg
Kravis Roberts & Co., L.P. ("KKR"). Under the terms of the Agreement and Plan
of Merger, approximately $393 million will be paid by the Company to reacquire
common stock, warrants, and options, and debt of $118 million will be retired.
The acquisition will be financed by the issuance of approximately $404 million
in new debt and approximately $148.75 million of equity will be invested by a
KKR affiliate. The total value of the transaction, including equity, debt and
fees is approximately $553 million. Among other conditions, the transaction is
contingent upon approval of a majority of the outstanding shares of common
stock of the Company and the obtaining of the required financing. Holders of
approximately 51.8% of the shares of Common Stock outstanding as of October 18,
1996 have agreed to vote in favor of the transaction. In connection with the
merger, the Company also has secured commitments for a $500 million secured
credit facility to complete the transaction and fund future growth and
acquisitions.
(4) EXTRAORDINARY LOSS
On June 3, 1996, the Board of Directors of KinderCare authorized the
purchase of up to $30 million aggregate principal amount of the Company's 10
3/8% Senior Notes due 2001. During the first quarter of 1997, the Company
purchased $30 million aggregate principal amount of the Notes at an aggregate
price of $31.5 million. This transaction resulted in recording an
extraordinary loss of $1.2 million, net of $0.8 million in tax benefits.
(5) STOCK REPURCHASE PROGRAM
On June 3, 1996, the Board of Directors authorized the repurchase of $23
million of the Company's Common Stock. As of the end of the first quarter
1997, 1,111,500 shares and 435,000 warrants had been repurchased for $18.3
million. All shares that were repurchased have been retired.
7
<PAGE> 9
(6) COMPUTATION OF INCOME PER SHARE
Income per share amounts are computed based on the weighted average number
of shares actually outstanding for the sixteen weeks ended September 20, 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>
SIXTEEN WEEKS ENDED
---------------------------------
SEPTEMBER 20, SEPTEMBER 22,
1996 1995
---------------------------------
<S> <C> <C>
Weighted average shares outstanding 19,261 19,989
Dilutive effect of common stock equivalents 778 528
-------------------------------
Primary shares outstanding 20,039 20,517
Fully dilutive effect of common stock equivalents 28 160
-------------------------------
Fully diluted shares outstanding 20,067 20,677
===============================
</TABLE>
(7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current presentation.
(8) SUBSEQUENT EVENTS
Expansion of Revolving Credit Facility
On October 15, 1996, the Company increased its Revolving Credit Facility by
$50 million to $200 million.
Tender Offer
On October 16, 1996, the Company announced that it has commenced a tender
offer and consent solicitation for its outstanding 10 3/8% Senior Notes due
2001. The proposed amendments seek the elimination of substantially all of the
restrictive covenants. The Total Consideration (as defined in the Offer to
Purchase and Consent Solicitation Statement) for each $1,000 principal amount
of Notes tendered shall be $1,100.57, based on a payment date of November 14,
1996 (plus accrued and unpaid interest). The price is equal to the present
value on the payment date of $1,051.875 per Note (the amount payable on June 1,
1998, which is the first date on which the Notes are redeemable), determined
based on a yield to such redemption date of 6.66% which is equal to the yield
on the 6% U.S. Treasury Note due May 31, 1998, based on the bid price for such
security as of 2:00 p.m. New York City time on October 30, 1996, plus 100 basis
points. The Total Consideration includes the Tender Offer Consideration (as
defined in the Offer to Purchase and Consent Solicitation Statement) of
$1,080.57 for each $1,000 principal amount of Notes validly tendered by 11:59
p.m., New York City time, on November 13, 1996, plus a consent payment of
$20.00 per $1,000 principal amount of Notes for
8
<PAGE> 10
which a valid consent to the proposed amendments is received by 11:59 p.m.,
New York City time, on November 6, 1996, the first business day following the
target consent date of November 5, 1996. If by 11:59 p.m., New York City time
on November 5, 1996, KinderCare has not received consents from holders
representing a majority in principal amount of the Notes, holders who validly
tender their Notes and deliver the related consents by 11:59 p.m. on the first
business day following the first date on which the Company announces receipt
of such requisite number of consents will receive the Total Consideration
equal to the Tender Offer Consideration plus the consent payment (plus accrued
and unpaid interest). In such case, the offer will be extended so that it
expires no earlier than five business days following the first business day
after the date the Company announces the receipt of the requisite number of
consents, the payment date will occur following such expiration date and the
Total Consideration and the Tender Offer Consideration will be adjusted to
reflect the new payment date.
Distribution from Former Parent
On October 25, 1996, the Company received a $1.5 million interest payment
from The Enstar Group, Inc. ("Enstar"), the Company's former parent. This
amount represents interest accrued on the Company's $12.0 million claim against
Enstar in the U.S. Bankruptcy Court in Montgomery and will be included as a
component of income in the second quarter of fiscal 1997.
9
<PAGE> 11
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sixteen weeks ended September 20, 1996 ("first quarter 1997") compared to
the sixteen weeks ended September 22, 1995 ("first quarter 1996").
The Company's operating results for the comparative quarters were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Change
----------------------------
First Quarter Percent of First Quarter Percent of Percent of
1997 Revenues 1996 Revenues Amount Revenues
-------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $171,427 100.0 $161,313 100.0 10,114 --
-------- ------ -------- ----- ------ ------
Salaries, wages and benefits 93,340 54.4 85,812 53.2 (7,528) (1.2)
Depreciation 11,857 6.9 10,189 6.3 (1,668) (0.6)
Rent expense 8,650 5.1 8,335 5.2 (315) 0.1
Other operating expenses 47,829 27.9 46,855 29.0 (974) 1.1
Litigation settlement and
restructuring costs, net -- -- (1,019) (0.6) (1,019) (0.6)
-------- ------ -------- ----- ------ ------
Operating income $9,751 5.7 $11,141 6.9 (1,390) (1.2)
======== ====== ======== ===== ====== ======
Centers open at the end of
each quarter 1,151 1,141 10
======== ======== ======
</TABLE>
Operating revenues - Operating revenues increased $10.1 million, or 6.3%, to
$171.4 million in the first quarter 1997. 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 1996 and early
1997, partially offset by center closings during fiscal 1996 and the first
quarter 1997. Same center revenues, defined as revenues from centers in
operation during both full quarters, were up 4.3% over first quarter 1996.
Total occupancy for the first quarter 1997 decreased 0.4% to 75.6% and
same center occupancy for the first quarter remained flat as compared with
first quarter fiscal 1996. Occupancy, a measure of revenue producing center
capacity utilization, is defined as actual net revenues for the respective
period divided by the sum of the building capacity of each of the Company's
centers multiplied by such center's basic tuition rate for a full-time,
three-year-old student for the respective period. The three-year-old tuition
rate represents the weekly tuition rate paid by a parent for a three-year-old
child to attend a KinderCare center five days during one week. The
three-year-old tuition rate represents an approximate average of all tuition
rates at each center. Center occupancy mix, however, can significantly impact
these averages with respect to any specific child care center. This revenue
measurement of center capacity utilization does not necessarily reflect the
actual number of full and part-time children enrolled.
10
<PAGE> 12
During the first quarter 1997, the Company opened eight community centers
and one KINDERCARE AT WORK(R) center and closed six centers. During the first
quarter 1996, the Company opened eight community centers, four KINDERCARE AT
WORK(R) centers, and seven KID'S CHOICE(TM) centers, and closed 15 centers.
These activities include one conversion during the first quarter 1996 from a
community center to a KID'S CHOICE(TM) center. New community centers opened in
fiscal 1996 and first quarter 1997 have an average building capacity of 178
children versus an average of 127 for existing community centers.
Consequently, total center capacity has increased to approximately 141,000 at
the end of first quarter fiscal 1997 from approximately 138,000 at the end of
first quarter fiscal 1996.
Salaries, wages and benefits - Salaries, wages and benefits increased, as a
percentage of operating revenues, to 54.4% from 53.2% in the first quarter 1997
versus 1996. Approximately two-thirds of this increase is attributable to
increased staff hours and one-third to increased wage rates since the end of
first quarter 1996, along with increased costs related to the implementation of
new employee health insurance plans. These increases are partially offset by
improvements in field overhead and administrative costs due to management
reorganizations.
Depreciation - Depreciation in the first quarter of 1997 increased 0.6%, as a
percentage of operating revenues, over the comparable quarter in 1996. This
increase is primarily attributable to renovations on existing centers,
purchases of short-lived assets, and to the opening of 27 new centers offset
partially by the closing of 17 centers since the end of first quarter last
year.
Rent Expense - Rent expense, as a percentage of operating revenues, decreased
0.1% during the first quarter 1997 compared to the first quarter 1996. This
decrease is due to the closing of 44 leased facilities since the end of first
quarter 1996.
Other operating expenses - Other operating expenses decreased 1.1%, as a
percentage of operating revenues, to 27.9% from 29.0% in the first quarter 1997
versus 1996. This improvement is primarily attributable to decreases in
marketing costs and net improvements associated with the field management
reorganization.
Operating income -- For the first quarter 1997, operating income decreased $1.4
million, or 1.2%, as a percentage of operating revenues, from the first quarter
1996. Operating income before litigation settlement and restructuring costs
decreased $0.4 million for the first quarter 1997 as compared to the first
quarter 1996. As a percentage of revenues, first quarter 1997 operating margin
before litigation settlement and restructuring costs of 5.7% decreased by 0.6%
from the first quarter 1996.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation, and amortization, for the first quarter 1997 of $20.4 million was
$1.0 million below the first quarter 1996. As a percentage of operating
revenues, EBITDA for the first quarter 1997 was 11.9% versus 13.3% during the
same period of the prior year. For the first quarter of 1997, EBITDA, before
litigation settlement and restructuring costs and the extraordinary loss
associated with the early extinguishment of debt, was $21.7 million, a $1.3
million increase over the first quarter of 1996. As a percentage of revenues,
EBITDA, before litigation settlement and restructuring costs and the
extraordinary loss associated with the early extinguishment of debt, remained
flat at 12.7% for the first quarters of 1997 and 1996. EBITDA does not
necessarily indicate that cash flow is sufficient to fund all of the Company's
cash needs or represent cash flow from operations as defined by generally
accepted accounting principles.
11
<PAGE> 13
Net investment income - Net investment income of $0.1 million for first quarter
fiscal 1997 was about even with first quarter fiscal 1996.
Interest expense - Interest expense decreased to $4.9 million from $5.4 million
for the first quarter 1997 versus 1996. The Company's weighted average
interest rate on its long-term debt, including debt cost amortization, was
9.29% for the first quarter 1997 versus 10.78% for the first quarter 1996.
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., 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 has charged $4.0 million of
restructuring costs, primarily severance agreements, against fiscal 1996
earnings.
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, 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.
Income tax expense - Income tax expense for the first quarter 1997 and 1996 of
$1.9 million and $2.3 million, respectively, is in excess of amounts computed
by applying statutory Federal income tax rates to income before income taxes
due primarily to state income taxes.
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 first quarter 1997 was $6.5 million,
compared to $14.9 million for the first quarter 1996. The ratio of current
assets to current liabilities was .63 to 1 at September 20, 1996 versus .58 to
1 at May 31, 1996. Management believes the cash provided from operations in
combination with funds available under the Company's revolving credit facility
will be adequate to meet the Company's working capital needs.
On June 3, 1996, the Board of Directors of KinderCare authorized the
purchase of up to $30 million aggregate principal amount of the Company's
10 3/8% Senior Notes due 2001. During the first quarter of fiscal 1997, the
Company purchased $30 million aggregate principal amount of the
12
<PAGE> 14
Notes at an aggregate price of $31.5 million. This transaction resulted in an
extraordinary loss of $1.2 million, net of income taxes, in the first quarter
of fiscal 1997.
During the 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.
This purchase completed the Company's $10.0 million stock buy-back program. A
total of 745,883 shares were repurchased at an average price of $13.41 per
share. All shares that were repurchased have been retired.
On June 3, 1996, the Board of Directors authorized the repurchase of $23
million of the Company's Common Stock. As of the end of the first quarter
1997, 1,111,500 shares and 435,000 warrants had been repurchased for $18.3
million. All shares that were repurchased have been retired.
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.
On October 25, 1996, the Company received a $1.5 million interest payment
from The Enstar Group, Inc. on the above claim.
During the first quarter 1996, the Company received $1.9 million in cash
from repayments from notes receivable related to the sales of centers in prior
years. In addition, the Company also received $0.7 million and $2.2 million in
cash from the sale of centers during the first quarter of 1997 and 1996,
respectively.
On October 3, 1996, the Company entered into an Agreement and Plan of
Merger whereby, on the effective date, ownership of approximately 85% of the
Company will be acquired by an entity organized at the direction of Kohlberg
Kravis Roberts & Co., L.P. ("KKR"). Under the terms of the Agreement and Plan
of Merger, approximately $393 million will be paid by the Company to reacquire
common stock, warrants, and options, and debt of $118 million will be retired.
The acquisition will be financed by the issuance of approximately $404 million
in new debt and approximately $148.75 million of equity will be invested by a
KKR affiliate. The total value of the transaction, including equity, debt and
fees is approximately $553 million. Among other conditions, the transaction is
contingent upon approval of a majority of the outstanding shares of common
stock of the Company and the obtaining of the required financing. Holders of
approximately 51.8% of the shares of Common Stock outstanding as of October 18,
1996 have agreed to vote in favor of the transaction. In connection with the
merger, the Company also has secured commitments for a $500 million secured
credit facility to complete the transaction and fund future growth and
acquisitions.
The Company will incur substantial indebtedness in connection with the
Merger. The Company's ability to make scheduled payments of the principal of,
or to pay interest on, or to refinance its indebtedness and to make scheduled
payments under its operating leases depends on its future performance, which to
a certain extent is subject to economic, financial, competitive and other
factors beyond its control.
On October 15, 1996, the Company increased its Revolving Credit Facility by
$50 million to $200 million.
13
<PAGE> 15
On October 16, 1996, the Company announced that it has commenced a tender
offer and consent solicitation for its outstanding 10 3/8% Senior Notes due
2001. The proposed amendments seek the elimination of substantially all of the
restrictive covenants. The Total Consideration (as defined in the Offer to
Purchase and Consent Solicitation Statement) for each $1,000 principal amount
of Notes tendered shall be $1,100.57, based on a payment date of November 14,
1996 (plus accrued and unpaid interest). The price is equal to the present
value on the payment date of $1,051.875 per Note (the amount payable on June 1,
1998, which is the first date on which the Notes are redeemable), determined
based on a yield to such redemption date of 6.66% which is equal to the yield
on the 6% U.S. Treasury Note due May 31, 1998, based on the bid price for such
security as of 2:00 p.m. New York City time on October 30, 1996, plus 100
basis points. The Total Consideration includes the Tender Offer Consideration
(as defined in the Offer to Purchase and Consent Solicitation Statement) of
$1,080.57 for each $1,000 principal amount of Notes validly tendered by
11:59 p.m., New York City time, on November 13, 1996, plus a consent payment of
$20.00 per $1,000 principal amount of Notes for which a valid consent to the
proposed amendments is received by 11:59 p.m., New York City time, on November
6, 1996, the first business day following the target consent date of
November 5, 1996. If by 11:59 p.m., New York City time on November 5, 1996,
KinderCare has not received consents from holders representing a majority in
principal amount of the Notes, holders who validly tender their Notes and
deliver the related consents by 11:59 p.m. on the first business day following
the first date on which the Company announces receipt of such requisite number
of consents will receive the Total Consideration equal to the Tender Offer
Consideration plus the consent payment (plus accrued and unpaid interest). In
such case, the offer will be extended so that it expires no earlier than five
business days following the first business day after the date the Company
announces the receipt of the requisite number of consents, the payment date
will occur following such expiration date and the Total Consideration and the
Tender Offer Consideration will be adjusted to reflect the new payment date.
Capital Expenditures
During fiscal 1997, the Company anticipates opening 20 to 23 new centers
consisting of 17 to 19 KinderCare community centers, one KinderCare at Work
center and two to three centers in the United Kingdom. There are no planned
additions to the Company's Kids' Choice format as management does not believe
the new format concept is meeting its full potential and needs further
refinement. New centers are evaluated using detailed site analyses that
include feasibility and demographic studies and financial modeling. No
assurance can be given that the Company will be able to successfully negotiate
and acquire properties, or meet targeted deadlines. Frequently, new site
negotiations are delayed or canceled or construction delayed for a variety of
reasons, many of which are outside the Company's control.
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, most centers are equipped with
computers for children's educational programs.
Capital expenditures during the first quarter 1997 amounted to
approximately $16.0 million. Approximately $2.7 million was spent on
renovations and improvements to existing facilities, approximately $4.0 million
on equipment purchases and the remaining $9.3 million on new center
development. Capital expenditures during the first quarter 1996 amounted to
approximately $25.0 million. Approximately $3.6 million was spent on
renovations and improvements to existing facilities, approximately $3.6
million on equipment purchases and the remaining $17.8 million on new center
development.
14
<PAGE> 16
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.
Inflation and Wage Increases
During 1996, Congress enacted an increase in the minimum hourly wage from
$4.25 to $4.75 effective October 1, 1996, with an additional increase to $5.15
to be effective on September 1, 1997. Management currently believes that the
new wage rates, including the effects of wage compression, will result in
increased expenses of approximately $0.3 million in fiscal 1997 and $1.5
million in fiscal 1998. On an annualized basis, the total effect of the
two-step, minimum wage increases is expected to be approximately $1.8 million,
and the full annualized effect will not be experienced until fiscal 1999. The
Company continually evaluates its wage structure and may implement further
changes which could impact estimated increases in relation to the 1996 - 1997
wage adjustments.
15
<PAGE> 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
In a Current report filed on Form 8-K dated October 9, 1996, the
Company announced that it had entered into an Agreement and Plan of Merger with
an affiliate of Kohlberg Kravis Roberts & Co. LP
16
<PAGE> 18
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: November 1, 1996 /s/ Sandra W. Scarr
--------------------------------------------
Sandra W. Scarr
Chairman and Chief Executive Officer
Date: November 1, 1996 /s/ Philip L. Maslowe
--------------------------------------------
Philip L. Maslowe
Executive Vice-President, Chief Financial
Officer, and Treasurer
17
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