<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 13, 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 January 8, 1997 was 19,423,577.
<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 twelve weeks
ended December 13, 1996 and December 15, 1995 and the
twenty-eight weeks ended December 13, 1996 and
December 15, 1995. . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets as of December 13, 1996 and
May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the
twenty-eight weeks ended December 13, 1996 and
December 15, 1995. . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 9
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 16
Item 5. Other information. . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 22
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</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 TWENTY-EIGHT WEEKS ENDED
------------------------------------ ----------------------------------
DECEMBER 13, DECEMBER 15, DECEMBER 13, DECEMBER 15,
1996 1995 1996 1995
------------------ ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $128,324 $124,079 $299,751 $285,392
-------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits 68,875 65,003 162,215 150,814
Depreciation 7,351 7,864 19,208 18,053
Rent 5,857 6,032 14,507 14,367
Provision for allowance for
doubtful accounts 811 1,030 1,851 1,792
Other 32,591 32,928 79,380 79,022
Litigation settlements and
restructuring costs (income),
net (1,527) -- (1,527) (1,019)
-------- -------- -------- --------
Total operating expenses 113,958 112,857 275,634 263,029
-------- -------- -------- --------
Operating income 14,366 11,222 24,117 22,363
Net investment income 15 50 86 161
Interest expense 3,201 3,811 8,141 9,219
-------- -------- -------- --------
Income before income taxes and
extraordinary item 11,180 7,461 16,062 13,305
Income tax expense 4,360 2,910 6,264 5,189
-------- -------- -------- --------
Income before extraordinary item 6,820 4,551 9,798 8,116
Extraordinary item -- loss on early
extinguishment of debt, net of
income tax benefit 5,251 -- 6,480 --
-------- -------- -------- --------
Net income $ 1,569 $ 4,551 $ 3,318 $ 8,116
======== ======== ======== ========
Income per share:
Income before extraordinary item $ 0.33 $ 0.23 $ 0.48 $ 0.40
Extraordinary item - loss on
early extinguishment of debt (0.25) -- (0.32) --
Net income $ 0.08 $ 0.23 $ 0.16 $ 0.40
======== ======== ======== ========
Weighted average common
shares and share equivalents 20,599 19,939 20,334 20,285
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE> 4
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 13, MAY 31,
ASSETS 1996 1996
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,426 $ 15,597
Receivables:
Tuition (net of allowance for doubtful
accounts of
$2,234 and $1,884 at December 13, 1996 and
May 31, 1996, respectively) 14,728 14,566
Other 439 563
Prepaid expenses and supplies 10,240 9,116
Deferred income taxes 4,664 4,664
-------- --------
Total current assets 40,497 44,506
-------- --------
Property and equipment, at cost 580,349 561,189
Less accumulated depreciation and
amortization 103,803 92,664
-------- --------
Net property and equipment 476,546 468,525
-------- --------
Deferred income taxes 4,454 4,422
Other assets 7,941 8,023
-------- --------
$529,438 $525,476
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 5
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND DECEMBER 13, MAY 31,
SHAREHOLDERS' EQUITY 1996 1996
------------ ----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,221 $ 14,330
Bank overdrafts 11,328 9,768
Current portion of long-term debt 1,095 853
Accrued expenses and other liabilities 40,482 51,163
-------- --------
Total current liabilities 62,126 76,114
Long-term debt 167,668 145,764
Self-insurance liabilities 20,210 17,652
Other noncurrent liabilities 23,983 20,488
-------- --------
Total liabilities 273,987 260,018
-------- --------
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 19,414,367 and
19,981,807 shares at December 13, 1996 and
May 31, 1996, respectively; outstanding
19,414,367 and 19,946,807 at December 13,
1996 and May 31, 1996, respectively 191 199
Additional paid-in capital 190,119 204,003
Retained earnings 65,117 61,799
Cumulative translation adjustment 24 (20)
Less treasury stock, at cost (35,000 shares at
May 31, 1996) -- (523)
-------- --------
Total shareholders' equity 255,451 265,458
-------- --------
$529,438 $525,476
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 6
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
-----------------------------
DECEMBER 13, DECEMBER 15,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net income $ 3,318 $ 8,116
Operating activities not requiring (providing) cash:
Depreciation 19,208 18,053
Amortization of intangibles and other assets 783 734
Writedown of Kid's Choice(TM) property and equipment -- 5,312
Gain on sales and disposals of property and equipment (34) (1,178)
Extraordinary item - loss on early extinguishment of debt 6,480 --
Changes in operating assets and liabilities:
Receivables 97 (2,446)
Prepaid expenses and supplies (1,124) (2,388)
Other assets (2,393) (166)
Accounts payable, accrued expenses and
other liabilities (9,676) 1,393
Other, net (48) (603)
------- -------
Net cash provided by operating activities $16,611 $26,827
------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 7
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
-----------------------------------
DECEMBER 13, DECEMBER 15,
1996 1995
------------- ------------------
<S> <C> <C>
Cash flows from investing activities:
Purchases of property and equipment $ (27,849) $(38,933)
Proceeds from sales of property and equipment 518 3,366
Proceeds from collection of notes receivable 12 2,029
Proceeds from sale of investment -- 3,396
Other, net (22) --
------------- ------------------
Net cash used by investing activities (27,341) (30,142)
------------- ------------------
Cash flows from financing activities:
Borrowings on revolving credit facility 122,500 --
Payments on long-term borrowings (105,133) (538)
Purchase and retirement of treasury stock (14,251) (10,000)
Bank overdrafts 1,560 8,970
Exercise of stock options and warrants 883 1,207
------------- ------------------
Net cash provided (used) by financing activities 5,559 (361)
------------- ------------------
Decrease in cash and cash equivalents (5,171) (3,676)
Cash and cash equivalents at the beginning of the period 15,597 14,237
------------- ------------------
Cash and cash equivalents at the end of the period $ 10,426 $ 10,561
============= ==================
Supplemental cash flow information:
Interest paid $ 11,774 $ 7,601
============= ==================
Income taxes paid $ 920 $ 2,134
============= ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<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 13, 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, and in conjunction with the
Company's Form S-4 Registration Statement under the Securities Act of 1933 as
filed with the Securities and Exchange Commission on January 7, 1997.
(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 ("Agreement") 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"). On December 27, 1996, the
Agreement was amended to revise the consideration to be paid in connection with
the Merger ("Amended Agreement"). Subject to certain provisions of the Amended
Agreement, each issued and outstanding share of Common Stock will be converted,
at the election of the holder, into either the right to receive $19.00 in cash
or the right to retain one share of Common Stock, subject to proration. Under
the terms of the Amended Agreement, approximately $122.5 million of existing
debt will be retired and approximately $367.2 million will be paid by the
Company to redeem Common Stock, warrants, and options. The acquisition will be
financed by the issuance of approximately $376.0 million in new debt and
approximately $148.8 million of equity will be invested by a KKR affiliate. The
total value of the transaction, including equity, debt and fees, is
approximately $524.7 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 51.4% of the shares of Common Stock outstanding as of January 8,
1997 have agreed to vote in favor of the transaction. In connection with the
Merger, the Company also has secured commitments for a $490.0 million senior
secured facility to complete the Merger and to fund future growth and
acquisitions. Effective with and subject to the closing of the Merger, Dr.
Sandra Scarr, Chairman of the Board and Chief Executive Officer ("CEO"), will
retire from her positions with the Company, while agreeing to remain on the
Board of Directors. David J. Johnson, most recently Chairman and Chief
Executive Officer of Red Lion Hotels, Inc. (formerly a KKR affiliate) or its
predecessor, will succeed Dr. Scarr as CEO.
6
<PAGE> 9
(4) EXTRAORDINARY LOSS
During the first quarter of fiscal 1997, the Company purchased $30.0
million aggregate principal amount of its 10 3/8% Senior Notes due 2001 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.
On October 16, 1996, the Company announced the commencement of a tender
offer and consent solicitation for its outstanding 10 3/8% Senior Notes due 2001
seeking the elimination of substantially all of the restrictive covenants. On
November 14, 1996, 99.7% of the outstanding Notes were purchased at an aggregate
price of $76.8 million. This second transaction resulted in an extraordinary
loss of $5.3 million, net of income taxes, recorded in second quarter 1997. The
Company increased its existing revolving credit facility by $50.0 million to
$200.0 million to finance the tender offer.
(5) STOCK REPURCHASE PROGRAM
In 1996, the Company repurchased 745,883 shares of its Common Stock for
$10.0 million, at an average cost of $13.41 per common share. During first
quarter 1997, the Board of Directors authorized the repurchase of $23.0 million
of the Company's Common Stock. As of the end of first quarter 1997, 1,111,500
shares and 435,000 warrants had been repurchased for $18.3 million. All shares
repurchased have been retired. No shares or warrants have been purchased since
July 22, 1996.
(6) COMPUTATION OF INCOME PER SHARE
Income per share amounts are computed based on the weighted average number
of shares actually outstanding for the respective periods, 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 13, 1996 DECEMBER 15, 1995 DECEMBER 13, 1996 DECEMBER 15, 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 19,245 19,504 19,255 19,781
Dilutive effect of common
stock equivalents 1,354 435 1,079 504
--------------------------------------------------------------------------
Primary shares outstanding 20,599 19,939 20,334 20,285
Fully dilutive effect of
common stock equivalents 79 -- 447 --
--------------------------------------------------------------------------
Fully diluted shares
outstanding 20,678 19,939 20,781 20,285
==========================================================================
</TABLE>
7
<PAGE> 10
(7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current presentation.
8
<PAGE> 11
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
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 1997 fiscal years are each 52 weeks long. The
information presented herein refers to the twelve weeks and the twenty-eight
weeks ended December 13, 1996 ("second quarter 1997" and "year-to-date 1997",
respectively) compared to the twelve weeks and the twenty-eight weeks ended
December 15, 1995 ("second quarter 1996" and "year-to-date 1996",
respectively).
Occupancy, a measure of the utilization of center capacity, is defined as
actual operating revenues for the respective period divided by 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 affect 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.
THE SECOND QUARTER 1997 COMPARED TO THE SECOND QUARTER 1996 AND YEAR-TO-DATE
1997 COMPARED TO YEAR-TO-DATE 1996.
The following tables show the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Change
--------------------
Second Percent Second Percent Percent
quarter of quarter of Amount of
1997 Revenues 1996 Revenues Revenues
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $128,324 100.0% $124,079 100.0% $ 4,245 --%
-------- ----- -------- ------ ------- ----
Operating expenses:
Salaries, wages and benefits 68,875 53.7 65,003 52.4 3,872 1.3
Depreciation 7,351 5.7 7,864 6.3 (513) (0.6)
Rent 5,857 4.6 6,032 4.9 (175) (0.3)
Other 33,402 26.0 33,958 27.4 (556) (1.4)
Litigation settlements and
restructuring costs
(income), net (1,527) (1.2) -- -- (1,527) (1.2)
-------- ----- -------- ------ ------- ----
Total operating expenses 113,958 88.8 112,857 91.0 1,101 (2.2)
-------- ----- -------- ------ ------- ----
Operating income $ 14,366 11.2% $ 11,222 9.0% $ 3,144 2.2%
======== ===== ======== ===== ======= ====
Change
--------------------
Year- Percent Year- Percent Percent
to-date of to-date of Amount of
1997 Revenues 1996 Revenues Revenues
-------- -------- -------- -------- ------- --------
Operating revenues $299,751 100.0% $285,392 100.0% $14,359 --%
-------- ----- -------- ------ ------- ----
Operating expenses:
Salaries, wages and benefits 162,215 54.1 150,814 52.9 11,401 1.2
Depreciation 19,208 6.4 18,053 6.3 1,155 0.1
Rent 14,507 4.8 14,367 5.0 140 (0.2)
Other 81,231 27.1 80,814 28.3 417 (1.2)
Litigation settlements and
restructuring costs
(income), net (1,527) (0.5) (1,019) (0.3) (508) (0.2)
-------- ----- -------- ----- ------- ----
Total operating expenses 275,634 91.9 263,029 92.2 12,605 (0.3)
-------- ----- -------- ----- ------- ----
Operating income $ 24,117 8.1% $ 22,363 7.8% $1,754 0.3%
======== ===== ======== ===== ======= ====
Centers open at the end of
each period 1,148 1,142 6
======== ======== =======
</TABLE>
RESULTS OF OPERATIONS
9
<PAGE> 12
Operating revenues - Operating revenues increased $4.2 million, or 3.4%, to
$128.3 million second quarter 1997 and $14.4 million, or 5.0%, to $299.8
million year-to-date 1997 versus the comparable periods in 1996. The increase
in revenues is attributable to 4.7% and 4.2% weighted average tuition increases
implemented during the second quarter of fiscal 1997 and fiscal 1996,
respectively, and new centers opened or acquired during fiscal 1996 and first
quarter 1997. These revenue increases were partially offset by center closings
during fiscal 1996 and first quarter 1997, and declines in total company
average occupancy in second quarter 1997 and year-to-date 1997. Same center
revenues, defined as revenues from centers in operation during both full
periods, were up 1.2% over second quarter 1996, and up 2.9% over year-to-date
1996. Same center revenue increases associated with the tuition increases
for both second quarter 1997 and year-to-date 1997 were partially offset by
same center occupancy declines during second quarter 1997.
Total company average occupancy decreased to 72.9% second quarter 1997 from
75.3% second quarter 1996 and to 74.2% year-to-date 1997 from 75.6%
year-to-date 1996. Same center occupancy also decreased to 73.4% second
quarter 1997 from 75.9% second quarter 1996 and to 74.8% year-to-date 1997 from
76.2% year-to-date 1996. The Company believes these declines in occupancy were
caused by a variety of factors, including in particular, the following recently
implemented initiatives: (a) a reduced, lower cost marketing program, (b) an
expanded employee childcare discount program that may preclude the enrollment
of tuition paying children, and (c) changes in field operations management
which provide less direct center supervision. The Company is in the process of
evaluating such initiatives.
During year-to-date 1997, the Company opened 11 new centers: ten community
centers and one KinderCare at Work(R) center; and closed 11 centers. During
year-to-date 1996 (including the conversion of one community center to a Kid's
Choice(TM) center), the Company opened 22 new centers: 11 community centers,
four KinderCare at Work centers, and seven Kid's Choice centers; and, closed
17 centers. Since the end of the second quarter 1996, the Company has opened a
total of 26 new centers with an average building capacity of 177 children and
has closed 20 centers with an average building capacity of 100 children. Total
center capacity has increased to approximately 142,000 at the end of second
quarter 1997 from approximately 138,000 at the end of second quarter 1996.
Salaries, wages and benefits - Salaries, wages and benefits expense increased
$3.9 million, or 6.0%, to $68.9 million second quarter 1997 and $11.4 million,
or 7.6%, to $162.2 million year-to-date 1997 versus the comparable periods in
1996. As a percentage of operating revenues, salaries, wages and benefits
expense increased to 53.7% from 52.4% in second quarter 1997 versus second
quarter 1996, respectively, and to 54.1% from 52.9% in year-to-date 1997 versus
year-to-date 1996, respectively. Approximately 40% and 58%, respectively, of
the second quarter and year-to-date increases are attributable to increased
center staff hours. Average hourly center staff wages increased approximately
4% for second quarter 1997 and year-to-date 1997 versus the comparable periods
in 1996. As a percentage of operating revenues, a portion of the increase in
salaries, wages and benefits is due to an approximately 28% increase in
employee-enrolled children (who are only charged an administrative fee plus
either a discounted tuition fee or no tuition) in year-to-date 1997 versus
year-to-date 1996, which resulted in additional staffing costs without a
commensurate increase in operating revenues. The increase in employee-enrolled
children is due to an enhanced staff discount program initiated to improve
staff retention. Management has revised and continues to evaluate this
program. Further, benefit costs have increased slightly due to the partial
implementation of new employee health insurance plans. Higher center labor
costs associated with these benefits have been partially offset by improvements
in field overhead and management reorganizations implemented during 1996.
10
<PAGE> 13
Depreciation - Depreciation expense decreased to $7.4 million during second
quarter 1997 from $7.9 million second quarter 1996. This decrease is due to
certain assets reaching the end of their fully depreciated lives during second
quarter 1997, more than offsetting the depreciation expense associated with new
asset additions. Depreciation expense increased to $19.2 million year-to-date
1997 from $18.0 million year-to-date 1996 due to asset additions related to
renovations of existing centers, purchases of short-lived assets, and to the
opening of 26 new centers, offset partially by the closing of 20 centers since
the end of second quarter 1996 and by a reduction in depreciation expense
related to the end of the estimated depreciable lives of certain assets
mentioned above.
Rent - Rent expense decreased to $5.8 million second quarter 1997 from $6.0
million second quarter 1996 and increased to $14.5 million year-to-date 1997
from $14.4 million year-to-date 1996. Eleven leased centers have been opened
and 15 leased centers have been closed since the end of second quarter 1996.
Other - Other operating expenses decreased to $33.4 million second quarter 1997
from $34.0 million second quarter 1996 and increased to $81.2 million
year-to-date 1997 from $80.8 million year-to-date 1996. As a percentage of
operating revenues, other operating expenses decreased to 26.0% second quarter
1997 from 27.4% second quarter 1996 and to 27.1% year-to-date 1997 from 28.3%
year-to-date 1996. These margin improvements are principally due to a reduced,
lower cost marketing program and improved administrative and center support
efficiencies from re-engineering efforts initiated during fiscal 1996.
Litigation Settlements and Restructuring Costs (Income), net
Litigation settlements - During first quarter 1996, the Company received
the final cash distribution of $11.3 million from The Enstar Group, Inc.
("Enstar"), the Company's former parent, in settlement of the Company's $12.0
million claim against Enstar in U.S. Bankruptcy Court in Montgomery, Alabama.
During second quarter 1997, the Company received a $1.5 million interest
payment from Enstar in connection with this claim.
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. As a result of these
changes, the Company charged $4.0 million of restructuring costs, primarily
severance agreements, against fiscal 1996 earnings during first quarter 1996.
Although substantial reorganization changes were implemented during fiscal
1996, the Company continues to evaluate 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.
During first quarter 1996, management limited Kid's Choice 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.
Operating income - Operating income increased $3.1 million, or 28.0%, to $14.4
million second quarter 1997 as compared to second quarter 1996 and increased
$1.8 million, or 7.8% to $24.1 million year-to-date 1997 as compared to
year-to-date 1996. Operating income before litigation settlements and
restructuring costs increased $1.6 million, or 14.4%, to $12.8 million as
compared to second quarter 1996 and increased $1.2 million, or 5.8%, to $22.6
million year-to-date 1997 as compared to year-to-date 1996 for the reasons
discussed above.
11
<PAGE> 14
Second quarter 1997 EBITDA, defined as earnings before interest expense,
income taxes, depreciation, and amortization, of $16.5 million, was $2.6
million below second quarter 1996, and year-to-date 1997 EBITDA of $36.9
million was $3.6 million below year-to-date 1996. As a percentage of operating
revenues, EBITDA for second quarter 1997 was 12.8% versus 15.4% for second
quarter 1996 and EBITDA for year-to-date 1997 was 12.3% versus 14.2% for
year-to-date 1996. Adjusted EBITDA, defined as EBITDA excluding the effects of
investment income; litigation settlements and restructuring costs (income),
net; and extraordinary items, was $20.2 million second quarter 1997, an
increase of $1.1 million over second quarter 1996 and $41.8 million
year-to-date 1997, an increase of $2.4 million over year-to-date 1996. As a
percentage of operating revenues, Adjusted EBITDA improved to 15.7% second
quarter 1997 from 15.4% second quarter 1996 and improved to 13.9% year-to-date
1997 from 13.8% year-to-date 1996. Neither EBITDA nor Adjusted EBITDA is
intended to 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.
Net investment income - Net investment income was $0.1 million year-to-date
1997 versus $0.2 million year-to-date 1996.
Interest expense - Interest expense decreased to $3.2 million from $3.8 million
for second quarter 1997 versus second quarter 1996 and to $8.1 million from
$9.2 million for year-to-date 1997 versus year-to-date 1996. The Company's
weighted average interest rate on its long-term debt, including debt cost
amortization, was 8.9% second quarter 1997 versus 11.2% second quarter 1996 and
9.5% year-to-date 1997 versus 10.9% year-to-date 1996.
Income tax expense - Income tax expense for second quarter 1997 and year-to-date
1997 of $4.4 million and $6.3 million, respectively, are 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 5% to 10% during the summer months and the year-end
holiday season. As a result, the Company seeks to open centers in August and
December in anticipation of the peak enrollment periods. The combination of
decreased attendance and escalated center development in 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
year-to-date 1997 was $16.6 million, compared to $26.8 million for year-to-date
1996. The reduced cash flow from operations year-to-date 1997 is due
primarily to the receipt of a $1.5 million interest payment from Enstar offset
by a $5.2 million interest payment on the Company's 10 3/8% Senior Notes due
2001 during year-to-date 1997, as compared to the Company's receipt of the
final cash distribution of $11.3 million from Enstar offset by a $5.0
million one-time restructuring charge during year-to-date 1996. As of
December 13, 1996, the Company had $10.4 million in cash and cash equivalents
and its ratio of current assets to current liabilities was .65 to 1 at December
13, 1996 versus .58 to 1 at May 31, 1996.
During first quarter 1997, the Company purchased $30.0 million aggregate
principal amount of its 10 3/8% Senior Notes due 2001 at an aggregate price of
$31.5 million. This transaction resulted in an extraordinary loss of $1.2
million, net of income taxes, in first quarter 1997. During second quarter
1997, the Company announced and completed a tender offer and consent
solicitation for its outstanding 10 3/8% Senior Notes due 2001 seeking the
elimination of substantially all of the restrictive covenants, and 99.7% of the
remaining notes were purchased at an aggregate price of $76.8 million. This
second transaction resulted in an extraordinary loss of $5.3 million, net of
12
<PAGE> 15
income taxes, recorded in second quarter 1997. The company increased its
existing revolving credit facility by $50.0 million to $200.0 million to
finance the tender offer.
In 1996, the Company repurchased 745,883 shares of its common stock for
$10.0 million, at an average cost of $13.41 per common share. On June 3, 1996,
the Board of Directors authorized the repurchase of $23.0 million of the
Company's Common Stock. As of the end of first quarter 1997, 1,111,500 shares
and 435,000 warrants had been repurchased for $18.3 million. All shares
repurchased have been retired. No Common Stock or warrants have been
purchased since July 22, 1996.
During first quarter 1996, the Company received a cash distribution of
$11.3 million from Enstar in connection with a settlement of the Company's
claim against Enstar in U.S. Bankruptcy Court in Montgomery, Alabama. During
second quarter 1997, the Company received a $1.5 million interest payment from
Enstar on the above claim.
During first quarter 1996, the Company received $1.9 million from
repayments of notes receivable which arose from the sales of centers in prior
years. In addition, the Company also received $0.5 million and $3.4 million
from sales of centers during year-to-date 1997 and year-to-date 1996,
respectively.
On October 3, 1996, the Company entered into an Agreement and Plan of
Merger ("Agreement") 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"). On December 27, 1996, the
Agreement was amended to revise the consideration to be paid in connection with
the Merger ("Amended Agreement"). Subject to certain provisions of the
Amended Agreement, each issued and outstanding share of Common Stock will be
converted, at the election of the holder, into either the right to receive
$19.00 in cash or the right to retain one share of Common Stock, subject to
proration. Under the terms of the Amended Agreement, approximately $122.5
million of existing debt will be retired and approximately $367.2 million will
be paid by the Company to redeem Common Stock, warrants, and options. The
acquisition will be financed by the issuance of approximately $376.0 million in
new debt and approximately $148.8 million of equity will be invested by a KKR
affiliate. The total value of the transaction, including equity, debt and fees
is approximately $524.7 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 51.4% of the shares of Common Stock outstanding as of January 8,
1997 have agreed to vote in favor of the transaction. In connection with the
Merger, the Company also has secured commitments for a $490.0 million senior
secured facility to complete the Merger and to fund future growth and
acquisitions. Effective with, and subject to, the closing of the Merger, the
CEO will retire from her positions with the Company, while agreeing to remain
on the Board of Directors. David J. Johnson, most recently Chairman and Chief
Executive Officer of Red Lion Hotels, Inc. (formerly a KKR affiliate) or its
predecessor, will succeed Dr. Scarr as CEO.
The Company will incur substantial indebtedness in connection with the
Merger. The Company's ability to refinance its indebtedness or to make
scheduled payments of principal and/or interest thereon, or 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.
Capital Expenditures
Following the Merger, the Company anticipates substantial increases in its
capital expenditures budget over the next several years. During fiscal 1997,
the Company expects to open 16 to 17 new centers consisting of 14 to 15
13
<PAGE> 16
community centers, one KinderCare at Work center and one center in the United
Kingdom. The number of new center openings is down from 20 to 23 centers
originally planned for 1997 because three community centers originally
scheduled to open in fiscal 1997 are now expected to open in fiscal 1998 and
because of a reduction in planned openings in the United Kingdom from two or
three centers to one center. No assurance can be given by the Company that it
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 outside the control of the
Company.
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, all community centers are equipped
with computers for children's educational programs.
Capital expenditures year-to-date 1997 amounted to approximately $27.8
million. Approximately $7.6 million was spent on renovations and improvements
to existing facilities, approximately $4.1 million was spent on computers for
children's educational programs, approximately $14.0 million was spent on new
center development, and the remaining $2.1 million was spent on corporate
information systems. Capital expenditures year-to-date 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.
Management believes that cash flow generated from operations and borrowings
under the $300.0 million revolving credit facility 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 may reduce 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 service. In the long term, if these expenditures were substantially
reduced, in management's opinion, its operations and its cash flow would be
adversely impacted.
14
<PAGE> 17
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 (commensurate wage
increases granted to certain hourly employees (with two or more years
experience at KinderCare at the time of such increase) earning more than
minimum wage), 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 effect will not be experienced until
fiscal 1999. The Company believes that through increases in its tuition rates
it can recover any increase in expenses caused by the 1996-1997 wage
adjustments and additional compensation adjustments necessitated by such
increases in the minimum wage rate. However, there can be no assurance that
the Company will be able to increase its rates sufficiently to offset such
increased costs. The Company continually evaluates its wage structure and may
implement further changes in addition to those discussed above.
15
<PAGE> 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 5. Other Information
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Capitalized terms used and not defined herein shall have the same meaning
and effect as those same terms as presented and defined in the Company's Proxy
Statement as filed with the Securities and Exchange Commission on Form 14(a) on
January 7, 1997.
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") have been derived by the application of pro
forma adjustments to the Company's historical consolidated financial statements.
The pro forma consolidated statements of operations for the periods presented
give effect to the Merger and related transactions as if such transactions were
consummated as of June 3, 1995 for the fiscal year ended May 31, 1996 and for
the twenty-eight weeks ended December 13, 1996, and as of December 16, 1995 for
the twelve months ended December 13, 1996. The pro forma consolidated balance
sheet gives effect to the Merger and related transactions as if such
transactions had occurred as of December 13, 1996. The adjustments are
described in the accompanying notes. The Pro Forma Financial Statements should
not be considered indicative of actual results that would have been achieved had
the Merger and related transactions been consummated on the date or for the
periods indicated and do not purport to indicate balance sheet data or results
of operations as of any future date or for any future period. The Pro Forma
Financial Statements should be read in conjunction with the Company's historical
consolidated financial statements and the notes thereto.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect and account for the Merger as a
recapitalization. Accordingly, the historical basis of the Company's assets
and liabilities has not been impacted by the transaction.
16
<PAGE> 19
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 13, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,426 $ (a) $10,426
Receivables 15,167 15,167
Prepaid expenses and supplies 10,240 10,240
Deferred income taxes 4,664 4,664
-------- --------
Total current assets 40,497 40,497
Property and equipment, net 476,546 476,546
Deferred income taxes 4,454 4,454
Deferred financing costs - 20,000 (b) 20,000
Other assets 7,941 (1,923)(c) 6,018
-------- --------- --------
TOTAL ASSETS $529,438 $ 18,077 $547,515
======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $20,549 $ - $ 20,549
Accrued liabilities 40,482 40,482
Current portion of long-term debt 1,095 1,095
-------- --------
Total current liabilities 62,126 62,126
Long-term debt 167,668 253,481 (d) 421,149
Other noncurrent liabilities 23,983 23,983
Self insurance liabilities 20,210 20,210
-------- --------
Total liabilities 273,987 253,481 527,468
Shareholders' equity 255,451 (235,404)(e) 20,047
-------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $529,438 $ 18,077 $547,515
======== ========= ========
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet
17
<PAGE> 20
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
The pro forma consolidated financial data have been derived by the
application of pro forma adjustments to the Company's historical
consolidated financial statements for the period noted. The Merger will be
accounted for as a recapitalization which will have no impact on the
historical basis of assets and liabilities. The pro forma consolidated
financial data assumes that there are no dissenting stockholders to the
Merger.
(a) The net effect of $0 reflects the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C>
SOURCES OF FUNDS:
Term Loan Facility $175,981
Senior Subordinated Notes 200,000
Equity Contribution 148,750
--------
Total sources $524,731
========
USES OF FUNDS:
Purchase equity $342,623
Options/warrants redeemed 24,608
Repayment of Existing Bank Credit Facility 122,500
Estimated transaction fees and expenses 35,000
--------
Total uses $524,731
========
Net $ 0
========
</TABLE>
(b) To reflect the anticipated portion of transaction fees which will be
recorded as deferred financing fees and will be amortized over the life of the
debt to be issued.
(c) To reflect the write-off of deferred financing fees associated with the
termination of the Existing Bank Credit Facility.
(d) To reflect the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C>
Repayment of Existing Bank Credit Facility $(122,500)
Senior Subordinated Notes 200,000
Term Loan Facility 175,981
---------
Total adjustment $ 253,481
=========
</TABLE>
18
<PAGE> 21
(e) To reflect the aggregate net change as a result of the Merger and the
related transactions:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C>
Convert to cash 18.0 million shares of Common Stock $(342,623)
Issue 7.8 million shares of Common Stock 148,750
Purchase Warrants (19,897)
Cancellation of Company stock options (4,711)
Write-off of deferred financing fees (c) (1,923)
Estimated transaction fees and expenses (1) (15,000)
---------
Total $(235,404)
=========
</TABLE>
- ------------
(1) Represents the portion of the total $35.0 million of estimated transaction
fees and expenses which will be recorded as an expense. Such estimated
transaction fees and expenses are anticipated to consist of: (i) professional,
advisory and investment banking fees and expenses, (ii) management bonuses and
(iii) miscellaneous fees and expenses such as printing and filing fees.
19
<PAGE> 22
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, 1996 TWENTY-EIGHT WEEKS ENDED DECEMBER 13, 1996
PRO FORMA PRO PRO FORMA PRO
HISTORICAL ADJUSTMENTS(A) FORMA HISTORICAL ADJUSTMENTS(A) FORMA
--------- ------------- ------ ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $541,264 $541,264 $299,751 $299,751
Operating expenses 489,555 489,555 275,634 275,634
-------- -------- -------- --------
Operating income 51,709 51,709 24,117 24,117
Net investment income 250 250 86 86
Interest expense 16,727 $ 24,717 (b) 41,444 8,141 $13,763 (b) 21,904
-------- -------- -------- -------- ------- --------
Income before income taxes and
extraordinary item 35,232 (24,717) 10,515 16,062 (13,763) 2,299
Income tax expense 13,549 (9,640)(c) 3,909 6,264 (5,367)(c) 897
-------- -------- -------- -------- ------- --------
Income before extraordinary item 21,683 (15,077) 6,606 9,798 (8,396) 1,402
Extraordinary item-loss on early
extinguishment of debt, net of
income tax benefit (6,480) (6,480)
-------- -------- -------- -------- ------- --------
Net income (loss) $ 21,683 $(15,077) $ 6,606 $ 3,318 $(8,396) $ (5,078)
======== ======== ======== ======== ======= ========
Ratio of earnings to fixed
charges (d) 2.4x 1.2x 2.2x 1.1x
-------- -------- -------- --------
TWELVE MONTHS ENDED DECEMBER 13, 1996
PRO FORMA PRO
HISTORICAL ADJUSTMENTS(A) FORMA
---------- --------------- -----
<C> <C> <C>
Operating revenues $555,623 $555,623
Operating expenses 502,160 502,160
-------- --------
Operating income 53,463 53,463
Net investment income 175 175
Interest expense 15,649 $ 25,194 (b) 40,843
-------- -------- --------
Income before income taxes and
extraordinary item 37,989 (25,194) 12,795
Income tax expense 14,624 (9,826)(c) 4,798
-------- -------- --------
Income before extraordinary item 23,365 (15,368) 7,997
Extraordinary item-loss on early
extinguishment of debt, net of
income tax benefit (6,480) (6,480)
Net income (loss) $ 16,885 $(15,368) $ 1,517
======== ======== ========
Ratio of earnings to fixed
charges (d) 2.5x 1.3x
-------- --------
</TABLE>
See Notes to Pro Forma Consolidated Statements of Operations
20
<PAGE> 23
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The pro forma consolidated financial data have been derived by the application
of pro forma adjustments to the Company's historical consolidated financial
statements for the periods noted. The Merger will be accounted for as a
recapitalization which will have no impact on the historical basis of assets
and liabilities. The pro forma consolidated financial data assumes that there
are no dissenting stockholders to the Merger.
(a) As provided in note (e) to the Pro Forma Consolidated Balance Sheet, the
pro forma adjustments exclude (i) $4.7 million of compensation expense related
to the Company stock options to be canceled in conjunction with the Merger,
(ii) write-off of $1.9 million of deferred financing fees associated with the
termination of the Existing Bank Credit Facility, and (iii) $15.0 million of
estimated transaction fees and expenses to be incurred in connection with the
Merger. Such amounts represent non-recurring expenses which the Company
anticipates will be reflected in the Consolidated Statement of Operations for
the period including the Merger.
(b) The pro forma adjustment to interest expense reflects the following:
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS TWELVE MONTHS
FISCAL YEAR ENDED ENDED ENDED
MAY 31, 1996 DECEMBER 13, 1996 DECEMBER 13, 1996
----------------- -------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest on historical debt repaid in Merger $(12,241) $(6,137) $(11,764)
Interest expense on the Term Loan Facility
(assumed 8.5% rate) 14,958 8,054 14,958
Interest expense on the Notes (assumed 10.0%
rate) 20,000 10,769 20,000
Amortization of deferred financing costs
(10 years) 2,000 1,077 2,000
-------- ------- --------
Total adjustment $ 24,717 $13,763 $ 25,194
======== ======= ========
</TABLE>
A 0.125% increase or decrease in the assumed interest rate on the Term
Loan Facility would change the pro forma interest expense by $0.22 million for
the fiscal year ended May 31, 1996 and the twelve months ended December 13,
1996 and $0.12 million for the twenty-eight weeks ended December 13, 1996.
A 0.125% increase or decrease in the assumed interest rate on the Notes
would change the pro forma interest expense by $0.25 million for the fiscal
year ended May 31, 1996 and the twelve months ended December 13, 1996 and $0.14
million for the twenty-eight weeks ended December 13, 1996.
(c) To reflect the tax effects of the pro forma adjustments at a 39% effective
income tax rate.
(d) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus fixed
charges. Fixed charges consist of interest expense on all indebtedness,
amortization of deferred financing costs, and one-third of rental expense on
operating leases representing that portion of rental expense deemed by the
Company to be attributable to interest.
21
<PAGE> 24
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
(i) A report on Form 8-K dated October 3, 1996, announced the signing
of an Agreement and Plan of Merger with KCLC Acquisition Corp., an
affiliate of Kohlberg Kravis Roberts & Co., L.P.
(ii) A report on Form 8-K dated November 18, 1996, announced the
consumation of a tender offer and consent solicitation with respect to
its 10 3/8% Senior Securities.
22
<PAGE> 25
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 21, 1997 /s/ Sandra W. Scarr.
-------------------------------------
Sandra W. Scarr
Chairman and Chief Executive Officer
Date: January 21, 1997 /s/ Philip L. Maslowe
------------------------------------
Philip L. Maslowe
Executive Vice-President and
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> DEC-13-1996
<EXCHANGE-RATE> 1
<CASH> 10,426
<SECURITIES> 0
<RECEIVABLES> 17,398
<ALLOWANCES> 2,234
<INVENTORY> 0
<CURRENT-ASSETS> 40,497
<PP&E> 580,349
<DEPRECIATION> 103,803
<TOTAL-ASSETS> 529,438
<CURRENT-LIABILITIES> 62,126
<BONDS> 167,668
0
0
<COMMON> 191
<OTHER-SE> 255,260
<TOTAL-LIABILITY-AND-EQUITY> 529,438
<SALES> 0
<TOTAL-REVENUES> 299,751
<CGS> 0
<TOTAL-COSTS> 273,783
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,851
<INTEREST-EXPENSE> 8,141
<INCOME-PRETAX> 16,062
<INCOME-TAX> 6,264
<INCOME-CONTINUING> 9,798
<DISCONTINUED> 0
<EXTRAORDINARY> (6,480)
<CHANGES> 0
<NET-INCOME> 3,319
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>