<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 7, 1997
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 4, 1997 was 9,368,421.
================================================================================
<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 March 7, 1997 and March 8, 1996 and the
forty weeks ended March 7, 1997 and March 8, 1996...............................2
Consolidated Balance Sheets as of March 7, 1997 and
May 31, 1996....................................................................3
Consolidated Statements of Shareholders' Equity as of
March 7, 1997 and May 31, 1997..................................................5
Consolidated Statements of Cash Flows for the
forty weeks ended March 7, 1997 and March 8, 1996...............................6
Notes to Consolidated Financial Statements........................................8
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................13
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings.......................................................21
Item 4. Submission of Matters to a Vote of Security Holders.....................21
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 FORTY WEEKS ENDED
-------------------------- --------------------------
MARCH 7, MARCH 8, MARCH 7, MARCH 8,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $ 126,657 $ 123,641 $ 426,408 $ 409,033
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and benefits 67,960 65,417 230,175 216,231
Depreciation 7,182 7,373 26,390 25,427
Rent 6,968 6,062 21,475 20,429
Provision for allowance for
doubtful accounts 898 556 2,749 2,348
Other 31,858 30,719 111,238 109,955
Recapitalization 14,865 -- 14,880 --
Litigation settlements and
restructuring costs (income),
net -- -- (1,543) (1,019)
----------- ----------- ----------- -----------
Total operating expenses 129,731 110,127 405,364 373,371
----------- ----------- ----------- -----------
Operating income (loss) (3,074) 13,514 21,044 35,662
Net investment income 36 27 122 403
Interest expense 4,587 3,921 12,728 13,140
----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (7,625) 9,620 8,438 22,925
Income tax expense 2,830 3,752 9,094 8,941
----------- ----------- ----------- -----------
Income (loss) before extraordinary
item (10,455) 5,868 (656) 13,984
Extraordinary item -- loss on early
extinguishment of debt, net of
income tax benefit (1,052) -- (7,532) --
=========== =========== =========== ===========
Net income (loss) $ (11,507) $ 5,868 $ (8,188) $ 13,984
=========== =========== =========== ===========
Income (loss) per share:
Income (loss) before
extraordinary item $ (0.61) $ 0.30 $ (0.04) $ 0.69
Extraordinary item - loss on
early extinguishment of debt (0.06) -- (0.40) --
=========== =========== =========== ===========
Net income (loss) $ (0.67) $ 0.30 $ (0.44) $ 0.69
=========== =========== =========== ===========
Weighted average common
shares and share equivalents 17,084 19,759 18,612 20,133
=========== =========== =========== ===========
</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>
MARCH 7, MAY 31,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,490 $ 13,597
Receivables:
Tuition (net of allowance for doubtful
accounts of $2,284 and $1,884 at
March 7, 1997 and May 31, 1996,
respectively) 15,049 14,566
Other 613 563
Prepaid expenses and supplies 8,171 9,116
Deferred income taxes 4,664 4,664
----------- -----------
Total current assets 43,987 42,506
----------- -----------
Property and equipment, at cost 573,842 561,189
Less accumulated depreciation and
amortization 110,116 92,664
----------- -----------
Net property and equipment 463,726 468,525
----------- -----------
Deferred financing costs 30,475 3,627
Deferred income taxes 4,447 4,422
Other assets 3,522 4,396
----------- -----------
$ 546,157 $ 523,476
=========== ===========
</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>
LIABILITIES AND MARCH 7, MAY 31,
SHAREHOLDERS' EQUITY 1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 6,638 $ 14,330
Bank overdrafts 6,819 7,768
Current portion of long-term debt 1,109 853
Accrued expenses and other liabilities 56,144 51,163
----------- -----------
Total current liabilities 70,710 74,114
Long-term debt 394,056 145,764
Self-insurance liabilities 20,827 17,652
Other noncurrent liabilities 25,483 20,488
----------- -----------
Total liabilities 511,076 258,018
----------- -----------
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 9,368,421 and 19,981,807
shares at March 7, 1997 and May 31, 1996,
respectively; outstanding 9,368,421 and 19,946,807 at
March 7, 1997 and May 31, 1996,
respectively 94 199
Additional paid-in capital -- 204,003
Retained earnings 35,112 61,799
Cumulative translation adjustment (125) (20)
Less treasury stock, at cost (35,000 shares at
May 31, 1996) -- (523)
----------- -----------
Total shareholders' equity 35,081 265,458
=========== ===========
$ 546,157 $ 523,476
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 6
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON COMMON PAID-IN RETAINED TRANSLATION TREASURY
SHARES STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 2, 1995 20,119,818 $ 201 $ 203,890 $ 40,116 $ 32 $ -- $ 244,239
Net income -- -- -- 21,683 -- -- 21,683
Tax benefits of the valuation
allowance for deferred tax assets -- 4,121 -- -- -- 4,121
Cumulative translation adjustment -- -- -- (52) (52)
Tax benefit of option exercises -- 993 -- -- 993
Repurchase and retirement of stock and
warrants (969,883) (10) (13,477) -- -- (523) (14,010)
Exercise of stock options and warrants 831,872 8 8,476 -- -- 8,484
-----------------------------------------------------------------------------------
Balance at May 31, 1996 19,981,807 199 204,003 61,799 (20) (523) 265,458
Net loss -- -- -- (8,188) -- -- (8,188)
Cumulative translation adjustment -- -- -- -- (105) -- (105)
Issuance of Common Stock 7,986,842 80 151,670 -- -- -- 151,750
Exercise of stock options and warrants 1,617,188 16 19,735 -- -- -- 19,751
Purchase and retirement of
common stock (20,217,416) (201) (363,365) (18,499) -- 523 (381,542)
Purchase of outstanding warrants -- -- (12,043) -- -- -- (12,043)
-----------------------------------------------------------------------------------
Balance at March 7, 1997 9,368,421 $ 94 $ -- $ 35,112 $ (125) $ -- $ 35,081
===================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
---------------------------
MARCH 7, MARCH 8,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ (8,188) $ 13,984
Operating activities not requiring (providing) cash:
Depreciation 26,390 25,427
Amortization of intangibles and other assets 1,026 --
Writedown of Kid's Choice(TM) property and
equipment -- 5,312
Gain on sales and disposals of property and equipment -- (1,359)
Extraordinary item - loss on early extinguishment of
debt 7,532 --
Changes in operating assets and liabilities:
Receivables (397) (2,992)
Prepaid expenses and supplies 945 (2,277)
Other assets 1,843 148
Accounts payable, accrued expenses and
other liabilities 5,567 7,800
Other, net (235) 472
----------- -----------
Net cash provided by operating activities $ 34,483 $ 46,515
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 8
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
--------------------------
MARCH 7, MARCH 8,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from investing activities:
Purchases of property and equipment $ (34,453) $ (50,653)
Proceeds from sales of property and
equipment 12,722 3,697
Proceeds from collection of notes receivable 69 2,042
Proceeds from sale of investment -- 3,396
----------- -----------
Net cash used by investing activities (21,662) (41,518)
----------- -----------
Cash flows from financing activities:
Proceeds on long-term borrowings, net of --
financing costs 319,387
Issuance of common stock 151,750 --
Exercise of stock options and warrants 19,751 2,725
Purchase and retirement of common stock (381,542) (10,000)
Payments on long-term borrowings (107,282) (5,786)
Purchase of outstanding warrants (12,043) --
Bank overdrafts (949) 3,688
----------- -----------
Net cash used by financing activities (10,928) (9,373)
----------- -----------
Increase (decrease) in cash and cash equivalents 1,893 (4,376)
Cash and cash equivalents at the beginning of the period 13,597 14,237
----------- -----------
Cash and cash equivalents at the end of the period $ 15,490 $ 9,861
=========== ===========
Supplemental cash flow information:
Interest paid $ 14,637 $ 8,010
=========== ===========
Income taxes paid $ 1,014 $ 3,497
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 9
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 7, 1997 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) RECAPITALIZATION
On February 13, 1997, the Company consummated a merger ("Merger") pursuant to an
Amended Agreement and Plan of Merger ("Agreement") whereby ownership of
approximately 85% of the Company was acquired by an entity organized at the
direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"). Subject to certain
provisions of the Agreement, each issued and outstanding share of Common Stock
was 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. In connection with the Merger, the Company:
(i) repaid the outstanding $91.6 million balance on the Company's
previous $150.0 million credit facility; and,
(ii) paid $382.4 million to redeem Common Stock, warrants, and
options.
In order to fund the Recapitalization, the Company:
(i) issued $300.0 million principal amount 9 1/2% Senior
Subordinated Notes due 2009;
(ii) executed a Revolving Credit Facility of $300.0 million;
(iii) executed a Term Loan Facility of $90.0 million against which
$50.0 million was immediately drawn; and,
(iv) issued $151.8 million of common stock to KKR affiliates.
8
<PAGE> 10
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recapitalization costs of $14.9 million were incurred and expensed. Financing
costs of $30.5 million have been deferred and will be amortized over the lives
of the new debt facilities (See Note 4 Long-Term Debt).
Effective with the closing of the Merger, David J. Johnson, most
recently Chairman and Chief Executive Officer of Red Lion Hotels, Inc., was
appointed CEO of the Company.
(4) LONG-TERM DEBT
Long-term debt is as follows (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 7, 1997 MAY 31, 1996
------------- -------------
<S> <C> <C>
Secured:
Borrowings under Term Loan Facility at LIBOR plus 3.00% $ 50,000 $ --
Industrial refunding revenue bonds at variable rates of interest from
3.85% to 5.57% at May 31, 1996, and 3.95% to 6.25% at June 2,
1995 supported by letters of credit, maturing 1999 to 2009 33,025 33,025
Real and personal property mortgages payable in monthly
installments through 2004 at rates of 8.75% to 12.25% 6,430 7,854
Industrial revenue bonds secured by real property with maturities to
2005 at rates of 4.20% to 12.75% 5,498 5,738
Unsecured:
Senior Subordinated Notes due 2009 at 91/2% 300,000 --
Senior Subordinated Notes due 2001 at 10 3/8% 211 100,000
------------ ------------
395,164 146,617
Less current portion of long-term debt 1,108 853
============ ============
$ 394,056 $ 145,764
============ ============
</TABLE>
Credit Facilities
The credit facilities ("Credit Facilities") are provided by a
syndicate of financial institutions and include a Term Loan Facility of $90.0
million and a Revolving Credit Facility of $300.0 million. The Company must pay
an annual commitment fee equal to 1/2 of 1% per annum of the undrawn portion of
the commitments in respect of the Credit Facilities and a letter of credit fee
based on the aggregate face value of the outstanding letters of credit under the
Revolving Credit Facility.
The Term Loan Facility will mature on February 13, 2006 and
provides for $0.5 million annual amortization. The initial interest rate, at the
option of the Company, is Adjusted LIBOR (as defined) plus 3.00% or ABR (as
defined) plus 1.75%. Under the Term Loan Facility, the remaining $40.0 million
is available to be drawn in a single additional drawing until August 13, 1997.
The Term Loan Facility is subject to mandatory prepayment from (i) 100% of the
net cash proceeds on the sale of certain non-ordinary-course assets, (ii) 100%
of the net cash proceeds from certain sale/leaseback transactions, (iii) 50% of
excess cash flow, (as defined) and (iv) 100% of the net proceeds from the
issuance of certain debt obligations.
9
<PAGE> 11
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Revolving Credit Facility commitment will mature February 13,
2004. The initial interest rate, at the option of the Company, is Adjusted LIBOR
plus 2.5% or ABR plus 1.25%. At March 7, 1997, of the $300.0 million available
under the Revolving Credit Facility, the Company had approximately $48.8 million
committed on outstanding letters of credit.
The Company's obligations under the combined Credit Facilities are
secured by a perfected first priority pledge of and security interest in all the
common stock of each existing and subsequently acquired direct domestic
subsidiary of the Company and 65% of the common stock of each existing and
subsequently acquired direct foreign subsidiary and, in certain circumstances,
non-cash consideration received for certain sales of assets.
The Credit Facilities contain customary covenants and restrictions
on the Company's ability to engage in certain activities and include customary
events of default. In addition, the Credit Facilities provide that the Company
must meet or exceed an interest coverage ratio and must not exceed leverage
ratios.
Industrial Revenue Bonds
Series A Through E Industrial Revenue Bonds - The Company is
obligated to various issuers of industrial revenue bonds (the "Refunded IRBs")
in an amount totaling approximately $33.0 million outstanding as of March 7,
1997 and May 31, 1996. The Refunded IRBs were issued to provide funds for
refunding an equal principal amount of industrial revenue bonds which were used
to finance the cost of acquiring, constructing and equipping certain child care
facilities and the Company's Montgomery, Alabama corporate headquarters. Each of
these Refunded IRBs is secured by a letter of credit under the Revolving Credit
Facility.
Other IRBs - The Company also is obligated to various issuers of
other industrial revenue bonds (the "IRBs") in the aggregate principal amount of
approximately $5.5 million and $5.7 million as of March 7, 1997 and May 31,
1996, respectively. The principal amount of such IRBs was used to finance the
cost of acquiring, constructing and equipping certain child care facilities and
the IRBs are secured by these facilities.
Senior Notes
On February 13, 1997, the Company issued $300 million in unsecured
senior subordinated notes due February 15, 2009 ("Notes"). The Notes bear
interest at a fixed rate of 9-1/2% per annum, payable semi-annually on February
15 and August 15 of each year, and are effectively subordinated to the secured
indebtedness of the Company, including indebtedness under the Credit Facilities.
The Notes are callable by the Company at 104.750% of par from
February 15, 2002 through February 15, 2003. The redemption price is reduced to
103.167% of par on February 15, 2003, and to 101.583% of par on February 15,
2004 and, thereafter until maturity, the Notes may be redeemed at par. Upon a
change of control, as defined in the Indenture, each holder of the Notes may
require the Company to repurchase all or a portion of such holder's Notes at a
purchase price in cash equal to 101% of par, together with accrued and unpaid
interest to the date of repurchase.
10
<PAGE> 12
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Notes contain a number of covenants similar to those of the
Credit Facilities and include certain limitations with respect to payment of
dividends, incurrence of additional indebtedness, creation of liens, asset or
subsidiary sales, transactions with affiliates, investments and guarantees.
(5) EXTRAORDINARY LOSS
During the first and second quarters of fiscal 1997, the Company
purchased 99.8% of its 10 3/8% Senior Notes due 2001 for an aggregate price of
$108.3 million. This transaction included deferred financing costs of $1.7
million and resulted in an extraordinary loss of $6.4 million, net of income
taxes, in fiscal 1997.
During third quarter fiscal 1997, in connection with the Merger and
retirement of existing debt, a $1.1 million, net of tax, extraordinary loss was
recognized for the write-off of deferred financing costs relating to the
previous credit faciltiy.
(6) INCOME TAXES
Income tax expense for third quarter 1997 and year-to-date 1997 of
$2.8 million and $9.1 million, respectively, are in excess of amounts computed
by applying statutory federal income tax rates to income before income taxes due
primarily to non-deductible recapitalization expenses and state income taxes.
(7) STOCK REPURCHASE PROGRAM
In fiscal 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 fiscal 1997, the Company purchased 1,111,500 common shares and
435,000 warrants for $18.3 million, at an average cost of $15.00 per common
share and $3.65 per warrant.
11
<PAGE> 13
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) COMPUTATION OF INCOME (LOSS) PER SHARE
Income (loss) 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 FORTY WEEKS ENDED
-------------------------------------------------
MARCH 7, MARCH 8, MARCH 7, MARCH 8,
1997 1996 1997 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 17,084 19,584 18,612 19,722
Dilutive effect of common
stock equivalents 0 175 0 411
=================================================
Weighted average common shares and common
share equivalents outstanding 17,084 19,759 18,612 20,133
=================================================
</TABLE>
When common stock equivalents are anti-dilutive, they are excluded
from the calculation of weighted average shares outstanding.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share" which requires companies to present basic and diluted earnings per
share upon adoption of the statement. If SFAS No. 128 had been adopted on June
1, 1996, basic and diluted earnings per share would not have been materially
different from reported earnings per share for each period presented.
(9) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current presentation.
12
<PAGE> 14
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 forty weeks
ended March 7, 1997 ("third quarter 1997" and "year-to-date 1997", respectively)
compared to the twelve weeks and the forty weeks ended March 8, 1996 ("third
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 THIRD QUARTER 1997 COMPARED TO THE THIRD 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
----------------------
Third quarter Percent of Third quarter Percent of Percent of
1997 Revenues 1996 Revenues Amount Revenues
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 126,657 100.0% $ 123,641 100.0% $ 3,016 -- %
--------- --------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages and benefits 67,960 53.6 65,417 52.9 2,543 0.7
Depreciation 7,182 5.7 7,373 6.0 (191) (0.3)
Rent 6,968 5.5 6,062 4.9 906 0.6
Other 32,756 25.9 31,275 25.3 1,481 0.6
Recapitalization 14,865 11.7 -- -- 14,865 11.7
--------- --------- --------- --------- --------- ---------
Total operating expenses 129,731 102.4 110,127 89.1 19,604 13.3
--------- --------- --------- --------- --------- ---------
Operating income (loss) $ (3,074) (2.4)% $ 13,514 10.9% $ (16,588) (13.3)%
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Change
-----------------------
Year-to-date Percent of Year-to-date Percent of Percent of
1997 Revenues 1996 Revenues Amount Revenues
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 426,408 100.0% $ 409,033 100.0% $ 17,375 -- %
--------- --------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages and benefits 230,175 54.0 216,231 52.8 13,944 1.2
Depreciation 26,390 6.2 25,427 6.2 963 0.0
Rent 21,475 5.0 20,429 5.0 1,046 0.0
Other 113,987 26.7 112,303 27.5 1,684 (0.8)
Recapitalization 14,880 3.5 -- -- 14,880 3.5
Litigation settlements and
restructuring costs
(income), net (1,543) (0.4) (1,019) (0.2) (524) (0.2)
--------- --------- --------- --------- --------- ---------
Total operating expenses 405,364 95.0 373,371 91.3 31,993 3.7
========= ========= ========= ========= ========= =========
Operating income $ 21,044 5.0% $ 35,662 8.7% $ (14,618) (3.7)%
========= ========= ========= ========= ========= =========
Centers open at the end of
each period 1,151 1,146 5
========= ========= =========
</TABLE>
13
<PAGE> 15
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
RESULTS OF OPERATIONS
Operating revenues - Operating revenues increased $3.0 million, or 2.4%, to
$126.7 million third quarter 1997 and $17.4 million, or 4.2%, to $426.4 million
year-to-date 1997 versus the comparable periods in 1996. The increases in
revenues are attributable to a 4.7% weighted average tuition increase
implemented during the second quarter of fiscal 1997 and to new centers opened
or acquired during fiscal 1996 and year-to-date 1997. These revenue increases
were partially offset by center closings during fiscal 1996 and year-to-date
1997, and declines in total company average occupancy in third 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 third quarter 1996, and up
2.9% over year-to-date 1996. Same center revenue increases associated with the
tuition increases for both third quarter 1997 and year-to-date 1997 were
partially offset by same center occupancy declines during third quarter 1997.
Total company average occupancy decreased to 70.3% third quarter
1997 from 73.7% third quarter 1996 and to 73.1% year-to-date 1997 from 75.2%
year-to-date 1996. Same center occupancy decreased to 70.9% third quarter 1997
from 74.4% third quarter 1996 and to 73.8% year-to-date 1997 from 75.7%
year-to-date 1996. The Company believes these declines in occupancy were caused
by a variety of factors including 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
these initiatives.
During year-to-date 1997, the Company opened 16 new centers: 15
community centers and one KinderCare at Work(R) center, and closed 13 centers.
During year-to-date 1996 (including the conversion of one community center to a
Kid's Choice(TM) center), the Company opened 30 new centers: 15 community
centers, six KinderCare at Work(R) centers, and nine Kid's Choice(TM) centers;
and, closed 21 centers. Since the end of third quarter 1996, the Company has
opened a total of 23 new centers with an average building capacity of 176
children and has closed 18 centers with an average building capacity of 91
children. Total center capacity has increased to approximately 142,000 at the
end of third quarter 1997 from approximately 139,000 at the end of third quarter
1996.
Salaries, wages and benefits - Salaries, wages and benefits expense increased
$2.5 million, or 3.9%, to $ 68.0 million third quarter 1997 and $13.9 million,
or 6.4%, to $230.2 million year-to-date 1997 versus the comparable periods in
1996. As a percentage of operating revenues, salaries, wages and benefits
expense increased to 53.6% third quarter 1997 from 52.9% third quarter 1996 and
to 54.0% year-to-date 1997 from 52.8% year-to-date 1996. Approximately 28% and
54%, respectively, of the third quarter and year-to-date increases are
attributable to increased center staff hours. Average hourly center staff wages
increased approximately 4% for third quarter 1997 and year-to-date 1997 versus
the comparable periods in 1996. As a percentage of operating revenues, some 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
14
<PAGE> 16
KINDERCARE LEARNING CENTERS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
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 cost reductions in field and management reorganizations
implemented during 1996.
Depreciation - Depreciation expense decreased to $7.2 million during third
quarter 1997 from $7.4 million third 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 $26.4 million year-to-date
1997 from $25.4 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 23 new centers, offset partially by the closing of 18 centers since
the end of third quarter 1996 and by a reduction in depreciation expense related
to the end of the estimated depreciable lives of certain assets mentioned above.
In addition to closing the centers identified above, during third quarter 1997
the Company converted 14 owned centers to leased centers through sale/leaseback
transactions.
Rent - Rent expense increased to $7.0 million third quarter 1997 from $6.1
million third quarter 1996 and increased to $21.5 million year-to-date 1997 from
$20.4 million year-to-date 1996. Six leased centers have been opened and 15
leased centers have been closed since the end of third quarter 1996. The seven
new leased centers are at significantly higher rental rates than the 15 closed
centers resulting in increased rent costs of $0.1 million and $0.3 million for
the quarter and year-to-date, respectively. Also, during fiscal 1997, the
Company entered into sale/leaseback agreements on 14 centers increasing rent
expense by $0.4 million for both third quarter and year-to-date. The remainder
of the increase is due to escalated rental payments and lease renewals at higher
rates.
Other - Other operating expenses increased to $32.8 million third quarter 1997
from $31.3 million third quarter 1996 and increased to $114.0 million
year-to-date 1997 from $112.3 million year-to-date 1996. As a percentage of
operating revenues, other operating expenses increased to 25.9% third quarter
1997 from 25.3% third quarter 1996 and decreased to 26.7% year-to-date 1997 from
27.5% year-to-date 1996. The decline in third quarter 1997 margins versus third
quarter 1996 can be attributed to the increase in employee-enrolled children for
whom there is very little increase in revenue, but the same incremental costs as
the full-paying children. The year-to-date margin improvement is principally due
to a reduced, lower cost marketing program and improved administrative and
center support efficiencies from re-engineering efforts initiated during fiscal
1996.
15
<PAGE> 17
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Recapitalization
On February 13, 1997, the Company consummated a merger ("Merger") pursuant to an
Amended Agreement and Plan of Merger ("Agreement") whereby ownership of
approximately 85% of the Company was acquired by an entity organized at the
direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"). Subject to certain
provisions of the Agreement, each issued and outstanding share of Common Stock
was 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. In connection with the Merger, the Company:
(i) repaid the outstanding $91.6 million balance on the Company's
previous $150.0 million credit facility; and,
(ii) paid $382.4 million to redeem Common Stock, warrants, and
options.
In order to fund the Recapitalization, the Company:
(i) issued $300.0 million principal amount 9 1/2% Senior
Subordinated Notes due 2009;
(ii) executed a Revolving Credit Facility of $300.0 million;
(iii) executed a Term Loan Facility of $90.0 million against which
$50.0 million was immediately drawn; and,
(iv) issued $151.8 million of common stock to KKR affiliates.
Recapitalization costs of $14.9 million were incurred and expensed. Financing
costs of $30.5 million have been deferred and will be amortized over the lives
of the new debt facilities (See Note 4 Long-Term Debt).
Effective with the closing of the Merger, David J. Johnson, most
recently Chairman and Chief Executive Officer of Red Lion Hotels, Inc., was
appointed CEO of the Company.
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 - During first quarter 1996, the Company made substantial
changes to its field operations management and support functions and charged
$4.0 million of restructuring costs, primarily severance agreements, against
fiscal 1996 earnings.
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
16
<PAGE> 18
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 (loss) - Operating income decreased $16.6 million to a loss of
$3.1 million third quarter 1997 as compared to third quarter 1996 and decreased
$14.6 million to $21.0 million year-to-date 1997 as compared to year-to-date
1996. Operating income before recapitalization, litigation settlements and
restructuring costs decreased $1.7 million, or 12.7%, to $11.8 million as
compared to third quarter 1996 and decreased $0.2 million, or 0.8%, to $34.4
million year-to-date 1997 as compared to year-to-date 1996 for the reasons
discussed above. As a percentage of operating revenue, operating income before
recapitalization, litigation settlements and restructuring costs decreased 1.6%
to 9.3% as compared to third quarter 1996 and decreased 0.4% to 8.1%
year-to-date 1997 as compared to year-to-date 1996.
Third quarter 1997 EBITDA, defined as earnings before interest expense,
income taxes, depreciation, and amortization, of $3.1 million, was $17.8 million
below third quarter 1996, and year-to-date 1997 EBITDA of $40.0 million was
$21.5 million below year-to-date 1996. Adjusted EBITDA, defined as EBITDA
excluding the effects of investment income; recapitalization, litigation
settlements and restructuring costs (income), net; and extraordinary items, was
$19.0 million third quarter 1997, a decrease of $1.9 million from third quarter
1996, and $60.8 million year-to-date 1997, an increase of $ 0.7 million over
year-to-date 1996. As a percentage of operating revenues, Adjusted EBITDA
declined to 15.0% third quarter 1997 from 16.9% third quarter 1996 and to 14.3%
year-to-date 1997 from 14.7% 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 $0.4 million year-to-date 1996.
Interest expense - Interest expense increased to $4.6 million from $3.9 million
for third quarter 1997 versus third quarter 1996 and decreased to $12.7 million
from $13.1 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% third quarter 1997 versus 11.2% third quarter 1996 and
9.5% year-to-date 1997 versus 10.9% year-to-date 1996.
Income tax expense - Income tax expense for third quarter 1997 and year-to-date
1997 of $2.8 million and $9.1 million, respectively, are in excess of amounts
computed by applying statutory federal income tax rates to income before income
taxes due primarily to non-deductible recapitalization expenses and 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
17
<PAGE> 19
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 $34.5 million, compared to $46.5 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 March 7, 1997, the
Company had $15.5 million in cash and cash equivalents and its ratio of current
assets to current liabilities was .62 to 1 at March 7, 1997 versus .57 to 1 at
May 31, 1996.
In connection with the Merger, the Company's debt has increased to
$395.2 million from $146.6 million (see discussion of Recapitalization under
Results of Operations included elsewhere herein). Accordingly, the Company will
have significant debt service obligations. 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.
During the first and second quarters of fiscal 1997, the Company
purchased 99.8% of its 10 3/8% Senior Notes due 2001 for an aggregate price of
$108.3 million. This transaction included deferred financing costs of $1.7
million and resulted in an extraordinary loss of $6.4 million, net of income
taxes, in fiscal 1997.
During third quarter fiscal 1997, in connection with the Merger and
retirement of existing debt, a $1.1 million, net of tax, extraordinary loss was
recognized for the write-off of deferred financing costs relating to the
previous credit facility.
In fiscal 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 fiscal 1997, the Company purchased 1,111,500 common shares and
435,000 warrants for $18.3 million, at an average cost of $15.00 per common
share and $3.65 per warrant. All shares repurchased have been retired.
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.
18
<PAGE> 20
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Capital Expenditures
The Company anticipates substantial increases in its capital
expenditures budget over the next several years in connection with anticpated
growth in centers and refurbishment of existing centers. However, 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 is delayed for a variety
of reasons, many outside the control of the Company.
During fiscal 1997, the Company expects to open 16 new centers
consisting of 14 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.
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 $34.5
million. Approximately $9.4 million was spent on renovations and improvements to
existing facilities, approximately $5.4 million was spent on computers for
children's educational programs, approximately $16.9 million was spent on new
center development, and the remaining $2.8 million was spent on corporate
information systems. Capital expenditures year-to-date 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.
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.
19
<PAGE> 21
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
FORWARD-LOOKING STATEMENTS
When used in this report, press releases and elsewhere by management or
the Company from time to time, the words "believes," "anticipates," "expects"
and similar expressions are intended to identify forward-looking statements
concerning the Company's operations, economic performances and financial
condition, including in particular, the likelihood of the Company's success in
developing and expanding its business. These statements are based upon a number
of assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. A
variety of factors could cause actual results to differ materially from those
anticipated in the Company's forward-looking statements, some of which include
Federal and state legislation regarding welfare reform or impacting minimum wage
increases, unforeseen changes in occupancy levels, and other risk factors that
are discussed from time to time in the Company's SEC reports and other filings,
including, the Company's Prospectus dated February 10, 1997. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date thereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof, or thereof, as the case may be, or to reflect the occurrence of
unanticipated events.
20
<PAGE> 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matter to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on February 6,
1997 at which time the following matters were brought before and voted upon by
the shareholders:
(a) To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of October 3, 1996 and as amended as of
December 27, 1996 between KinderCare and KCLC Acquisition Corp.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
---------- ---------- ----------- ------------------
<S> <C> <C> <C>
16,440,108 9,751 855,638 642,934
</TABLE>
(b) The election of the following to the Board of Directors to serve until the
1997 Annual Meeting of Shareholders or until their respective successors
are duly elected or appointed and qualified; provided that, if the Merger
Agreement is approved and adopted by the KinderCare stockholders, the
directors of the Company immediately after the effective time of the
Merger would be as provided for in the Merger Agreement; therefore:
(i) From February 6, 1997 through February 13, 1997 (the effective time
of the Merger), the directors were:
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
Sandra W. Scarr, Ph.D. 17,773,359 - 175,072
Thomas E. Bronson 17,773,359 - 175,072
M. Taylor Dawson, Jr. 17,773,359 - 175,072
Jeffrey S. Halis 17,773,359 - 175,072
Malcolm T. Hopkins 17,773,359 - 175,072
Stephen A. Kaplan 17,773,359 - 175,072
Bruce A. Karsh 17,773,359 - 175,072
</TABLE>
(ii) Beginning February 13, 1997, the directors became:
David J. Johnson
Nils P. Brous
Stephen A. Kaplan
Henry R. Kravis
Clifton S. Robbins
George R. Roberts
Sandra W. Scarr, Ph.D.
(c) To ratify the selection of KPMG Peat Marwick LLP for fiscal year ending May
31, 1997 as the Company's independent auditors:
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C>
17,938,122 6,158 4,151
</TABLE>
21
<PAGE> 23
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
***2.1 (a) Agreement and Plan of Merger dated as of October 3, 1996,
between KinderCare Learning Centeres, Inc. ("KinderCare) and
KCLC Acquisition Corp. ("KCLC Acquisition") (incorporated by
reference to Exhibit 2.1(a) to KinderCare's Form S-4, filed
January 7, 1997, File no., 333-19345).
(b) Merger Agreement Amendment dated as of December 27, 1996 between
KinderCare and KCLC Acquisitiion (incorporated by reference to
Exhibit 2.1(b) to KinerCare's Form S-4, filed Januaray 7, 1997,
File no. 333-19345).
***2.2 (a) Voting Agreement, dated as of October 3, 1996, among KCLC
Acquisition and the stockholders parties thereto (incorporated
by reference to Exhibit 2.2(a) to KinderCare's Form s-4, filed
January 7, 1997, File no. 333-19345).
*2.3 Stockholders' Agreement between KinderCare Learning Centers, Inc. and
the stockholders parties thereto. (incorporated by reference from
Exhibit 2.3 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 dated April 9, 1997, File no. 333-23127).
*3.1 Certificate of Merger of KCLC Acquisition Corp. into KinderCare
Learning Centers, Inc. (incorporated by reference from Exhibit
3.1 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 dated April 9, 1997, File no. 333-23127).
*3.2 By-Laws of KinderCare Learning Centers, Inc. (incorporated by
reference from Exhibit 3.2 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
*4.1 Indenture dated as of February 13, 1997 between KinderCare Learning
Centers, Inc. and Marine Midland Bank, as Trustee. (incorporated by
reference from Exhibit 4.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no
333-23127).
*4.2 Form of 9 1/2% Senior Subordinated Note due 2009. (incorporated by
reference from Exhibit 4.2 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
*4.3 Form of 9 1/2% Series B Senior Subordinated Noted due 2009.
(incorporated by reference from Exhibit 4.3 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
*4.4 Registration Rights Agreement dated February 13, 1997, among
KinderCare Learning Centers, Inc., Chase Securities Inc., BT
Securities Corporation, Salomon Brothers Inc and Smith Barney Inc.
(incorporated by reference from Exhibit ___ of Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
10.1 Credit Agreement, dated as of February 13, 1997, among KinderCare
Learning Centers, Inc., the several lenders from time to tome parties
thereto, and the Chase Manhattan Bank as administrative agent,
(incorporated by reference from Exhibit 10.1 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
10.2 Registration Rights Agreement, dated as of February 13, 1997, among
KCLC Acquisition Corp., KLC Associated L.P. and KKR Partners II,
L.P., incorporated by reference from Exhibit 10.2 of Amendment
No. 1 to the Registrant's Registration Statement on Form S-4 dated
April 9, 1997, File no. 333-23127.
10.3 Purchase Agreement, dated as of February 13, 1997, among KinderCare
Learning Centers, Inc., Chase Securities Inc., BT Securities
Corporation, Salomon Brothers, inc. and Smith Barney, Inc., hereby
(incorporated by reference from Exhibit 10.3 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 dated April 9, 1997,
File No. 333-23127).
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
(i) A report on Form 8-K dated January 3, 1997,
announced an Amendment to the 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 February 13, 1997,
announced the consummation of the Agreement and Plan
of Merger with KCLC Acquisition Corp., an affiliate
of Kohlberg Kravis Roberts & Co., L.P..
22
<PAGE> 24
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 21, 1997 /s/ David J. Johnson
-------------------------------------------------------
David J. Johnson
Chairman and Chief Executive Officer
Date: April 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> 9-MOS
<FISCAL-YEAR-END> MAY-30-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAR-07-1997
<EXCHANGE-RATE> 1
<CASH> 15,490
<SECURITIES> 0
<RECEIVABLES> 17,946
<ALLOWANCES> 2,284
<INVENTORY> 0
<CURRENT-ASSETS> 43,987
<PP&E> 573,842
<DEPRECIATION> 110,116
<TOTAL-ASSETS> 546,157
<CURRENT-LIABILITIES> 70,710
<BONDS> 394,056
0
0
<COMMON> 94
<OTHER-SE> 34,987
<TOTAL-LIABILITY-AND-EQUITY> 546,157
<SALES> 0
<TOTAL-REVENUES> 426,408
<CGS> 0
<TOTAL-COSTS> 402,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,749
<INTEREST-EXPENSE> 12,728
<INCOME-PRETAX> 8,438
<INCOME-TAX> 9,094
<INCOME-CONTINUING> (656)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,532)
<CHANGES> 0
<NET-INCOME> (8,188)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
