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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 18, 1998
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 Number)
650 N.E. Holladay Street, Suite 1400
Portland, Oregon 97232
(Address of principal executive offices)
(502) 872-1300
(Registrant's telephone number, including area code)
(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 [ ]
The number of shares of Registrant's common stock, $.01 par value per
share, outstanding at October 16, 1998 was 9,474,197.
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<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Index
Part I. Financial Information Page
----
Item 1. Consolidated financial statements (unaudited):
Consolidated balance sheets at September 18, 1998 and
May 29, 1998 (unaudited)...................................1
Consolidated statements of operations for the sixteen
weeks ended September 18, 1998 and
September 19, 1997 (unaudited).............................2
Consolidated statements of stockholders' equity
for the sixteen weeks ended September 18, 1998
and the fiscal year ended May 29, 1998 (unaudited).........3
Consolidated statements of cash flows for the sixteen
weeks ended September 18, 1998 and
September 19, 1997 (unaudited).............................4
Notes to unaudited consolidated financial statements.........5
Item 2. Management's discussion and analysis of
financial condition and results of operations..............6
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K............................12
Signatures....................................................................13
<PAGE>
<TABLE>
<CAPTION>
PART I
Item 1. Consolidated Financial Statements (unaudited)
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
September 18, May 29,
1998 1998
------------- -------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 6,064 $ 11,820
Receivables, net 17,229 14,987
Prepaid expenses and supplies 6,851 4,939
Deferred income taxes 12,412 12,412
------------- -------------
Total current assets 42,556 44,158
Property and equipment, net 522,002 508,113
Deferred income taxes 12,030 12,030
Deferred financing costs and other assets 24,886 27,238
------------- -------------
$ 601,474 $ 591,539
============= =============
Liabilities and Stockholders' Equity:
Current liabilities:
Bank overdrafts $ 7,723 $ 8,184
Accounts payable 7,776 9,796
Current portion of long-term debt 5,722 1,839
Accrued expenses and other liabilities 64,034 76,221
------------- -------------
Total current liabilities 85,255 96,040
Long-term debt 416,918 401,258
Self insurance liabilities 21,685 20,922
Deferred income taxes 5,453 5,444
Other noncurrent liabilities 36,483 35,975
------------- -------------
Total liabilities 565,794 559,639
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding -- --
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
9,474,197 shares 95 95
Additional paid-in capital 2,009 2,009
Notes receivable from stockholders (1,028) (1,325)
Retained earnings 34,722 31,179
Cumulative translation adjustment (118) (58)
------------- -------------
Total stockholders' equity 35,680 31,900
------------- -------------
$ 601,474 $ 591,539
============= =============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
1
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<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Sixteen Weeks Ended
---------------------------------------------
September 18, 1998 September 19, 1997
------------------ ------------------
<S> <C> <C>
Revenues, net $ 192,274 $ 180,562
------------- -------------
Operating expenses:
Salaries, wages and benefits 105,435 99,529
Depreciation 10,108 11,280
Rent 9,039 8,251
Provision for doubtful accounts 593 1,151
Other 48,867 46,139
Restructuring charges 2 1,563
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Total operating expenses 174,044 167,913
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Operating income 18,230 12,649
Investment income, net 148 348
Interest expense (12,780) (12,954)
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Income before income taxes 5,598 43
Income tax expense 2,055 15
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Net income $ 3,543 $ 28
============= =============
Comprehensive income:
Net income $ 3,543 $ 28
Cumulative translation adjustment (60) 72
------------- -------------
Comprehensive income $ 3,483 $ 100
============= =============
Basic and diluted net income per share $ 0.37 $ 0.00
============= =============
Weighted average common shares outstanding
9,474,000 9,368,000
============= =============
Weighted average common shares outstanding
and potential common shares 9,483,000 9,369,000
============= =============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except share amounts)
(Unaudited)
Common Stock Additional Cumulative
---------------------- Paid-in Notes Retained Translation
Shares Amount Capital Receivable Earning Adjustment Total
---------- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 30, 1997 9,368,421 $ 94 $ -- $ -- $ 27,753 $ (140) $ 27,707
Net income -- -- -- -- 3,426 -- 3,426
Cumulative translation adjustment -- -- -- -- -- 82 82
Issuance of common stock 105,776 1 2,009 (1,490) -- -- 520
Proceeds from collection of
notes receivable -- -- -- 165 -- -- 165
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at May 29, 1998 9,474,197 95 2,009 (1,325) 31,179 (58) 31,900
Net income -- -- -- -- 3,543 -- 3,543
Cumulative translation adjustment -- -- -- -- -- (60) (60)
Proceeds from collection of
notes receivable -- -- -- 297 -- -- 297
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at September 18, 1998 9,474,197 $ 95 $ 2,009 $ (1,028) $ 34,722 $ (118) $ 35,680
========== ========== ============ ============ ========== ============ ============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Sixteen Weeks Ended
---------------------------------------------
September 18, 1998 September 19, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operations:
Net income $ 3,543 $ 28
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 10,108 11,280
Provision for doubtful accounts 593 1,151
Amortization of deferred financing costs and other assets 950 981
Gain on sales and disposals of property and
equipment, net (71) (124)
Changes in operating assets and liabilities:
Increase in receivables (3,601) (2,678)
Increase in prepaid expenses and supplies (1,912) (1,785)
Decrease (increase) in other assets 1,402 (260)
Decrease in accounts payable, accrued expenses
and other liabilities (12,927) (8,495)
Other, net (60) 184
--------------- ---------------
Net cash provided (used) by operating activities (1,975) 282
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (24,314) (14,696)
Proceeds from sales of property and equipment 388 816
Proceeds from collection of notes receivable 766 785
--------------- ---------------
Net cash used by investing activities (23,160) (13,095)
--------------- ---------------
Cash flows from financing activities:
Proceeds from long-term borrowings 30,000 --
Proceeds from collection of stockholders' notes receivable 297 --
Payments on long-term borrowings (10,457) (419)
Bank overdrafts (461) 2,472
--------------- ---------------
Net cash provided by financing activities 19,379 2,053
--------------- ---------------
Decrease in cash and cash equivalents (5,756) (10,760)
Cash and cash equivalents at the beginning of the quarter 11,820 24,150
--------------- ---------------
Cash and cash equivalents at the end of the quarter $ 6,064 $ 13,390
=============== ===============
Supplemental cash flow information:
Interest paid $ 16,943 $ 16,633
Income taxes paid (refunded), net 187 (23)
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
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KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
KinderCare Learning Centers, Inc. ("KinderCare" or the "Company") is the
largest for-profit provider of preschool educational and childcare services in
the United States. At September 18, 1998, KinderCare operated a total of 1,147
centers, with 1,145 centers in 39 states in the United States and two centers in
the United Kingdom. The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries: Mini-Skools
Limited; KinderCare Development Corp.; KinderCare Real Estate Corporation;
KinderCare Learning Centres Limited and KinderCare Properties Limited. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of the Company at September
18, 1998 and the results of operations and cash flows for each of the sixteen
weeks ended September 18, 1998 and September 19, 1997. Interim results are not
necessarily indicative of results to be expected for a full fiscal year. The
unaudited consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended May 29, 1998.
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 1999 and 1998 fiscal years are each 52 weeks long.
References to fiscal 1999 and fiscal 1998 are to the fiscal years ended May 28,
1999 and May 29, 1998, respectively.
Comprehensive Income
Effective May 30, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. The
Company has disclosed comprehensive income and its components on the face of the
statement of operations for all periods presented.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 131 establishes standards for disclosure about operating segments in
annual financial statements and requires disclosure of selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The new standard becomes effective for the Company's fiscal
year end 1999 reporting and requires that comparative information from earlier
years be restated to conform to the requirements of this standard. The Company
does not believe any substantial changes to its disclosures will be made at the
time SFAS No. 131 is adopted.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. The new standard
becomes effective for the Company's fiscal year 2001. The Company has not yet
fully evaluated the impact of this statement.
5
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
2. Restructuring Charges
During fiscal year 1997, the Company decided to relocate its corporate
offices from Montgomery, Alabama to Portland, Oregon in fiscal 1998. In
connection with the relocation, the Company recognized $1.6 million in
restructuring charges during the first quarter of fiscal 1998. Expenses incurred
were primarily for the retention, recruitment and relocation of employees and
travel costs related to the office relocation.
3. Income Taxes
For the sixteen weeks ended September 18, 1998 and September 19, 1997,
income tax expense was in excess of amounts computed by applying the statutory
federal income tax rate to income before income taxes as a result of state
income taxes, offset by tax credits.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included elsewhere in this
document. The Company's fiscal year ends on the Friday closest to May 31. The
information presented herein refers to the sixteen weeks ended September 18,
1998 ("first quarter of fiscal 1999") and September 19, 1997 ("first quarter of
fiscal 1998").
Occupancy, a measure of the utilization of center capacity, is defined by
the Company as the full-time equivalent ("FTE") attendance at all of the
Company's centers divided by the sum of the licensed capacity of all of the
Company's centers. FTE attendance is not a strict head count. Rather, the
methodology used is to determine an approximate number of full-time children
based on weighted averages. For example, an enrolled full-time child equates to
1.0 FTE, while a part-time child enrolled for a half-day equates to 0.5 FTE. The
FTE measurement of center capacity utilization does not necessarily reflect the
actual number of full-time and part-time children enrolled.
Average tuition rate is defined by the Company as actual net revenues,
exclusive of fees (primarily reservation and registration) and non-tuition
income, divided by FTE attendance for the respective period. The average tuition
rate represents the approximate weighted average tuition rate at each center
paid by a parent for a child to attend a KinderCare center five full days during
one week. Center occupancy mix, however, can significantly affect these averages
with respect to any specific child care center.
Results of Operations
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Sixteen Sixteen Change
Weeks Ended Percent Weeks Ended Percent Amount
September 18, of September 19, of Increase/
1998 Revenues 1997 Revenues (Decrease)
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 192,274 100.0% $ 180,562 100.0% $ 11,712
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and 105,435 54.8 99,529 55.1 5,906
benefits
Depreciation 10,108 5.3 11,280 6.2 (1,172)
Rent 9,039 4.7 8,251 4.6 788
Other 49,460 25.7 47,290 26.2 2,170
Restructuring charges 2 0.0 1,563 0.9 (1,561)
----------- ----------- ----------- ----------- -----------
Total operating expenses 174,044 90.5 167,913 93.0 6,131
----------- ----------- ----------- ----------- -----------
Operating income $ 18,230 9.5% $ 12,649 7.0% $ 5,581
=========== =========== =========== =========== ===========
</TABLE>
Revenues, net - Net revenues increased $11.7 million, or 6.5%, to $192.3
million in the first quarter of fiscal 1999 from the comparable quarter last
year. The increase in net revenues is primarily attributable to an approximate
4.4% weighted average tuition increase implemented in the second quarter of
fiscal 1998 and new center openings subsequent to the first quarter of fiscal
1998. The average tuition rate increased $6.91, or 6.6%, to $112.00 for the
first quarter of fiscal 1999 from $105.09 for the first quarter of fiscal 1998,
while occupancy remained flat at 68.3% for both quarters. The positive effect of
these factors on net revenues was offset in part by center closings.
During the first quarter of fiscal 1999, the Company opened nine community
centers and closed nine centers. During the first quarter of fiscal 1998, the
Company opened seven community centers and closed three centers. Total licensed
capacity was approximately 143,000 at the end of both the first quarter of
fiscal 1999 and 1998.
Salaries, wages and benefits - Salaries, wages and benefits, which include
bonus incentives, increased $5.9 million, or 5.9%, to $105.4 million in the
first quarter of fiscal 1999 from the comparable quarter last year.
7
<PAGE>
The expense directly associated with the centers was $98.1 million in the first
quarter of fiscal 1999, an increase of $5.0 million from the first quarter of
fiscal 1998. The center level increase is primarily attributable to increased
staff wage rates, as well as additional hours. The expense related to field
management and corporate administration was $7.3 million in the first quarter of
fiscal 1999, an increase of $0.9 million from the first quarter of fiscal 1998.
The increase is attributable to the addition of certain field management
positions and higher administrative salaries as a result of the relocation of
the corporate office to Portland, Oregon.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, decreased slightly to 51.0% for the first quarter of fiscal
1999 from 51.6% for the comparable quarter last year despite increased wage
rates and labor hours. Total salaries, wages and benefits expense, as a
percentage of net revenues, decreased to 54.8% for the first quarter of fiscal
1999 from 55.1% for the comparable quarter last year.
Depreciation - Depreciation expense decreased $1.2 million to $10.1 million
in the first quarter of fiscal 1999 from the comparable quarter last year.
During fiscal year 1998, the Company spent approximately $18.0 million for
educational supplies and equipment in order to upgrade the quantity and quality
of such items in each center. Since then, the replacement of these items has
declined resulting in reduced depreciation expense.
Rent - Rent expense increased $0.8 million to $9.0 million in the first
quarter of fiscal 1999 from the comparable quarter last year. The increase is
primarily a result of the Company's occupancy of its new headquarters in
Portland, Oregon during the second quarter of fiscal 1998. Subsequent to the
first quarter of fiscal 1998, 23 leased centers were closed, while three leased
centers were opened. The rental rates experienced on leases entered into
currently are higher than those experienced in previous periods.
Other operating expenses - Other operating expenses increased $2.2 million,
or 4.6%, to $49.5 million in the first quarter of fiscal 1999 from the
comparable quarter last year. Other operating expenses include costs directly
associated with the centers, such as food, educational materials, janitorial and
maintenance costs, utilities and transportation, and expenses related to field
management and corporate administration. The increase is primarily due to
increased center pre-opening costs, additional marketing expense and higher
taxes and licenses. As a percentage of net revenues, other operating expenses
decreased to 25.7% for the first quarter of fiscal 1999 from 26.2% for the first
quarter of fiscal 1998. The improvement in other operating expenses, as a
percentage of net revenues, is due to effective cost control by management.
Restructuring charges - During fiscal year 1997, the Company decided to
relocate its corporate offices from Montgomery, Alabama to Portland, Oregon in
fiscal 1998. In connection with the relocation, the Company recognized $1.6
million in restructuring charges during the first quarter of fiscal 1998.
Expenses incurred were primarily for the retention, recruitment and relocation
of employees and travel costs related to the office relocation.
Operating income - Operating income increased $5.6 million to $18.2 million
in the first quarter of fiscal 1999 from the comparable quarter last year. The
increase is primarily due to the increased net revenues as a result of the
higher average tuition rate, as discussed above.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for the first quarter of fiscal 1999 was $28.5
million, $4.2 million above the comparable quarter last year. As a percentage of
net revenues, EBITDA for the first quarter of fiscal 1999 was 14.8% compared to
13.4% for the first quarter of fiscal 1998. Adjusted EBITDA, defined as EBITDA
exclusive of restructuring charges and investment income was $28.3 million in
the first quarter of fiscal 1999, an increase of $2.8 million from the
comparable quarter last year. As a percentage of net revenues, Adjusted EBITDA
was 14.7% for the first quarter of fiscal 1999 and 14.1% for the first quarter
of fiscal 1998. 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. In addition, EBITDA and Adjusted EBITDA should not be used as tools
for comparison as the computation may not be similar for all companies.
Interest expense - Interest expense decreased slightly to $12.8 million in
the first quarter of fiscal 1999 from $13.0 million in the first quarter of
fiscal 1998. The Company's weighted average interest rate on its long-term debt,
including amortization of deferred financing costs, was 9.8% for the first
quarter of fiscal 1999 versus 10.4% for the first quarter of fiscal 1998.
8
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Income tax expense - Income tax expense during the first quarter of fiscal
1999 and 1998 of $2.1 million and $15,000, respectively, was computed by
applying estimated effective income tax rates to income before income taxes.
Income tax expense varies from the statutory federal income tax rate due to
state income taxes, offset by tax credits.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flow generated from
operations and future borrowings under the $300.0 million revolving credit
facility. The Company's principal uses of liquidity are meeting debt service
requirements, financing the Company's capital expenditures and renovations and
providing working capital.
The Company's consolidated net cash used by operating activities for the
first quarter of fiscal 1999 was $2.0 million, which represents a $2.3 million
decrease in net cash flow from operations from the comparable quarter last year.
The decrease in net cash flow from operations is primarily a result of fiscal
year end bonus incentive payments of $8.2 million in the first quarter of fiscal
1999 versus $1.4 million in the first quarter of fiscal 1998, offset in part by
an increase in net income of $3.5 million, the components of which are discussed
above. Cash and cash equivalents totaled $6.1 million at September 18, 1998
compared to $11.8 million at May 29, 1998.
New enrollments are generally highest in September and January, with
attendance declining 5% to 10% during the summer months and the calendar
year-end holiday period. The decreased attendance in the summer months and
during the calendar year-end holiday period may result in decreased liquidity
during these periods.
Capital Expenditures
The Company anticipates substantial increases in its capital expenditures
budget over the next several years. During fiscal 1999, the Company expects to
open approximately 40 new centers. During the first quarter of fiscal 1999 and
1998, the Company opened nine and seven community centers, respectively. Over
the next three years, the Company expects to increase its rate of opening and/or
acquiring new centers to between 50 and 75 new centers per year in the
aggregate, which the Company expects will be primarily community centers, and to
continue its practice of closing centers that are identified as not meeting
performance expectations.
The length of time from site selection to the opening of a community center
ranges from 18 to 24 months. The average total cost per community center
typically ranges from $1.5 million to $1.8 million depending on the size and
location of the center; however, the actual costs of a particular center may
vary from such range. New centers are based upon detailed site analyses that
include feasibility and demographic studies and financial modeling. No assurance
can be given by the Company that it will be able to successfully negotiate and
acquire properties, meet its targets for new center additions 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.
The Company also plans to make significant capital expenditures in
connection with the renovation of its existing facilities. The Company expects
to make these improvements over the next four to five years.
Capital expenditures, during the first quarter of fiscal 1999 totaled
approximately $24.3 million compared to $14.7 million in the comparable quarter
last year. Expenditures for new center development were $17.0 and $8.4 million
and renovations on existing facilities were $5.3 and $2.5 million during the
first quarter of fiscal 1999 and 1998, respectively. Purchases of equipment and
corporate information systems were $1.6 and $0.4 million, respectively, during
the first quarter of fiscal 1999, and $3.2 and $0.6 million, respectively,
during the first quarter of fiscal 1998.
Capital expenditure limits under the credit facilities for fiscal 1999 are
$155.0 million. Capital expenditure limits may be increased by carryover of a
portion of unused amounts from previous periods and are subject to certain
exceptions. Also, the Company is permitted a degree of flexibility under the
provisions of the
9
<PAGE>
indenture under which the senior subordinated notes were issued and the credit
facilities with respect to the incurrence of additional indebtedness, including
through certain mortgages or sale-leaseback transactions.
Management believes that cash flow generated from operations and future
borrowings under the 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 long term, if these
expenditures were substantially reduced, in management's opinion, its operations
and its cash flow would be adversely impacted.
Governmental Laws and Regulations
In August and September of 1998, the National Highway Transportation Safety
Administration ("NHTSA") issued interpretive letters that appear to modify its
interpretation of regulations governing the sale by automobile dealers of
vehicles intended to be used for the transportation of children to and from
school. These letters indicate that dealers may no longer sell 15 passenger vans
for this use, and that any vehicle designed to transport eleven persons or more
must meet federal school bus standards if it is likely to be "used
significantly" to transport children to and from school or school-related
events. These interpretations will affect the type of vehicle that may be
purchased by the Company in the future for use in transporting children between
schools and the Company's centers. The Company anticipates that NHTSA's recent
interpretation and potential related changes in state and federal transportation
regulations will increase the cost to the Company of transporting children,
because school buses are more expensive to purchase and maintain, and may
require drivers who have commercial licenses.
Wage Increases
Salaries, wages and benefits represented approximately 54.8% of net
revenues for the first quarter of fiscal 1999. Low unemployment rates and
positive economic trends have challenged recruiting efforts and put pressure on
wage rates in many of the Company's markets. The Company believes that, through
increases in its tuition rates, it can recover any future increase in expenses
caused by the minimum wage rate, or other market adjustments. 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 changes at targeted local levels.
Year 2000
The Company has implemented a comprehensive project plan (the "Project")
with respect to identifying, mitigating and remedying the risks associated with
the Year 2000 ("Y2K"). The Project is comprised of these broad sections:
applications software, hardware, or infrastructure, and third party vendors,
affiliates and customers. The progress of the Project is being monitored by an
internal Y2K compliance committee (the "Committee") which was formed during the
fourth quarter of fiscal 1998. The Committee is led by the Vice President,
General Counsel and consists of one other officer, other employees representing
multiple disciplines and a full-time project manager with over twelve years of
experience with the Company. An independent consultant has been engaged to
assist in systems testing and to validate the Company's processes by performing
a readiness review at the conclusion of the Project.
Each section of the Project will progress through similar phases, as
follows: the inventory and assignment of priorities to Y2K items, the assessment
of compliance of material items, the remediation, or replacement of material
non-compliant items, the testing of material items, and the development and
possible implementation of contingency plans. Currently, the Company is
primarily in the assessment phase with respect to all sections of the Project. A
complete inventory of all hardware, applications software and data flow exchange
to, or from, third parties is expected to be completed by the end of December
1998. Certain applications software programs have already been identified as
high priority items. Remediation and testing on these high priority items was
begun in fiscal 1998.
10
<PAGE>
Following the establishment of a complete inventory, all material
identified hardware and applications software will be remediated, upgraded, or
replaced, as necessary. Certification of Y2K readiness will be requested from
key third parties. Certain third party systems may be tested, if appropriate.
The Company expects to develop a contingency plan for each section of the
Project. The need to implement any contingency plans will be evaluated during
the final phase of the Project. The Company expects the development of the
contingency plan and the systems testing and remediation to be completed during
calendar year 1999.
Due to the early stages of the Project, the Company is uncertain of the
ultimate total costs for Y2K modifications. However, total costs incurred are
not expected to be material to the Company's results of operations, cash flow or
financial position. The Company expects to be able to fund the necessary costs
through cash flow from operations, which are included in existing operating
budgets.
Due to the general uncertainty inherent in addressing Y2K readiness, the
most likely worst case Y2K scenario and the impact it may have on the Company is
uncertain. The Company could incur significant unanticipated costs if there are
unexpected failures by critical third parties, or unexpected problems with the
Company's systems.
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, within
the meaning of federal securities law, concerning the Company's operations,
economic performance and financial condition, including, in particular, the
number of centers expected to be added in future years, planned transactions and
changes in operating systems and policies and their intended results, and
similar statements concerning anticipated future events and expectations that
are not historical facts.
The forward-looking statements are based on 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, including: the effects of economic
conditions; federal and state legislation regarding welfare reform,
transportation safety and minimum wage increases; competitive conditions in the
child care and early education industries; availability of a qualified labor
pool, the impact of labor organization efforts and the impact of government
regulations concerning labor and employment issues; various factors affecting
occupancy levels; availability of sites and/or licensing or zoning requirements
affecting new center development; the impact of Y2K compliance by the Company or
those entities with which the Company does business; and other risk factors that
are discussed in this report and, from time to time, in other Securities and
Exchange Commission reports and filings. One or more of the foregoing factors
may cause actual results to differ materially from those expressed in or implied
by the statements herein.
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.
11
<PAGE>
PART II
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
10(a) - Form of Letter regarding 1999 Management Bonus Plan
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned,
thereunto duly authorized:
KINDERCARE LEARNING CENTERS, INC.
(Registrant)
Date: October 26, 1998 /s/ DAVID J. JOHNSON
---------------------------------
David J. Johnson
Chairman of the Board of Directors
and Chief Executive Officer
Date: October 26, 1998 /s/ DAN R. JACKSON
---------------------------------
Dan R. Jackson
Vice President, Financial Control
and Planning
(Principal Financial and Accounting
Officer)
13
Exhibit 10.a
October 6, 1998
_______________________
_______________________
_______________________
Dear ____________:
For Fiscal Year 1999, your target bonus is __________ of your base pay, and will
be determined as follows:
1. 90% based on the Company's Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA).
2. 10% based on how well you achieve your personal objectives.
To receive a bonus, you will need to be employed in a bonus eligible position on
the last day of Fiscal Year 1999: May 28, 1999. If you transfer out of your
current position during the fiscal year, your bonus will be calculated using
this criteria through the end of the accounting period in which the transfer
occurs, and using the criteria appropriate for your new bonus eligible position
beginning on the first day of the accounting period following the transfer.
The bonus plan is designed to reward excellent performance. To receive any
amount with respect to the portion of your Fiscal Year 1999 Bonus that is based
on the Company's EBITDA performance, the Company must achieve EBITDA of at least
90% of the target EBITDA that is reflected in the Fiscal Year 1999 Financial
Plan for the Company (the FY 99 Plan). If the Company achieves 100% of its
targeted FY 99 Plan EBITDA, you will receive 100% of your target bonus that is
based on Company EBITDA. If the Company achieves 110% of targeted FY 99 Plan
EBITDA, you will receive two times the amount of your target bonus that is based
on Company
<PAGE>
_______________________
October 6, 1998
Page 2 of 2
EBITDA. The attached worksheet illustrates the amount of the Company EBITDA
portion of your bonus you will receive based on various levels of assumed
Company EBITDA performance. It also illustrates how the portion of your bonus
that is based on achievement of your personal objectives will be calculated.
Because part of your bonus is based on how well you accomplish your personal
objectives, you need to work with your supervisor to establish them. Attached is
a Personal Bonus Objectives - Bonus `99 form. Your supervisor will meet with you
to discuss your personal objectives for the year. Upon approval, the objectives
will be forwarded, with a signed copy of this letter, to the Compensation and
Benefits Department, where they will be maintained throughout the year. These
items are due in our office no later than October 31, 1998.
Any questions you have about the bonus plan can be directed to me, or Brent
Davis at (503) 872-1380, in the Compensation and Benefits Department.
Sincerely,
/s/ RODGER J. ROONEY
Rodger J. Rooney
Senior Director, Compensation and Benefits
By signing below, I acknowledge receipt and understanding of the FY99 Bonus
Plan.
- --------------------------------------- -----------------------------------
Name Date
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-28-1999
<PERIOD-START> MAY-30-1998
<PERIOD-END> SEP-18-1998
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0
0
<COMMON> 95
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<TOTAL-LIABILITY-AND-EQUITY> 601,474
<SALES> 0
<TOTAL-REVENUES> 192,274
<CGS> 0
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<LOSS-PROVISION> 593
<INTEREST-EXPENSE> 12,780
<INCOME-PRETAX> 5,598
<INCOME-TAX> 2,055
<INCOME-CONTINUING> 3,543
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<EXTRAORDINARY> 0
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<NET-INCOME> 3,543
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