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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 December 12, 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 Number)
650 N.E. Holladay, Suite 1400
Portland, Oregon 97232
(Address of principal executive offices)
(503) 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 [ ]
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
confirmation by the court. Yes [X] No [ ]
The number of shares of Registrant's common stock, $.01 par value per
share, outstanding at January 9, 1998 was 9,368,421.
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<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Index
Page
Part 1. Financial Information
Item 1. Consolidated financial statements (unaudited):
Consolidated balance sheets at December 12, 1997 and
May 30, 1997 (unaudited)..............................2
Consolidated statements of operations for the twelve and
twenty-eight weeks ended December 12, 1997 and
December 13, 1996 (unaudited)..........................3
Consolidated statements of shareholders' equity
for the twenty-eight weeks ended December 12, 1997
and the fiscal year ended May 30, 1997 (unaudited).....4
Consolidated statements of cash flows for the twenty-
eight weeks ended December 12, 1997 and
December 13, 1996 (unaudited)..........................5
Notes to unaudited consolidated financial statements......6
Item 2. Management's discussion and analysis of
financial condition and results of operations.............8
Part II. Other Information
Item 6. Exhibit and reports on Form 8-K..........................18
Signatures....................................................................19
1
<PAGE>
PART I
Item 1. Consolidated Financial Statements (unaudited)
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
(Unaudited)
December 12, 1997 May 30, 1997
----------------- ---------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 8,621 $ 24,150
Receivables 17,006 13,649
Deferred income taxes 14,127 14,127
Prepaid expenses and supplies 7,068 6,114
------------ ------------
Total current assets 46,822 58,040
Property and equipment, net 485,987 471,558
Deferred income taxes 15,567 11,621
Deferred financing costs and other assets 26,144 28,659
------------ ------------
$ 574,520 $ 569,878
============ ============
Liabilities and Shareholders' Equity:
Current liabilities:
Bank overdrafts $ 4,772 $ 5,357
Accounts payable 9,294 10,746
Accrued expenses and other liabilities 66,369 69,056
Current portion of long-term debt 1,732 1,760
------------ ------------
Total current liabilities 82,167 86,919
Long-term debt 392,345 393,129
Self insurance liabilities 26,338 21,880
Other noncurrent liabilities 45,366 40,243
------------ ------------
Total liabilities 546,216 542,171
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding -- --
Common stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding
9,368,421 shares 94 94
Retained earnings 28,100 27,753
Cumulative translation adjustment 110 (140)
------------ ------------
Total shareholders' equity 28,304 27,707
------------ ------------
$ 574,520 $ 569,878
============ ============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Twelve Weeks Ended Twenty-Eight Weeks Ended
-------------------------------------- --------------------------------------
December 12, 1997 December 13, 1996 December 12, 1997 December 13, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Operating revenues, net $ 135,587 $ 128,324 $ 316,149 $ 299,751
------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 74,237 68,875 173,766 162,215
Depreciation 7,888 7,351 19,168 19,208
Rent 5,788 5,857 14,039 14,507
Provision for doubtful accounts 814 811 1,965 1,851
Other 33,761 32,591 79,900 79,380
Restructuring charges and other
(income), net 3,292 (1,527) 4,855 (1,527)
------------ ------------ ------------ ------------
Total operating expenses 125,780 113,958 293,693 275,634
------------ ------------ ------------ ------------
Operating income 9,807 14,366 22,456 24,117
Investment income, net 94 15 442 86
Interest expense (9,418) (3,201) (22,372) (8,141)
------------ ------------ ------------ ------------
Income before income taxes and
extraordinary items 483 11,180 526 16,062
Income tax expense 164 4,360 179 6,264
------------ ------------ ------------ ------------
Income before extraordinary items 319 6,820 347 9,798
Extraordinary items - loss on early
retirement of debt, net of income taxes -- 5,251 -- 6,480
------------ ------------ ------------ ------------
Net income $ 319 $ 1,569 $ 347 $ 3,318
============ ============ ============ ============
Primary earnings per common share:
Income before extraordinary items $ 0.03 $ 0.33 $ 0.04 $ 0.48
Extraordinary items - loss on
early retirement of debt,
net of income taxes -- 0.25 -- 0.32
------------ ------------ ------------ ------------
Net income $ 0.03 $ 0.08 $ 0.04 $ 0.16
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 9,368,000 20,599,000 9,368,000 20,334,000
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except share amounts)
(Unaudited)
Common Stock Additional Cumulative
-------------------------- Paid-in Retained Translation Treasury
Shares Amount Capital Earnings Adjustment Stock Total
------------ ---------- ---------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996 19,981,807 $ 199 $ 200,980 $ 61,799 $ (20) $ (523) $ 262,435
Net loss -- -- -- (12,967) -- -- (12,967)
Cumulative translation
adjustment -- -- -- -- (120) -- (120)
Issuance of common stock 7,986,842 80 151,670 -- -- -- 151,750
Purchase and retirement
of common stock (20,217,416) (201) (361,685) (21,079) -- 523 (382,442)
Purchase of outstanding
warrants -- -- (11,143) -- -- -- (11,143)
Exercise of stock options
and warrants 1,617,188 16 19,735 -- -- -- 19,751
Tax benefit of option
exercises -- -- 443 -- -- -- 443
----------- ---------- ---------- ---------- ------- --------- ----------
Balance at May 30, 1997 9,368,421 94 -- 27,753 (140) -- 27,707
Net income -- -- -- 347 -- -- 347
Cumulative translation
adjustment -- -- -- -- 250 -- 250
----------- ---------- ---------- ---------- ------- --------- ----------
Balance at December 12, 1997 9,368,421 $ 94 $ -- $ 28,100 $ 110 $ -- $ 28,304
=========== ========== ========== ========== ======= ========= ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Twenty-eight Weeks Ended
------------------------------------------
December 12, 1997 December 13, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operations:
Net income $ 347 $ 3,318
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 19,168 19,208
Amortization of deferred financing costs and
intangibles 1,517 783
Gain on sales and disposals of property and
equipment, net (124) (34)
Extraordinary items-loss on early
retirement of debt, net of income taxes -- 6,480
Changes in operating assets and liabilities:
Decrease (increase) in receivables (3,303) 97
Increase in prepaid expenses and supplies (953) (1,124)
Decrease (increase) in other assets 207 (2,393)
Increase (decrease)in accounts payable,
accrued expenses and other liabilities 1,256 (9,676)
Other, net 250 (48)
---------- ----------
Net cash provided by operating activities 18,365 16,611
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (32,841) (27,849)
Proceeds from sales of property and equipment 118 496
Proceeds from collection of notes receivable and other 585 12
---------- ----------
Net cash used by investing activities (32,138) (27,341)
---------- ----------
Cash flows from financing activities:
Bank overdrafts (585) 1,560
Revolving credit facility borrowings -- 122,500
Exercise of stock options and warrants -- 883
Payments on long-term borrowings (813) (105,133)
Payments on capital leases (358) --
Purchases of treasury stock and warrants -- (14,251)
---------- ----------
Net cash provided (used) by financing activities (1,756) 5,559
---------- ----------
Decrease in cash and cash equivalents (15,529) (5,171)
Cash and cash equivalents at the beginning of the period 24,150 15,597
========== ==========
Cash and cash equivalents at the end of the period $ 8,621 $ 10,426
========== ==========
Supplemental cash flow information:
Interest paid $ 17,576 $ 11,774
Income taxes paid 747 920
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
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 provider of for-profit preschool educational and child care services in
the United States. At December 12, 1997, KinderCare operated 1,146 centers in 38
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 Corporation; KinderCare Real Estate; 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 December
12, 1997 and the results of operations and cash flows for each of the twelve and
twenty-eight week periods ended December 12, 1997 and December 13, 1996. 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.
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 1998 and 1997 fiscal years are each 52 weeks long.
References to fiscal 1998 and fiscal 1997 are to the fiscal years ended May 29,
1998 and May 30, 1997, respectively.
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.
6
<PAGE>
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share, which requires companies to present two new
measures of earnings per share, basic and diluted. If SFAS No. 128 had been
adopted for all periods presented, basic and diluted earnings per share would
not have materially differed from reported earnings per share. The Company will
adopt SFAS No. 128 in the third quarter of fiscal year 1998 and, at that time,
will restate all prior periods presented.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes requirements for disclosure of comprehensive income.
The new standard becomes effective for the Company's fiscal year 1999 and
requires reclassification of earlier financial statements for comparative
purposes.
In June 1997, the 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. This statement supercedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's fiscal year 1999 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.
2. Recapitalization
On October 3, 1996, the Company and KCLC Acquisition Corp. ("KCLC") entered
into an Agreement and Plan of Merger (the "Merger Agreement"). KCLC was a wholly
owned subsidiary of KLC Associates, L.P., a partnership formed at the direction
of Kohlberg Kravis Roberts & Co., a private investment firm ("KKR"). Pursuant to
the Merger Agreement, on February 13, 1997, KCLC was merged with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation. Upon completion of the Merger, affiliates of KKR owned 7,828,947
shares, or approximately 83.6% of the Company's common stock outstanding after
the Merger. Subject to certain provisions of the Merger 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 repaid the outstanding $91.6
million balance on the Company's previous $150.0 million credit facility and
paid $382.4 million to redeem common stock, warrants and options. In order to
fund the transactions contemplated by the Merger (the "Recapitalization"), the
Company issued $300.0 million 9 1/2% senior subordinated notes, executed a
revolving credit facility of $300.0 million, executed a term loan facility of
$90.0 million, against which $50.0 million was immediately drawn, and issued
7,828,947 shares of common stock to KKR affiliates for $148.8 million.
7
<PAGE>
3. Restructuring Charges and Other Income, net
During fiscal 1997, the Company decided to relocate its corporate offices
from Montgomery, Alabama to Portland, Oregon in fiscal year 1998. The Company
recognized $3.3 million and $4.9 million in restructuring charges during the
twelve and twenty-eight weeks ended December 12, 1997, respectively. The charges
are primarily comprised of costs incurred in the retention, recruitment and
relocation of employees and travel costs related to the office relocation.
During the second quarter of fiscal 1997, the Company received a $1.5
million interest payment from Enstar Group Inc. ("Enstar"), the Company's former
parent, in connection with a settlement of the Company's claim against Enstar in
the U.S. Bankruptcy court in Montgomery, Alabama.
4. Extraordinary Losses
During the first quarter of fiscal 1997, the Company purchased $30.0
million aggregate principal amount of its 10 3/8% senior subordinated notes for
an aggregate price of $31.5 million. This transaction included the write-off of
deferred financing costs of $0.5 million and resulted in an extraordinary loss
of $1.2 million, net of income taxes of $0.8 million.
During the second quarter of fiscal 1997, the Company purchased $69.4
million aggregate principal amount of its 10 3/8% senior subordinated notes for
an aggregate price of $76.8 million. This transaction included the write-off of
deferred financing costs of $1.2 million and resulted in an extraordinary loss
of $5.3, net of income taxes of $3.3 million.
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 quarters ended December 12, 1997
("second quarter of fiscal 1998") and December 13, 1996 ("second quarter of
fiscal 1997"), each of which was twelve weeks long, and the twenty-eight weeks
ended December 12, 1997 and December 13, 1996.
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 is to determine an approximate number of full-time children based on
weighted averages. For example, an enrolled full-time child equates to one FTE,
while a part-time child enrolled for a half-day would equate to 0.5 FTE. The FTE
measurement of center capacity utilization does not necessarily reflect the
actual number of full- and part-time children enrolled.
8
<PAGE>
Average tuition rate is defined by the Company as actual net operating
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
Second Quarter of Fiscal 1998 compared to Second Quarter of Fiscal 1997
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Twelve Weeks Twelve Weeks Change
Ended Percent Ended Percent Amount
December 12, of December 13, of Increase/
1997 Revenues 1996 Revenues (Decrease)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues, net $ 135,587 100.0% $ 128,324 100.0% $ 7,263
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 74,237 54.8 68,875 53.7 5,362
Depreciation 7,888 5.8 7,351 5.7 537
Rent 5,788 4.3 5,857 4.6 (69)
Other 34,575 25.5 33,402 26.0 1,173
Restructuring charges and other
(income), net 3,292 2.4 (1,527) (1.2) 4,819
---------- ---------- ---------- ---------- ----------
Total operating expenses 125,780 92.8 113,958 88.8 11,822
---------- ---------- ---------- ---------- ----------
Operating income $ 9,807 7.2% $ 14,366 11.2% $ (4,559)
========== ========== ========== ========== ==========
</TABLE>
Operating revenues, net - Net operating revenues increased $7.3 million, or
5.7%, to $135.6 million for the second quarter of fiscal 1998 from the
comparable quarter last year. The increase in net operating 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 and
acquisitions. An approximate weighted average tuition increase of 4.7% was
implemented in the second quarter of fiscal 1997. The average tuition rate and
occupancy, respectively, increased to $105.83 and 71.8% for the second quarter
of fiscal 1998 from $101.19 and 71.3% for the second quarter of fiscal 1997. The
positive effect of these factors on net operating revenues was offset in part by
center closings.
During the second quarter of fiscal 1998, the Company opened one community
center and closed one center. During the second quarter of fiscal 1997, the
Company opened two community centers and closed or sold five centers. Total
licensed capacity increased to 143,000 at the end of the second quarter of
fiscal 1998 from 142,000 at the end of the second quarter of fiscal 1997. At
December 12, 1997, the Company operated 1,148 centers.
Salaries, wages and benefits - Salaries, wages and benefits expense
increased $5.4 million, or 7.8%, to $74.2 million for the second quarter of
fiscal 1998 from the comparable quarter last year. The expense directly
associated with the centers was $69.0 million for the second quarter of fiscal
1998, an increase of $3.9 million from the second quarter of fiscal 1997.
Approximately $3.1 million of the center level increase is attributable to
increased staff wage
9
<PAGE>
rates and bonus expense. The expense related to field management and corporate
administration increased $1.5 million from the second quarter of fiscal 1997.
The increase is attributable to the addition of certain field management
positions and higher 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 operating revenues, increased only slightly to
50.9% for the second quarter of fiscal 1998 from 50.7% for the comparable
quarter last year. Total salaries, wages and benefits expense, as a percentage
of net operating revenues, increased to 54.8% for the second quarter of fiscal
1998 from 53.7% for the comparable quarter last year.
Depreciation - Depreciation expense increased to $7.9 million for the
second quarter of fiscal 1998 from $7.4 million for the comparable quarter last
year due to additional depreciation expense related to new centers. The Company
opened 14 new centers and closed or sold 13 older centers since the end of the
second quarter of fiscal 1997.
Rent - Rent expense decreased to $5.8 million for the second quarter of
fiscal 1998 from $5.9 million for the comparable quarter last year. The decrease
is primarily a result of the closure of 13 leased centers, offset slightly by
the opening of one leased center, since the end of the second quarter of fiscal
1997. The rental rates experienced on leases entered into currently are higher
than those experienced in previous periods. The Company anticipates higher
administrative rent expense associated with the Company's new headquarters in
Portland, Oregon during fiscal 1998.
Other operating expenses - Other operating expenses increased to $34.6
million for the second quarter of fiscal 1998 from $33.4 million for 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 insurance, and expenses related to field
management and corporate administration. The increase is primarily due to an
additional $1.0 million of marketing expenses which funded a targeted marketing
program during the fall of fiscal 1998. Costs directly associated with the
centers increased commensurate with the additional FTE attendance experienced
during the second quarter of fiscal 1998, while corporate administration
expenses have, for the most part, declined. As a percentage of net operating
revenues, other operating expenses decreased to 25.5% for the second quarter of
fiscal 1998 from 26.0% for the second quarter of fiscal 1997. The improvement in
other operating expenses, as a percentage of net operating revenues, is due to
effective cost control by management.
Restructuring charges and other income, net - During fiscal 1997, the
Company decided to relocate its corporate offices from Montgomery, Alabama to
Portland, Oregon in fiscal 1998. During the second quarter of fiscal 1998, the
Company recognized $3.3 million in restructuring charges. The charges are
primarily comprised of costs incurred in the retention, recruitment and
relocation of employees and travel costs related to the office relocation. The
Company anticipates incurring additional restructuring charges related to the
relocation during the remainder of fiscal 1998.
During the second quarter of fiscal 1997, the Company received a $1.5
million interest payment from Enstar Group Inc. ("Enstar"), the Company's former
parent, in connection with a
10
<PAGE>
settlement of the Company's claim against Enstar in the U.S. Bankruptcy court in
Montgomery, Alabama.
Operating income - Operating income decreased $4.6 million, or 31.7%, to
$9.8 million for the second quarter of fiscal 1998 from the comparable quarter
last year. Operating income before restructuring charges and other income, net,
increased $0.3 million, or 2.0%, to $13.1 million for the second quarter of
fiscal 1998 from the comparable quarter last year. The increase is primarily due
to the weighted average tuition rate increase and the effective management of
labor hours, costs directly associated with the centers and corporate
administration expenses, as discussed above.
Second quarter of fiscal 1998 EBITDA, defined as earnings before interest
expense, income taxes, depreciation and amortization, of $17.8 million was $1.3
million above the comparable quarter last year. As a percentage of net operating
revenues, EBITDA for the second quarter of fiscal 1998 was 13.1% compared to
12.8% for the second quarter of fiscal 1997. Adjusted EBITDA, defined as EBITDA
exclusive of restructuring charges and other income, net, investment income and
extraordinary items was $21.0 million for the second quarter of fiscal 1998, an
increase of $0.8 million from the comparable quarter last year. As a percentage
of net operating revenues, Adjusted EBITDA was 15.5% for the second quarter of
fiscal 1998 and 15.7% for the second quarter of fiscal 1997. 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.
Interest expense - Interest expense increased to $9.4 million for the
second quarter of fiscal 1998 from $3.2 million for the comparable quarter last
year. This increase is substantially attributable to the $350.0 million of
long-term debt which was incurred in the third quarter of fiscal 1997 to fund
the Merger and repay $91.6 million on the Company's then existing line of
credit. The Company's weighted average interest rate on its long-term debt,
including amortization of deferred financing costs, was 10.6% for the second
quarter of fiscal 1998 versus 8.9% for the second quarter of fiscal 1997. As a
result of the Recapitalization, the Company expects to incur higher interest
expense in fiscal 1998 than in prior fiscal years.
Income tax expense - Income tax expense for the second quarter of fiscal
1998 of $0.2 million was computed by applying estimated effective income tax
rates to income before income taxes. Income tax expense varies from the
statutory federal rate due primarily to state income taxes and tax credits.
Extraordinary item - During the second quarter of fiscal 1997, the Company
purchased $69.4 million aggregate principal of its 10 3/8% senior subordinated
notes for an aggregate price of $76.8 million. This transaction included the
write-off of deferred financing costs of $1.2 million and resulted in an
extraordinary loss of $5.3 million, net of income taxes of $3.3 million.
11
<PAGE>
Twenty-eight Weeks Ended December 12, 1997 compared to Twenty-eight Weeks Ended
December 13, 1996
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Twenty-Eight Twenty-Eight Change
Weeks Ended Percent Weeks Ended Percent Amount
December 12, of December 13, of Increase/
1997 Revenues 1996 Revenues (Decrease)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues, net $ 316,149 100.0% $ 299,751 100.0% $ 16,398
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 173,766 55.0 162,215 54.1 11,551
Depreciation 19,168 6.1 19,208 6.4 (40)
Rent 14,039 4.4 14,507 4.9 (468)
Other 81,865 25.9 81,231 27.1 634
Restructuring charges and other
(income), net 4,855 1.5 (1,527) (0.5) 6,382
---------- ---------- ---------- ---------- ----------
Total operating expenses 293,693 92.9 275,634 92.0 18,059
---------- ---------- ---------- ---------- ----------
Operating income $ 22,456 7.1% $ 24,117 8.0% $ (1,661)
========== ========== ========== ========== ==========
</TABLE>
Operating revenues, net - Net operating revenues increased $16.4 million,
or 5.5%, to $316.1 million for the twenty-eight weeks ended December 12, 1997
from the comparable period last year. The increase in net operating revenues is
primarily attributable to higher average tuition rates and new center openings
and acquisitions. The average tuition rate and occupancy, respectively,
increased to $105.42 and 69.8% for the twenty-eight weeks ended December 12,
1997 from $101.41 and 69.3% for the twenty-eight weeks ended December 13, 1996.
The positive effect of these factors on net operating revenues was offset in
part by center closings.
During the twenty-eight weeks ended December 12, 1997, the Company opened
eight community centers and closed or sold four centers. During the twenty-eight
weeks ended December 13, 1996, the Company opened 11 centers: 10 community
centers and one KinderCare at Work(R) center and closed or sold 11 centers.
Salaries, wages and benefits - Salaries, wages and benefits expense
increased $11.6 million, or 7.1%, to $173.8 million for the twenty-eight weeks
ended December 12, 1997 from the comparable period last year. The expense
directly associated with the centers was $162.1 million for the twenty-eight
weeks ended December 12, 1997, an increase of $8.3 million from the twenty-eight
weeks ended December 13, 1996. Approximately $6.6 million of the center level
increase is attributable to increased staff wage rates and bonus expense. The
expense related to field management and corporate administration increased $3.3
million from the twenty-eight weeks ended December 13, 1996. The increase is
attributable to the addition of certain field management positions and higher
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 operating revenues, remained flat at 51.3% for the
twenty-eight weeks ended December 12, 1997 and December 13, 1996 due to the
control of labor hours by field management. Total salaries, wages and benefits
expense, as a percentage of net operating revenues, increased to 55.0% for the
twenty-eight weeks ended December 12, 1997 from 54.1% for the comparable period
last year.
12
<PAGE>
Depreciation - Depreciation expense decreased slightly to $19.2 million for
the twenty-eight weeks ended December 12, 1997. The Company incurred additional
depreciation expense related to new centers, which was offset by the impact of
certain assets reaching the end of their estimated depreciable lives since the
end of the second quarter of fiscal 1997.
Rent - Rent expense decreased to $14.0 million for the twenty-eight weeks
ended December 12, 1997 from $14.5 million for the comparable period last year.
The decrease is primarily a result of the closure of 13 leased centers, offset
slightly by the opening of one leased center, since the end of the second
quarter of fiscal 1997. The rental rates experienced on leases entered into
currently are higher than those experienced in previous periods.
Other operating expenses - Other operating expenses increased to $81.9
million for the twenty-eight weeks ended December 12, 1997 from $81.2 million
for the comparable period last year. The increase is primarily due to an
additional $2.1 million of marketing expenses which funded a targeted marketing
program during the fall of fiscal 1998. Costs directly associated with the
centers increased commensurate with the additional FTE attendance experienced
during the twenty-eight weeks ended December 12, 1997, while corporate
administration expenses have, for the most part, declined. As a percentage of
net operating revenues, other operating expenses decreased to 25.9% for the
twenty-eight weeks ended December 12, 1997 from 27.1% for the twenty-eight weeks
ended December 13, 1996. The improvement in other operating expenses, as a
percentage of net operating revenues, is due to effective cost control by
management.
Restructuring charges and other income, net - During fiscal 1997, the
Company decided to relocate its corporate offices from Montgomery, Alabama to
Portland, Oregon in fiscal 1998. During the twenty-eight weeks ended December
12, 1997, the Company recognized $4.9 million in restructuring charges. The
charges are primarily comprised of costs incurred in the retention, recruitment
and relocation of employees and travel costs related to the office relocation.
During the second quarter of year 1997, the Company received a $1.5 million
interest payment from Enstar Group Inc. ("Enstar"), the Company's former parent,
in connection with a settlement of the Company's claim against Enstar in the
U.S. Bankruptcy court in Montgomery, Alabama.
Operating income - Operating income decreased $1.7 million, or 6.9%, to
$22.5 million for the twenty-eight weeks ended December 12, 1997 from the
comparable period last year. Operating income before restructuring charges and
other income, net, increased $4.7 million, or 20.9%, to $27.3 million for the
twenty-eight weeks ended December 12, 1997 from the comparable period last year.
The increase is primarily due to the weighted average tuition rate increase and
the effective management of labor hours, costs directly associated with the
centers and corporate administration expenses, as discussed above.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for the twenty-eight weeks ended December 12,
1997 of $42.1 million was $5.1 million above the comparable period last year. As
a percentage of net operating revenues,
13
<PAGE>
EBITDA for the twenty-eight weeks ended December 12, 1997 was 13.3% compared to
12.3% for the twenty-eight weeks ended December 13, 1996. Adjusted EBITDA,
defined as EBITDA exclusive of restructuring charges and other income, net,
investment income and extraordinary items was $46.5 million for the twenty-eight
weeks ended December 12, 1997, an increase of $4.7 million from the comparable
period last year. As a percentage of net operating revenues, Adjusted EBITDA was
14.7% for the twenty-eight weeks ended December 12, 1997 and 13.9% for the
twenty-eight weeks ended December 13, 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.
Interest expense - Interest expense increased to $22.4 million for the
twenty-eight weeks ended December 12, 1997 from $8.1 million for the comparable
period last year. This increase is substantially attributable to the $350.0
million of long-term debt which was incurred in the third quarter of fiscal 1997
to fund the Merger and repay $91.6 million on the Company's then existing line
of credit. The Company's weighted average interest rate on its long-term debt,
including amortization of deferred financing costs, was 10.5% for the
twenty-eight weeks ended December 12, 1997 versus 9.5% for the twenty-eight
weeks ended December 13, 1996. As a result of the Recapitalization, the Company
expects to incur higher interest expense in fiscal 1998 than in prior fiscal
years.
Income tax expense - Income tax expense for the twenty-eight weeks ended
December 12, 1997 of $0.2 million was computed by applying estimated effective
income tax rates to income before income taxes. Income tax expense varies from
the statutory federal rate due primarily to state income taxes and tax credits.
Extraordinary item - During the twenty-eight weeks ended December 13, 1996,
the Company purchased $99.4 million aggregate principal of its 10 3/8% senior
subordinated notes for an aggregate price of $108.3 million. This transaction
included the write-off of deferred financing costs of $1.7 million and resulted
in an extraordinary loss of $6.5 million, net of income taxes of $4.1 million.
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 flow from operations for the
twenty-eight weeks ended December 12, 1997 was $18.4 million, compared to $16.6
million for the comparable period last year. The increase in net cash flow from
operations is primarily a result of higher net operating revenues and effective
cost controls of other operating expenses. Cash and cash equivalents totaled
$8.6 million at December 12, 1997 compared to $24.2 million at May 30, 1997.
14
<PAGE>
New enrollments are generally highest in September and January, with
attendance declining 5% to 10% during the summer months and the year-end holiday
period. The decreased attendance in the summer months and during the 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 1998, the Company anticipates
opening approximately 20 new centers. 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 (excluding center closings),
which the Company expects will be primarily community centers, and to continue
its practice of closing centers that are identified as underperforming. 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, or meet targeted deadlines. Frequently, new site negotiations are
delayed or canceled or construction delayed for a variety of reasons, many
outside the control of the Company.
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 three to four years.
During the twenty-eight weeks ended December 12, 1997, the Company opened
eight community centers. There are no planned additions to the Company's Kids'
Choice(TM) format as management does not believe that the concept is meeting its
full potential and needs further refinement. The Company currently anticipates
that any Kid's Choice(TM) center that is underperforming when its lease expires
will be closed at that time. During the twenty-eight weeks ended December 13,
1996, center openings totaled 11 centers; consisting of 10 KinderCare community
centers and one KinderCare At Work(R) center.
Capital expenditures, during the twenty-eight weeks ended December 12,
1997, amounted to approximately $32.8 million. Approximately $16.4 million was
spent on new center development, $4.5 million on equipment purchases, $10.1
million on renovations and improvements to existing facilities and the remaining
$1.8 million on corporate information systems. Capital expenditures, during the
twenty-eight weeks ended December 13, 1996, amounted to approximately $27.8
million. Approximately $14.0 million was spent on new center development, $4.1
million on equipment purchases, $7.6 million on renovations and improvements to
existing facilities and the remaining $2.1 million on corporate information
systems.
Many of the Company's computer systems will require modification or
replacement over the next two years in order to render these systems compliant
with the "Year 2000." The Company has conducted a review of its computer systems
to identify those areas which may be
15
<PAGE>
affected by the Year 2000 issue and is developing an implementation plan to
provide resolution. The Company presently believes, with modification to
existing software and converting to new software, the Year 2000 will not pose
significant operational problems. However, there can be no assurance that the
systems of other companies on which the Company may rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems. Costs associated with Year 2000
compliance, which will be expensed as incurred, are not anticipated to be
material to the Company's financial position or results of operations in any
given year.
Capital expenditure limits under the credit facilities for fiscal 1998 are
$100.0 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 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.
Inflation and Wage Increases
Management does not believe that the effect of inflation on the results of
the Company's operations has been significant in recent periods.
Salaries, wages and benefits represented approximately 55.0% of net
operating revenues for the twenty-eight weeks ended December 12, 1997. During
the twenty-eight weeks ended December 12, 1997, the Company's average wage rate
for hourly employees was $6.67 per hour, compared to the current federal minimum
wage rate of $5.15 per hour. 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 effective on September 1, 1997. The effect of the
federal minimum wage increase is not material to the results of operations.
The Company believes that, through increases in its tuition rates, it can
recover any increase in expenses caused by 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.
16
<PAGE>
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
and minimum wage increases; competitive conditions in the child care and early
education industries; availability of a qualified labor pool and the impact of
government regulations; various factors affecting occupancy levels; availability
of sites and/or licensing or zoning requirements affecting new center
development; the impact of Year 2000 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.
17
<PAGE>
PART II
Other Information
Item 6. Exhibit and reports on Form 8-K
(a) Exhibit:
27 Financial Data Schedule
(b) Reports on Form 8-K--None
18
<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: January 23, 1998 /s/ DAVID J. JOHNSON
-----------------------------------------
David J. Johnson
Chairman of the Board of Directors and
Chief Executive Officer
Date: January 23, 1998 /s/ DAN R. JACKSON
-----------------------------------------
Dan Jackson
Vice President, Financial Control and
Planning
(Principal Financial and Accounting
Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-29-1998
<PERIOD-START> MAY-31-1997
<PERIOD-END> DEC-12-1997
<EXCHANGE-RATE> 1
<CASH> 8,621
<SECURITIES> 0
<RECEIVABLES> 19,250
<ALLOWANCES> 2,244
<INVENTORY> 0
<CURRENT-ASSETS> 46,822
<PP&E> 603,315
<DEPRECIATION> 117,328
<TOTAL-ASSETS> 574,520
<CURRENT-LIABILITIES> 82,167
<BONDS> 392,345
0
0
<COMMON> 94
<OTHER-SE> 28,210
<TOTAL-LIABILITY-AND-EQUITY> 574,520
<SALES> 0
<TOTAL-REVENUES> 316,149
<CGS> 0
<TOTAL-COSTS> 293,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,965
<INTEREST-EXPENSE> 22,372
<INCOME-PRETAX> 526
<INCOME-TAX> 179
<INCOME-CONTINUING> 347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 347
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
