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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 22, 2000
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)
(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 requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock, $.01 par value per
share, outstanding at October 20, 2000 was 9,468,664.
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<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Index
Part I. Financial Information Page
Item 1. Consolidated financial statements:
Consolidated balance sheets at September 22, 2000
and June 2, 2000 (unaudited).............................. 2
Consolidated statements of operations for the
sixteen weeks ended September 22, 2000
and September 17, 1999 (unaudited)........................ 3
Consolidated statements of stockholders' equity and
comprehensive income (loss) for the sixteen
weeks ended September 22, 2000 and the fiscal
year ended June 2, 2000 (unaudited)....................... 4
Consolidated statements of cash flows for the
sixteen weeks ended September 22, 2000 and
September 17, 1999 (unaudited)............................ 5
Notes to unaudited consolidated financial statements........ 6
Item 2. Management's discussion and analysis of
financial condition and results of operations............. 9
Item 3. Quantitative and qualitative disclosures
about market risk.........................................13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................15
Signatures....................................................................16
1
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<TABLE>
<CAPTION>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
September 22, 2000 June 2, 2000
------------------ ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 6,297 $ 1,445
Receivables, net................................... 27,997 24,294
Prepaid expenses and supplies...................... 9,249 7,244
Deferred income taxes.............................. 10,472 12,208
------------------ ------------------
Total current assets............................ 54,015 45,191
Property and equipment, net........................... 617,107 613,206
Deferred income taxes................................. 1,100 1,374
Deferred financing costs and other assets............. 64,365 35,799
------------------ ------------------
$ 736,587 $ 695,570
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts.................................... $ 9,847 $ 4,549
Accounts payable................................... 10,027 6,487
Current portion of long-term debt.................. 15,719 15,612
Accrued expenses and other liabilities............. 86,071 99,690
------------------ ------------------
Total current liabilities....................... 121,664 126,338
Long-term debt........................................ 491,513 444,834
Self insurance liabilities............................ 15,046 15,214
Deferred income taxes................................. 6,114 5,563
Other noncurrent liabilities.......................... 26,930 26,948
------------------ ------------------
Total liabilities............................... 661,267 618,897
------------------ ------------------
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
9,468,664 and 9,481,937 shares, respectively.... 95 95
Additional paid-in capital......................... 13,185 13,509
Notes receivable from stockholders................. (1,099) (1,186)
Retained earnings.................................. 63,623 64,668
Accumulated other comprehensive income............. (484) (413)
------------------ ------------------
Total stockholders' equity...................... 75,320 76,673
------------------ ------------------
$ 736,587 $ 695,570
================== ==================
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 Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Sixteen Weeks Ended
------------------------------------
September 22, September 17,
2000 1999
---------------- ----------------
<S> <C> <C>
Revenues, net.................................. $ 216,492 $ 207,775
---------------- ----------------
Operating expenses:
Salaries, wages and benefits................ 122,773 115,316
Depreciation and amortization............... 13,327 11,615
Rent........................................ 10,473 8,993
Provision for doubtful accounts............. 1,314 1,097
Other....................................... 53,907 51,751
---------------- ----------------
Total operating expenses................ 201,794 188,772
Operating income.......................... 14,698 19,003
Investment income.............................. 121 142
Interest expense............................... (15,156) (13,084)
---------------- ----------------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle, net................. (337) 6,061
Income tax (expense) benefit................... 82 (2,302)
---------------- ----------------
Income (loss) before cumulative effect of a
change in accounting principle, net......... (255) --
Cumulative effect of a change in accounting
principle, net of income taxes of $484...... (790) --
---------------- ----------------
Net income (loss)....................... $ (1,045) $ 3,759
================ ================
Net income (loss) per share:
Basic - income (loss) before cumulative
effect of a change in accounting principle,
net......................................... $ (0.03) $ 0.40
Cumulative effect of a change in accounting
principle, net of taxes..................... (0.08) --
---------------- ----------------
Net income (loss)......................... $ (0.11) $ 0.40
================ ================
Diluted - income (loss) before cumulative
effect of a change in accounting principle,
net......................................... $ (0.03) $ 0.39
Cumulative effect of a change in accounting
principle, net of taxes..................... (0.08) --
---------------- ----------------
Net income (loss)......................... $ (0.11) $ 0.39
================ ================
Weighted average common shares outstanding..... 9,472,000 9,474,000
================ ================
Weighted average common shares outstanding and
potential common shares..................... 9,472,000 9,708,000
================ ================
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 Stockholders' Equity and Comprehensive Income (Loss)
(Dollars in thousands)
(Unaudited)
Accumulated
Common Stock Additional Stockholders' Other
------------------------ Paid-in Notes Retained Comprehensive
Shares Amount Capital Receivable Earnings Income (Loss) Total
----------- ----------- ---------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 28, 1999.............. 9,480,837 $ 95 $ 8,355 $ (1,128) $ 44,705 $ (237) $ 51,790
Comprehensive income:
Net income......................... -- -- -- -- 19,963 -- 19,963
Cumulative translation adjustment.. -- -- -- -- -- (176) (176)
-----------
Total comprehensive income....... 19,787
Issuance of common stock............. 20,108 -- 452 (338) -- -- 114
Purchase of common stock............. (19,008) -- (396) -- -- -- (396)
Proceeds from collection of
stockholders' notes receivable..... -- -- -- 280 -- -- 280
Reversal of pre-fresh
start contingency.................. -- -- 5,098 -- -- -- 5,098
----------- ----------- ---------- ------------- ---------- ------------- -----------
Balance at June 2, 2000.......... 9,481,937 95 13,509 (1,186) 64,668 (413) 76,673
Comprehensive income:
Net loss........................... -- -- -- -- (1,045) -- (1,045)
Cumulative translation adjustment.. -- -- -- -- -- (71) (71)
-----------
Total comprehensive (loss)....... (1,116)
Purchase of common stock............. (13,273) -- (324) -- -- -- (324)
Proceeds from collection of
stockholders' notes receivable..... -- -- -- 87 -- -- 87
----------- ----------- ---------- ------------- ---------- ------------- -----------
Balance at September 22, 2000.... 9,468,664 $ 95 $ 13,185 $ (1,099) $ 63,623 $ (484) $ 75,320
=========== =========== ========== ============= ========== ============= ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
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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 22, 2000 September 17, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operations:
Net income (loss)................................. $ (1,045) $ 3,759
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.................................... 13,043 11,615
Provision for doubtful accounts................. 1,314 1,097
Amortization of deferred financing costs and
goodwill...................................... 1,219 950
Gain on sales and disposals of property and
equipment, net................................ (367) (537)
Changes in operating assets and liabilities:
Increase in receivables....................... (5,017) (5,602)
Decrease (increase) in prepaid expenses and
supplies.................................... (2,005) 143
Increase in other assets...................... (2,816) (46)
Increase in accounts payable, accrued
expenses and other liabilities.............. (7,703) (17,769)
Other, net...................................... (71) (13)
------------------ ------------------
Net cash used by operating activities............. (3,448) (6,403)
------------------ ------------------
Cash flows from investing activities:
Purchases of property and equipment............... (18,139) (25,565)
Acquisition of new subsidiary..................... (15,076) --
Investment accounted for under the cost method.... (10,069) --
Issuance of note receivable....................... (2,225) --
Proceeds from sales of property and equipment..... 1,962 952
------------------ ------------------
Net cash used by investing activities........... (43,547) (24,613)
------------------ ------------------
Cash flows from financing activities:
Proceeds from long-term borrowings................ 60,078 31,000
Payments on long-term borrowings.................. (13,292) (1,359)
Proceeds from collection of stockholders' notes
receivable...................................... 87 200
Purchases of common stock......................... (324) (282)
Bank overdrafts................................... 5,298 751
------------------ ------------------
Net cash provided by financing activities....... 51,847 30,310
------------------ ------------------
Increase (decrease) in cash and cash equivalents.. 4,852 (706)
Cash and cash equivalents at the beginning of the
period.......................................... 1,445 5,750
------------------ ------------------
Cash and cash equivalents at the end of the period $ 6,297 $ 5,044
================== ==================
Supplemental cash flow information:
Interest paid..................................... $ 18,548 $ 17,095
Income taxes paid, net............................ 1,289 832
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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") is the leading for-profit provider of educational services
and care for children between the ages of six weeks and five years in the United
States. Recently, KinderCare has taken steps to become a more broad-based
education company that serves infants to young adults. During the past year, our
new subsidiary, KC Distance Learning, Inc., purchased a distance learning
company that offers an accredited high school program delivered through
correspondence format and over the internet. Also, KinderCare made minority
investments in Beacon Education Management, Inc., a charter school management
company and in Voyager Expanded Learning, Inc., a provider of activity-based
after-school, in-school, and summer-school programs for elementary and middle
schools.
At September 22, 2000, we operated a total of 1,142 early childhood
education and care centers and served approximately 120,000 children between the
ages of six weeks and twelve years and their families. Of the 1,142 centers,
1,140 were located in 39 states in the United States and two centers were
located in the United Kingdom.
The unaudited consolidated financial statements include the financial
statements of KinderCare and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial
statements reflect the adjustments, all of which are of a normal recurring
nature, except for the cumulative effect of a change in accounting principle due
to the adoption of Securities and Exchange Commission Staff Accounting Bulletin
("SAB") 101, Revenue Recognition in Financial Statements, necessary to present
fairly the financial position of KinderCare at September 22, 2000 and the
results of operations and cash flows for the sixteen weeks ended September 22,
2000 and September 17, 1999. 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 KinderCare's Annual Report on
Form 10-K for the fiscal year ended June 2, 2000.
Fiscal Year. References to fiscal 2001 and fiscal 2000 are to the 52 weeks
ended June 1, 2001 and the 53 weeks ended June 2, 2000, respectively.
KinderCare's fiscal year ends on the Friday closest to May 31. Typically, the
first quarter is comprised of 16 weeks and the second, third and fourth quarters
are each comprised of 12 weeks. Fiscal 2000, however, was 53 weeks long with 13
weeks in the fourth quarter.
Revenue Recognition. KinderCare adopted SAB 101 on June 3, 2000. As a
result of that adoption, KinderCare deferred $4.0 million of non-refundable
registration and education fee revenues at September 22, 2000. These
non-refundable fees will be recognized as revenue throughout the remainder of
fiscal year 2001. In addition, fee revenues totaling $0.8 million, net of income
taxes of $0.5 million, were deferred from the fourth quarter of fiscal 2000.
This one-time charge was recorded as a cumulative effect of a change in
accounting principle. All of the $1.3 million of fee revenues deferred from the
previous fiscal year were subsequently recognized during the sixteen weeks ended
September 22, 2000. The fee revenues deferred under SAB 101 will be amortized
over the estimated average enrollment period, not to exceed 12 months.
6
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Net Income per Share. The difference between basic and diluted net income
per share was a result of the dilutive effect of options, which are considered
potential common shares. A summary of the weighted average common shares was as
follows, with shares in thousands:
<TABLE>
<CAPTION>
Sixteen Weeks Ended
----------------------------
September 22, September 17,
2000 1999
------------ ------------
<S> <C> <C>
Weighted average common shares outstanding.. 9,472 9,474
Dilutive effect of options.................. -- 234
------------ ------------
Weighted average common shares outstanding
and potential common shares.............. 9,472 9,708
============ ============
</TABLE>
In the sixteen weeks ended September 22, 2000, 807,000 shares were excluded
from potential common shares due to their anti-dilutive effect.
Recently Issued Accounting Pronouncements. Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, 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
KinderCare's fiscal year 2002. KinderCare does not believe the adoption of SFAS
No. 133 will have a material impact on KinderCare's financial position or
results of operations.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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 periods' presentation.
2. Restructuring Charges
During the fiscal year ended May 28, 1999, a provision of $4.0 million was
recorded related to the planned early termination of certain center operating
leases. The provision included an estimate of discounted future lease payments
and anticipated incremental costs related to closure of the centers. At June 2,
2000, a reserve remained of $2.9 million which included $2.1 million for the
expected closure of 36 underperforming leased centers and $0.8 million for
commitments on centers closed in the previous fiscal year. During the sixteen
weeks ended September 22, 2000, 34 leased centers were closed. KinderCare is in
the process of reviewing the status of the two remaining centers. Such centers
may or may not be closed as result of this review. If a center does not close,
the related reserve would be reversed. As part of KinderCare's practice of
identifying centers that are not meeting performance expectations, additional
exit plans may be committed to, which would result in additional provisions.
A summary of the lease termination reserve was as follows, with dollars in
thousands:
Balance at June 2, 2000...................................... $ 2,946
Payments with respect to the 34 centers closed during the
sixteen weeks ended September 22, 2000..................... (644)
Payments with respect to certain of the 25 centers closed
during the fiscal year ended June 2, 2000.................. (238)
----------
Balance at September 22, 2000.............................. $ 2,064
==========
7
<PAGE>
During the sixteen weeks ended September 22, 2000 and September 17, 1999,
the 34 leased centers that have been closed contributed aggregate net revenues
of $1.3 and $3.9 million, respectively. Aggregate operating losses of $0.7 and
$0.2 million were incurred in the sixteen weeks ended September 22, 2000 and
September 17, 1999, respectively, related to the centers.
8
<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 the related notes included elsewhere in
this document. The information presented refers to the sixteen weeks ended
September 22, 2000 as "the first quarter of fiscal 2001" and the sixteen weeks
ended September 17, 1999 as "the first quarter of fiscal 2000."
KinderCare defines occupancy, a measure of the utilization of center
capacity, as the full-time equivalent, or FTE, attendance at all of the centers
divided by the sum of the centers' licensed capacity. FTE attendance is not a
strict head count. Rather, the methodology determines 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 equates 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.
KinderCare defines the average tuition rate as net revenues, exclusive of
fees, which are primarily reservation and registration fees, and non-tuition
income, divided by FTE attendance for the respective period. The average tuition
rate represents the approximate weighted average tuition rate at all of the
centers paid by parents for children to attend the centers five full days during
a week. However, the occupancy mix between full- and part-time children at each
center can significantly affect these averages with respect to any specific
center.
Results of Operations
First Quarter of Fiscal 2001 compared to the First Quarter of Fiscal 2000
The following table shows the comparative operating results of KinderCare,
with dollars in thousands:
<TABLE>
<CAPTION>
Sixteen Sixteen Change
Weeks Ended Percent Weeks Ended Percent Amount
September 22, of September 17, of Increase/
2000 Revenue 1999 Revenues (Decrease)
------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues, net.................... $ 216,492 100.0% $ 207,775 100.0% $ 8,717
------------ --------- ------------ --------- -----------
Operating expenses:
Salaries, wages and benefits:
Center expense............... 114,279 52.8 107,388 51.7 6,891
Field and corporate expense.. 8,494 3.9 7,928 3.8 566
------------ --------- ------------ --------- -----------
Total salaries, wages and
benefits................... 122,773 56.7 115,316 55.5 7,457
Depreciation and amortization.. 13,327 6.2 11,615 5.6 1,712
Rent........................... 10,473 4.8 8,993 4.3 1,480
Other.......................... 55,221 25.5 52,848 25.5 2,373
------------ --------- ------------ --------- -----------
Total operating expenses..... 201,794 93.2 188,772 90.9 13,022
------------ --------- ------------ --------- -----------
Operating income........... $ 14,698 6.8% $ 19,003 9.1% $ (4,305)
============ ========= ============ ========= ===========
</TABLE>
Revenues, net. Net revenues increased $8.7 million, or 4.2%, to $216.5
million from the same period last year. During the first quarter of fiscal 2001,
KinderCare adopted SAB 101, which resulted in the deferral of $4.0 million of
non-refundable registration and education fee revenues to future periods.
Without the impact of the deferral of fee revenues, net revenues would have
increased $12.7 million, or 6.1%.
KinderCare opened 13 new centers in the first quarter of fiscal 2001 as
compared to seven centers in the same period last year. The opening of 13 new
centers resulted in additional net revenues of $0.8 million. Also, KinderCare
accelerated its strategy of exiting underperforming assets by closing 40 centers
versus 22 centers in the same period last year. The 40 center closures included
34 leased centers, the closure costs of which were reserved in
9
<PAGE>
the previous fiscal year, and six owned centers. The closure of 40 centers
reduced net revenues by $3.0 million, or 1.4%.
The average tuition rate increased $6.94, or 5.8%, to $125.88 from $118.94
for the same period last year due to tuition increases and, to a lesser degree,
higher than average tuition rates experienced at newly opened centers. Occupancy
declined slightly to 67.1% from 67.9% for the same period last year due
partially to the new centers, which open with lower occupancy than mature
centers, and a decline of enrollment in the pre-school summer program. Total
licensed capacity was approximately 147,000 and 145,000 at the end of the first
quarter of fiscal 2001 and 2000, respectively.
Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $7.5 million, or 6.5%, to $122.8 million from the same period last
year. The expense directly associated with the centers was $114.3 million, an
increase of $6.9 million from the same period last year. The increase in center
related expenses was primarily attributable to higher staff wage rates. The
expense related to field management and corporate administration was $8.5
million, an increase of $0.6 million from the same period last year.
After adjusting for the impact from the deferral of fee revenues discussed
above, at the center level, salaries, wages and benefits expense as a percentage
of net revenues remained relatively flat at 51.8% compared to 51.7% for the same
period last year. Total salaries, wages and benefits expense as a percentage of
net revenues increased slightly to 55.7% from 55.5% for the same period last
year, after adjusting for the impact from the deferral of fee revenues.
Depreciation and amortization. Depreciation expense increased $1.4 million
to $13.0 million from the same period last year. The increase was due primarily
to additional depreciation as a result of the property and equipment related to
newly opened and/or acquired centers and increased renovation spending. The
increase was partially offset by center closures.
Rent. Rent expense increased $1.5 million to $10.5 million from the same
period last year. The increase was primarily associated with the newly opened
leased centers, partially offset by center closures. The rental rates
experienced on renewed center leases are higher than those experienced in
previous fiscal periods.
Other operating expenses. Other operating expenses increased $2.4 million,
or 4.5%, to $55.2 million from the same period last year. The increase was due
primarily to $0.7 million of marketing expenses accelerated to the first quarter
of fiscal 2001, earlier than in previous fiscal years. Also, $0.8 million of
incremental pre-opening costs were incurred related to the newly opened centers.
In connection with the deferral of fee revenues discussed above, $0.7 million of
other operating expenses were deferred to future periods. After adjusting for
the impact of the deferral of fee revenues, net of related costs, other
operating expenses as a percentage of net revenues remained flat at 25.4% for
the first quarters of fiscal 2001 and 2000. Other operating expenses include
costs directly associated with the centers, such as food, insurance,
transportation, janitorial and maintenance costs, utilities and marketing, and
expenses related to field management and corporate administration.
Operating income. Operating income was $14.7 million, a decrease of $4.3
million, or 22.7%, from the same period last year. The primary reason for the
decline was the deferral of fee revenues, net of related costs, of $2.9 million.
Opening 13 new centers and closing 40 centers in the first quarter of fiscal
2001 resulted in operating losses of $1.6 million. Also, $0.7 million of
marketing expenses were accelerated into the first quarter.
Interest expense. Interest expense was $15.2 million compared to $13.1
million for the same period last year. The increase was substantially
attributable to the additional borrowings in order to fund capital expenditures,
investments and acquisitions and higher interest rates. KinderCare's weighted
average interest rate on its long-term debt, including amortization of deferred
financing costs, was 10.2% for the first quarter of fiscal 2001 compared to 9.0%
for the first quarter of fiscal 2000.
Income tax (expense) benefit. An income tax benefit of $0.1 million was
recognized during the first quarter of fiscal 2001. Income tax expense during
the first quarter of fiscal 2000 was $2.3 million. The income tax (expense)
benefit was computed by applying estimated annual effective income tax rates to
income before income
10
<PAGE>
taxes. Income tax (expense) benefit varies from the statutory federal income tax
rate due primarily to state and foreign income taxes, offset by tax credits.
Net income. KinderCare incurred a net loss of $1.0 million in the first
quarter of fiscal 2001 compared to net income of $3.8 million in the same period
last year. The primary reason for the decline in net income was the deferral of
fee revenues of $2.6 million, comprised of $1.8 million deferred in the first
quarter of fiscal 2001 and a one-time deferral of $0.8 million from the fourth
quarter of the previous fiscal year. Without the impact of the deferral of fee
revenues, net of related costs, net income would have been $1.5 million. The new
center openings and the older center closures generated $1.2 million of losses.
The accelerated marketing expenses of $0.4 million negatively impacted net
income. In addition, additional interest expense was incurred due to higher
borrowings and interest rates and additional depreciation expense was incurred
due to newly opened and/or acquired centers and increased renovation spending.
For the first quarter of fiscal 2001, both basic and diluted net loss per share
were $0.03 before and $0.11 after the cumulative effect of a change in
accounting principle. Basic and diluted net income per share were $0.40 and
$0.39, respectively, in the first quarter of fiscal 2000.
EBITDA. EBITDA was $28.0 million compared to $30.6 million in the same
period last year. The decline was primarily as a result of the $3.3 million
deferral of fee revenues, net of related costs. Without the impact of the
deferral of fee revenues, net of related costs, EBITDA would have been $31.3
million. The newly opened centers and the closed centers contributed negative
EBITDA of $1.8 million. In addition, EBITDA was negatively impacted by the
acceleration of $0.7 million of marketing expenses. EBITDA is defined as net
income before the cumulative effect of a change in accounting principle,
investment income, interest expense, income taxes, depreciation and
amortization. EBITDA is not intended to indicate that cash flow is sufficient to
fund all of KinderCare's cash needs or represent cash flow from operations as
defined by generally accepted accounting principles. In addition, EBITDA should
not be used as a tool for comparison as the computation may not be similar for
all companies.
Liquidity and Capital Resources
KinderCare's principal sources of liquidity are cash flow generated from
operations, borrowings under the $300.0 million revolving credit facility and
the $100.0 million synthetic lease facility. At September 22, 2000, KinderCare
had drawn $135.0 million under the revolving credit facility, had committed to
outstanding letters of credit totaling $35.5 million and had funded $56.4
million under the synthetic lease facility discussed below. KinderCare's
availability under the revolving credit facility at September 22, 2000 was
$129.5 million. KinderCare's principal uses of liquidity are meeting debt
service requirements, financing its capital expenditures and providing working
capital.
KinderCare's consolidated net cash used by operating activities for the
first quarter of fiscal 2001 was $3.4 million, which represented a $3.0 million
increase in net cash flow from the same period last year due primarily to the
deferral of fee revenues, net of related costs of $2.9 million. Cash and cash
equivalents totaled $6.3 million at September 22, 2000, compared to $1.4 million
at June 2, 2000.
In order to fund new center development, KinderCare entered into a $100.0
million synthetic lease facility in September 1999. Under the synthetic lease
facility, a third-party lessor will finance construction of centers for lease to
KinderCare for a three to five year period, which might be extended, subject to
the consent of the lenders. KinderCare is contingently liable for a significant
portion of the cost through a residual guarantee, but will have the right to
acquire the property for its original cost at the end of the lease term. The
related leases, when executed, are expected to be classified as operating
leases. Accordingly, KinderCare expects lower depreciation and interest expense
and higher rent expense as a result of implementation of the synthetic lease
facility compared to such expenses that would have been incurred if KinderCare
financed the centers directly as owner. The synthetic lease will close to draws
on February 13, 2001 and will mature three years later.
KinderCare may experience decreased liquidity in the summer months and
during the calendar year-end holiday period due to decreased attendance during
these periods. New enrollments are generally highest in October and February,
with attendance declining 5% to 10% during the summer months and the calendar
year-end holiday period.
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Management believes that cash flow generated from operations and borrowings
under the revolving credit and synthetic lease facilities will adequately
provide for its working capital and debt service needs and will be sufficient to
fund KinderCare's expected capital expenditures for the foreseeable future. Any
future acquisitions, joint ventures or similar transactions may require
additional capital, and such capital may not be available to KinderCare on
acceptable terms or at all. Although no assurance can be given that such sources
of capital 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, cash flow requirements, debt covenants,
competitive factors and seasonality of openings. If KinderCare experiences a
lack of working capital, it may reduce its future capital expenditures. If these
expenditures were substantially reduced, in management's opinion, KinderCare's
operations and its cash flow would be adversely impacted.
Capital Expenditures
During the first quarter of fiscal 2001 and 2000, KinderCare opened 13 and
seven centers, respectively. KinderCare expects to open approximately 40 new
centers per year in the aggregate for at least the next several years and to
continue its practice of closing centers that are identified as not meeting
performance expectations. In addition, KinderCare may acquire existing centers
for local or regional early childhood education and care providers. KinderCare
may not be able to successfully negotiate and acquire sites and/or previously
constructed centers, meet its targets for new center additions or meet targeted
deadlines for development of new centers.
New centers are located based upon detailed site analyses that include
feasibility and demographic studies and financial modeling. The length of time
from site selection to construction and, finally, the opening of a community
center ranges from 18 to 24 months. Frequently, new site negotiations are
delayed or canceled or construction is delayed for a variety of reasons, many of
which are outside the control of KinderCare. The average total cost per
internally developed community center typically ranges from $1.8 to $2.2 million
depending on the size and location of the center. However, the actual costs of a
particular center may vary from such range.
KinderCare's new internally-developed centers have a pro forma licensed
capacity of 180, while centers constructed during fiscal 1997 and earlier have
an average licensed capacity of 125. When mature, these larger centers are
designed to generate higher revenues, operating income and margins than
KinderCare's existing centers. These new centers also have a higher average cost
of construction and typically take three to four years to reach maturity. On
average KinderCare's new centers should begin to produce positive EBITDA by the
end of the first year of operation and begin to produce positive net income by
the end of the second year of operation. Accordingly, as more new centers are
developed and opened, profitability will be negatively impacted in the
short-term, but is expected to be enhanced in the long-term once these new, more
profitable centers achieve anticipated levels.
Capital expenditures included the following with dollars in thousands:
<TABLE>
<CAPTION>
Sixteen Weeks Ended
----------------------------
September 22, September 17,
2000 1999
------------ ------------
<S> <C> <C>
New center development.................. $ 8,668 $ 14,616
Renovation of existing facilities....... 7,093 7,372
Equipment purchases..................... 1,799 2,194
Information systems purchases........... 579 1,383
------------ ------------
$ 18,139 $ 25,565
============ ============
</TABLE>
Capital expenditure limits under KinderCare's credit facilities for fiscal
year 2001 are $190.0 million. Capital expenditure limits may be increased by
carryover of a portion of unused amounts from previous periods and are subject
to exceptions. Also, KinderCare has some ability to incur additional
indebtedness, including through mortgages or sale-leaseback transactions,
subject to the limitations imposed by the indenture under which the senior
subordinated notes were issued and the credit facilities.
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Wage Increases
Expenses for salaries, wages and benefits represented approximately 56.7%
of net revenues for the first quarter of fiscal 2001. Low unemployment rates and
positive economic trends have challenged recruiting efforts and put pressure on
wage rates in many of KinderCare's markets. KinderCare believes that, through
increases in its tuition rates, it can recover any future increase in expenses
caused by adjustments to the federal or state minimum wage rates or other market
adjustments. However, KinderCare may not be able to increase its rates
sufficiently to offset such increased costs. KinderCare continually evaluates
its wage structure and may implement changes at targeted local levels.
Forward Looking Statements
When used in this document, press releases and elsewhere by KinderCare or
management 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 KinderCare's operations,
economic performance and financial condition, including, in particular, the
number of early childhood education and care 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.
These 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 KinderCare, 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
KinderCare'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; 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. KinderCare 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of KinderCare.
KinderCare is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
Interest Rates
KinderCare's exposure to market risk for changes in interest rates relates
primarily to debt obligations. KinderCare has no cash flow exposure due to rate
changes on its 9 1/2% senior subordinated notes aggregating $290.0 million at
September 22, 2000. KinderCare also has no cash flow exposure on certain
mortgages and industrial revenue bonds aggregating $7.3 million at September 22,
2000. However, KinderCare does have cash flow exposure on its revolving credit
facility, its term loan facility, and certain industrial revenue bonds subject
to variable LIBOR or adjusted base rate pricing. Accordingly, for the sixteen
weeks ended September 22, 2000 and September 17, 1999 a 1% change in the LIBOR
rate and the adjusted base rate would have resulted in interest expense changing
by approximately $1.9 and $1.4 million, respectively. In addition, KinderCare
has cash flow exposure on its vehicle leases with variable interest rates. For
the sixteen weeks ended September 22, 2000 and September 17, 1999, a 1% change
in the defined interest rate would have resulted in a change of $0.5 million in
vehicle lease expense, which was a component of rent expense.
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Foreign Exchange Risk
KinderCare is exposed to foreign exchange risk to the extent of
fluctuations in the United Kingdom pound sterling. Based upon the relative size
of KinderCare's operations in the United Kingdom, KinderCare does not believe
that the reasonably possible near-term change in the related exchange rate would
have a material effect on KinderCare's financial position, results of operations
or cash flows.
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<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this document or incorporated herein
by reference:
(a) Exhibits:
10 (a) Addendum dated June 28, 2000 to Lease dated June 2, 1997
between 600 Holladay Limited Partnership and KinderCare
Learning Centers, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on November 6, 2000.
KINDERCARE LEARNING CENTERS, INC.
By: /s/ DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: /s/ ROBERT ABELES
----------------------------------
Robert Abeles
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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