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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 March 3, 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 March 31, 2000 was 9,481,937.
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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 March 3, 2000 and
May 28, 1999 (unaudited)................................. 2
Consolidated statements of operations for the
twelve and forty weeks ended March 3, 2000
and March 5, 1999 (unaudited)............................ 3
Consolidated statements of stockholders' equity
and comprehensive income for the forty weeks
ended March 3, 2000 and the fiscal year
ended May 28, 1999 (unaudited)........................... 4
Consolidated statements of cash flows for the
forty weeks ended March 3, 2000 and
March 5, 1999 (unaudited)................................ 5
Notes to unaudited consolidated financial statements....... 6
Item 2. Management's discussion and analysis of
financial condition and results of operations............ 7
Item 3. Quantitative and qualitative disclosures
about market risk........................................ 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................... 15
Signatures................................................................... 16
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
March 3, 2000 May 28, 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,697 $ 5,750
Receivables, net 24,463 19,299
Prepaid expenses and supplies 7,954 6,056
Deferred income taxes 11,636 14,442
------------- -------------
Total current assets 46,750 45,547
Property and equipment, net 600,703 566,365
Deferred income taxes 5,056 3,499
Deferred financing costs and other assets 36,073 23,386
------------- -------------
$ 688,582 $ 638,797
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts $ 8,022 $ 7,791
Accounts payable 7,060 8,825
Current portion of long-term debt 15,582 11,586
Accrued expenses and other liabilities 77,647 88,899
------------- -------------
Total current liabilities 108,311 117,101
Long-term debt 461,165 414,209
Self insurance liabilities 17,329 17,368
Deferred income taxes 5,822 5,646
Other noncurrent liabilities 27,036 32,683
------------- -------------
Total liabilities 619,663 587,007
------------- -------------
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
9,481,937 and 9,480,837, respectively 95 95
Additional paid-in capital 13,481 8,355
Notes receivable from stockholders (1,242) (1,128)
Retained earnings 56,851 44,705
Accumulated other comprehensive income (266) (237)
------------- -------------
Total stockholders' equity 68,919 51,790
------------- -------------
$ 688,582 $ 638,797
============= =============
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)
Twelve Weeks Ended Forty Weeks Ended
----------------------------- -----------------------------
March 3, 2000 March 5, 1999 March 3, 2000 March 5, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues, net $ 154,852 $ 143,039 $ 515,757 $ 477,550
------------- ------------- ------------- -------------
Operating expenses:
Salaries, wages and benefits 84,821 78,904 286,437 263,740
Depreciation 8,663 8,886 28,977 27,061
Rent 6,804 7,147 22,682 22,629
Provision for doubtful accounts 1,251 1,188 3,095 2,413
Other 33,578 30,664 121,728 113,954
Restructuring charges -- (570) -- (521)
------------- ------------- ------------- -------------
Total operating expenses 135,117 126,219 462,919 429,276
------------- ------------- ------------- -------------
Operating income 19,735 16,820 52,838 48,274
Investment income 100 139 297 390
Interest expense (10,441) (9,559) (33,769) (32,026)
------------- ------------- ------------- -------------
Income before income taxes 9,394 7,400 19,366 16,638
Income tax expense 3,615 2,776 7,220 6,250
------------- ------------- ------------- -------------
Net income $ 5,779 $ 4,624 $ 12,146 $ 10,388
============= ============= ============= =============
Basic net income per share $ 0.61 $ 0.49 $ 1.28 $ 1.10
============= ============= ============= =============
Diluted net income per share $ 0.61 $ 0.48 $ 1.26 $ 1.08
============= ============= ============= =============
Weighted average common shares outstanding 9,477,000 9,480,000 9,475,000 9,476,000
============= ============= ============= =============
Weighted average common shares outstanding and
potential common shares 9,477,000 9,587,000 9,633,000 9,591,000
============= ============= ============= =============
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
(Dollars in thousands)
Accumulated
Common Stock Additional Stockholders' Other
------------------------ Paid-in Notes Retained Comprehensive
Shares Amount Capital Receivable Earnings Income Total
----------- ----------- ---------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 29, 1998 9,474,197 $ 95 $ 2,009 $ (1,325) $ 31,179 $ (58) $ 31,900
---------- ------------- -----------
Comprehensive income:
Net income -- -- -- -- 13,526 -- 13,526
Cumulative translation adjustment -- -- -- -- -- (179) (179)
---------- ------------- -----------
Total comprehensive income -- -- -- -- 13,526 (179) 13,347
---------- ------------- -----------
Issuance of common stock 6,640 -- 135 (110) -- -- 25
Proceeds from collection of
stockholders' notes receivable -- -- -- 307 -- -- 307
Reversal of pre-fresh start
contingency -- -- 6,211 -- -- -- 6,211
----------- ----------- ---------- ------------- ---------- ------------- -----------
Balance at May 28, 1999 9,480,837 95 8,355 (1,128) 44,705 (237) 51,790
---------- ------------- -----------
Comprehensive income:
Net income -- -- -- -- 12,146 -- 12,146
Cumulative translation adjustment -- -- -- -- -- (29) (29)
---------- ------------- -----------
Total comprehensive income 12,146 (29) 12,117
---------- ------------- -----------
Issuance of common stock 20,108 -- 452 (338) -- -- 114
Purchase of common stock (19,008) -- (424) -- -- -- (424)
Proceeds from collection of
stockholders' notes receivable -- -- -- 224 -- -- 224
Reversal of pre-fresh start
contingency -- -- 5,098 -- -- -- 5,098
----------- ----------- ---------- ------------- ---------- ------------- -----------
Balance at March 3, 2000 9,481,937 $ 95 $ 13,481 $ (1,242) $ 56,851 $ (266) $ 68,919
=========== =========== ========== ============= ========== ============= ===========
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)
Forty Weeks Ended
------------------------------
March 3, 2000 March 5, 1999
------------- -------------
<S> <C> <C>
Cash flows from operations:
Net income $ 12,146 $ 10,388
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 28,977 27,061
Provision for doubtful accounts 3,095 2,413
Amortization of deferred financing costs and other assets 2,370 2,376
Gain on sales and disposals of property and
equipment, net (527) (402)
Changes in operating assets and liabilities:
Increase in receivables (8,259) (8,708)
Increase in prepaid expenses and supplies (1,898) (1,066)
(Increase) decrease in other assets (4,268) 1,058
Decrease in accounts payable, accrued expenses
and other liabilities (12,180) (3,389)
Other, net (29) (65)
------------- -------------
Net cash provided by operating activities 19,427 29,666
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (59,784) (69,427)
Acquisition of previously constructed centers (9,467) --
Investment accounted for under the cost method (5,398) --
Proceeds from sales of property and equipment 996 1,324
Proceeds from collection of notes receivable 76 1,175
------------- -------------
Net cash used in investing activities (73,577) (66,928)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 78,000 50,000
Payments on long-term borrowings (27,048) (14,070)
Proceeds from issuance of common stock 114 25
Proceeds from collection of stockholders' notes receivable 224 307
Purchase of common stock (424) --
Bank overdrafts 231 (1,004)
------------- -------------
Net cash provided by financing activities 51,097 35,258
------------- -------------
Decrease in cash and cash equivalents (3,053) (2,004)
Cash and cash equivalents at the beginning of the period 5,750 11,820
------------- -------------
Cash and cash equivalents at the end of the period $ 2,697 $ 9,816
============= =============
Supplemental cash flow information:
Interest paid $ 37,458 $ 35,585
Income taxes paid 2,554 834
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
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KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
KinderCare Learning Centers, Inc. ("KinderCare") is the leading for-profit
provider of early childhood care and education services in the United States. At
March 3, 2000, KinderCare operated a total of 1,161 centers, with 1,159 centers
in 39 states in the United States and two centers in the United Kingdom. The
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.
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 KinderCare at March 3,
2000 and the results of operations and cash flows for each of the twelve and
forty week periods ended March 3, 2000 and March 5, 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 May 28, 1999.
Fiscal Year
References to fiscal 2000 and fiscal 1999 are to the 53 weeks ended June 2,
2000 and the 52 weeks ended May 28, 1999, respectively. KinderCare's fiscal year
ends on the Friday closest to May 31. Typically the first quarter is 16 weeks
long and the second, third and fourth quarters are each twelve weeks long.
Fiscal 2000, however, is 53 weeks long with 13 weeks in the fourth quarter.
Comprehensive Income
Comprehensive income is comprised of the following, for the periods
indicated, with dollars in thousands:
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
---------------------------- ----------------------------
March 3, 2000 March 5, 1999 March 3, 2000 March 5, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 5,779 $ 4,624 $ 12,146 $ 10,388
Cumulative translation adjustment 22 (62) (29) (65)
------------- ------------- ------------- -------------
$ 5,801 $ 4,562 $ 12,117 $ 10,323
============= ============= ============= =============
</TABLE>
Comprehensive income does not include the reversal of certain contingency
accruals established in fresh-start reporting when KinderCare emerged from
bankruptcy in March 1993. Such amounts are credited to additional paid-in
capital.
Net Income per Share
The difference between basic and diluted net income per share is a result
of the dilutive effect of options, which are considered potential common shares.
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.
6
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements,
which provides guidance related to revenue recognition. SAB 101 allows companies
to report any changes in revenue recognition related to adopting its provisions
as an accounting change at the time of implementation in accordance with
Accounting Practice Board Opinion No. 20, Accounting Changes. SAB 101 becomes
effective for the first quarter of KinderCare's fiscal year 2001. KinderCare has
not yet determined the impact, if any, SAB 101 will have on its financial
position or results of operations.
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.
2. Restructuring Charges
During the fourth quarter of fiscal 1999, a provision of $4.0 million was
recorded related to the planned early termination of operating leases for 38
underperforming centers. The provision included an estimate of discounted future
lease payments and anticipated incremental costs related to closure of the
centers.
During the forty weeks ended March 3, 2000, 20 of these underperforming
centers were closed. KinderCare has paid and/or committed to pay $1.4 million of
lease termination and closure costs for such closed centers. During the twelve
and forty week periods ended March 3, 2000, the 20 closed centers generated
aggregate net revenues of $0 and $1.6 million, respectively, and contributed
aggregate operating losses of $0.1 and $0.9 million, respectively. The 20 closed
centers generated aggregate net revenues of $1.3 and $4.3 million, respectively,
and contributed aggregate operating losses of $0.4 and $1.4 million,
respectively, during the twelve and forty week periods ended March 5, 1999.
KinderCare is in the process of reviewing the status of the 18 remaining
centers. Such centers may or may not be closed as a result of this review. If a
center does not close, the related provision, which was originally recorded as a
restructuring charge, would be reversed. KinderCare expects to determine whether
or not to close the centers in the fourth quarter of fiscal 2000. As part of
KinderCare's practice of identifying centers that are not meeting performance
expectations, however, further exit plans may be committed to in the fourth
quarter of fiscal 2000, which would result in additional provisions.
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 information presented herein refers to the twelve weeks ended
March 3, 2000 ("third quarter of fiscal 2000") and March 5, 1999 ("third quarter
of fiscal 1999") and the forty weeks ended March 3, 2000 and March 5, 1999.
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
7
<PAGE>
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
Third Quarter of Fiscal 2000 compared to the Third Quarter of Fiscal 1999
The following table shows the comparative operating results of KinderCare
for the periods indicated, with dollars in thousands:
<TABLE>
<CAPTION>
Change
Twelve Weeks Percent Twelve Weeks Percent Amount
Ended of Ended of Increase/
March 3, 2000 Revenue March 5, 1999 Revenues (Decrease)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 154,852 100.0% $ 143,039 100.0% $ 11,813
------------- ------------- ------------- ------------- -------------
Operating expenses:
Salaries, wages and benefits:
Center expense 78,582 50.7 73,122 51.1 5,460
Field and corporate expense 6,239 4.1 5,782 4.0 457
------------- ------------- ------------- ------------- -------------
Total salaries, wages
and benefits 84,821 54.8 78,904 55.1 5,917
Depreciation 8,663 5.6 8,886 6.2 (223)
Rent 6,804 4.4 7,147 5.0 (343)
Other 34,829 22.5 31,852 22.3 2,977
Restructuring charges -- -- (570) (0.4) 570
------------- ------------- ------------- ------------- -------------
Total operating expenses 135,117 87.3 126,219 88.2 8,898
------------- ------------- ------------- ------------- -------------
Operating income $ 19,735 12.7% $ 16,820 11.8% $ 2,915
============= ============= ============= ============= =============
</TABLE>
Revenues, net - Net revenues increased $11.8 million, or 8.3%, to $154.9
million in the third quarter of fiscal 2000 from the comparable quarter last
year. The increase in net revenues was primarily attributable to additional
revenues generated by the newly opened and/or acquired centers. During the third
quarter of fiscal 2000, centers opened and/or acquired within the current and
two most previous fiscal years contributed incremental net revenues of $8.6
million over the comparable quarter last year, while centers that were closed
incrementally reduced net revenues by $2.2 million. During the third quarter of
fiscal 2000, KinderCare opened 19 community centers, which included 13 acquired
centers, and closed six centers. During the third quarter of fiscal 1999,
KinderCare opened nine centers and closed seven centers. Total licensed capacity
was approximately 148,000 and 145,000 at the end of the third quarter of fiscal
2000 and 1999, respectively.
For the third quarter of fiscal 2000, the average tuition rate increased
$7.45, or 6.5%, to $121.95 from $114.50 for the third quarter of fiscal 1999.
The tuition increase was due to targeted local increases at existing centers, as
well as the addition of new centers with higher than average tuition rates.
Occupancy increased 0.3 percentage points to 67.9% for the third quarter of
fiscal 2000 from 67.6% for the third quarter of fiscal 1999.
Salaries, wages and benefits - Expenses for salaries, wages and benefits
increased $5.9 million, or 7.5%, to $84.8 million in the third quarter of fiscal
2000 from the comparable quarter last year. The expense directly associated with
the centers was $78.6 million in the third quarter of fiscal 2000, an increase
of $5.5 million from the third quarter of fiscal 1999. The increase in center
related expenses was primarily attributable to increased staff wage rates and,
to a lesser degree, increased hours and rising health benefit costs. The expense
related to field management and corporate administration increased $0.5 million
to $6.2 million in the third quarter of fiscal 2000.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, decreased to 50.7% for the third quarter of fiscal 2000 from
51.1% for the comparable quarter last year due to a slight improvement in labor
productivity. Total salaries, wages and benefits expense, as a percentage of net
revenues, increased to 54.8% for the third quarter of fiscal 2000 from 55.1% for
the comparable quarter last year.
Depreciation - Depreciation expense decreased $0.2 million to $8.7 million
in the third quarter of fiscal 2000 from the comparable quarter last year.
8
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Rent - Rent expense decreased $0.3 million to $6.8 million in the third
quarter of fiscal 2000 from the comparable quarter last year.
Other operating expenses - Other operating expenses increased $3.0 million,
or 9.3%, to $34.8 million in the third quarter of fiscal 2000 from the
comparable quarter last year. Other operating expenses include costs directly
associated with the centers, such as food, educational materials, janitorial and
maintenance costs, utilities, transportation and insurance, and expenses related
to field management and corporate administration. The increase was due primarily
to higher expenses related to janitorial services, utilities, telecommunications
and insurance in the third quarter of fiscal 2000. As a percentage of net
revenues, other operating expenses increased slightly to 22.5% for the third
quarter of fiscal 2000 from 22.3% for the comparable quarter last year.
Restructuring charges - During fiscal year 1998, KinderCare relocated its
corporate offices from Montgomery, Alabama to Portland, Oregon. During the third
quarter of fiscal 1999, the remaining relocation reserve balance related to
employee termination benefits of $0.6 million was reversed following a favorable
determination in an arbitration proceeding.
Operating income - Operating income increased $2.9 million, or 17.3%, to
$19.7 million in the third quarter of fiscal 2000 from the comparable quarter
last year. The increased operating income was due to the growth in net revenues,
while total operating expenses as a percentage of net revenues declined overall,
as discussed above.
Adjusted EBITDA, defined as income before interest expense, income taxes,
depreciation and amortization, exclusive of restructuring charges and investment
income, was $28.4 million in the third quarter of fiscal 2000, an increase of
$3.3 million from the comparable quarter last year. As a percentage of net
revenues, Adjusted EBITDA for the third quarter of fiscal 2000 and 1999 was
18.3% and 17.6%, respectively. Adjusted 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, Adjusted EBITDA should not be used as a tool for comparison as the
computation may not be similar for all companies.
Interest expense - Interest expense was $10.4 million for the third quarter
of fiscal 2000, compared to $9.6 million for the third quarter of fiscal 1999
due primarily to higher borrowings under the revolving credit facility.
KinderCare's weighted average interest rate on its long-term debt, including
amortization of deferred financing costs, was 9.7% for the third quarter of
fiscal 2000 compared to 9.6% for the third quarter of fiscal 1999.
Income tax expense - Income tax expense during the third quarter of fiscal
2000 and fiscal 1999 of $3.6 and $2.8 million, respectively, was computed by
applying estimated effective income tax rates to income before income taxes.
Income tax expense varies from the statutory federal income tax rate due
primarily to state and foreign income taxes, offset by tax credits.
Net income - Net income for the third quarter of fiscal 2000 was $5.8
million compared to $4.6 million during the third quarter of fiscal 1999. Basic
and diluted net income per share for the third quarter of fiscal 2000 were $0.61
compared to $0.49 and $0.48, respectively, for the third quarter of fiscal 1999.
9
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Forty Weeks ended March 3, 2000 compared to the Forty Weeks ended March 5, 1999
The following table shows the comparative operating results of KinderCare for
the periods indicated, with dollars in thousands:
<TABLE>
<CAPTION>
Change
Forty Weeks Percent Forty Weeks Percent Amount
Ended of Ended of Increase/
March 3, 2000 Revenue March 5, 1999 Revenues (Decrease)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 515,757 100.0% $ 477,550 100.0% $ 38,207
------------- ------------- ------------- ------------- -------------
Operating expenses:
Salaries, wages and benefits:
Center expense 266,439 51.7 245,122 51.3 21,317
Field and corporate expense 19,998 3.8 18,618 3.9 1,380
------------- ------------- ------------- ------------- -------------
Total salaries, wages
and benefits 286,437 55.5 263,740 55.2 22,697
Depreciation 28,977 5.7 27,061 5.7 1,916
Rent 22,682 4.4 22,629 4.7 53
Other 124,823 24.2 116,367 24.4 8,456
Restructuring charges -- -- (521) (0.1) 521
------------- ------------- ------------- ------------- -------------
Total operating expenses 462,919 89.8 429,276 89.9 33,643
------------- ------------- ------------- ------------- -------------
Operating income $ 52,838 10.2% $ 48,274 10.1% $ 4,564
============= ============= ============= ============= =============
</TABLE>
Revenues, net - Net revenues increased $38.2 million, or 8.0%, to $515.8
million in the forty weeks ended March 3, 2000 from the comparable period last
year. The increase in net revenues was primarily attributable to additional
revenues generated by the newly opened and/or acquired centers. During the forty
weeks ended March 3, 2000, centers opened and/or acquired within the current and
two most previous fiscal years contributed incremental net revenues of $26.3
million over the comparable period last year, while centers that were closed
incrementally reduced net revenues by $7.0 million. During the forty weeks ended
March 3, 2000, KinderCare opened 30 community centers, which included 13
acquired centers, and closed 29 centers. During the forty weeks ended March 5,
1999, KinderCare opened 26 centers, which consisted of 25 community centers and
one KinderCare at Work(R) center, and closed 22 centers.
For the forty weeks ended March 3, 2000, the average tuition rate increased
$7.22, or 6.4%, to $120.00 from $112.78 for the forty weeks ended March 5, 1999.
The tuition increase was due in part to targeted local increases at existing
centers, as well as the addition of new centers with higher than average tuition
rates. Occupancy declined 0.1 percentage points to 68.7% for the forty weeks
ended March 3, 2000 from 68.8% for the forty weeks ended March 5, 1999.
Salaries, wages and benefits - Expenses for salaries, wages and benefits
increased $22.7 million, or 8.6%, to $286.4 million in the forty weeks ended
March 3, 2000 from the comparable period last year. The expense directly
associated with the centers was $266.4 million in the forty weeks ended March 3,
2000, an increase of $21.3 million from the forty weeks ended March 5, 1999. The
increase in center related expenses was primarily attributable to increased
staff wage rates and, to a lesser degree, increased hours and rising health
benefit costs. The expense related to field management and corporate
administration was $20.0 million in the forty weeks ended March 3, 2000, an
increase of $1.4 million from the forty weeks ended March 5, 1999.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased to 51.7% for the forty weeks ended March 3, 2000 from
51.3% for the comparable period last year, due to the higher wage rates and a
slight decline in labor productivity, as discussed above. Total salaries, wages
and benefits expense, as a percentage of net revenues, increased to 55.5% for
the forty weeks ended March 3, 2000 from 55.2% for the comparable period last
year.
Depreciation - Depreciation expense increased $1.9 million to $29.0 million
in the forty weeks ended March 3, 2000 from the comparable 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. During
the four quarters ended March 3, 2000 and March 5, 1999, 43 and 35 centers were
opened and/or acquired, respectively.
10
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Rent - Rent expense increased $0.1 million in the forty weeks ended March
3, 2000 from the comparable period last year.
Other operating expenses - Other operating expenses increased $8.5 million,
or 7.3%, to $124.8 million in the forty weeks ended March 3, 2000 from the
comparable period last year. The increase was due primarily to higher expenses
related to food, janitorial services, utilities, telecommunications, field
trips, insurance and the provision for doubtful accounts. As a percentage of net
revenues, other operating expenses decreased to 24.2% for the forty weeks ended
March 3, 2000 from 24.4% for the comparable period last year.
Restructuring charges - During fiscal 1998, KinderCare relocated its
corporate offices from Montgomery, Alabama to Portland, Oregon. During the third
quarter of fiscal 1999, the remaining relocation reserve balance related to
employee termination benefits of $0.6 million was reversed following a favorable
determination in an arbitration proceeding.
Operating income - Operating income increased $4.6 million, or 9.5%, to
$52.8 million in the forty weeks ended March 3, 2000 from the comparable period
last year. The increased operating income was due to the growth in net revenues,
while total operating expenses as a percentage of net revenues remained
relatively flat, as discussed above.
Adjusted EBITDA was $81.8 million in the forty weeks ended March 3, 2000,
an increase of $7.0 million from the comparable period last year. As a
percentage of net revenues, Adjusted EBITDA for the forty weeks ended March 3,
2000 and the forty weeks ended March 5, 1999 was 15.9% and 15.7%, respectively.
Adjusted 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, Adjusted EBITDA should
not be used as a tool for comparison as the computation may not be similar for
all companies.
Interest expense - Interest expense was $33.8 million for the forty weeks
ended March 3, 2000 compared to $32.0 million for the forty weeks ended March 5,
1999. KinderCare's weighted average interest rate on its long-term debt,
including amortization of deferred financing costs, was 9.7% for the forty weeks
ended March 3, 2000 compared to 9.9% for the forty weeks ended March 5, 1999.
Income tax expense - Income tax expense during the forty weeks ended March
3, 2000 and the forty weeks ended March 5, 1999 of $7.2 and $6.3 million,
respectively, was computed by applying estimated effective income tax rates to
income before income taxes. Income tax expense varies from the statutory federal
income tax rate due primarily to state and foreign income taxes, offset by tax
credits.
Net income - Net income for the forty weeks ended March 3, 2000 was $12.1
million compared to $10.4 million during the forty weeks ended March 5, 1999.
Basic and diluted net income per share for the forty weeks ended March 3, 2000
were $1.28 and $1.26, respectively, compared to $1.10 and $1.08, respectively,
for the forty weeks ended March 5, 1999.
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 established in the first quarter of
fiscal 2000. At March 3, 2000, KinderCare was committed on outstanding letters
of credit totaling $36.2 million, had outstanding draws of $104.0 million under
the revolving credit facility and $19.5 million was funded under the synthetic
lease facility. KinderCare's principal uses of liquidity are meeting debt
service requirements, financing its capital expenditures and providing working
capital.
KinderCare's consolidated net cash provided by operating activities for the
forty weeks ended March 3, 2000 was $19.4 million, which represented a $10.2
million decrease in net cash flow from operations from the comparable period
last year due primarily to an increase in other assets and decreases in accrued
expenses and other current and non-current liabilities. Cash and cash
equivalents totaled $2.7 million at March 3, 2000, compared to $5.8 million at
May 28, 1999.
11
<PAGE>
KinderCare anticipates substantially increasing its capital expenditure
budget over the next several years due to an increased rate of opening and/or
acquiring new centers and the renovation of existing facilities. In September
1999, KinderCare entered into a $100 million synthetic lease facility under
which 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.
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.
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. The decreased attendance in the summer months and
during the calendar year-end holiday period may result in decreased liquidity
during these periods.
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.
During the second quarter of fiscal 2000, KinderCare acquired $10.0 million
aggregate principal amount of its 9 1/2% senior subordinated notes at an
aggregate price of $9.6 million. This transaction resulted in the write-off of
deferred financing costs of $0.3 million and a gain of approximately $0.1
million.
Capital Expenditures
During the forty weeks ended March 3, 2000 and March 5, 1999, KinderCare
opened 30 centers, which included 13 acquired centers, and 26 centers,
respectively. KinderCare expects to open and/or acquire approximately 45 to 50
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. 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 million 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 has devised a new prototype for internally developed centers
that is larger and has a more physically appealing design than prior prototypes.
The new centers have a proforma licensed capacity of 180, while the 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 have a higher average cost of construction and typically take three to
four years to reach maturity. Based on KinderCare's prototype, on average a new
center should begin to produce positive EBITDA by the end of its first year of
operation and begin to produce positive net income by the end of its 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.
12
<PAGE>
KinderCare also plans to make significant capital expenditures in
connection with a renovation program, which includes interior and playground
renovations and signage replacements, that is designed to bring all of its
existing facilities to a company standard for plant and equipment and to enhance
the curb appeal of these centers.
Capital expenditures during the forty weeks ended March 3, 2000 and March
5, 1999 totaled approximately $59.8 and $69.4 million, respectively.
Expenditures for new center development were $28.3 and $42.0 million, while
expenditures for renovations of existing facilities were $24.3 and $16.4 million
during the forty weeks ended March 3, 2000 and March 5, 1999, respectively.
Purchases of equipment were $4.9 and $8.3 million and expenditures related to
information systems were $2.3 and $2.7 million, respectively, during the forty
weeks ended March 3, 2000 and March 5, 1999.
Capital expenditure limits under KinderCare's credit facilities for fiscal
year 2000 are $185.0 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.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. KinderCare completed all phases of its Year 2000 project before December
31, 1999. Based on the results of the project, it was determined that there were
no material weaknesses in KinderCare's systems and any minor weaknesses
identified were remedied. While KinderCare is not currently aware of any
internal or external Year 2000 failures, KinderCare will continue to monitor
internal systems and external parties to ensure that possible Year 2000
interruptions are identified and resolved.
Wage Increases
Expenses for salaries, wages and benefits represented approximately 55.5%
of net revenues for the forty weeks ended March 3, 2000. 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 report, 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 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; the impact of Year 2000 compliance by
KinderCare or those entities with which KinderCare does business; and other risk
factors that are discussed in this report and, from time
13
<PAGE>
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
Information regarding fluctuating interest rates is contained in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. KinderCare is not presently engaged in any other transactions of the
type described in S-K Item 305.
14
<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) Exhibit:
27 - Financial Data Schedule.
(b) Reports on Form 8-K: None.
15
<PAGE>
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 April 5, 2000.
KINDERCARE LEARNING CENTERS, INC.
(Registrant)
/s/ DAVID J. JOHNSON
-----------------------------------------
David J. Johnson
Chairman of the Board of Directors and
Chief Executive Officer
/s/ ROBERT ABELES
-----------------------------------------
Robert Abeles
Executive Vice President,
Chief Financial Officer
16
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