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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 10, 1999
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 January 7, 2000 was 9,475,767.
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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 December 10, 1999
and May 28, 1999 (unaudited)............................ 2
Consolidated statements of operations for the
twelve and twenty-eight weeks ended December 10,
1999 and December 11, 1998 (unaudited).................. 3
Consolidated statements of stockholders' equity
and comprehensive income for the twenty-eight
weeks ended December 10, 1999 and the fiscal
year ended May 28, 1999 (unaudited)..................... 4
Consolidated statements of cash flows for the
twenty-eight weeks ended December 10, 1999
and December 11, 1998 (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>
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
December 10, 1999 May 28, 1999
----------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,620 $ 5,750
Receivables, net 27,082 19,299
Prepaid expenses and supplies 5,847 6,056
Deferred income taxes 13,701 14,442
------------ ------------
Total current assets 52,250 45,547
Property and equipment, net 587,280 566,365
Deferred income taxes 1,938 3,499
Deferred financing costs and other assets 20,874 23,386
------------ ------------
$ 662,342 $ 638,797
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts $ 8,657 $ 7,791
Accounts payable 8,548 8,825
Current portion of long-term debt 7,186 11,586
Accrued expenses and other liabilities 78,200 88,899
------------ ------------
Total current liabilities 102,591 117,101
Long-term debt 446,471 414,209
Self insurance liabilities 17,102 17,368
Deferred income taxes 5,822 5,646
Other noncurrent liabilities 32,350 32,683
------------ ------------
Total liabilities 604,336 587,007
------------ ------------
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
9,475,767 and 9,480,837, respectively 95 95
Additional paid-in capital 8,243 8,355
Notes receivable from stockholders (1,116) (1,128)
Retained earnings 51,072 44,705
Accumulated other comprehensive income (288) (237)
------------ ------------
Total stockholders' equity 58,006 51,790
------------ ------------
$ 662,342 $ 638,797
============ ============
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 per share amounts)
(Unaudited)
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------------- -------------------------------------
December 10, 1999 December 11, 1998 December 10, 1999 December 11, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues, net $ 153,130 $ 142,237 $ 360,905 $ 334,511
------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 86,300 79,401 201,616 184,836
Depreciation 8,699 8,067 20,314 18,175
Rent 6,885 6,443 15,878 15,482
Provision for doubtful accounts 747 632 1,844 1,225
Other 36,399 34,422 88,150 83,289
Restructuring charges -- 47 -- 49
------------ ------------ ------------ ------------
Total operating expenses 139,030 129,012 327,802 303,056
------------ ------------ ------------ ------------
Operating income 14,100 13,225 33,103 31,455
Investment income 55 103 197 251
Interest expense (10,244) (9,688) (23,328) (22,468)
------------ ------------ ------------ ------------
Income before income taxes 3,911 3,640 9,972 9,238
Income tax expense 1,303 1,419 3,605 3,474
------------ ------------ ------------ ------------
Net income $ 2,608 $ 2,221 $ 6,367 $ 5,764
============ ============ ============ ============
Basic net income per share $ 0.28 $ 0.23 $ 0.67 $ 0.61
============ ============ ============ ============
Diluted net income per share $ 0.27 $ 0.23 $ 0.66 $ 0.60
============ ============ ============ ============
Weighted average common shares outstanding 9,475,000 9,474,000 9,474,000 9,474,000
============ ============ ============ ============
Weighted average common shares outstanding
and potential common shares 9,707,000 9,594,000 9,688,000 9,592,000
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
<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 -- -- -- -- 6,367 -- 6,367
Cumulative translation adjustment -- -- -- -- -- (51) (51)
----------- ------------- -----------
Total comprehensive income 6,367 (51) 6,316
----------- ------------- -----------
Issuance of common stock 13,938 -- 312 (212) -- -- 100
Purchase of common stock (19,008) -- (424) -- -- -- (424)
Proceeds from collection of
stockholders' notes receivable -- -- -- 224 -- -- 224
----------- ----------- ----------- ------------ ----------- ------------- -----------
Balance at December 10, 1999 9,475,767 $ 95 $ 8,243 $ (1,116) $ 51,072 $ (288) $ 58,006
=========== =========== =========== ============ =========== ============= ===========
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 10, 1999 December 11, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operations:
Net income $ 6,367 $ 5,764
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 20,314 18,175
Provision for doubtful accounts 1,844 1,225
Amortization of deferred financing costs and other assets 1,661 1,663
Gain on sales and disposals of property and
equipment, net (507) (290)
Changes in operating assets and liabilities:
Increase in receivables (9,627) (6,324)
Decrease (increase) in prepaid expenses and supplies 209 (180)
Decrease in other assets 849 1,066
Decrease in accounts payable, accrued expenses
and other liabilities (9,097) (4,016)
Other, net (51) (3)
------------ ------------
Net cash provided by operating activities 11,962 17,080
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (41,706) (44,665)
Proceeds from sales of property and equipment 984 787
Proceeds from collection of notes receivable 2 1,175
------------ ------------
Net cash used in investing activities (40,720) (42,703)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings 46,000 30,000
Proceeds from issuance of common stock 100 --
Proceeds from collection of stockholders' notes receivable 224 297
Purchase of common stock (424) --
Payments on long-term borrowings (18,138) (12,731)
Bank overdrafts 866 (662)
------------ ------------
Net cash provided by financing activities 28,628 16,904
------------ ------------
Decrease in cash and cash equivalents (130) (8,719)
Cash and cash equivalents at the beginning of the period 5,750 11,820
------------ ------------
Cash and cash equivalents at the end of the period $ 5,620 $ 3,101
============ ============
Supplemental cash flow information:
Interest paid $ 20,153 $ 18,900
Income taxes paid 1,896 460
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") is the leading for-profit
provider of early childhood care and education services in the United States. At
December 10, 1999, KinderCare operated a total of 1,148 centers, with 1,146
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: KinderCare Real Estate Corp.;
Mini-Skools Limited; KC Development Corp.; 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 KinderCare at December 10,
1999 and the results of operations and cash flows for each of the twelve and
twenty-eight week periods ended December 10, 1999 and December 11, 1998. 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 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 Twenty-Eight Weeks Ended
------------------------------------- -------------------------------------
December 10, 1999 December 11, 1998 December 10, 1999 December 11, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income $ 2,608 $ 2,221 $ 6,367 $ 5,764
Cumulative translation
adjustment (38) 57 (51) (3)
---------- ---------- ---------- ----------
$ 2,570 $ 2,278 $ 6,316 $ 5,761
========== ========== ========== ==========
</TABLE>
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.
The number of potential common shares outstanding and, therefore, diluted net
income per share were restated for the twelve and twenty-eight weeks ended
December 11, 1998 to conform to the current period presentation.
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
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
December 10, 1999 ("second quarter of fiscal 2000") and December 11, 1998
("second quarter of fiscal 1999") and the twenty-eight weeks ended December 10,
1999 and December 11, 1998.
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
Second Quarter of Fiscal 2000 compared to the Second Quarter of Fiscal 1999
The following table shows the comparative operating results of KinderCare
for the periods indicated, with dollars in thousands:
<TABLE>
<CAPTION>
Twelve Weeks Twelve Weeks Change
Ended Percent Ended Percent Amount
December 10, of December 11, of Increase/
1999 Revenues 1998 Revenues (Decrease)
------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 153,130 100.0% $ 142,237 100.0% $ 10,893
------------ -------- ------------ -------- ------------
Operating expenses:
Salaries, wages and benefits:
Center expense 80,469 52.5 74,003 52.0 6,466
Field and corporate expense 5,831 3.8 5,398 3.8 433
------------ -------- ------------ -------- ------------
Total salaries, wages and
benefits 86,300 56.3 79,401 55.8 6,899
Depreciation 8,699 5.8 8,067 5.7 632
Rent 6,885 4.5 6,443 4.5 442
Other 37,146 24.2 35,054 24.7 2,092
Restructuring charges -- -- 47 -- (47)
------------ -------- ------------ -------- ------------
Total operating expenses 139,030 90.8 129,012 90.7 10,018
------------ -------- ------------ -------- ------------
Operating income $ 14,100 9.2% $ 13,225 9.3% $ 875
============ ======== ============ ======== ============
</TABLE>
7
<PAGE>
Revenues, net - Net revenues increased $10.9 million, or 7.7%, to $153.1
million in the second quarter of fiscal 2000 from the comparable quarter last
year. The increase in net revenues was primarily attributable to the increase in
the average tuition rate of $7.35, or 6.6%, to $119.48 for the second quarter of
fiscal 2000 from $112.13 for the second quarter of fiscal 1999. The tuition
increase was due in part to the addition of new centers with higher than average
tuition rates, as well as targeted local increases at existing centers.
Occupancy increased 0.2 percentage points to 70.7% for the second quarter of
fiscal 2000 from 70.5% for the second quarter of fiscal 1999.
During the second quarter of fiscal 2000, centers opened within the current
and two most previous fiscal years contributed incremental net revenues of $8.1
million over the comparable quarter last year, while centers that were closed
incrementally reduced net revenues by $2.4 million. During the second quarter of
fiscal 2000, KinderCare opened four community centers and closed one center.
During the second quarter of fiscal 1999, KinderCare opened eight centers,
consisting of seven community centers and one KinderCare at Work(R) center, and
closed six centers. Total licensed capacity was approximately 146,000 and
144,000 at the end of the second quarter of fiscal 2000 and 1999, respectively.
Salaries, wages and benefits - Expenses for salaries, wages and benefits
increased $6.9 million, or 8.7%, to $86.3 million in the second quarter of
fiscal 2000 from the comparable quarter last year. The expense directly
associated with the centers was $80.5 million in the second quarter of fiscal
2000, an increase of $6.5 million from the second 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 $0.4 million to $5.8 million in the second quarter of
fiscal 2000.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased to 52.5% for the second quarter of fiscal 2000 from
52.0% for the comparable quarter last year, primarily due to the higher wage
rates, as discussed above. Total salaries, wages and benefits expense, as a
percentage of net revenues, increased to 56.3% for the second quarter of fiscal
2000 from 55.8% for the comparable quarter last year.
Depreciation - Depreciation expense increased $0.6 million to $8.7 million
in the second quarter of fiscal 2000 from the comparable quarter last year. The
increase was a result of opening 33 new, larger centers during the past four
quarters.
Rent - Rent expense increased $0.4 million to $6.9 million in the second
quarter of fiscal 2000 from the comparable quarter last year. KinderCare has
closed 30 and opened eight leased centers in the past four quarters. Rental
rates for new center leases and renewals have been higher than the rates
experienced in the past.
Other operating expenses - Other operating expenses increased $2.1 million,
or 6.0%, to $37.1 million in the second 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 and insurance in
the second quarter of fiscal 2000. Certain marketing expenses were accelerated
into the first quarter of fiscal 2000 as compared to the prior fiscal year,
resulting in a decrease in such expenses in the second quarter of fiscal 2000
from the comparable quarter last year. As a percentage of net revenues, other
operating expenses decreased slightly to 24.2% for the second quarter of fiscal
2000 from 24.7% for the comparable quarter last year.
Operating income - Operating income increased $0.9 million, or 6.6%, to
$14.1 million in the second 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 remained
relatively flat, as discussed above.
Adjusted EBITDA, defined as income before interest expense, income taxes,
depreciation and amortization, exclusive of restructuring charges and investment
income, was $22.8 million in the second quarter of fiscal 2000, an increase of
$1.5 million from the comparable quarter last year. As a percentage of net
revenues, Adjusted EBITDA for the second quarter of fiscal 2000 and 1999 was
14.9% and 15.0%, respectively. Adjusted EBITDA is not intended to indicate that
cash flow is sufficient to fund all of KinderCare's cash needs or represent
8
<PAGE>
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 $10.2 million for the second
quarter of fiscal 2000, compared to $9.7 million for the second 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 9.8% for the second
quarter of fiscal 2000 compared to 10.2% for the second quarter of fiscal 1999.
Income tax expense - Income tax expense during the second quarter of fiscal
2000 and fiscal 1999 of $1.3 and $1.4 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 to
state and foreign income taxes, offset by tax credits.
Net income - Net income for the second quarter of fiscal 2000 was $2.6
million compared to $2.2 million during the second quarter of fiscal 1999. Basic
and diluted net income per share for the second quarter of fiscal 2000 were
$0.28 and $0.27, respectively, compared to $0.23 for the second quarter of
fiscal 1999.
Twenty-Eight Weeks ended December 10, 1999 compared to the Twenty-Eight Weeks
ended December 11, 1998
The following table shows the comparative operating results of KinderCare
for the periods indicated, with dollars in thousands:
<TABLE>
<CAPTION>
Twenty-Eight Twenty-Eight Change
Weeks Ended Percent Weeks Ended Percent Amount
December 10, of December 11, of Increase/
1999 Revenues 1998 Revenues (Decrease)
------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 360,905 100.0% $ 334,511 100.0% $ 26,394
------------ -------- ------------ -------- ------------
Operating expenses:
Salaries, wages and benefits:
Center expense 187,857 52.1 172,138 51.5 15,719
Field and corporate expense 13,759 3.8 12,698 3.8 1,061
------------ -------- ------------ -------- ------------
Total salaries, wages and
benefits 201,616 55.9 184,836 55.3 16,780
Depreciation 20,314 5.6 18,175 5.4 2,139
Rent 15,878 4.4 15,482 4.6 396
Other 89,994 24.9 84,514 25.3 5,480
Restructuring charges -- -- 49 -- (49)
------------ -------- ------------ -------- ------------
Total operating expenses 327,802 90.8 303,056 90.6 24,746
------------ -------- ------------ -------- ------------
Operating income $ 33,103 9.2% $ 31,455 9.4% $ 1,648
============ ======== ============ ======== ============
</TABLE>
Revenues, net - Net revenues increased $26.4 million, or 7.9%, to $360.9
million in the twenty-eight weeks ended December 10, 1999 from the comparable
period last year. The increase in net revenues was primarily attributable to the
increase in the average tuition rate of $7.11, or 6.3%, to $119.17 for the
twenty-eight weeks ended December 10, 1999 from $112.06 for the twenty-eight
weeks ended December 11, 1998. The tuition increase was due in part to the
addition of new centers with higher than average tuition rates, as well as
targeted local increases at existing centers. Occupancy declined 0.2 percentage
points to 69.1% for the twenty-eight weeks ended December 10, 1999 from 69.3%
for the twenty-eight weeks ended December 11, 1998. The decline was primarily a
result of the increased rate of opening new, larger centers. New centers tend to
open with lower than average enrollment and typically take three or four years
to mature.
During the twenty-eight weeks ended December 10, 1999, centers opened
within the current and two most previous fiscal years contributed incremental
net revenues of $17.7 million over the comparable period last year, while
centers that were closed incrementally reduced net revenues by $4.8 million.
During the twenty-eight weeks ended December 10, 1999, KinderCare opened eleven
community centers and closed 23 centers. During the
9
<PAGE>
twenty-eight weeks ended December 11, 1998, KinderCare opened 17 centers,
consisting of 16 community centers and one KinderCare at Work(R) center, and
closed 15 centers.
Salaries, wages and benefits - Expenses for salaries, wages and benefits
increased $16.8 million, or 9.1%, to $201.6 million in the twenty-eight weeks
ended December 10, 1999 from the comparable period last year. The expense
directly associated with the centers was $187.9 million in the twenty-eight
weeks ended December 10, 1999, an increase of $15.7 million from the
twenty-eight weeks ended December 11, 1998. 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 $13.8 million in
the twenty-eight weeks ended December 10, 1999, an increase of $1.1 million from
the twenty-eight weeks ended December 11, 1998.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased to 52.1% for the twenty-eight weeks ended December
10, 1999 from 51.5% for the comparable period last year, due to the higher wage
rates discussed above. Total salaries, wages and benefits expense, as a
percentage of net revenues, increased to 55.9% for the twenty-eight weeks ended
December 10, 1999 from 55.3% for the comparable period last year.
Depreciation - Depreciation expense increased $2.1 million to $20.3 million
in the twenty-eight weeks ended December 10, 1999 from the comparable period
last year. The increase was due primarily to opening 33 new, larger centers in
the past four quarters.
Rent - Rent expense increased $0.4 million in the twenty-eight weeks ended
December 10, 1999 from the comparable period last year.
Other operating expenses - Other operating expenses increased $5.5 million,
or 6.5%, to $90.0 million in the twenty-eight weeks ended December 10, 1999 from
the comparable period last year. The increase was due primarily to higher
expenses related to food, maintenance and janitorial services, field trips,
insurance and the provision for doubtful accounts. As a percentage of net
revenues, other operating expenses decreased to 24.9% for the twenty-eight weeks
ended December 10, 1999 from 25.3% for the comparable period last year.
Operating income - Operating income increased $1.6 million, or 5.2%, to
$33.1 million in the twenty-eight weeks ended December 10, 1999 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 $53.4 million in the twenty-eight weeks ended December
10, 1999, an increase of $3.7 million from the comparable period last year. As a
percentage of net revenues, Adjusted EBITDA for the twenty-eight weeks ended
December 10, 1999 and the twenty-eight weeks ended December 11, 1998 was 14.8%
and 14.9%, 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 $23.3 million for the twenty-eight
weeks ended December 10, 1999 compared to $22.5 million for the twenty-eight
weeks ended December 11, 1998. KinderCare's weighted average interest rate on
its long-term debt, including amortization of deferred financing costs, was 9.9%
for the twenty-eight weeks ended December 10, 1999 compared to 10.1% for the
twenty-eight weeks ended December 11, 1998.
Income tax expense - Income tax expense during the twenty-eight weeks ended
December 10, 1999 and the twenty-eight weeks ended December 11, 1998 of $3.6 and
$3.5 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 to state and foreign income taxes, offset
by tax credits.
10
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Net income - Net income for the twenty-eight weeks ended December 10, 1999
was $6.4 million compared to $5.8 million during the twenty-eight weeks ended
December 11, 1998. Basic and diluted net income per share for the twenty-eight
weeks ended December 10, 1999 were $0.67 and $0.66, respectively, compared to
$0.61 and $0.60, respectively, for the twenty-eight weeks ended December 11,
1998.
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 December 10, 1999, KinderCare was committed on outstanding
letters of credit totaling $36.2 million, had outstanding draws of $80.0 million
under the revolving credit facility and $9.5 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
twenty-eight weeks ended December 10, 1999 was $12.0 million, which represents a
$5.1 million decrease in net cash flow from operations from the comparable
period last year due primarily to an increase in receivables and decreases in
accounts payable and other liabilities. Cash and cash equivalents totaled $5.6
million at December 10, 1999, compared to $5.8 million at May 28, 1999.
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 the acquisition and 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 capital expenditures in the long
term. 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 twenty-eight weeks ended December 10, 1999 and December 11,
1998, KinderCare opened eleven and 17 centers, respectively. Over the next three
years, KinderCare expects to increase its rate of opening and/or acquiring new
centers to approximately 45 to 50 centers per year in the aggregate and to
continue its practice of closing centers that are identified as not meeting
performance expectations.
11
<PAGE>
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 $1.8 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. New centers are located based upon detailed site analyses
that include feasibility and demographic studies and financial modeling.
However, KinderCare may not be able to successfully negotiate and acquire
properties, meet its targets for new center additions or meet targeted deadlines
for development of new centers. 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.
KinderCare has developed a new center prototype 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 the opening of our new centers is accelerated, 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.
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 twenty-eight weeks ended December 10, 1999
and December 11, 1998 totaled approximately $41.7 and $44.7 million,
respectively. Expenditures for new center development were $20.7 and $30.0
million, while expenditures for renovations of existing facilities were $15.2
and $10.0 million during the twenty-eight weeks ended December 10, 1999 and
December 11, 1998, respectively. Purchases of equipment were $3.8 and $3.6
million and corporate information systems were $2.0 and $1.1 million,
respectively, during the twenty-eight weeks ended December 10, 1999 and December
11, 1998.
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 under the provisions of the indenture under which the senior
subordinated notes were issued and the credit facilities, including through
mortgages or sale-leaseback transactions.
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. This could result in systems failures or miscalculations which cause
disruptions of operations. KinderCare does not use information technology in the
delivery of its services, but it uses such technology extensively for financial
reporting systems, payroll, purchasing and other important support functions.
KinderCare completed an inventory of all hardware, software applications
and data flow exchanges to or from third parties and identified systems that are
critical to KinderCare operations. Testing was performed on all critical systems
before December 31, 1999 and it was determined that there were no material
weaknesses in those systems. Any minor weaknesses identified were remedied.
KinderCare recently replaced its non-Year 2000 compliant payroll system
based primarily on other business considerations. The new human resource/payroll
software package has been certified by the vendor as Year 2000 compliant.
Internal testing was also performed to ensure Year 2000 readiness. No material
weaknesses were identified. The total cost of purchasing and implementing the
human resource/payroll system, most of which
12
<PAGE>
was incurred in fiscal year 1999, was approximately $1.9 million. These costs
have been expensed as incurred or will be amortized over five years in
accordance with generally accepted accounting principles.
KinderCare sent Year 2000 compliance questionnaires to third party vendors,
utility companies and government agencies administering subsidized tuition
programs. KinderCare also requested compliance certificates from any vendors
identified as critical. KinderCare's critical vendors represented that Year 2000
compliance would be achieved prior to calendar year-end 1999.
KinderCare had limited success in obtaining Year 2000 certifications from
government agencies administering subsidized tuition programs. However,
KinderCare's assessment of Year 2000 risks is that, although payments from these
agencies may be delayed, payments ultimately will be made. Management believes
that Year 2000 failures among these agencies would not have a material adverse
effect on KinderCare's business.
KinderCare developed and tested detailed contingency plans in the event
that the systems and equipment of critical suppliers and vendors supporting
critical business processes were not Year 2000 compliant. As of the date of this
report, KinderCare has not been impacted by or been made aware of any internal
or external Year 2000 failures that would require planned contingencies.
KinderCare did not incur significant incremental costs specifically in
connection with its Year 2000 project and all upgrades and system replacements
made in connection with its Year 2000 project were part of previously planned
software and hardware upgrades.
While KinderCare is not currently aware of any internal and external Year
2000 failures, KinderCare believes that the worst-case scenario of failures that
could potentially still occur and the possible adverse effects resulting from
such failures include the following:
o Vendor Problems. KinderCare may be unable to receive materials and
supplies due to Year 2000-related failures on the part of its
suppliers of food and other products necessary to operate existing
centers. Although KinderCare believes that it could obtain these
supplies from alternate sources, it would likely result in increased
costs. As of the date of this report, all vendors have provided
materials and supplies as scheduled.
o Payment Delays. As discussed above, payments from governmental
agencies administering tuition programs could be delayed, requiring
KinderCare to fund cash flow requirements through additional
borrowings. As of the date of this report, KinderCare is unaware of
any Year 2000 failures among governmental agencies providing
KinderCare subsidized tuition payments.
An independent review of all phases of KinderCare's Year 2000 project was
completed and the review generally confirmed that KinderCare is at low risk for
Year 2000 interruption. Notwithstanding KinderCare's preparations, software code
used by KinderCare and software code used by external vendors may not be Year
2000 compliant in all instances. 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 55.9%
of net revenues for the twenty-eight weeks ended December 10, 1999. 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.
13
<PAGE>
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 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
KinderCare is not presently engaged in any 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 January 20, 2000.
KINDERCARE LEARNING CENTERS, INC.
(Registrant)
DAVID J. JOHNSON
--------------------------------------
David J. Johnson
Chairman of the Board of Directors and
Chief Executive Officer
ROBERT ABELES
--------------------------------------
Robert Abeles
Executive Vice President,
Chief Financial Officer
16
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