Document/Exhibit Description Pages Size
1: 10-K Kindercare Learning Centers, Inc. Form 10-K 61 291K
2: EX-10.(F5) Fifth Amendment to Credit Agreement 7 26K
3: EX-10.(F6) Sixth Amendment to Credit Agreement 6 24K
4: EX-10.(P) Employment Resignation Agreement 6 32K
5: EX-10.(Q) Employment Resignation Agreement 6 31K
6: EX-10.(R) Employment Resignation Agreement 6 32K
7: EX-10.(S) Employment Resignation Agreement 5 29K
8: EX-10.(T) Employment Resignation Agreement 6 31K
9: EX-10.(U) Employment Resignation Agreement 6 30K
10: EX-10.(V) Employment Resigantion Agreement 6 30K
11: EX-10.(W) Employment Resignation Agreement 6 29K
12: EX-10.(X) Employment Resignation Agreement 6 29K
13: EX-10.(Y) Employment Resignation Agreement 6 29K
14: EX-23 Consent 1 8K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
---------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 No.)
2400 PRESIDENTS DRIVE
MONTGOMERY, ALABAMA 36116
(Address of principal executive offices)
(334) 277-5090
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
WARRANTS TO PURCHASE COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing required for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's known information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant (assuming for purposes of this calculation, without
conceding, that all executive officers and directors are "affiliates") was
$139,641,963 at July 26, 1996 based on a closing market price of $15.25 for the
Common Stock on such date as reported by the Nasdaq National Market.
The number of shares of Registrant's Common Stock, $.01 par value per
share, outstanding at July 26, 1996 was 19,172,558.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmation by the court.
[X] Yes [ ] No
Part III incorporates information by reference from the definitive
Proxy Statement in connection with the Registrant's Annual Meeting of
Shareholders to be held on November 13, 1996.
===============================================================================
PART 1
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
ORGANIZATIONAL CHANGES
On April 16, 1996, KinderCare Learning Centers, Inc. ("KinderCare" or
the "Company") implemented significant organizational changes in both field and
facilities management, including redefining the roles and responsibilities of
Center Directors and the other field management positions. These changes were
implemented to increase operating efficiencies by: 1) eliminating unnecessary
layers of management, 2)increasing field management authority, and 3)
empowering center directors.
Under the new organizational structure, four Regional Vice Presidents
are responsible for center operations in each of their respective geographical
areas. Each region is divided into 11 to 14 areas led by an Area Coordinator
who in turn is responsible for an average of 23 centers. A new position, Vice
President of Operations, has been created to coordinate the activities of the
four Regional Vice Presidents and regional activities with the corporate
headquarters in Montgomery, Alabama. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion of the financial implications of this reorganization.)
Although substantial reorganization changes were implemented during
fiscal 1996, the Company continues to evaluate certain other support functions
and systems in an effort to improve future operating effectiveness and
efficiencies, as well as to improve the quality of services.
STOCK REPURCHASE PROGRAMS AND SUBSEQUENT EVENTS
On February 15, 1995 the Board of Directors of KinderCare authorized
the repurchase of up to $10 million of the Company's Common Stock. This
repurchase was completed and all shares retired during the second quarter
ending December 15, 1995. On May 2, 1996, the Board of Directors authorized
another repurchase of $10 million, which was increased to $23.0 million on June
3, 1996. Under this second stock buyback program, as of May 31, 1996, 259,000
shares and 120,000 warrants had been repurchased for $4.2 million; and, as of
July 26, 1996, 1,111,500 shares and 435,000 warrants had been repurchased for
$18.3 million.
On June 3, 1996, the Board of Directors of KinderCare authorized the
purchase of up to $30 million par of the Company's 10-3/8% Senior Notes due
2001. During the first quarter of fiscal 1997, the Company purchased $30
million par of the Notes at an aggregate price of $31.5 million. This
transaction results in recording an extraordinary loss of $1.2 million, net of
$0.8 million in tax benefits, in the first quarter of fiscal 1997.
1
GENERAL OPERATIONS
KinderCare is the largest preschool and child care company in the
United States based upon number of centers, children served and revenues. The
Company provides center-based child care and pre-school educational services
five days a week throughout the year to children between the ages of six weeks
and twelve years. At July 26, 1996 the Company operated 1,144 child care
centers located in 38 states and the United Kingdom and had enrollment of
approximately 119,000 full-time and part-time children. The Company's
aggregate center capacity is approximately 140,000 full-time children. For the
fiscal year ended May 31, 1996 and the year ended June 2, 1995, average
occupancy rates were 75.9% and 76.3%, respectively, and the average full-time
three-year-old weekly tuition rates (which the Company believes approximates
the Company's average full-time weekly tuition rates) were $100 and $96,
respectively.
A number of national demographic trends have significantly increased
demand for the Company's services. According to the United States Bureau of
the Census, in 1989 (for the first time since 1964, the final year of the "baby
boom") and repeatedly through 1995, the annual number of babies born
approximated four million. In addition to the increase in the number of babies
born in recent years, the demand for center-based child care has been growing
more rapidly on a percentage basis than the demand for home-based child care.
Since 1965, center-based child care has grown from caring for an estimated 6%
of the total number of children receiving child care to 30% in 1993. The
Company believes that it is well positioned to capitalize on the increased use
of child care.
KinderCare seeks to differentiate its educational and other child care
services through its "Whole Child Development" concept with professionally
planned, age-specific educational programs. This concept includes programs that
provide children with activities that support physical, intellectual,
emotional, and social development. New programs are developed and existing
programs are frequently enhanced by the Company's education department, under
the leadership of two professionals with Ph.D.'s in early childhood
education/curriculum supervision. The programs use developmentally appropriate
materials, activities and resources which cater to the differing needs of
various age groups and are used by center teachers as the foundation for each
week's program. The programs include age-appropriate experiences in areas such
as reading, math, science and language, and provide unique opportunities for
motor skill development through indoor and outdoor activities. COMPUTER
CLUBS(TM), a program for children of pre-school and school age, provides
educational opportunities linked to the curriculum for children to acquire
computer literacy at an early age. These programs are further enhanced by
PLAYSCAPES, which are designed to create an outdoor learning environment, and
the Company's LET'S MOVE, LET'S PLAY(TM) movement video for children. The
Company's WHOLE CHILD DEVELOPMENT(TM) programs are provided in Company centers
designed and tailored specifically to accommodate the special needs and safety
requirements of children. Centers are staffed with a director, an assistant
director and an appropriate number of staff and teachers as required by state
licensing requirements and Company standards.
The Company operates three types of child care centers - KinderCare
community centers, KINDERCARE AT WORK(R) centers and KID'S CHOICE(TM) centers.
KinderCare community
2
and KINDERCARE AT WORK centers typically provide education and child care
services to children between the ages of six weeks and 12 years. KID'S CHOICE
centers are for school age children provided in separate facilities designed
specifically for this age group and which are apart from the Company's
community centers. The KID'S CHOICE program offers before- and after-school
programs plus a full-day summer program. In the geographic locations served by
KID'S CHOICE centers, the Company's community centers generally provide child
care services to children under the age of six.
The Company's centers are open throughout the year, generally Monday
through Friday from 6:30 a.m. to 6:00 p.m. although hours may vary by
location. Children are usually enrolled on a weekly basis for either full-day
or half-day sessions and are accepted, where capacity permits, on an hourly
basis. The Company's tuition rates vary for children of different ages, with
the tuition for three-year-old children approximating the average tuition rate
charged for all children.
BUSINESS STRATEGY
The Company's business strategy is to: (i) develop or acquire new
centers and new child care formats in demographically appropriate and carefully
selected locations; (ii) - enhance communications and information systems to
support greater autonomy and business decisions at the center level, within a
framework of "One Company, One Policy"; (iii) continue its sales and marketing
efforts aimed at increasing new enrollments and promoting customer retention
and loyalty; (iv) reduce staff turnover through enhanced benefits and training
programs for center directors and staff; (v) broaden its child care services
through an innovative age-specific curriculum; (vi) improve its operating
efficiencies by taking advantage of economies of scale and centralized support
services; and (vii) maintain and improve the facilities and equipment at its
existing child care centers through regular renovations and modernization.
Child Care Center Development. The Company continually evaluates new
sites for child care centers and plans to continue to focus its new center
development on child care centers of varying capacities located in larger
metropolitan markets where the Company believes the market for child care
services will support higher tuition rates. However, attractive and growing
locations in smaller metropolitan areas which meet the Company's operating and
financial goals also will be pursued. In these situations, smaller more
economical child care center buildings will be constructed.
During fiscal year 1996, the Company opened 36 new centers: 22
community centers; six KINDERCARE AT WORK centers and eight KID'S CHOICE
centers. During fiscal 1997, the Company anticipates opening 20 to 23 new
centers consisting of 17 to 19 KinderCare community centers, one KINDERCARE AT
WORK center and two to three community centers in the United Kingdom. These
additions will be through new center construction or new leases. There are no
additions to the Company's KID'S CHOICE format scheduled as management does
not believe the new format concept is meeting its full potential and needs
further refinement. To augment new center development, the Company is seeking
to purchase existing child care centers where demographics, operating
standards, and customer service are similar.
3
The Company seeks to locate child care centers in middle to
upper-middle income suburban areas near residential developments, elementary
schools, shopping centers and office parks. Other locations are considered as
opportunities arise. The Company makes location decisions based upon a
detailed site analysis that includes feasibility and demographic studies and
financial modeling. The real estate and development staff work closely with
operations and marketing personnel with the objective of opening centers with
the highest possible pre-enrollment.
Communication and Information Systems. The Company continually seeks
to improve its operating efficiencies by re-engineering its support services
and providing management with more timely information through its nationwide
communications network and its automated information systems. The Company
introduced company-wide E-mail and on-line inquiry for all managers and has
been able to increase the span of control for field managers and eliminate one
senior level of field management in fiscal 1996.
The Company is expanding its nationwide network to include the
Internet and company wide Intranet applications. The Company believes that its
communications network and information system is unique in the child care
industry and will continue to use the system to improve the quality of child
care and enhance the educational experience of KinderCare students.
Advertising and Promotions. The Company's promotional activities are
designed to increase new enrollments, primarily through Yellow Pages and
customer referrals. These activities are also designed to enhance customer
loyalty through various programs, including HELPING AMERICA'S BUSIEST
FAMILIES(R). The Company's advertising emphasizes preschool education,
computers, and quality child care. The Company believes that this advertising
message creates name awareness and service differentiation by communicating the
Company's commitment to a defined program devoted to the development of the
whole child. For fiscal 1997, the Company is employing a local marketing plan
addressing human resources, operations, and local market needs.
Employee Training. The Company's center staff training program
utilizes a mentor approach in which veteran teachers are assigned to new
employees to provide immediate feedback and guidance during the introductory
training course, as research indicates that caregivers learn more quickly by
emulating role models. Additional levels of training include the Company's
Certificate of Excellence and Child Development Associate certificate, a
nationally recognized credential that staff and center directors are
encouraged, and financially supported, to earn. In addition, staff training
stations, which contain all the training materials and equipment, were
available in all centers. In fiscal 1997, the Company plans to initiate
tracking systems to enforce consistent and timely completion of staff training.
KinderCare encourages center directors and their staff to obtain
accreditation from the National Association for the Education of Young Children
("NAEYC"). NAEYC offers professional development opportunities to early
childhood educators designed to improve the quality of services to children
from birth through age eight - the critical years of development.
4
Currently, 32 KinderCare centers are NAEYC accredited and 478 are undergoing
self-evaluation or are in the first steps of accreditation.
To encourage participation in training programs, teachers receive a
wage increase upon satisfactory completion of each step. Additionally,
KinderCare provides a tuition assistance program for eligible staff, is
expanding employee medical plans, and is establishing salaried positions for
primary teachers. The Company believes that the combination of these efforts
will enhance the quality of child care and educational services and will
improve staff retention, all of which will promote customer retention.
Expansion and Improvement of Child Care Education and Services. As
part of the Company's commitment to its customers and the quality of child care
and educational services that it provides, the Company continually tests and
implements innovative services and offerings. During fiscal 1996, the Company
rolled out a new program for school-aged children called KC IMAGINATION
HIGHWAY(TM). This program encourages children to engage in meaningful,
purposeful, long-lasting projects that require an active imagination.
Another new concept that enhances the Company's quality of services is
the development and implementation of multi-age groupings in the Company's two
recently revised preschool programs, ONCE UPON A TIME(R) and MY WINDOW ON THE
WORLD(R). Research indicates that multi-age grouping has many social,
emotional, intellectual and physical benefits for preschool children. Our
centers benefit by being able to fill class rooms without locking children into
specific age group settings.
Expansion and improvement of quality is also evident in the Company's
new commitment to NAEYC Accreditation for centers. The accreditation process
starts with an in-depth and comprehensive self study which analyzes the quality
of existing services and provides direction for growth and development of the
individual center. The resulting accreditation is a nationally recognized
credential that parents will recognize as a "seal of approval" ensuring
quality.
The Company's KINDERCARE AT WORK division currently operates 40
on-site/near-site employer-sponsored child care centers for 15 hospitals, eight
universities, and several large corporations such as Walt Disney, Lego Systems,
University of Utah, and Ford Motor Co. The Company plans to pursue additional
benefit partnerships with employers through joint center developments and
management agreements.
In addition to the educational programming offered in its child care
centers, the Company has developed a variety of specialized services tailored
to the busy lifestyles of its customers in a program called "HELPING AMERICA'S
BUSIEST FAMILIES(R)". Under this program, a quarterly newsletter, SMALL
TALK(TM), is mailed directly to customers which provides parents with current
information regarding child development, program information, parenting tips,
child care ideas and center activities. Other aspects of the program offered
by each KinderCare center include periodic extended evening hours and a
departure snack that is provided to the children as they are picked up by their
parents.
5
Centralized Support Services. The Company continually attempts to
improve its operating efficiencies by re-engineering its support services and
providing management with more timely information through its automated
information systems. The centralized computer system is designed to improve
financial and operating reporting, as well as to assist management in analyzing
information for its marketing, pricing and center development decisions.
Facility and Equipment Improvement. The Company is committed to
maintaining and enhancing its child care centers. The Company believes that
facility and equipment improvements have resulted in increased revenues through
increases in tuition rates, as parents are willing to pay a premium for such
improvements. The Company's child care centers are designed specifically for
the needs of children and are well-equipped and regularly renovated.
The following table summarizes center openings and closings, for the
indicated periods:
[Download Table]
FISCAL FISCAL FISCAL TWENTY-ONE FISCAL
YEAR YEAR YEAR WEEKS ENDED YEAR
1996 1995 1994 MAY 28, 1993 1992
----------------------------------------------------
Openings
KinderCare community centers 22 29 4 1 8
KinderCare at Work 6 3 4 3 5
Kid's Choice centers 8 13 23 -- --
Centers sold or closed (a) 25 37 63 33 58
(a) One additional Community Center was converted to a KID'S CHOICE
center in fiscal 1996, three in fiscal 1995 and two in fiscal 1994.
EDUCATIONAL PROGRAMS
The Company's educational programs are designed to provide
opportunities for the development of the whole child, as embraced in the
Company's slogan, THE WHOLE CHILD IS THE WHOLE IDEA(TM). The child-centered
environment consists of classrooms which have been designed and furnished to
meet the creative and developmental needs of young children. Classrooms
encourage children to explore and learn at their own pace. The schedule of
activities provides for quiet, active, group and individual participation with
opportunities for outdoor play on specially designed playscapes. The Company's
age-specific programs offer a wide variety of curriculum activities based upon
monthly topics and weekly themes such as transportation, seasons, colors,
numbers, pets, safety, shapes and sizes.
Each KinderCare center is designed to function as a neighborhood
operation where the center director has the necessary autonomy to tailor the
programs to the needs of the local community. The Company emphasizes selection
of staff who are responsive to children, and each teacher is given the
opportunity, training and resources to plan active and creative programs.
Opportunity for professional growth is available through company-wide training
programs, KinderCare Certification of Excellence Programs, and tuition
reimbursement for Child Development Associate employment-related college course
work. The Company also maintains an Education and Training Department in its
corporate headquarters. This department is led by two professionals with
Ph.D.'s in early childhood education/curriculum supervision and is staffed by
curriculum specialists.
6
In the INFANT PROGRAM (ages six weeks to one year), care is
individualized with daily routines focusing on one-on-one time to build
affection and trust. Language development activities begin in the infant care
program as does fostering physical and social skills through interaction with
other infants and adults. Strict health and sanitation policies have been
developed in accordance with state licensing requirements to ensure a safe
environment which permits infants' exploration of their surroundings.
Toddlers (ages one to two years) are encouraged to learn as they
explore and conquer the activity areas of their classrooms. The toddler
program, LOOK AT ME!(R), has been designed to develop the toddler through play
opportunities and support the toddler as he or she gains independence and
skills. Monthly curriculum ideas and activity suggestions emphasize fun
learning and self-help skills.
The Company's program for two-year-olds, LET ME DO IT!(R), recognizes
that a child's second year of life is a time of energy, curiosity and
independence. The LET ME DO IT! program is designed to help the child grow and
develop by learning at his or her own pace through play. The program
emphasizes physical development, including dressing, feeding and toileting, and
intellectual development encompassing learning colors, shapes, language skills
and decision-making.
The Company has two preschool programs suitable for multi-age groups.
MY WINDOW ON THE WORLD is designed to encourage inquisitive children to
discover questions and formulate answers using the world of nature. KinderCare
utilizes Your Big Backyard, the National Wildlife Federation's magazine for
pre-schoolers, as a resource for this program. Through this program, children
learn expression through art, dramatic play, science, table games, books and
music, as well as important language, literacy and math skills.
The Company's ONCE UPON A TIME(R) program based on children's
literature, both classic and modern, is the second pre-school program. The
concepts developed in the stories provide a foundation for learning math
relationships, colors and shapes, language and literacy skills, comparisons,
social awareness, fine-motor skills and creative expression. This program also
is designed to be suitable for multi-age settings with children ages three to
five years.
Approximately two-thirds of the Company's centers have a KINDERGARTEN
AT KINDERCARE program where children learn through play, as well as activities
and experiences that are hands-on and sensory in nature. Children participate
primarily in small group instruction and carefully designed free exploration
activities that promote specific skills. Language arts, math, science,
physical education, fine arts and music, health and safety, and social studies
are all curriculum components of the nationally recognized curriculum,
developed by DLM, a division of SRA.
The Company's newest program, KC IMAGINATION HIGHWAY(TM), is designed
to meet the differentiating needs of active, social school-aged children.
Because 6 to 12-year-olds spend most of their school day sitting as desks and
tables engaged in quiet, traditional paper/pencil activities, the new program
is designed to include many stimulating and challenging activities and
projects, ranging from loud and active to quiet, thoughtful, and
7
social. The foundation of this new program is based upon the project approach.
The goal is for children to use their imaginations.
KID'S CHOICE (started in August 1993) is the Company's program for
school-aged children provided in separate facilities designed specifically for
this age group and which are apart from the Company's community centers. The
KID'S CHOICE program offers year-round facilities with before-and after-school
programs plus a full-day summer program. KID'S CHOICE facilities are divided
into areas for quiet reading, studying, socializing, exploration of new
interests and play. KID'S CHOICE focuses on providing an age-specific
environment for activities that lead to physical, intellectual, emotional and
social growth also utilizing the KC IMAGINATION HIGHWAY(TM) program.
CORPORATE CHILD CARE SERVICES
The Company organized its corporate child care services, referred to
as KINDERCARE AT WORK, to offer business, industry and institutions, including
universities and hospitals, alternatives for providing on-site
employer-sponsored child care. These alternatives include developing on-site
centers, operating employers' on-site centers through management contracts, and
providing consulting services for developing and managing centers.
The Company operates 40 on-site centers for corporations such as Delco
Electronics Corp., Ford Motor Co., Lego Systems, Inc., The Walt Disney Company,
Inc., several universities and various hospitals. Of the 40 on-site centers,
34 are Company-owned or leased and 6 are operated by the Company under
management contracts. The management contracts for KINDERCARE AT WORK centers
generally provide for a three-to-five-year initial period with renewal options
ranging from two to five years. The Company's compensation under such
agreements is generally based on a fixed fee with annual escalations. There is
one KINDERCARE AT WORK center scheduled to open in fiscal 1997
KinderCare at Work also sponsors a tuition subsidy program, KINDUSTRY,
for over 400 companies nationwide, including several Fortune 500 corporations,
city/state governments, and health care providers. Kindustry participants
qualify for a 10% tuition discount on KinderCare child care services.
PERSONNEL
The Company's day-to-day center operations are organized into four
regions and 50 areas reporting to a vice president of operations. Individual
centers are managed by a director and an assistant director. The Company has
recently established a position of primary teacher who supervises the teachers
for all classes in a specific age-group, ensuring proper supervision at every
level. All management personnel participate in periodic training programs or
meetings and must comply with applicable state and local licensing regulations.
All center staff are required to attend an initial half-day training session
prior to beginning work. Additionally, the Company has developed and
implemented extensive training programs to certify personnel as teachers of
various age groups in accordance with the Company's internal standards and in
connection with its age-specific educational programs. Due to high employee
turnover rates in the child care industry, the Company focuses on and
emphasizes recruiting
8
and retaining qualified personnel. The Corporate Human Resources department is
organized to constantly monitor salaries and benefits for competitiveness as
well as the development of sound human resources policies and programs. The
Company also has developed a program which aids in identification of high
quality district manager/center director candidates.
The Company's most fundamental interest is in the care and safety of
the children enrolled in its centers. Utmost precautions are taken to ensure
the safety and well-being of all children, however, a small number of incidents
of alleged child abuse have been reported. It is the Company's policy to
report any allegation of abuse to the appropriate authorities, to investigate
all allegations of abuse, and, if appropriate, to place any accused employee on
administrative leave pending resolution of the incident. Although no
assurances can be made that allegations of abuse will not occur in the future,
the Company's procedures are designed to prevent child abuse, and the Company
has not historically experienced a material adverse impact from allegations of
child abuse.
COMPETITION
The child care and pre-school education industry is highly fragmented
and competitive. The Company's competition consists principally of local
nursery schools and day care centers, some of which are non-profit, including
church-affiliated centers, providers of services that operate out of their
homes and other proprietary companies which may operate a number of centers.
Local nursery schools and day care centers generally charge less for their
services than the Company charges. Many church-affiliated and other non-profit
child care centers have no or lower rental costs than the Company and may
receive donations or other funding to cover operating expenses. Consequently,
tuition rates at these facilities are commonly less than the Company's rates.
Additionally, fees for home-based care are normally lower than fees for
center-based care because providers of home care are not always required to
satisfy the same health, safety or operational regulations as the Company's
centers. The Company competes by offering professionally planned educational
and recreational programs, contemporary, well-equipped facilities, trained
teachers and supervisory personnel, and a range of services, including infant
and toddler care, drop in service and the transportation of older children
enrolled in the Company's before- and after-school program between the
Company's child care centers and schools.
EMPLOYEES
As of July 26, 1996 the Company employed approximately 23,000 persons,
of whom 287 were employed at corporate headquarters, 168 were regional or area
managers and support personnel, and the remainder were employed at the centers.
Center employees include center directors; assistant directors; primary
teachers; regular full-time and part-time teachers; temporary and substitute
teachers and teachers' aides; and, non-teaching staff, including cooks and van
drivers. All management and supervisory personnel are salaried; all other
employees are paid on an hourly basis. The Company does not have an agreement
with any labor union and believes that its relations with its employees are
good.
SEASONALITY
9
New enrollments are generally highest in September and January;
accordingly, August and December are the best months to open new centers.
Centers which open at other times usually experience a lower rate of enrollment
during early months of operation. Enrollment generally decreases 5% to 10%
during holiday periods and summer months.
GOVERNMENTAL LAW AND REGULATION
Child care centers are subject to numerous state and local regulations
and licensing requirements. Although these regulations vary from jurisdiction
to jurisdiction, government agencies generally review the fitness and adequacy
of buildings and equipment, the ratio of staff personnel to enrolled children,
staff training, record keeping, the dietary program, the daily curriculum and
compliance with health and safety standards.
There are certain tax incentives for child care programs. Section 21
of the Internal Revenue Code provides a federal income tax credit ranging from
20% to 30% of certain child care expenses for "qualifying individuals" (as
defined therein). The fees paid to the Company for child care services by
eligible taxpayers qualify for the tax credit, subject to the limitations of
Section 21. Slightly less than 13% of the Company's net revenues are generated
from federal and state child care assistance programs, primarily the Child Care
and Development Block Grant and At-Risk Programs. These programs are designed
to assist low-income families with child care expenses and are administered
through various state agencies. Under new legislation, signed by President
Clinton in August, 1996, additional funding for child care will be available
for low income families as part of welfare reform. Depending on state
decisions, the Company may experience an increase in revenue from this program.
No assurance can be given that these changes will have any material effect on
the Company.
The Federal Americans With Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations
and employment. The Disabilities Act became effective as to public
accommodations in January 1992 and as to employment in July 1992. Since
effectiveness of the Disabilities Act, the Company has not experienced any
material adverse impact as a result of the legislation.
INSURANCE
The Company's insurance program currently includes the following types
of policies: workers' compensation, comprehensive general liability, automobile
liability, property, excess "umbrella" liability, and a medical payment program
for accidents which applies to each child enrolled in a Company center. The
policies provide for a variety of coverages, are subject to various limits, and
include substantial deductibles or self-insured retention. For liability
insurance purposes, the Company's policies generally have retention limits of
$1.0 million per occurrence. Property insurance policy deductibles vary,
depending upon the nature of the insured event. Special insurance is sometimes
obtained with respect to specific hazards, when and if deemed appropriate and
available at reasonable cost. As of May 1996, the Company had approximately $14
million of letters of credit available to secure its obligations under
retrospective and self-insurance programs. There is no assurance that claims in
excess of, or not included within, the Company's coverage will not be asserted,
the effect of which could have an adverse effect on the Company.
10
EXECUTIVE OFFICERS
The names, ages, positions with the Company and employment history of
each of the executive officers of the Company are set forth below.
[Enlarge/Download Table]
YEAR FIRST
ELECTED
DIRECTOR OR
NAME AGE POSITION WITH COMPANY OFFICER
---- --- --------------------- -----------
Sandra W. Scarr, Ph.D. 60 Chief Executive Officer and Chairman of the Board 1990
Philip L. Maslowe 49 Executive Vice President and Chief Financial Officer 1993
William E. Bailey 37 Vice President/Corporate Controller 1991
Rebecca S. Bryan 39 Vice President/General Counsel/Secretary 1989
Joe R. Cooper 39 Vice President/Finance 1996
Robert H. Fries 47 Vice President/Treasurer 1996
Marcia P. Guddemi, Ph.D. 43 Vice President/Education, Research, and Training 1991
Jerry B. Hill 57 Vice President/Human Resources 1989
Mark F. Hoffmann 33 Vice President/Real Estate 1996
S. Wray Hutchinson 36 Vice President/Operations 1996
Ann P. Muscari 66 Vice President/Customer Service and Government
Relations 1985
Bob J. Willey 56 Vice President/Information Services 1995
Dr. Scarr was elected Chief Executive Officer on June 15, 1995. She
has been a Director of the Company since 1990 and has served as the Company's
Chairman of the Board since July 1994. Dr. Scarr was the Commonwealth
Professor of Psychology at the University of Virginia from 1983 until joining
KinderCare. Among other things, Dr. Scarr has been President of the Society
for Research in Child Development, President of the Behavior Genetics
Association, a Director of the American Psychological Society and a Fellow of
the American Association for the Advancement of Science. In 1996-1997 she
will serve as President of the American Psychological Society. She is also an
elected member of the American Academy of Arts and Sciences and the author of
numerous books and journal articles on child development.
Mr. Maslowe was promoted to Executive Vice President in September
1995. He joined the Company as Chief Financial Officer on July 26, 1993. From
February 1991 until June 1993, Mr. Maslowe served as Executive Vice President,
Chief Financial Officer, Treasurer and, beginning September 22, 1992, as a
member of the Board of Directors for Thrifty Corporation, a retail chain
operating over 1,000 drug, membership discount, and sporting goods stores
located throughout the United States. Prior to joining Thrifty Corporation,
Mr. Maslowe spent over ten years at the Vons Companies, Inc., a food/drug
retail chain located primarily in Southern California and Nevada. From 1987 to
1991, he was Group Vice President of Finance at Vons.
Mr. Bailey was promoted to Vice President/Corporate Controller in
February 1993. Mr. Bailey joined the Company in August 1987 as Manager of
Financial Reporting and Senior Accountant, served as Director of Planning and
Analysis from June 1989 to October 1991 and as Corporate Controller from
October 1991 to February 1993.
11
Ms. Bryan was named Vice President and General Counsel in June 1989
and Secretary in March 1991. She joined the Company in June 1987 as Assistant
General Counsel and Assistant Secretary.
Mr. Cooper joined the Company in May 1996 as Vice President of
Finance. Prior to joining the Company, he was Financial Controller for Bath &
Body Works (division of The Limited, Inc.) from 1995 to 1996 and from 1991
through 1995, he was employed by The Limited, Inc. in the positions of Director
of Financial Reporting and Manager of Financial Reporting.
Mr. Fries was promoted to Vice President and Treasurer in April 1996.
Mr. Fries began his employment with the Company in March 1994 as Assistant
Treasurer, Debt and Income Taxes and Assistant Secretary. Prior to his joining
KinderCare, Mr. Fries served as Director of Taxes for Blount, Inc. from 1986
until 1994.
Dr. Guddemi joined the Company in August 1991 as Vice President of
Education and Research. For over five years prior to joining the Company, she
was an assistant professor of early childhood education at the University of
South Florida and at the University of South Carolina.
Mr. Hill was named Vice President of Human Resources in October 1995.
He joined the Company in July 1987 as Director of Risk Management and was named
Vice President of Corporate Insurance and Risk Management in June 1989.
Mr. Hoffmann joined the Company in February 1996 as Vice President of
Real Estate. Prior to joining the Company, Mr. Hoffmann served as the Director
of Real Estate for B.C. Great Lakes, LLC from 1993 until 1996 and in various
real estate management positions of increased responsibility with Taco Bell
Corporation from 1989 through 1993.
Mr. Hutchinson was promoted to Vice President of Operations in April
of 1996. He began his employment with the Company in 1992 as a District
Manager in New Jersey and was later promoted to Region Manager for the Chicago
area. From 1990 until 1992, Mr. Hutchinson was self-employed.
Ms. Muscari was named Vice President of Customer Service and
Government Relations in March 1990. Ms. Muscari was Vice President of
Corporate Communications from October 1985 to March 1990.
Mr. Willey joined the Company in June 1995 as Vice President of
Information Services. From 1992 to 1995, Mr. Willey served as MIS Director
for PETSTUFF, Inc. and was Corporate Information Officer for ANCO Management
Service, Inc. from 1989 to 1992.
12
ITEM 2. PROPERTIES
The Company's home office is located in Montgomery, Alabama, in a
60,000 square foot building owned by the Company. At July 26, 1996 the Company
owned 733 of its operating child care centers and leased or subleased 406
operating child care centers and operated 5 child care centers under management
contracts. The Company owns or leases certain other child care centers which
have not yet been opened or which are being held for disposition. In addition,
the Company owns certain real property held for future development of centers.
A typical KinderCare community center is a one-story, air-conditioned
building located on approximately one acre of land (larger capacity centers are
situated on parcels ranging from one to four acres of land) constructed in
accordance with model designs generally developed by the Company. The
community centers contain open classroom and play areas and complete kitchen
and bathroom facilities and can accommodate from 70 to 250 children, with most
centers able to accommodate 90 to 135 children. Over the past few years, the
Company opened community centers that are larger in size with a building
licensed capacity ranging from 165 to 200 children. Each center is equipped
with a variety of audio and visual aids, educational supplies, games, puzzles,
toys and vehicles used for field trips and transporting children enrolled in
the Company's after-school program. KINDERCARE AT WORK provides individualized
child care programs for each corporate sponsor. Facilities are on the
corporate sponsor's site and range in capacity from 42 to 187 children. KID'S
CHOICE centers contain homework and computer game rooms, and are able to
accommodate from 74 to 180 children. Each provides school-age children with
areas to perform activities of interest to them. In addition, virtually all
centers are equipped with computers for children's educational programs.
13
The KinderCare community centers, KinderCare at Work and Kid's Choice
centers operated by the Company at July 26, 1996 were located as follows:
[Download Table]
COMMUNITY KINDERCARE AT KIDS CHOICE
LOCATION CENTERS WORK CENTERS CENTERS
------------- --------- ------------- -----------
Alabama 13 -- 1
Arizona 16 2 --
Arkansas 4 -- --
California 93 1 2
Colorado 23 -- 1
Connecticut 13 2 --
Delaware 5 -- --
Florida 66 6 2
Georgia 37 -- 2
Illinois 72 3 8
Indiana 25 2 1
Iowa 7 2 1
Kansas 18 -- --
Kentucky 13 1 1
Louisiana 13 2 --
Maryland 21 -- 1
Massachusetts 17 -- --
Michigan 32 2 1
Minnesota 31 -- 1
Mississippi 4 -- --
Missouri 48 -- --
Nebraska 10 1 --
Nevada 10 -- --
New Jersey 27 4 --
New Mexico 7 -- --
New York 2 1 --
North Carolina 34 -- 2
Ohio 56 3 6
Oklahoma 10 -- --
Oregon 13 3 --
Pennsylvania 41 -- --
Rhode Island -- 1 --
Tennessee 27 2 2
Texas 124 1 8
Utah 6 -- --
Virginia 51 -- 2
Washington 47 -- 2
Wisconsin 23 1 --
United Kingdom 1 -- --
------ -------- --------
Total 1,060 40 44
====== ======== ========
Subsequent to January 1, 1993, the Company renegotiated approximately
70 leases related to under-performing centers in order to amend the terms and
allow the Company to terminate these leases at any time with minimal notice.
In connection with the termination option, the Company, in certain instances,
prepaid rent totaling approximately $3.2 million. Such amounts are being
amortized over the termination period or over the appropriate remaining months
of the lease period. Commitments under these amended leases totaled
14
approximately $16.8 million over the original lease terms. Upon giving the
landlord termination notice of at least six months, the amendments provide that
the Company would be permitted to utilize the facilities for the final
six-month period rent-free, as well as relieve itself of all future commitments
remaining under the lease. As of July 26, 1996, the Company has elected to
close 24 of these centers and the remaining unamortized prepaid balance is $2.6
million.
In 1992, the Company fully implemented a centralized maintenance
program to improve the maintenance of its facilities located across the
country. The department's maintenance technicians, each with a van stocked
with spare parts, handle routine and preventative maintenance functions through
the central telephone dispatch and systematic checklist system. Each
technician is responsible for the support of approximately 25 centers. A level
of supervision also has been added to provide guidance and additional technical
support to the technicians. These supervisors are responsible for specific
geographic areas and each manages approximately 5 technicians. The department
recently completed the final phase of this implementation and reduced the staff
of technicians from 90 to 65.
Substantially all of the Company's assets, including the capital stock
of its subsidiaries, are pledged as security for the Company's debt.
The Company believes that its properties are in good condition and are
adequate to meet its current and reasonably anticipated future needs.
15
ITEM 3. LEGAL PROCEEDINGS
The plaintiffs have dismissed all charges against the Company in the
stockholder suit filed in the Circuit Court of Montgomery County, Montgomery,
Alabama styled Peter N. Zachary, et al. V. Richard Grassgreen, Perry Mendel,
and KinderCare Learning Centers, Inc. in the Circuit Court for Montgomery,
Alabama, Case No., CV-91-2801-G. The suit was for $20 million in compensatory
damages and $20 million in punitive damages in each of seven counts. The
Company was named as defendant in five of those seven counts. In December
1995, the other defendants settled with the shareholders.
On July 7, 1992, KinderCare filed a Proof of Claim for $37.1 million
in the United States District Court for the Southern District of New York in a
pending action brought by Presidential Life Insurance Company against Michael
R. Milken, et al. styled Presidential Life Insurance Co., v. Michael R.
Milken, et al., Class Action in District Court, Southern District of New York,
92 Civ. 1151 (MP). The claim alleges that, but for the defendants' wrongful
conduct as described in the claim, the Company would not have made the junk
bond purchases outlined in the claim. The claim is under review and is subject
to court approval and available distribution. The Company estimates it will
receive approximately $0.5 million in final settlement of this claim based on
funds available for distribution; however, there are no assurances that the
Company will receive this or any other amount pursuant to the claim.
The Company is presently, and is from time to time, subject to
additional claims and suits arising in the ordinary course of business,
including suits alleging child abuse. In certain of such actions, plaintiffs
request damages that are covered by insurance. The Company believes that none
of the additional actions of which it is currently aware will materially affect
its financial position or future operating results, although no assurance can
be given with respect to the ultimate outcome of any such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCK HOLDER MATTERS
(a) Price Range of Common Stock and Warrants
The Company's Common Stock and Warrants trade on the Nasdaq National
Market System. The following table shows, for the fiscal periods indicated, the
high and low bid quotations per share for the Common Stock and Warrants as
reported by Nasdaq. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs, or commissions, and
may not necessarily represent actual transactions.
[Download Table]
COMMON STOCK WARRANTS
--------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
FISCAL YEAR ENDED MAY 31, 1996
First Quarter $ 14 5/8 $ 12 1/4 $ 4 $ 2 3/4
Second Quarter 14 1/4 11 3/4 3 5/8 1 3/8
Third Quarter 13 3/8 11 3/4 1 7/8 1 1/4
Fourth Quarter 15 2/5 12 1/4 3 5/8 1 1/4
FISCAL YEAR ENDED JUNE 2, 1995
First Quarter $ 16 1/4 $ 13 $ 7 1/4 $ 4 1/2
Second Quarter 15 1/4 10 7/8 6 3/4 4 1/4
Third Quarter 13 11 5 1/2 3 5/8
Fourth Quarter 14 5/8 12 3/8 5 3 1/2
(b) Approximate Number of Security Holders
On July 26, 1996 the last reported sale prices of the Common Stock and
Warrants on the Nasdaq National Market were $15.25 and $3.50, per share and
Warrant, respectively. As of July 26, 1996 there were approximately 1,894 and
1,893 holders of record of the Common Stock and Warrants, respectively.
(c) Dividend Policy
During the past three fiscal years, the Company has not declared or
paid any cash dividends or distributions on its capital stock. The Company
currently intends to retain earnings of the Company for operations and does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
other data for the Company as of and for the periods indicated. This
information should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto and the information set forth in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations." The statement of operations for the year ended May 28, 1993 is
presented for comparison to the fiscal years ended May 31, 1996, June 2, 1995
and June 3, 1994 to reflect the Company's change in fiscal year. Due to the
implementation of Fresh Start Reporting on April 2, 1993, the statement of
operations for the year ended May 28, 1993 includes both pre- and
post-bankruptcy amounts, and is therefore not comparable to the other periods
presented. The balance sheet data for the Company as of May 31, 1996, June 2,
1995, June 3, 1994, May 28, 1993 and April 2, 1993, and the statement of
operations data for the years ended May 31, 1996, June 2, 1995 and June 3, 1994
and eight weeks ended May 28, 1993, after giving effect to the Plan of
Reorganization, are not comparable to the historical financial condition or
results of operations of the Company prior to the Plan of Reorganization. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes to Consolidated Financial Statements.
18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share and child care centers data)
[Enlarge/Download Table]
POST-CONFIRMATION
-------------------------------------------------------
EIGHT
JUNE 3, 1994 WEEKS ENDED,
MAY 31, 1996 JUNE 2, 1995 (53 WEEKS) MAY 28, 1993
-------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Operating revenues (b) $ 541,264 $ 506,505 488, 726 72,612
Operating expenses 489,555 455,719 441,560 68,609
-------------------------------------------------------
Operating income (loss) 51,709 50,786 47,166 4,003
Net investment income (loss) 250 2,635 3,176 140
Interest expense (d) 16,727 17,318 17,675 3,253
Reorganization items -- -- -- --
-------------------------------------------------------
Earnings (loss) before taxes and extraordinary item 35,232 36,103 32,667 890
Income tax expense (benefit) 13,549 14,037 12,837 273
-------------------------------------------------------
Earnings (loss) before extraordinary item 21,683 22,066 19,830 617
Extraordinary item - gain (loss) on debt discharge, net of taxes -- -- (2,397) --
-------------------------------------------------------
Net income(loss) $ 21,683 $ 22,066 17,433 617
=======================================================
Earnings (loss) per share:
Primary
Before extraordinary item and cumulative effect
of accounting change $ 1.10 $ 1.07 .97 .03
Extraordinary item -- -- (.12) --
Cumulative effect of accounting change -- -- -- --
-------------------------------------------------------
Net income (loss) $ 1.10 $ 1.07 .85 .03
=======================================================
Fully diluted
Net income $ 1.05
=============
CHILD CARE CENTERS:
Number of centers (at end of period) 1,148 1,137 1,132 1,160
Center capacity (at end of period)(g) 140,000 137,000 136,000 138,000
Average percentage occupancy(h) 76% 77% 77% 75%
Average three-year-old weekly tuition rate (actual dollars) (h) $ 100 $ 96 $ 90 $ 83
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $525,476 $501,274 $456,920 $457,388
Total debt (i) 146,617 160,394 178,692 218,037
Shareholders' equity (deficit) 265,458 244,238 206,905 179,487
PRE-CONFIRMATION
------------------------------------------------------------------
FISCAL YEAR ENDED
THIRTEEN --------------------------------
YEAR ENDED WEEKS ENDED JANUARY 3, 1992
MAY 28, 1993 (A) APRIL 2, 1993 JANUARY 1, 1993 (53 WEEKS)
------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Operating revenues (b) $447,243 $ 114,705 437,203 411,040
Operating expenses 423,841 104,675 413,800(c) 412,299(c)
----------------------------------------------------------------
Operating income (loss) 23,402 10,030 23,403 (1,259)
Net investment income (loss) 8,686 3,309 5,908 (1,216)
Interest expense (d) 24,709 692 38,400 46,578
Reorganization items 103,483(e) 101,604(e) 1,879 --
----------------------------------------------------------------
Earnings (loss) before taxes and extraordinary item (96,104) (88,957) (10,968) (49,053)
Income tax expense (benefit) (216) 404 (246) 1,655
----------------------------------------------------------------
Earnings (loss) before extraordinary item (95,888) (89,361) (10,722) (50,708)
Extraordinary item - gain (loss) on debt discharge, net of taxes 157,573 157,573 -- --
----------------------------------------------------------------
Net income(loss) $ 61,685 $ 68,212 (10,722) (50,708)
================================================================
Earnings (loss) per share:
Primary
Before extraordinary item and cumulative effect
of accounting change N/A (a) $ (1.71) (.21) (.99)
Extraordinary item N/A (a) 3.01 -- --
Cumulative effect of accounting change N/A (a) -- -- --
----------------------------------------------------------------
Net income (loss) $ 1.30 (.21) (.99)
================================================================
Fully diluted
Net income
CHILD CARE CENTERS:
Number of centers (at end of period) 1,160 1,166 1,196 1,240
Center capacity (at end of period)(g) 138,000 139,000 140,000 146,000
Average percentage occupancy(h) 74% 75% 72% 70%
Average three-year-old weekly tuition rate (actual dollars) (h) $ 83 $ 83 $ 83 $ 80
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $457,388 $ 457,000 $ 516,282 $ 486,942
Total debt (i) 218,037 218,175 400,136 402,146
Shareholders' equity (deficit) 179,487 178,870 (44,886) (34,164)
19
(a) To facilitate a discussion of the Company's operating performance for
the fiscal year ended June 3, 1994 (a 53-week fiscal year), the
corresponding prior year period ended May 28, 1993 (a 52-week fiscal
year) is presented. For purposes of this discussion, this period is
referred to as "the year ended May 28, 1993." Due to the
implementation of Fresh Start Reporting, the consolidated financial
statements of the Company after April 2, 1993 are not comparable in
all material respects to any financial statements prior to that time,
and the operating results for the year ended May 28, 1993 include both
pre- and post-bankruptcy amounts. Additionally, on the Effective Date
of the Plan of Reorganization, all previously outstanding common stock
of the Company was canceled and 20,000,000 shares of new common stock
were issued. Accordingly, the presentation of historical earnings per
share information for periods including the Effective Date are not
meaningful. Earnings (loss) per share data on a pro-forma basis,
assuming the 20,000,000 shares of new common stock had been
outstanding since the beginning of the year ended May 28, 1993, would
be as follows:
Loss before extraordinary item $(4.79)
Extraordinary item 7.87
------
Net earnings $ 3.08
======
(b) An additional week of revenues is included in fiscal years 1994 and
1991 due to the Company's 52/53 week fiscal year policy.
(c) In fiscal year 1991, the Company recorded charges related to the
write-off of goodwill of its wholly-owned subsidiary, Sylvan Learning
Corporation. In fiscal years 1991 and 1992, portions of the 1990
closed center reserves were recaptured. The net effect of these items
was to increase operating expenses by $7.3 million in fiscal year 1991
and to reduce operating expenses by $4.0 million in fiscal year 1992.
In addition, debt restructuring costs of $5.3 million and $7.0 million
are included in operating expenses for fiscal years 1992 and 1991,
respectively. Debt restructuring costs represent legal and other
professional fees incurred in connection with the Company's efforts to
reorganize its debt prior to filing for Chapter 11 on November 10,
1993.
(d) During the Chapter 11 petition from November 10, 1992 through March
31, 1993, the Company did not pay or accrue interest on approximately
$356.5 million debt obligations classified as "Liabilities subject to
settlement under reorganization proceedings" on the Company's
consolidated balance sheet at January 1, 1993.
(e) Reorganization items for the year ended May 28, 1993 and the 13 weeks
ended April 2, 1993 include $97.7 million of net adjustments to state
assets and liabilities at fair value in connection with the adoption
of Fresh Start Reporting (as defined).
(g) Prior to January 4, 1992, the Company utilized licensed capacity in
measuring its center capacity. As of January 4, 1992, the Company
changed its method of measuring center capacity to building capacity.
As of April 2, 1992, aggregate building capacity was approximately
101.0% of licensed capacity.
(h) Occupancy, a measure of revenue producing center capacity utilization,
is defined as actual net revenues for the respective period divided by
the sum of the building capacity of each of the Company's centers
multiplied by such center's basic tuition rate for full-time,
three-year-old students for the respective period. The three-year-old
tuition rate represents the weekly tuition rate paid by a parent for a
three-year-old
20
child to attend a KinderCare center five days during one week. The
three-year-old tuition rate represents an approximate average of all
tuition rates at each center. Center occupancy mix, however, can
significantly affect these averages.
(i) Total debt includes long-term debt, current portion of long-term debt
and, at January 1, 1993, debt obligations of $356.5 million included
in the classification, "Liabilities subject to settlement under
reorganization proceedings" on the Company's consolidated balance
sheet.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
document. The Company's fiscal year ends on the Friday closest to May 31. The
information presented herein refers to the years ended May 31, 1996 ("fiscal
1996"), June 2, 1995 ("fiscal 1995"), and June 3, 1994 ("fiscal 1994"). Fiscal
1996 and fiscal 1995 were 52-week fiscal years. Fiscal 1994 was a 53-week
fiscal year with the additional week included in the fourth quarter.
When used in this report, press releases and elsewhere by management
or the Company from time to time, the words "believes," "anticipates," and
"expects" and similar expressions are intended to identify forward-looking
statements that involve certain risks and uncertainties. A variety of factors
could cause actual results to differ materially from those anticipated in the
Company's forward-looking statements, some of which include Federal and state
legislation regarding welfare reform or Federal legislation impacting minimum
wage increases, and other risk factors that are discussed from time to time in
the Company's SEC reports. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date thereof.
The Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Occupancy, a measure of the utilization of center capacity, is defined
as actual net revenues for the respective period divided by the sum of the
building capacity of each of the Company's centers multiplied by such center's
basic tuition rate for a full-time, three-year-old student for the respective
period. The three-year-old tuition rate represents the weekly tuition rate
paid by a parent for a three-year-old child to attend a KinderCare center five
days during one week. The three-year-old tuition rate represents an
approximate average of all tuition rates at each center. Center occupancy mix,
however, can significantly affect these averages with respect to any specific
child care center.
22
The fiscal year ended May 31, 1996 ("fiscal 1996"), compared to the
fiscal year ended June 2, 1995 ("fiscal 1995").
The following table shows the comparative operating results of the
Company (dollars in thousands):
[Enlarge/Download Table]
CHANGE
-------------------------
PERCENT PERCENT PERCENT
MAY 31, OF JUNE 2, OF OF
1996 REVENUES 1995 REVENUES AMOUNT REVENUES
--------- -------- --------- -------- --------- ---------
Operating revenues $ 541,264 100.0% $ 506,505 100.0% $ 34,759 ---%
--------- ------ --------- ------ -------- -------
Operating expenses:
Salaries, wages and benefits 284,115 52.5 263,527 52.0 20,588 0.5
Rent and lease payments 26,515 4.9 26,099 5.2 416 (0.3)
Depreciation 33,972 6.3 28,071 5.5 5,901 0.8
Other 143,469 26.5 138,910 27.5 4,559 (1.0)
Litigation settlements and
restructuring costs(income), net 1,484 0.3 (888) (0.2) 2,372 0.5
--------- ------ --------- ------ -------- -------
Total operating expenses 489,555 90.5 455,719 90.0 33,836 0.5
--------- ------ --------- ------ -------- -------
Operating income $ 51,709 9.5% $ 50,786 10.0% $ 923 (0.5)%
========= ======= ========= ====== ======== =======
Operating revenues - Fiscal 1996 revenues increased $34.8 million or
6.9% over fiscal 1995. The increase in operating revenues is mostly
attributable to a 4.2% weighted average tuition increase implemented in the
fall of 1995 and to new center openings and acquisitions, offset by a slight
decline in same center occupancy and center closings. Fiscal 1996 same center
revenues, defined as centers in operation during both full years, increased
4.1% over fiscal 1995.
Total Company average occupancy decreased slightly to 75.9% in fiscal
1996 from 76.3% in fiscal 1995. Same center average occupancy remained almost
constant at 76.9% for fiscal 1996 compared to 77.1% for fiscal 1995. The
slight decrease in same center average occupancy is attributable to heavy
competitor promotional activities and increasing market price sensitivities
during the fall of 1995.
During fiscal 1996, the Company opened 36 new centers: 22 KinderCare
community centers, six KINDERCARE AT WORK centers and eight KID'S CHOICE
centers; and closed or sold 25 centers. During fiscal 1995 the Company opened
or acquired 45 new centers: 29 KinderCare community centers (including 12
acquired centers), three KINDERCARE AT WORK centers and 13 KID'S CHOICE
centers; and closed or sold 37 centers. The average capacity for new community
center openings is 175 and 163 in fiscal 1996 and 1995, respectively, while
closed center average capacity was 103 and 110, respectively, and the average
capacity of the new KID'S CHOICE centers is 149. Consequently, total capacity
increased from 137,000 at the end of fiscal 1995 to 140,000 at the end of
fiscal 1996.
Salaries, wages and benefits - Salaries, wages and benefits increased,
as a percentage of revenues, by 0.5% to 52.5%. The increase is attributable to
increased hours and wage rates since the end of fiscal 1995 offset partially by
improvements in field overhead and administrative costs due to management
reorganizations.
23
Rent and lease expense - Rent expense increased $0.4 million in fiscal
1996 from fiscal 1995. This increase is attributable to rent incurred on new
KID'S CHOICE and community center leases offset partially by the closing of 17
leased community centers and the favorable effects of the disposal of some
leased vehicles.
Depreciation - Depreciation expense increased $5.9 to $34.0 million in
fiscal 1996 million from $28.1 million in fiscal 1995. This increase is
primarily attributable to the opening of 36 new centers and to the expenditure
of $25.2 million in fiscal 1996 for center renovations and short-lived assets,
such as the computers for children's educational programs, offset somewhat by
the closing of 25 older centers in fiscal 1996.
Other operating expenses - Other operating expenses, as a percentage
of revenues, decreased 1.0% to 26.5% in fiscal 1996 from 27.5% in fiscal 1995.
This improvement is mostly due to: 1) a decrease in insurance costs from
improving experience, 2) gains on the sales of assets, and 3) improvements
associated with the field management reorganization such as decreases in travel
costs and office supplies. These improvements are partially offset by
increased costs associated with upgrades in the food and educational programs
and increased marketing costs.
Litigation Settlements and Restructuring Costs (Income), Net
Litigation settlements - On July 3, 1995, the Company received
a cash distribution of $11.3 million from The Enstar Group, Inc.
("Enstar"), the Company's former parent, in connection with a
settlement of the Company's claim against Enstar in U.S. Bankruptcy
Court in Montgomery.
In the third of quarter 1995, the Company received approximately $0.9
million in connection with litigation settlements with Enstar and
KinderCare's former Chairman of the Board.
Restructuring - On June 15, 1995 the Board of Directors
appointed Dr. Sandra Scarr, Chairman of the Board, to be Chief
Executive Officer ("CEO"), replacing the former CEO whose resignation
was effective on the same date. Subsequent to the appointment, the
Company made substantial changes to its field operations management
and support functions. As a result of the changes, the Company
charged $4.0 million of restructuring costs, primarily severance
agreements, against fiscal 1996 earnings during the quarter ending
September 22, 1995 ("first quarter 1996").
On April 16, 1996, the Company implemented further organization
changes in both field and facilities management, redefining the roles
and responsibilities of center directors and the other field
management positions. These changes were implemented to increase
operating efficiencies by: 1) eliminating unnecessary layers of
management, 2) increasing management authority, 3) empowering center
directors. One-time costs of $2.5 million, primarily to cover
severance arrangements were charged against earnings during the fourth
quarter of fiscal 1996.
24
Although substantial reorganization changes were implemented during
fiscal 1996, the Company continues to evaluate certain other support
functions and systems in an effort to improve future operating
effectiveness and efficiencies, as well as to improve the quality of
services.
Management has limited KID'S CHOICE development to contracts in
process, and recorded an impairment loss of $6.3 million in first
quarter 1996, consisting of a writedown of $5.3 million for the
recoverability of certain long lived assets, primarily leasehold
improvements, and $1.0 million for anticipated lease termination
costs.
Operating income - Fiscal 1996 operating income increased 1.8% or $0.9
million. As a percentage of revenues, fiscal 1996 operating margin of 9.5%
decreased 0.5% from the prior year operating income margin for the reasons
discussed above. Before litigation settlements and restructuring costs, as
discussed above, fiscal 1996 operating income of $53.2 million is $3.3 million
better than fiscal 1995 operating income of $49.9 million and, as a percentage
of revenues, operating income margin remained about flat at 9.8%.
Fiscal 1996 EBITDA, defined as earnings before interest expense,
income taxes, depreciation and amortization, increased 5.4% or $4.4 million.
As a percentage of operating revenues, the EBITDA margin was 0.2% lower than
the prior fiscal year at 15.9% from 16.1%. Before litigation settlements and
restructuring costs, as discussed above, fiscal 1996 EBITDA increased 8.5% or
$6.8 million to $87.4 million from $80.6 million, and, as a percentage of
revenues, increased 0.3% to 16.2% from 15.9%. EBITDA does not necessarily
indicate that cash flow is sufficient to fund all of the Company's cash needs,
nor does it represent cash flow from operations as defined by generally
accepted accounting principles.
Net investment income - Net investment income was $0.2 million for
fiscal 1996 compared to $2.6 million for fiscal 1995. The decrease is
primarily due to the sale of certain investments during fiscal 1995.
Interest expense - Interest expense decreased to $16.7 million for
fiscal 1996 from $17.3 million for fiscal 1995. This decrease is attributable
to a reduction of long term debt obligations offset by higher average interest
rates. The Company's weighted average interest rate on its long-term debt,
including amortization of debt issuance costs, was 10.8% for fiscal 1996 versus
10.0% for fiscal 1995
Income tax expense - Income tax expense for fiscal 1996 of $13.5
million was in excess of amounts computed by applying statutory federal income
tax rates to income before income taxes due primarily to state income taxes.
Additional paid-in capital was increased by $4.1 million for tax benefits
recognized in fiscal 1996 relating to valuation allowances established for
deferred taxes at April 2, 1993, the effective date of the Company's emergence
from a pre-organized bankruptcy.
25
The fiscal year ended June 2, 1995 ("fiscal 1995", a 52-week year)
compared to the fiscal year ended June 3, 1994 ("fiscal 1994", a 53-week year).
The following table shows the comparative operating results of the
Company (dollars in thousands):
[Enlarge/Download Table]
CHANGE
---------------------
PERCENT PERCENT PERCENT
JUNE 2, OF JUNE 3, OF OF
1995 REVENUES 1994 (A) REVENUES AMOUNT REVENUES
------- -------- -------- -------- ------ --------
Operating revenues 506,505 100.0% 488,726 100.0% 17,779 ---%
------- ------ ------- ------ ------ ----
Operating expenses:
Salaries, wages and benefits 263,527 52.0 256,468 52.5 7,059 (0.5)
Rent and lease payments 26,099 5.2 22,563 4.6 3,536 0.6
Depreciation 28,071 5.5 25,148 5.1 2,923 0.4
Other 138,910 27.5 137,381 28.1 1,529 (0.6)
Gain on litigation settlements (888) (0.2) -- 0.0 (888) (0.2)
------- ------ ------- ------ ------ ----
Total operating expenses 455,719 90.0 441,560 90.3 14,159 (0.3)
------- ------ ------- ------ ------ ----
Operating income 50,786 10.0% 47,166 9.7% 3,620 0.3%
======= ====== ======= ====== ====== ====
(a) - The fiscal year ended June 3, 1994 was a 53-Week year.
Operating revenues - Including the 53rd week in fiscal 1994, fiscal
1995 revenues (52-weeks) increased $17.8 million or 3.6%. After adjusting
fiscal 1994 to a comparable 52-week basis, fiscal 1995 revenues of $506.5
million increased $27.3 million or 5.7% over fiscal 1994. The increase in
operating revenues is mostly attributable to tuition increases. In fiscal
1995, tuition rates were increased approximately 4.4% during the second
quarter. In fiscal 1994, tuition rates were increased 4.8% during the second
quarter and increased an additional 1% during the fourth quarter. Fiscal 1995
revenues also were favorably impacted by $0.5 million from 12 centers acquired
on May 5, 1995. Fiscal 1995 same center revenues, defined as centers in
operation during both full years, increased 5.84% over fiscal 1994, again after
adjusting fiscal 1994 to a comparable 52-week basis.
Total company average occupancy decreased slightly to 76.7% in fiscal
1995 from 77.2% in fiscal 1994. Same center average occupancy remained almost
constant at 77.1% for fiscal 1995 compared to 77.4% for fiscal 1994. The
slight decrease in occupancy is attributable to new center openings and a
softer than expected third and fourth quarter.
During fiscal 1995, the Company opened or acquired 45 new centers: 29
KinderCare community centers (including 12 acquired centers), three KINDERCARE
AT WORK centers and 13 KID'S CHOICE centers; and closed or sold 37 centers.
During fiscal 1994 the Company opened 31 new centers: four KinderCare community
centers, four KINDERCARE AT WORK centers and 23 KID'S CHOICE centers; and
closed or sold 63 centers. The average capacity for new community center
openings is 163 and 171 in fiscal 1995 and 1994, respectively, while closed
center average capacity was 110 and 101, respectively. Consequently, total
capacity remained about the same.
Salaries, wages and benefits - Salaries, wages and benefits decreased
as a percentage of revenues by 0.5% to 52.0%. These improvements reflect
continued management focus on center staff scheduling initiated in early 1994,
which led to improvement throughout fiscal 1994 and 1995 and favorable cost
reductions in employee medical costs due to new program
26
roll-outs and management focus on medical cost containment. The improvement in
center staff productivity (calculated as a percentage of revenues) was
partially offset by increased support services and the expansion of the Kid's
Choice format as the Company continued its focus on improving the quality of
services and the expansion of new centers and new center format concepts.
Rent and lease expense - Rent expense increased $3.5 million in fiscal
1995 from fiscal 1994. This increase is primarily attributable to an increase
in rent on the Company's vehicle leases and rent incurred on new KID'S CHOICE
leases.
Depreciation - Depreciation expense increased $2.9 to $28.1 million in
fiscal 1995 million from $25.2 million in fiscal 1994. The increase is
attributable to the opening of 45 new centers, of which 28 were owned, offset
somewhat by the closing of 37 older centers, of which only nine were owned, and
depreciation on short-lived assets acquired in fiscal 1995.
Other operating expenses - Other operating expenses, as a percentage
of revenues, decreased 0.8% to 27.3% in fiscal 1995 from 28.1% in fiscal 1994.
This improvement is mostly due to a decrease in insurance costs from improving
experience, which was partially offset by increases in support services, new
center development, replacement of education supplies, and pre-opening and
start-up costs of new centers.
Gain on litigation settlements - In third quarter 1995, the Company
received approximately $0.9 million in connection with litigation settlements
with Enstar and KinderCare's former Chairman of the Board.
Operating income - Including the 53rd week in fiscal 1994, fiscal 1995
operating income (52 weeks) increased 7.7% or $3.6 million. After adjusting
fiscal 1994 to a comparable 52-week basis operating income for fiscal 1995 of
$50.8 million increased 9.8% or $4.5 million over fiscal 1994. As a percentage
of revenues, fiscal 1995 operating margin of 10.0% improved by 0.30% over the
prior year operating income margin for the reasons discussed above.
Including the 53rd week in fiscal 1994, fiscal 1995 EBITDA, defined as
earnings before interest expense, income taxes, depreciation and amortization,
(52 weeks) increased 7.9% or $6.0 million. After adjusting fiscal 1994 to a
comparable 52-week basis, EBITDA increased 8.6% or $6.4 million over fiscal
1994 EBITDA. As a percentage of operating revenues, the EBITDA margin, as
adjusted, improved 0.6% over the prior fiscal year to 16.1%. EBITDA does not
necessarily indicate that cash flow is sufficient to fund all of the Company's
cash needs, nor does it represent cash flow from operations as defined by
generally accepted accounting principles.
Net investment income - Net investment income decreased $0.6 million
from $3.2 million in fiscal 1994 to $2.6 million in fiscal 1995. During fiscal
1995, the Company recognized a $2.0 million gain on the sale of securities and
earned $0.6 million interest on cash balances. In fiscal 1994, a $1.9 million
gain was recognized on the collection and retirement of the note receivable
received in conjunction with the sale of Sylvan Learning Corporation
27
("Sylvan"), a wholly-owned subsidiary, in July 1993, and earned $1.3 million
interest on cash balances.
Interest expense - Interest expense decreased slightly to $17.3
million for fiscal 1995 from $17.7 million for fiscal 1994. This decrease is
attributable to a reduction of long term debt obligations offset by higher
average interest rates and amortization of debt issuance costs associated with
the Refinancing Plan. The Company's weighted average interest rate on its
long-term debt, including amortization of debt issuance costs, was 10.0% for
fiscal 1995 versus 9.6% for fiscal 1994.
Income tax expense - Income tax expense for fiscal 1995 of $14.0
million is in excess of amounts computed by applying statutory federal income
tax rates to income before income taxes due primarily to state income taxes.
Additional paid-in capital was increased by $13.9 million for tax benefits
recognized in fiscal 1995 relating to valuation allowances established for
deferred taxes at April 2, 1993, the effective date of the Company's emergence
from a pre-organized bankruptcy.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Year 1996
The Company's consolidated net cash flow from operations for fiscal
1996 was $75.9 million, compared to $73.0 million for fiscal 1995. Cash and
cash equivalents totaled $15.6 million at May 31, 1996 compared to $14.2
million at June 2, 1995 and the ratio of current assets to current liabilities
was .58 to 1, versus .54 to 1 at June 2, 1995.
New enrollments are generally highest in September and January, with
attendance declining during July and August and the year-end holiday season.
To prepare centers for fall enrollments, the Company seeks during the summer
months to open new centers, accelerate renovations and improvements to existing
facilities, and accelerate purchases of equipment. Consequently, the
combination of decreased attendance and escalated capital activity during the
summer months and during the year-end holiday period may result in decreased
liquidity during these periods. Management believes that the combination of
cash provided from operations and funds available under the Company's revolving
credit facility are adequate to meet the Company's working capital needs.
On May 31, 1995, the Company amended its Bank Credit Facility to
include an extension of the maturity date to May 15, 1998 and the release of up
to 19 collateralized centers without the need to provide substitute collateral.
Additionally, capital expenditure limitations for fiscal years 1996 and 1997
were increased by $25 million to $96 million and $108 million, respectively.
Fiscal year 1998's capital expenditure limitations were set at $115 million.
These limits may also be increased by the proceeds from qualified mortgages and
sale leasebacks.
There is no scheduled amortization relating to the Senior Notes or
borrowings under the Bank Credit Facility, although the Senior Notes mature
June 1, 2001 and the Bank Credit Facility must be repaid or renegotiated by
May 15, 1998.
28
On June 3, 1996, the Board of Directors of KinderCare authorized the
purchase of up to $30 million par of the Company's 10-3/8% Senior Notes due
2001. During the first quarter of fiscal 1997, the Company purchased $30
million par of the Notes at an aggregate price of $31.5 million. This
transaction will result in an extraordinary loss of $1.2 million, net of income
taxes, in the first quarter of fiscal 1997.
As of July 27, 1996, approximately $64.2 million was available under
the revolving credit facility to incur any additional indebtedness for capital
expenditures, to maintain existing facilities and develop new centers, or to
meet working capital needs. The Company's 10 3/8% senior notes are rated Ba3
by Moody's and Standard & Poor's assigned the Company a BB- issuer credit
rating and the senior notes a B rating.
On February 15, 1995, the Board of Directors of KinderCare authorized
the repurchase of up to $10 million of the Company's Common Stock. This
repurchase was completed and all shares retired during the second quarter
ending December 15, 1995. On May 2, 1996, the Board of Directors authorized
another repurchase of $10 million and increased it to $23.0 million on June 3,
1996. As of May 31, 1996, under the second stock buyback program, 259,000
shares and 120,000 warrants had been repurchased for $4.2 million. As of July
27, 1996, under the second stock buyback program, 1,111,500 shares and 435,000
warrants have been repurchased for $18.3 million.
The Company intends to continue to make purchases from time to time as
market conditions are favorable on the open market or in negotiated
transactions.
During first quarter fiscal 1996, the Company received a cash
distribution of $11.3 million from The Enstar Group, Inc., the Company's former
parent, in connection with a settlement of the Company's claim against Enstar
in US Bankruptcy Court in Montgomery.
During second quarter fiscal 1996, the Company sold holdings in
Leveraged Preferred Stock Partnerships for $3.4 million.
During fiscal 1996, the Company received $2.0 million in cash from the
repayments of notes receivable related to the sales of centers in prior years.
In addition, the Company also received $3.7 million in cash from the sale of
assets during the year.
Capital Expenditures
Capital expenditures during fiscal 1996 amounted to approximately
$67.3 million. Approximately $14.9 million was spent in renovations and
improvements to existing facilities, approximately $12.4 million was spent on
equipment purchases, including $0.5 million on computers for children's
educational programs, and the remaining $40.0 million was spent on new center
development. Capital expenditures during fiscal 1995 amounted to approximately
$74.4 million. During fiscal 1995, approximately $13.5 million was spent on
renovations and improvements to existing facilities, approximately $17.4
million was spent on equipment purchases, including $6.8 million on computers
for children's educational programs, and the remaining $43.5 million was spent
on new center development.
29
Fiscal 1996 new center openings totaled 36 centers; consisting of 22
KinderCare community centers, six KINDERCARE AT WORK centers and eight Kid's
Choice(TM) centers. This compares to 45 center openings in fiscal 1995;
consisting of 29 KinderCare Community Centers (12 acquired centers), three
KINDERCARE AT WORK centers and 13 KID'S CHOICE centers. The average capacity
for community centers opened in fiscal 1996 and 1995, respectively, is 175 and
163.
During fiscal 1997, the Company anticipates opening 20 to 23 new
centers consisting of 17 to 19 KinderCare community centers, one KINDERCARE AT
WORK center and two to three centers in the United Kingdom. There are no
planned additions to the Company's KIDS' CHOICE(TM) format as management does
not believe the new format concept is meeting its full potential and needs
further refinement. New centers are based upon detailed site analyses that
include feasibility and demographic studies and financial modeling. Of course,
no assurance can be given by the Company that it will be able to successfully
negotiate and acquire properties, or meet targeted deadlines. Frequently, new
site negotiations are delayed or canceled or construction delayed for a variety
of reasons, many outside the control of the Company.
To augment new center development, the Company is seeking to purchase
existing child care centers where demographics, operating standards, and
customer services are similar. Again, no assurance can be given by the Company
that it will be able to successfully negotiate and acquire existing centers.
The Company also expects to continue its plans to renovate, upgrade
and improve existing centers for such items as improved playgrounds, computers,
educational materials, and infant suites. At present, most centers are
equipped with computers for children's educational programs.
Under the amended provisions of the Indenture and the Bank Credit
Facility, the Company is permitted to make increased capital expenditures.
Capital expenditure limits for fiscal years 1997 and 1998 are $108 million and
$115 million, respectively. Also, the Company is permitted greater flexibility
under the provisions of the Indenture and the New Credit Facility with respect
to the acquisition of additional indebtedness, whether through qualified
mortgages or sale leaseback transactions.
The Company believes that cash on hand, borrowings under the Bank
Credit facility, cash provided by operating activities and funds from permitted
additional financing will adequately provide for its working capital and debt
service needs and will be sufficient to fund the Company's expected capital
expenditures over the next several years. Although no assurance can be given
that such sources will be sufficient, the capital expenditure program has
substantial flexibility and is subject to revision based on various factors,
including but not limited to, business conditions, changing time constraints,
cash flow requirements, debt covenants, competitive factors, and seasonality of
openings. If the Company experiences a lack of working capital, it is in a
position to cut back its capital expenditures. In the near term, if the
Company were to reduce substantially or postpone its capital expenditures,
management believes there would be no substantial impact on current operations
and it is
30
likely that more cash would be available for working capital needs and debt
servicing. In the long term, if these expenditures were substantially reduced,
in the Company's opinion, its operating business and ultimately its cash flow
would be adversely impacted.
Lease Commitments
Lease commitments for child care facilities for fiscal 1997 total
approximately $15.7 million which the Company expects to fund from operations.
Subsequent to January 1, 1993, the Company re-negotiated approximately
70 leases related to under-performing centers in order to amend the terms and
allow the Company to terminate these leases at any time with minimal notice.
The Company paid approximately $3.2 million in exchange for the modified terms.
Commitments under these amended leases totaled approximately $16.8 million over
the original lease term. Upon giving the landlord notice of at least six
months, the Company would be permitted to utilize the facilities for the final
six-month period and pay no rent, as well as relieve itself of all future
commitments remaining under the lease. As of July 26, 1996, the Company had
elected to close 24 of these centers and the remaining unamortized prepaid
balance was $2.6 million.
31
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) was issued. SFAS 123
encourages companies to adopt a fair value based method of accounting for
stock-based compensation plans in place of the intrinsic value based method
provided for by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Companies which continue to apply the
provisions of APB 25 must make pro forma disclosures in the notes to their
financial statements of net income and earnings per share as if the fair value
based method of accounting defined in SFAS 123 had been applied. The Company
plans to adopt SFAS 123 in fiscal year 1997 on a pro forma disclosure basis.
SEASONALITY
New enrollments are generally highest in September and January, with
attendance declining 5% to 10% during the summer months and the year-end
holiday period. As a result, the Company seeks to open centers in August and
December in anticipation of the peak enrollment periods. The combination of
decreased attendance and escalated center development in the summer months and
during the year-end holiday period may result in decreased liquidity during
these periods.
GOVERNMENTAL LAW & REGULATIONS
There are certain tax incentives for child care programs. Section 21
of the Internal Revenue Code provides a federal income tax credit ranging from
20% to 30% of certain child care expenses for "qualifying individuals" (as
defined therein). The fees paid to the Company for child care services by
eligible taxpayers qualify for the tax credit, subject to the limitations of
Section 21. Slightly less than 13% of the Company's net revenues are generated
from federal and state child care assistance programs, primarily the Child Care
and Development Block Grant and At-Risk Programs. These programs are designed
to assist low-income families with child care expenses and are administered
through various state agencies. Under new legislation, signed by President
Clinton in August 1996, additional funding for child care will be available for
low income families as part of welfare reform. Depending on state decisions,
the Company may experience an increase in revenue from this program. No
assurance, however, can be given that these changes will have any material
effect on the Company.
INFLATION AND WAGE INCREASES
Approximately 52.5% of operating expenses during fiscal 1996 consisted
of salary, wages and benefits. As of May 31, 1996, the Company's average wage
rate for hourly employees was $6.45 per hour, compared to the current federal
minimum wage rate of $4.25 per hour.
32
Management does not believe that the effect of inflation on the
results of the Company's operations has been significant in recent periods.
During 1996, Congress enacted an increase in the minimum hourly wage from $4.25
to $4.75 effective October 1, 1996, with an additional increase to $5.15 to be
effective on September 1, 1997. The Company believes the new wage rates will
result in increased expenses of approximately $1.0 million to $1.2 million in
fiscal 1997 and $2.6 million to $2.8 million in fiscal 1998. On an annual
basis, the resulting wage increase is expected to be approximately $3.1 million
and will not be experienced until fiscal 1999. The Company believes it can
recover any increase in expenses caused by the 1996 - 1997 wage adjustments and
additional adjustments necessitated by the increases in the minimum wage rate
by appropriate increases in its tuition rates. However, there can be no
assurance that the Company will be able to increase sufficiently its rates to
offset such increased costs.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
[Enlarge/Download Table]
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
MAY 31, 1996 JUNE 2, 1995 JUNE 3, 1994
------------------------------------------------------
Operating revenues $ 541,264 $ 506,505 $ 488,726
Operating expenses:
Salaries, wages and benefits 284,115 263,527 256,468
Rent and lease payments 26,515 26,099 22,563
Depreciation 33,972 28,071 25,148
Provision for allowance for doubtful accounts 3,908 3,612 3,885
Other 139,561 135,298 133,496
Litigation settlements and restructuring
costs (income), net 1,484 (888) --
----------------------------------------------------
Total operating expenses 489,555 455,719 441,560
----------------------------------------------------
Operating income 51,709 50,786 47,166
Net investment income 250 2,635 3,176
Interest expense 16,727 17,318 17,675
----------------------------------------------------
Income before income taxes and
extraordinary item 35,232 36,103 32,667
Income tax expense 13,549 14,037 12,837
----------------------------------------------------
Income before extraordinary item 21,683 22,066 19,830
====================================================
Extraordinary item - loss on debt discharge, net
of income taxes of $1,597 in 1994 -- -- (2,397)
Net income $ 21,683 $ 22,066 $ 17,433
====================================================
Primary income per common share:
Income before extraordinary item $ 1.10 $ 1.07 $ .97
Extraordinary item - loss on debt
discharge -- -- (.12)
----------------------------------------------------
Net income $ 1.10 $ 1.07 $ .85
====================================================
Weighted average common shares and share
equivalents 19,752 20,683 20,533
====================================================
Fully-diluted income per common share:
Net income $ 1.05
==========
Weighted average common shares and share
equivalents 20,683
==========
See accompanying notes to consolidated financial statements.
34
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
[Enlarge/Download Table]
MAY 31, 1996 JUNE 2, 1995
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 15,597 $ 14,233
Receivables:
Tuition (net of allowance for doubtful accounts of $1,884 and $873
at May 31, 1996 and June 2, 1995, respectively) 14,566 9,913
Other 563 1,156
Prepaid expenses and supplies 9,116 8,282
Deferred income taxes 4,664 2,099
--------- ---------
Total current assets 44,506 35,683
--------- ---------
Property and equipment, at cost:
Land 142,856 135,965
Buildings and leasehold improvements 305,292 269,938
Equipment 96,216 78,414
Construction in progress 16,825 13,373
--------- ---------
561,189 497,690
Less accumulated depreciation and amortization 92,664 55,244
--------- ---------
Net property and equipment 468,525 442,446
--------- ---------
Investments -- 1,981
Deferred income taxes 4,422 9,502
Other assets 8,023 11,662
--------- ---------
$ 525,476 $ 501,274
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 14,330 $ 12,639
Bank overdrafts 9,768 7,017
Current portion of long-term debt 853 889
Accrued expenses and other liabilities 51,163 45,926
--------- ---------
Total current liabilities 76,114 66,471
Long-term debt 145,764 159,505
Self insurance liabilities 17,652 17,927
Other noncurrent liabilities 20,488 13,132
--------- ---------
Total liabilities 260,018 257,035
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding -- --
Common stock, $.01 par value; authorized 40,000,000 shares;
issued 19,981,807 and 20,119,818 shares at May 31, 1996
and June 2, 1995, respectively; outstanding 19,946,807 and
20,119,818 shares at May 31, 1996 and June 2, 1995, respectively 199 201
Additional paid-in capital 204,003 203,890
Retained earnings 61,799 40,116
Cumulative translation adjustment (20) 32
--------- ---------
265,981 244,239
Less cost of 35,000 common shares held in treasury (523) --
--------- ---------
Total shareholders' equity 265,458 244,239
--------- ---------
$ 525,476 $ 501,274
========= =========
See accompanying notes to consolidated financial statements.
35
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
[Enlarge/Download Table]
ADDITIONAL CUMULATIVE
COMMON COMMON PAID-IN RETAINED TRANSLATION TREASURY
SHARES STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
-----------------------------------------------------------------------------
Balance at May 28, 1993 20,000,190 200 178,670 617 -- 179,487
Net income -- -- -- 17,433 -- 17,433
Tax benefits of the valuation
allowance for deferred tax assets -- -- 9,884 -- -- 9,884
Exercise of stock options and warrants 9,327 -- 101 -- -- 101
-----------------------------------------------------------------------------
Balance at June 3, 1994 20,009,517 200 188,655 18,050 -- 206,905
Net income -- -- -- 22,066 -- -- 22,066
Tax benefits of the valuation
allowance for deferred tax assets -- -- 13,932 -- -- -- 13,932
Cumulative translation adjustment -- -- -- -- 32 -- 32
Exercise of stock options and warrants 110,301 1 1,303 -- -- -- 1,303
-----------------------------------------------------------------------------
Balance at June 2, 1995 20,119,818 201 203,890 40,116 32 -- 244,239
Net income -- -- -- 21,683 -- -- 21,683
Tax benefits of the valuation
allowance for deferred tax assets -- -- 4,121 -- -- -- 4,121
Cumulative translation adjustment -- -- -- (52) -- (52)
Tax benefit of option exercises -- -- 993 -- -- -- 993
Repurchase and retirement of stock and
warrants (969,883) (10) (13,477) -- -- (523) (14,010)
Exercise of stock options and warrants 831,872 8 8,476 -- -- 8,484
-----------------------------------------------------------------------------
Balance at May 31, 1996 19,981,807 199 204,003 61,799 (20) (523) 265,458
=============================================================================
See accompanying notes to consolidated financial statements.
36
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
[Enlarge/Download Table]
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
MAY 31, JUNE 2, JUNE 3,
1996 1995 1994
----------------------------------------
Cash flows from operations:
Net income (loss) $ 21,683 $ 22,066 $ 17,433
Operating activities not requiring (providing) cash:
Depreciation 33,972 28,071 25,148
Write-down of KIDS CHOICE(TM) property and
equipment 5,312 -- --
Amortization of intangibles and other assets 1,533 1,681 95
Amortization of debt premium/discount -- -- (165)
Gain on sales and disposals of property and
equipment, net (1,684) -- --
Gain on sale of Sylvan Learning Corporation -- -- (1,900)
Deferred tax expense 12,285 9,862 10,342
Equity in earnings of leveraged preferred stock
partnerships and other investments -- (24) (49)
Extraordinary item-loss on debt discharge -- -- 2,397
Changes in operating assets and liabilities:
Receivables (2,473) 4,440 (519)
Prepaid expenses and supplies (1,354) 2,900 680
Other assets 116 (978) 6,900
Accounts payable, accrued expenses and
other liabilities 7,735 7,813 12,598
Other, net (1,228) (2,868) 1,391
----------------------------------------
Net cash provided by operating activities 75,897 72,963 74,351
----------------------------------------
See accompanying notes to consolidated financial statements.
37
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
[Enlarge/Download Table]
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
MAY 31, 1996 JUNE 2, 1995 JUNE 3, 1994
-------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (67,304) (74,376) (35,710)
Proceeds from sales of property and equipment 3,883 12,454 4,253
Proceeds from sales or redemption of investments 3,396 2,211 1,759
Proceeds from collection of notes receivable 2,042
Proceeds from the sale of Sylvan Learning
Corporation -- -- 3,150
Other, net -- 82 (156)
-------------------------------------------
Net cash used by investing activities (57,983) (59,629) (26,704)
-------------------------------------------
Cash flows from financing activities:
Purchases of treasury stock and warrants (14,010) -- --
Payments on long-term borrowings (13,777) (18,298) (179,097)
Exercise of stock options and warrants 8,484 1,303 101
Bank overdrafts 2,753 5,931 (11,224)
Proceeds from long-term borrowings -- -- 130,504
-------------------------------------------
Net cash used by financing activities (16,550) (11,064) (59,716)
-------------------------------------------
Increase (decrease) in cash and cash equivalents 1,364 2,270 (12,069)
Cash and cash equivalents at the beginning of the period 14,233 11,963 24,032
-------------------------------------------
Cash and cash equivalents at the end of the period $ 15,597 $ 14,233 $ 11,963
===========================================
Supplemental cash flow information:
Interest paid (net of amounts capitalized) $ 8,944 $ 14,850 $ 19,835
===========================================
Income taxes paid $ 3,795 $ 2,551 $ 8,352
===========================================
See accompanying notes to consolidated financial statements.
38
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
KinderCare Learning Centers, Inc.("KinderCare" or the "Company") is
the largest preschool and child care company in the United States. At the end
of fiscal 1996, KinderCare operated 1,147 centers in 38 states in the United
States and one center in the United Kingdom. The consolidated financial
statements include the financial statements of the "Company" and its wholly
owned subsidiaries: Mini-Skools Limited ("Mini-Skools"); KinderCare Development
Corporation; KinderCare Real Estate; KinderCare Learning Centres, Limited; and
KinderCare Properties, Limited. All significant intercompany balances and
transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the Friday closest to May 31. The
fiscal year ended June 3, 1994 ("fiscal 1994") was a 53-week fiscal year. The
fiscal years ended June 2, 1995 ("fiscal 1995") and May 31, 1996 ("fiscal
1996") were 52-week fiscal years.
Revenue Recognition
The Company recognizes revenue for child care services as earned.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of"(SFAS No. 121). SFAS No. 121
requires that, when certain conditions are present, the carrying value of
long-lived assets be reviewed for impairment and be reported at the lower of
carrying amount or fair value less costs to dispose. SFAS No. 121 also
establishes the procedures for review of recoverability, and measurement of
impairment if necessary, of long-lived assets used by an entity. The Company
adopted SFAS No. 121 during the first quarter of fiscal 1996, evaluated the
recoverability of long-lived assets, and, recorded a one-time, non-recurring
expense of $5.3 million for the impairment of certain long-lived assets
utilized in operating its KID'S CHOICE child care format (primarily leasehold
improvements, which were valued based on anticipated discounted cash flows).
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in banks and liquid
investments with original maturities not exceeding 90 days.
Property and Equipment
Property and equipment are stated at cost. Depreciation on buildings
and equipment is provided on the straight-line basis over the estimated useful
lives of the assets. Leasehold improvements are amortized over the shorter of
the estimated useful life of the improvements or the lease term, including
expected lease renewal options where the Company has the unqualified right to
exercise the option.
39
The Company's property and equipment is depreciated using the
following estimated useful lives:
[Download Table]
Life
-----------
Buildings 10-40 years
Building renovations 5-10 years
Leasehold improvements 5-10 years
Computer equipment 3 years
All other equipment 5-10 years
Investments
Investments are accounted for under the specific identification
method.
For years prior to fiscal 1996, the Company accounted for its
investments in leveraged preferred stock partnerships under the equity method.
All of the Company's holdings in leveraged preferred stock partnerships were
liquidated in fiscal 1996.
Pre-Opening Costs
Costs incurred prior to a center's opening are deferred and amortized
over one year. Pre-opening costs include training salaries, grand opening and
promotion expenses, and the initial purchase of forms and supplies needed to
operate the center.
Self Insurance Programs
The Company is self-insured for certain levels of general liability,
workers' compensation, property and employee medical coverage. Estimated costs
of these self-insurance programs are accrued at the undiscounted value of
projected settlements for known and anticipated claims.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year's presentation.
2. LITIGATION SETTLEMENTS AND RESTRUCTURING COSTS (INCOME), NET
On July 3, 1995, the Company received a cash distribution of $11.3
million from The Enstar Group, Inc., the Company's former parent, in connection
with a settlement of the Company's claim against Enstar in the U.S. Bankruptcy
Court in Montgomery.
40
On June 15, 1995, the Board of Directors appointed Dr. Sandra Scarr,
Chairman of the Board, to be Chief Executive Officer ("CEO"), replacing the
former CEO whose resignation was effective on the same date. Subsequent to the
appointment, the Company made substantial changes to its field operations
management and support functions. As a result of these changes, the Company
provided $4.0 million for restructuring costs, primarily severance, during the
quarter ending September 22, 1995 ("first quarter 1996").
On April 16, 1996 the Company implemented further organization changes
in both field and facilities management, redefining the roles and
responsibilities of Center Directors and the other field management positions.
These changes are resulting in increased management span of control, increased
empowerment at the center director level, and increased operating efficiencies.
One-time costs of $2.5 million were charged against earnings during the fourth
quarter of fiscal 1996, primarily to cover severance arrangements.
In connection with the above, less than 100 positions were eliminated.
The Company is continuing to evaluate certain other support functions and
systems in an effort to improve future operating effectiveness and efficiencies
as well as to improve the quality of services.
Management has limited KID'S CHOICE development to contracts in
process until the concept is more fully developed, and recorded an impairment
loss of $6.3 million in first quarter 1996, consisting of a writedown of $5.3
million for the recoverability of certain long lived assets, primarily
leasehold improvements, and $1.0 million for anticipated lease termination
costs.
Information relating to the reserves recorded for the changes in
management organization and anticipated KID'S CHOICE lease termination costs
are as follows(dollars in thousands):
Restructuring charges and lease termination costs
recorded in fiscal 1996 $ 7,531
Cash payments primarily severance and lease
termination costs (4,440)
-------
Remaining liabilities at May 31, 1996 $ 3,091
=======
In the third quarter of 1995, the Company received approximately $0.9
million in connection with litigation settlements with Enstar and KinderCare's
former Chairman of the Board.
3. PREPAID EXPENSES AND SUPPLIES
Prepaid expenses and supplies are summarized as follows (dollars in
thousands):
[Download Table]
MAY 31, 1996 JUNE 2, 1995
------------ ------------
Prepaid rent $ 3,676 $ 3,847
Inventories 2,491 2,350
Other 2,949 2,085
------------ ------------
$ 9,116 $ 8,282
============ ============
41
4. INVESTMENTS
Net investment income is summarized as follows (dollars in thousands):
[Download Table]
MAY 31, 1996 JUNE 2, 1995 JUNE 3, 1994
----------------------------------------------
Interest income $ 199 $ 612 $ 1,241
Gain on sale of leveraged
preferred stock partnerships 215
Gain on sale of Securities -- 2,000 --
Gain on sale of Sylvan -- -- 1,900
Equity in earnings of leveraged
preferred stock partnerships -- 23 48
Other (164) -- (13)
--------------------------------------------
$ 250 $ 2,635 $ 3,176
============================================
During fiscal 1996, the Company sold all of its holdings in leveraged
preferred stock partnerships at a gain of $0.2 million.
During fiscal 1995, the Company sold investment securities with a
carrying value of $0.2 million resulting in a gain of $2.0 million.
On January 29, 1993, the Company sold 100% of the outstanding common
stock of Sylvan, a wholly-owned subsidiary, for $8.0 million. The Company
received $4.5 million in cash and a promissory note in the amount of $3.5
million. A gain of approximately $3.0 million was recognized at the time of
the sale. The remaining gain of approximately $2.3 million was deferred to be
recognized under the installment method. On July 15, 1993, the Company
accepted prepayment of the $3.5 million note at a discounted amount of $3.2
million. In connection with the early retirement, the Company recognized a
$1.9 million gain in fiscal 1994.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows
(dollars in thousands):
[Download Table]
MAY 31, 1996 JUNE 2, 1995
------------ ------------
Accrued compensation and related taxes $ 17,282 $ 18,219
Self insurance 6,707 6,457
Deferred revenue 6,451 5,132
Accrued property taxes 5,633 5,712
Accrued interest 5,585 165
Accrued restructuring and lease termination costs 3,091 --
Accrued income taxes 2,402 6,967
Other 4,012 3,274
--------- ----------
$ 51,163 $ 45,926
========= ==========
42
6. LONG-TERM DEBT
Long-term debt is as follows (dollars in thousands):
[Enlarge/Download Table]
MAY 31, 1996 JUNE 2, 1995
------------ -----------
Secured:
Borrowings under Revolving Credit Facility at LIBOR plus 1.25% $ -- $ 13,000
Industrial refunding revenue bonds at variable rates of interest from
3.85% to 5.57% at May 31, 1996, and 3.95% to 6.25% at June 2, 1995
supported by letters of credit, maturing 1999 to 2009 33,025 33,025
Industrial revenue bonds secured by real property with maturities to
2005 at rates of 4.20% to 12.75% 5,738 5,939
Obligations secured by mortgages on real and personal property
payable in monthly installments through 2004 at rates of 8.75%
to 12.25% 7,854 8,430
Unsecured:
Senior Notes due 2001 at 10 3/8% 100,000 100,000
--------- ----------
146,617 160,394
Less current portion of long-term debt 853 889
--------- ----------
$ 145,764 $ 159,505
========= ==========
Revolving Credit Facility
The Company has an agreement with a number of participating banks
providing for: (i) a $115.0 million secured three-year Revolving Credit
Facility which may be used for general corporate purposes, including
construction of new facilities and permitted acquisitions, and (ii) a letter of
credit facility of approximately $35.0 million used to replace letters of
credit securing obligations of the Company to various issuers of industrial
revenue bonds. (See "Industrial Revenue Bonds" below.) Additionally, up to
$25.0 million of the Revolving Credit Facility is available for the issuance of
letters of credit required in the ordinary course of business.
Obligations outstanding under the Revolving Credit Facility mature on
May 15, 1998, with up to two annual extensions remaining. Outstanding advances
bear interest at a rate equal to, at the option of the Company, either the base
rate or LIBOR, plus the applicable margins, each as defined in the agreement.
The base rate is the higher of the federal funds rate plus 0.5% or the agent
bank's prime rate. The applicable margin is 1.25% and may be increased or
decreased by 0.25% based upon the Company's debt/cash flow ratio. The Company
must pay an annual commitment fee equal to 0.5% (and may be increased or
decreased by 0.125%) of the unused portion of the Revolving Credit Facility.
The Company, at its option, may prepay the outstanding indebtedness under the
New Credit Facility at any time, in whole or in part, without penalty.
The Revolving Credit Facility is secured by a first priority lien on
substantially all of the assets of the Company and Mini-Skools, except for
certain leasehold interests and approximately 163 centers (22 of which have
been previously closed) and 12 other real estate sites owned by the Company.
In addition, the Company has pledged the stock of all its subsidiaries as
security.
At May 31, 1996, the Company had approximately $13.7 million committed
on outstanding letters of credit and $101.3 million of available credit under
the Revolving Credit Facility.
The Revolving Credit Facility contains several covenants which are
customary in similar agreements, including, but not limited to, restrictions on
incurrence of additional indebtedness, creation of liens, asset or subsidiary
sales, transactions with affiliates, investments and guarantees.
43
Industrial Revenue Bonds
Series A Through E Industrial Revenue Bonds - The Company is obligated
to various issuers of industrial revenue bonds (the "Refunded IRBs") in an
amount totaling approximately $33.0 million outstanding as of May 31, 1996 and
June 2, 1995. The Refunded IRBs were issued to provide funds for refunding an
equal principal amount of industrial revenue bonds which were used to finance
the cost of acquiring, constructing and equipping certain child care facilities
and the Company's Montgomery, Alabama corporate headquarters. Each of these
Refunded IRBs is secured by a letter of credit obtained under the Letter of
Credit Facility.
Other IRBs - The Company also is obligated to various issuers of other
industrial revenue bonds (the "IRBs") in the aggregate principal amount of
approximately $5.7 million and $5.9 million as of May 31, 1996 and June 2,
1995, respectively. The principal amount of such IRBs was used to finance the
cost of acquiring, constructing and equipping certain child care facilities and
the IRBs are secured by these facilities.
Senior Notes
On June 2, 1994, the Company issued $100 million in unsecured senior
notes due June 1, 2001. The Notes were issued under an indenture (the
"Indenture") between the Company and AmSouth Bank N.A. as trustee.
The Notes bear interest at a fixed rate of 10-3/8% per annum, payable
semi-annually on December 1 and June 1 of each year, and are effectively
subordinated to the secured indebtedness of the Company, including indebtedness
under the Revolving Credit Facility.
The Notes are callable by the Company at 105-3/16% of par from June 1,
1998 through June 1, 1999. On June 1, 1999, the redemption price is reduced to
102% of par, and on June 1, 2000, until maturity, the Notes may be redeemed at
par. Upon a change of control, as defined in the Indenture, each holder of the
Notes may require the Company to repurchase all or a portion of such holder's
Notes at a purchase price in cash equal to 101% of par, together with accrued
and unpaid interest to the date of repurchase.
The Indenture contains a number of covenants similar to those in the
Revolving Credit Facility. Certain limitations exist with respect to payment
of dividends, incurrence of additional indebtedness, creation of liens, asset
or subsidiary sales, transactions with affiliates, investments and guarantees,
all of which are defined in the Indenture.
Principal Payments
The aggregate minimum annual maturities of long-term debt for the five
fiscal years subsequent to May 31, 1996 are as follows (dollars in thousands):
[Download Table]
Fiscal Year Amount
---------------------------------------
1997 $ 853
1998 1,200
1999 1,274
2000 12,203
2001 114,075
Thereafter 17,012
------------
Total $ 146,617
============
44
7. INCOME TAXES
The provision (benefit) for income taxes attributable to income before
income taxes and extraordinary item is as follows (dollars in thousands):
[Download Table]
FOR THE FISCAL YEARS ENDED MAY 31, 1996 JUNE 2, 1995 JUNE 3, 1994
----------------------------------------------
Current:
Federal $ 832 $ 2,909 $ 1,217
State (132) 662 604
Foreign 564 604 674
----------------------------------------------
1,264 4,175 2,495
----------------------------------------------
Deferred:
Federal 10,292 8,293 8,370
State 2,137 1,859 1,972
Foreign (144) (290) --
----------------------------------------------
12,285 9,862 10,342
----------------------------------------------
$ 13,549 $ 14,037 $ 12,837
==============================================
A reconciliation between the statutory federal income tax rate and the
effective income tax rates on continuing operations is as follows:
[Enlarge/Download Table]
FOR THE FISCAL YEARS ENDED MAY 31, 1996 JUNE 2, 1995 JUNE 3, 1994
----------------------------------------------
% % %
Expected tax rate on income before
income taxes and extraordinary item
at federal rate 35.0 35.0 35.0
State income taxes, net of federal tax
benefit 3.7 4.5 5.1
Other, net (0.2) (0.6) (0.8)
----------------------------------------------
38.5 38.9 39.3
==============================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 31,
1996 and June 2, 1995 are summarized as follows (dollars in thousands):
[Enlarge/Download Table]
MAY 31, 1996 JUNE 2, 1995
-------------- --------------
Deferred tax assets:
Self-insurance reserves $ 9,099 $ 8,871
Net operating loss carryforwards 7,895 13,354
Capital loss carryforwards 4,818 12,732
Tax credits 3,172 3,200
Property and equipment, basis differences 2,458 8,498
Other 6,098 3,597
-------------- --------------
Total gross deferred tax assets 33,540 50,252
Less valuation allowance (10,310) (27,929)
-------------- --------------
Net deferred tax assets 23,230 22,323
-------------- --------------
Deferred tax liabilities:
Property and equipment, basis differences of foreign subsidiary (9,088) (9,232)
Stock basis of foreign subsidiary (3,621) --
Other (1,434) (1,490)
-------------- --------------
Total gross deferred tax liabilities (14,143) (10,722)
-------------- --------------
Financial statement net deferred tax asset (liability) $ 9,086 $ 11,601
============== ==============
45
The valuation allowance decreased by $17.6 million during the year
ended May 31, 1996. Deferred tax assets have been recognized to the extent of
existing deferred tax liabilities and income taxes paid that are subject to
recovery through carryback. Future recognized tax benefits relating to the
valuation allowance for deferred tax assets at May 31, 1996 will be recorded as
direct additions to additional paid-in capital.
At May 31, 1996, the Company had $20.0 million of net operating losses
available for carryforward which expire in 2008. Utilization of the net
operating losses is subject to an annual limitation of $19.1 million. The
Company also has capital losses of $8.7 million, which are available to offset
future capital gains, and expire in varying amounts through 2000.
Additionally, the Company has tax credits available for carryforward for
federal income tax purposes of $3.2 million which are available to offset
future federal income taxes through 2010.
8. EMPLOYEE BENEFIT PLANS
Stock Option Plans
On February 9, 1993, the Company adopted the KinderCare Learning
Centers, Inc. 1993 Stock Option and Incentive Plan (the "1993 Stock Option
Plan"). This plan authorizes a committee of the Board of Directors of the
Company to grant or award to eligible employees of the Company and its
subsidiaries and affiliates, stock options and restricted stock and related
warrants of the Company beginning on March 31, 1993 and expiring on the tenth
anniversary of such date. In connection with the 1993 Stock Option Plan, the
Company reserved approximately 1.9 million shares of Common Stock for issuance
to employees of the Company upon exercise of options available for grant by the
Board of Directors of the Company.
A summary of option transactions under the 1993 Stock Option Plan is as follows
(dollars in thousands):
[Download Table]
OPTION PRICE NUMBER OF TOTAL OPTION
PER SHARE SHARES PRICE
---------------- --------- ------------
Granted in connection
with the Plan $7.50 to 10.00 1,311,500 $ 12,740
Canceled $10.00 (5,960) (60)
--------- --------
Outstanding May 28, 1993 1,305,540 12,680
Granted $10.76 51,600 555
Exercised $10.00 (6,512) (65)
Canceled $10.00 (55,620) (556)
--------- --------
Outstanding June 3, 1994 1,295,008 12,614
--------- --------
Granted $12.50 to 13.75 196,500 2,487
Exercised $10.00 to 12.50 (108,110) (1,083)
Canceled $10.00 to 12.50 (75,760) (801)
--------- --------
Outstanding June 2, 1995 1,307,638 13,217
--------- --------
Granted $12.88 to $13.63 256,700 3,345
Exercised $ 7.50 to $12.88 (746,560) (7,164)
Canceled $10.00 to $12.88 (93,640) (856)
--------- --------
Outstanding May 31, 1996 744,138 $ 8,542
========= ========
At May 31, 1996, options for a total of 358,978 shares of stock were
exercisable with a total option price of approximately $3.9 million.
46
Savings and Investment Plan
The Board of Directors of the Company adopted the KinderCare Learning
Centers, Inc. Savings and Investment Plan (the "Savings Plan") effective
January 1, 1990. All full-time employees of the Company and its subsidiaries
are eligible to participate in the Savings Plan upon completion of one year of
service and the attainment of age 18. Participants may contribute, in
increments of 1%, up to 10% (6% before July 1, 1994) of their compensation to
the Savings Plan. In accordance with the provisions of the Savings Plan, the
Board of Directors has elected, since April 1, 1991, not to match employee
contributions.
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires the Company to disclose estimated
fair values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments as of
May 31, 1996 and June 2, 1995.
Cash and cash equivalents, short term investments, trade receivables and trade
payables
Fair value approximates cost as reflected in the consolidated balance
sheets at May 31, 1996 and June 2, 1995 because of the short term maturity of
these instruments.
Long-term debt
The carrying value and the fair value for the Company's 10 3/8 Senior Notes are
$100.0 million and $105.0 million at May 31, 1996, respectively, based on
current market activity, while the carrying value of $100.0 million at
June 2, 1995 approximated fair value due to the recent refinancing. The
carrying values for the Company's remaining long-term debt of $46.6 million and
$60.4 million at May 31, 1996, and June 2, 1995, respectively, approximates
market value based on current rates that management believes could be obtained
for similar debt.
10. QUARTERLY RESULTS (UNAUDITED)
A summary of results of operations for the years ended May 31, 1996
and June 2, 1995 are as follows (dollars in thousands, except per share data):
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER (A) QUARTER (B) QUARTER (B) QUARTER(B)
----------- ----------- ----------- ---------
Year ended May 31, 1996:
Operating Revenues $ 161,313 $ 124,079 $ 123,641 $ 132,231
Operating income 11,141 11,222 13,514 15,832
Net income 3,565 4,551 5,868 7,699
Net income per share (primary) $ .17 $ .23 $ .30 $ .39
Net income per share (fully-diluted) N/C N/C N/C $ .37
Year ended June 2, 1995:
Operating Revenues $ 151,502 $ 116,765 $ 115,696 $ 122,542
Operating income 10,352 11,394 12,120 16,920
Net income 3,091 4,511 5,604 8,860
Net income per share $ .15 $ .22 $ .28 $ .43
N/C - Not calculated
(a) Sixteen week quarters
(b) Twelve week quarters
The computation of fully-diluted earnings per share is based on the higher of
the average or year-end market price of the Company's common stock.
Fully-diluted earnings per share need not be
47
presented for 1995 nor 1994 since further dilution from primary earnings per
share was less than 3 percent.
11. COMPUTATION OF EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding for the fiscal years ended May 31, 1996
and June 2, 1995, plus the shares that would be outstanding assuming the
exercise of dilutive stock options and the Warrants, all of which are
considered common stock equivalents. The number of shares that would be issued
from the exercise of the stock options and the Warrants has been reduced by the
number of shares that could have been purchased from the proceeds at the
average market price of the Company's stock, up to 20% of the outstanding
shares. A reconciliation of the actual weighted average shares to the shares
used in the computation of earnings per share for the periods indicated is as
follows (in thousands):
[Enlarge/Download Table]
MAY 31, 1996 JUNE 2, 1995 JUNE 3, 1994
------------ ------------ ------------
Primary
Weighted average common shares outstanding 19,752 20,093 20,004
Dilutive effect of common stock equivalents -- 590 529
--------- -------- -------
Weighted average common and common
equivalent shares outstanding 19,752 20,683 20,533
--------- -------- -------
Fully Diluted
Dilutive effect of common stock equivalents 931 N/A N/A
--------- -------- -------
Adjusted outstanding 20,683 N/A N/A
========= ======== =======
N/A - Not applicable
Fully diluted earnings were not required to be reported for the years ended
June 2, 1995 and June 3, 1994 since dilution was less than 3 percent.
12. COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations from leased or
subleased day care centers. Additionally, the Company leases its fleet
vehicles under a 12 month non-cancelable master lease. The lease may be
renewed on a month-to-month basis after 12 months. The vehicle leases require
that the Company guarantee specified residual values upon cancellation. All of
the leases are classified as operating leases. In most cases, management
expects that in the normal course of business substantially all of the leases
will be renewed or replaced by other leases.
Subsequent to January 1, 1993, the Company re-negotiated certain day
care center leases to amend the terms to allow the Company the right to
terminate the lease at any time with minimal notice. In connection with the
termination option, the Company, in certain instances, prepaid up to 12 months
rent. Such amounts, totaling approximately $3.2 million, will be amortized
over the termination transition period or over the appropriate remaining months
of the lease period. As of May 31, 1996, the remaining unamortized balance of
the prepaid amount was $2.6 million. In addition, several leases were
re-negotiated to decrease the monthly fixed rental payments.
48
Following is a schedule of future minimum lease payments under
operating leases, that have initial or remaining non-cancelable lease terms in
excess of one year as of May 31, 1996 (dollars in thousands):
[Download Table]
FISCAL YEAR:
1997 $ 15,695
1998 15,034
1999 13,512
2000 11,744
2001 9,559
Subsequent years 37,239
The Company was a co-defendant to a stockholder suit filed in the
Circuit Court of Montgomery County, Montgomery, Alabama styled Peter N.
Zachary, et al. v. Richard Grassgreen, Perry Mendel, and KinderCare Learning
Centers, Inc. in the Circuit Court for Montgomery, Alabama, Case No.
CV-91-2801-G. The suit was for $20 million in compensatory damages and $20
million in punitive damages in each of seven counts. The Company was named as
a defendant in five of those seven counts. In December 1995, the other
defendants settled with the shareholders. The plaintiffs have dismissed all
charges against the Company.
On July 7, 1992, KinderCare filed a Proof of Claim in the United
States District Court for the Southern District of New York in a pending action
brought by Presidential Life Insurance Company against Michael R. Milken, et
al. styled Presidential Life Insurance Co., v. Michael R. Milken, et al., Class
Action in District Court, Southern District of New York, 92 Civ. 1151 (MP).
The claim alleges that, but for the defendants' wrongful conduct as described
in the claim, the Company would not have made the junk bond purchases outlined
in the claim. The total amount of damages claimed by the Company is
approximately $37.1 million. The claim has been evaluated at $15.6 million by
the Presidential Life Executive Committee and reviewed and submitted to the
Court for approval by the SEC representative. This amount is subject to final
approval by the Court and to available distribution. The Company estimates it
will receive approximately 5% of this amount based on available distribution
funds; however, there are no assurances that the Company will receive this or
any other amount pursuant to the claim.
The Company is presently, and is from time to time, subject to
additional claims and suits arising in the ordinary course of business,
including suits alleging child abuse. In certain of such actions, plaintiffs
request damages that are covered by insurance. The Company believes that none
of the additional actions of which it is currently aware will materially affect
its financial position or future operating results, although no assurance can
be given with respect to the ultimate outcome of any such actions.
13. STOCK REPURCHASE PROGRAMS AND SUBSEQUENT EVENTS
On February 15, 1995 the Board of Directors of KinderCare authorized
the repurchase of up to $10 million of the Company's Common Stock. This
repurchase was completed and all shares retired during the second quarter
ending December 15, 1995. On May 2, 1996, the Board of Directors authorized
another repurchase of $10 million and increased it to $23.0 million on June 3,
1996. As of May 31, 1996, under the second stock buyback program, 259,000
shares and 120,000 warrants had been repurchased for $4.2 million. As of July
27, 1996, under the second stock buyback program, 1,111,500 shares and 435,000
warrants had been repurchased for $18.3 million.
49
On June 3, 1996, the Board of Directors of KinderCare authorized the
purchase of up to $30 million par of the Company's 10-3/8% Senior Notes due
2001. As of July 26, 1996, the Company had purchased $30 million par of the
Notes at an aggregate price of $31.5 million. This transaction results in
recording an extraordinary loss of $1.2 million, net of $0.8 million in tax
benefits, in the first quarter of fiscal 1997.
50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KinderCare Learning Centers, Inc.:
We have audited the consolidated balance sheets of KinderCare Learning Centers,
Inc. and subsidiaries as of May 31, 1996 and June 2, 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended May 31, 1996, June 2, 1995, and June 3, 1994. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KinderCare Learning
Centers, Inc. and subsidiaries as of May 31, 1996 and June 2, 1995, and the
results of their operations and their cash flows for the years ended May 31,
1996, June 2, 1995, and June 3, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, during the
year ended May 31, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 and changed its method of accounting for
the impairment of long-lived assets and for long-lived assets to be disposed
of.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
August 9, 1996
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information contained
under the headings "Certain Information Concerning Nominees and Directors,"
"Meetings of the Board of Directors and Committees," and "Other Matters -
Filings Under Section 16(a)" from its definitive proxy statement to be
delivered to the shareholders of the Company in connection with the 1996 annual
meeting of shareholders to be held on November 13, 1996. Certain information
regarding the executive officers of the Company appears at pages 14 to 16 of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information contained
under the heading "Executive Compensation" from its definitive proxy statement
to be delivered to the shareholders of the Company in connection with the 1996
annual meeting of shareholders to be held on November 13, 1996. In no event
shall the information contained in the proxy statement under the sections
entitled "Shareholder Return Analysis" and "Compensation and Stock Option
Committee's Report on Executive Compensation" be included in this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company hereby incorporates by reference the information contained
under the heading "Security Ownership of Certain Beneficial Owners" from its
definitive proxy statement to be delivered to the shareholders of the Company
in connection with the 1996 annual meeting of shareholders to be held on
November 13, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information contained
under the heading "Certain Transactions" from its definitive proxy statement to
be delivered to the shareholders of the Company in connection with the 1996
annual meeting of shareholders to be held on November 13, 1996.
52
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of the Company are set
forth on the pages indicated.
[Download Table]
Page
----
Consolidated Statements of Operations for the fiscal
years ended May 31, 1996, June 2, 1995, and
June 3, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Balance Sheets as of May 31, 1996 and
June 2, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Shareholders' Equity (Deficit)
for the fiscal years ended May 31, 1996, June 2, 1995, and
June 3, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Cash Flows for the fiscal
years ended May 31, 1996, June 2, 1995, and June 3, 1994 . . . . . 37
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 39
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 51
(a)(3) Exhibits (see exhibit index immediately preceding the exhibits for the
page number where each exhibit can be found).
53
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3(a) Amended and Restated Certificates of Incorporation of KinderCare Learning
Centers, Inc., hereby incorporated by reference from Exhibit 2 of the
Registrant's Current Report on Form 8-K dated March 31, 1993 (Exhibit 4).
3(b) KinderCare Learning Centers, Inc. Amended and Restated Bylaws hereby incorporated
by reference from Exhibit 2 of the Registrant's Current Report on Form 8-K dated
March 31, 1993 (Exhibit 3).
4(a) Indenture, dated June 2, 1994 between KinderCare Learning Centers, Inc. and
AmSouth Bank N.A. as Trustee, hereby incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 3, 1994
(Exhibit 4(a)).
4(b) Specimen Note Certificate for the Notes of KinderCare Learning Centers, Inc.
hereby incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 3, 1994 (Exhibit 4 (b))(included in the Indenture
filed as Exhibit 4(a)).
4(c) Warrant Agreement, by and between KinderCare Learning Centers, Inc. and The First
National Bank of Boston as Warrant Agent dated March 31, 1993, hereby
incorporated by reference from Exhibit 2 of the Registrant's Current Report on
Form 8-K dated March 31, 1993 (Exhibit 14).
4(d) Specimen Stock Certificate for the Common Stock of the Registrant, hereby
incorporated by reference from Exhibit 6 of the Registrant's Registration
Statement on Form 8-A, Amendment No. 1, dated March 25, 1993.
4(e) Specimen Warrant Certificate for the Warrants of the Registrant, hereby
incorporated by reference from Exhibit 7 of the Registrant's Registration
Statement on Form 8-A, Amendment No. 1, dated March 25, 1993.
10(a) Equity Registration Rights Agreement, by and among KinderCare Learning Centers,
Inc., Dickstein & Co., L.P., Dickstein International Limited, TCW Special
Credits, Cargill Financial Services Corporation and Lodestar Management
Incorporated and Lodestar Associates, L.P,. dated March 31, 1993, hereby
incorporated by reference from Exhibit 2 of the Registrant's Current Report on
Form 8-K dated March 31, 1993 (Exhibit 6).
54
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
10(b) Mutual Release, by and among KinderCare Learning Centers, Inc., each of the
subsidiaries of KinderCare Learning Centers, Inc. listed therein, each of the
Lenders listed therein, Citibank, N.A., as Agent under the Revolving Credit
Agreement, Child Care Leasing-A, Inc., Child Care Leasing-B, Inc., the CCA/CCB
Participants listed therein, NationsBank of Texas, N.A., as Assignee of the
Federal Deposit Insurance Corporation, as Receiver for First Republic Bank, N.A.,
as Lender of Record with respect to CCA and CCB, LVK Incorporated, Linda Van der
Kar, the Reset Noteholders listed therein, and the Lodestar parties listed
therein, dated March 31, 1993, hereby incorporated by reference from Exhibit 2 of
the Registrant's Current Report on Form 8-K dated March 31, 1993 (Exhibit 10).
10(c) Warrant Registration Rights Agreement, by and among KinderCare Learning Centers,
Inc., Lodestar Management Incorporated and Lodestar Associates, L.P., dated March
31, 1993, hereby incorporated by reference from Exhibit 2 of the Registrant's
Current Report on Form 8-K dated March 31, 1993 (Exhibit 14).
10(d) Release notice by Toronto Dominion (Texas), Inc. as Agent for the Tranche A
Lenders, dated June 2, 1994, hereby incorporated by reference from Exhibit 10(I)
of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 3,
1994.
10(e) Release notice by AmSouth Bank N.A., as Trustee under the Indenture for the
Tranche B Noteholders, dated June 2, 1994, hereby incorporated by reference from
Exhibit 10(j) of the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 3, 1994.
10(f) Credit Agreement, by and among KinderCare Learning Centers, Inc., the Lenders
listed therein, and The Toronto-Dominion Bank, as Facing Bank, and Toronto
Dominion (Texas), Inc., as Agent, dated June 2, 1994, hereby incorporated by
reference from Exhibit 10(l) of the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 3, 1994.
10(f-1) First Amendment to the Credit Agreement dated October 6, 1994, hereby
incorporated by reference from Exhibit 10(l-1) of the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 2, 1995.
10(f-2) Second Amendment to the Credit Agreement dated January 6, 1995, hereby
incorporated by reference from Exhibit 10(l-2) of the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 2, 1995.
55
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------- -----------------------
10(f-3) Third Amendment to the Credit Agreement dated May 24, 1995, hereby incorporated
by reference from Exhibit 10(l-3) of the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 2, 1995.
10(f-4) Fourth Amendment to the Credit Agreement dated April 5, 1996, hereby incorporated
by reference from Exhibit 10(l-4) of the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 8, 1996.
10(f-5) Fifth Amendment to the Credit Agreement dated May 17, 1996.
10(f-6) Sixth Amendment to the Credit Agreement dated August 13, 1996.
10(g) Master Security Document entered into by and among KinderCare Learning Centers,
Inc., KinderCare Real Estate Corp., Mini-Skools Limited, KC Development Corp. and
Toronto Dominion (Texas), Inc., as Agent dated June 2, 1994, hereby incorporated
by reference from Exhibit 10(m) of the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 3, 1994.
10(h) KinderCare Learning Centers, Inc. Target Executive Incentive Plan for fiscal year
1994, hereby incorporated by reference from the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 3, 1994 (Exhibit 10(n)).
10(i) KinderCare Learning Centers, Inc. Target Incentive Plan for fiscal year 1995
hereby incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 3, 1994 (Exhibit 10(o)).
10(j) KinderCare Learning Centers, Inc., 1993 Stock Option and Incentive Plan, hereby
incorporated by reference from Exhibit 2 of the Registrant's Current Report on
Form 8-K dated March 31, 1993 (Exhibit 11).
10(k) Employment Agreement of Philip L. Maslowe dated May 8, 1995, hereby incorporated
by reference from Exhibit 10(w) of the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 2, 1995.
10(l) Employment Agreement of Sandra Scarr dated June 16, 1995, hereby incorporated by
reference from Exhibit 10(x) of the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 2, 1995.
56
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- -----------------------
10(m) Consulting Agreement between KinderCare Learning Centers, Inc. and Tull N.
Gearreald dated June 15, 1995, hereby incorporated by reference from Exhibit
10(y) of the Registrant's Annual Report on Form 10-K for the fiscal year ended
June 2, 1995.
10(n) Resignation Agreement of O. Seaburn Eaton, III dated February 22, 1995, hereby
incorporated by reference from Exhibit 10(z) of the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 2, 1995.
10(o) Resignation Agreement of Roger Brunk dated December 12, 1994, hereby incorporated
by reference from Exhibit 10(aa) of the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 2, 1995.
10(p) Resignation Agreement of Judy Adorno dated June 16, 1995.
10(q) Resignation Agreement of Eldon Wyatt dated June 16, 1995.
10(r) Resignation Agreement of Robert A. Benowitz dated June 16, 1995.
10(s) Resignation Agreement of Jan Hollon dated July 17, 1995.
10(t) Resignation Agreement of Thomas A. McClelland dated August 29, 1995.
10(u) Resignation Agreement of David L. Hiott dated September 27, 1995.
10(v) Resignation Agreement of Kay Channell dated October 27, 1995.
10(w) Resignation Agreement of Gaynelle Henger dated February 12, 1996.
10(x) Resignation Agreement of Robert M. Schiel dated February 12, 1996.
10(y) Resignation Agreement of Scott Burchardt dated March 22, 1996.
21 Subsidiaries of KinderCare Learning Centers, Inc., hereby incorporated by
reference from the Registrant's Transition Report on Form 10-K for the twenty-one
weeks ended May 28, 1993 (Exhibit 21).
23 Consent of KPMG Peat Marwick LLP
57
(b) The registrant filed the following reports on Form 8-K during the first
quarter of fiscal 1996 as follows:
(i) A report on Form 8-K filed on June 15, 1995 reporting under Item 5
announcing the appointment of Dr. Sandra Scarr as Chief Executive Officer and
the resignation of Tull Gearrald, Jr. from that position.
(c) The Exhibits to this Report are listed under item 14(a)(3) above.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 August 30,
1995.
KINDERCARE LEARNING CENTERS, INC.
BY: /s/ Sandra W. Scarr, Ph.D.
---------------------------
Sandra W. Scarr, Ph.D.
Chief Executive Officer
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant in the capacity indicated on August 20, 1996.
[Enlarge/Download Table]
SIGNATURE TITLE
/s/ Sandra W. Scarr, Ph.D. Chief Executive Officer, and Chairman of
------------------------------------------- the Board of Directors (Principal Executive Officer)
Sandra W. Scarr, Ph.D.
/s/ Philip L. Maslowe Executive Vice President/Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting Officer
Philip L. Maslowe
/s/ Thomas E. Bronson Director
-------------------------------------------
Thomas E. Bronson
/s/ M. Taylor Dawson, Jr. Director
-------------------------------------------
M. Taylor Dawson, Jr.
/s/ Jeffrey S. Halis Director
-------------------------------------------
Jeffrey S. Halis
/s/ Malcolm T. Hopkins Director
-------------------------------------------
Malcolm T. Hopkins
/s/ Bruce A. Karsh Director
-------------------------------------------
Bruce A. Karsh
/s/ Stephen Kaplan Director
-------------------------------------------
Stephen Kaplan
59
KINDERCARE LEARNING CENTERS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MAY 31, 1996
EXHIBIT INDEX
[Download Table]
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
10(f-5) Fifth Amendment to the Credit Agreement dated 61
May 17, 1996.
10(f-6) Sixth Amendment to the Credit Agreement dated 68
August 13, 1996.
10(p) Resignation Agreement of Judith A. Adorno 74
dated June 16, 1995.
10(q) Resignation Agreement of Eldon L. Wyatt dated 80
June 16, 1995.
10(r) Employment Agreement of Robert A. Benowitz 86
dated June 16, 1995.
10(s) Resignation Agreement of Jan Hollon dated 92
July 17, 1995.
10(t) Resignation agreement of Thomas A. McClelland 97
dated August 29, 1995.
10(u) Resignation Agreement of David L. Hiott dated 103
September 27, 1995.
10(v) Resignation agreement of Kay Channell dated 109
October 27, 1995.
10(w) Resignation agreement of Gaynelle Henger 115
dated February 12, 1996.
10(x) Resignation agreement of Robert M. Schiel 121
dated February 12, 1996.
10(y) Resignation agreement of Scott Burchardt 127
dated March 22, 1996.
23 Auditor's Consent - KPMG Peat Marwick LLP 128
60
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000950144-96-006062 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Wed., Apr. 24, 9:49:55.2am ET 
