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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 20, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-42137
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.)
650 NE Holladay Street, Suite 1400
Portland, OR 97232
(Address of principal executive offices)
(503) 872-1300
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ ]
The number of shares of the registrant's common stock, $.01 par value per
share, outstanding at October 25, 2002 was 19,699,514.
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KinderCare Learning Centers, Inc. and Subsidiaries
Index
Part I. Financial Information.............................................. 2
Item 1. Unaudited financial statements:
Consolidated balance sheets at September 20, 2002
and May 31, 2002 (unaudited)............................ 2
Consolidated statements of operations for the sixteen
weeks ended September 20, 2002 and September 21,
2001 (unaudited)........................................ 3
Consolidated statements of stockholders' equity and
comprehensive income (loss) for the sixteen weeks
ended September 20, 2002 and the fiscal year ended
May 31, 2002 (unaudited)................................ 4
Consolidated statements of cash flows for the sixteen
weeks ended September 20, 2002 and September 21,
2001 (unaudited)........................................ 5
Notes to unaudited consolidated financial statements...... 6
Item 2. Management's discussion and analysis of financial
condition and results of operations....................... 11
Item 3. Quantitative and qualitative disclosures about
market risk............................................... 21
Item 4. Controls and Procedures................................... 21
Part II. Other Information.................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders....... 22
Item 6. Exhibits and reports on Form 8-K.......................... 22
Signatures.................................................................. 23
Certifications.............................................................. 24
1
PART I.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
September 20, May 31,
2002 2002
------------- -------------
Assets
Current assets:
Cash and cash equivalents............................ $ 9,298 $ 8,619
Receivables, net..................................... 35,606 31,657
Prepaid expenses and supplies........................ 11,672 9,948
Deferred income taxes................................ 11,224 13,904
Assets held for sale................................. 1,365 --
------------- -------------
Total current assets............................... 69,165 64,128
Property and equipment, net............................ 708,168 702,160
Deferred income taxes.................................. 551 8
Goodwill............................................... 42,565 42,565
Other assets........................................... 34,123 35,324
------------- -------------
$ 854,572 $ 844,185
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts...................................... $ 9,521 $ 9,779
Accounts payable..................................... 8,867 9,836
Current portion of long-term debt.................... 1,729 6,237
Accrued expenses and other liabilities............... 108,983 112,667
------------- -------------
Total current liabilities.......................... 129,100 138,519
Long-term debt......................................... 545,976 526,080
Long-term self-insurance liabilities................... 15,883 15,723
Deferred income taxes.................................. 13,344 12,208
Other noncurrent liabilities........................... 27,879 28,386
------------- -------------
Total liabilities.................................. 732,182 720,916
------------- -------------
Commitments and contingencies..........................
Stockholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding................ -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued and outstanding 19,699,514 and
19,819,352 shares, respectively.................... 197 198
Additional paid-in capital........................... 26,462 28,107
Notes receivable from stockholders................... (1,325) (1,426)
Retained earnings.................................... 97,339 96,882
Accumulated other comprehensive loss................. (283) (492)
------------- -------------
Total stockholders' equity......................... 122,390 123,269
------------- -------------
$ 854,572 $ 844,185
============= =============
See accompanying notes to unaudited consolidated financial statements.
2
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
Revenues, net................................... $ 256,782 $ 247,068
------------- -------------
Operating expenses:
Salaries, wages and benefits.................. 146,686 141,663
Depreciation and amortization................. 17,269 16,581
Rent.......................................... 15,605 15,258
Provision for doubtful accounts............... 1,727 1,600
Other......................................... 61,731 60,630
------------- -------------
Total operating expenses.................. 243,018 235,732
------------- -------------
Operating income............................ 13,764 11,336
Investment income............................... 108 224
Interest expense................................ (12,839) (14,132)
------------- -------------
Income (loss) before income taxes and
discontinued operations..................... 1,033 (2,572)
Income tax (expense) benefit.................... (409) 954
------------- -------------
Income (loss) before discontinued operations 624 (1,618)
Discontinued operations, net of income tax
benefit of $109 and $90, respectively......... (167) (152)
------------- -------------
Net income (loss)........................... $ 457 $ (1,770)
============= =============
Basic and diluted net income (loss) per share:
Income (loss) before discontinued operations.. $ 0.03 $ (0.08)
Discontinued operations, net.................. (0.01) (0.01)
------------- -------------
Net income (loss)........................... $ 0.02 $ (0.09)
============= =============
Weighted average common shares outstanding:
Basic......................................... 19,771,203 19,819,352
Diluted....................................... 19,973,777 19,819,352
See accompanying notes to unaudited consolidated financial statements.
3
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands)
(Unaudited)
Notes Accumulated
Common Stock Additional Receivable Other
--------------------- Paid-in from Retained Comprehensive
Shares Amount Capital Stockholders Earnings Loss Total
---------- -------- ---------- ------------ --------- ------------- ---------
Balance at June 1, 2001................. 19,819,352 $ 198 $ 28,107 $ (1,355) $ 80,339 $ (558) $ 106,731
Comprehensive income:
Net income............................ -- -- -- -- 16,543 -- 16,543
Cumulative translation adjustment..... -- -- -- -- -- 66 66
---------
Total comprehensive income.......... 16,609
Proceeds from collection of
stockholders' notes receivable........ -- -- -- 35 -- -- 35
Issuances of stockholders' notes
receivable............................ -- -- -- (106) -- -- (106)
---------- -------- ---------- ------------ --------- ------------- ---------
Balance at May 31, 2002............. 19,819,352 198 28,107 (1,426) 96,882 (492) 123,269
Comprehensive income:
Net income............................ -- -- -- -- 457 -- 457
Cumulative translation adjustment..... -- -- -- -- -- 209 209
---------
Total comprehensive income.......... 666
Retirement of common stock.............. (119,838) (1) (1,645) -- -- -- (1,646)
Proceeds from collection of
stockholders' notes receivable........ -- -- -- 101 -- -- 101
---------- -------- ---------- ------------ --------- ------------- ---------
Balance at September 20, 2002....... 19,699,514 $ 197 $ 26,462 $ (1,325) $ 97,339 $ (283) $ 122,390
========== ======== ========== ============ ========= ============= =========
See accompanying notes to unaudited consolidated financial statements.
4
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
Cash flows from operations:
Net income (loss)................................ $ 457 $ (1,770)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation................................. 17,180 15,887
Amortization of deferred financing costs,
goodwill and other intangible assets....... 1,034 1,707
Provision for doubtful accounts.............. 1,749 1,608
Gain on sales and disposals of property and
equipment.................................. (74) (146)
Deferred tax expense......................... 3,273 176
Changes in operating assets and liabilities:
Increase in receivables.................... (5,698) (6,497)
Increase in prepaid expenses and supplies.. (1,724) (1,330)
Decrease in other assets................... 115 910
Decrease in accounts payable, accrued
expenses and other current and noncurrent
liabilities.............................. (10,611) (6,527)
Other, net................................... 209 66
------------- -------------
Net cash provided by operating activities...... 5,910 4,084
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment.............. (34,739) (33,064)
Proceeds from sales of property and equipment.... 14,658 180
Proceeds from collection of notes receivable..... 52 --
------------- -------------
Net cash used by investing activities.......... (20,029) (32,884)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings............... 36,000 33,002
Payments on long-term borrowings................. (20,612) (1,562)
Payments on capital leases....................... (433) (525)
Proceeds from collection of stockholders' notes
receivable..................................... 101 35
Bank overdrafts.................................. (258) 89
------------- -------------
Net cash provided by financing activities...... 14,798 31,039
------------- -------------
Increase in cash and cash equivalents........ 679 2,239
Cash and cash equivalents at the beginning of
the period..................................... 8,619 3,657
------------- -------------
Cash and cash equivalents at the end of the
period......................................... $ 9,298 $ 5,896
============= =============
Supplemental cash flow information:
Interest paid.................................... $ 16,717 $ 18,348
Income taxes paid, net........................... 1,141 4,462
Non-cash financial activities:
Property and equipment under capital leases...... $ 46 $ 2
See accompanying notes to unaudited consolidated financial statements.
5
KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Nature of Business
KinderCare Learning Centers, Inc., referred to as KinderCare, is the
leading for-profit provider of early childhood education and care in the United
States. At September 20, 2002, we served approximately 124,000 children and
their families at 1,264 child care centers. At our child care centers, we
provide educational services to infants and children up to twelve years of age.
However, the majority of the children we serve are from six weeks to five years
old. The total licensed capacity at our centers was approximately 166,000 at
September 20, 2002.
We operate child care centers under two brands as follows:
o KinderCare - At September 20, 2002, we operated 1,193 KinderCare
centers. The brand was established in 1969 and operates centers in 39
states, as well as two centers located in the United Kingdom.
o Mulberry - We operated 71 Mulberry centers and 12 before- and
after-school programs at September 20, 2002. Mulberry operates
primarily in the northeast region of the United States and southern
California. We acquired Mulberry in April 2001.
In addition to our center-based child care operations, we have invested in
more broad-based education companies serving children, teenagers and young
adults. KC Distance Learning, Inc., our wholly-owned subsidiary, offers an
accredited high school program delivered through correspondence format and over
the internet. We have made minority investments in Chancellor Beacon Academies,
Inc., a charter school management company, and Voyager Expanded Learning, Inc.
Voyager developed Universal Literacy Systems(TM), a reading program for students
in grades kindergarten through sixth, provides summer school programs for
elementary and middle schools and created Voyager University for retraining
public school teachers.
This report will be available on our website, kindercare.com, as soon as
practicable after filing with the Securities and Exchange Commission. The
information on our website is not incorporated by reference in this report.
2. Summary of Significant Accounting Policies
Basis of Presentation. The unaudited consolidated financial statements
include the financial statements of KinderCare and our subsidiaries, all of
which are wholly owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial
statements reflect the adjustments, all of which are of a normal recurring
nature, necessary to present fairly our financial position at September 20,
2002, and our results of operations and cash flows for the sixteen weeks ended
September 20, 2002 and September 21, 2001. Interim results are not necessarily
indicative of results to be expected for a full fiscal year because of seasonal
and short-term variances and other factors such as the timing of new center
openings and center closures. The unaudited consolidated financial statements
should be read in conjunction with the annual consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended May 31, 2002.
6
Fiscal Year. References to fiscal 2003 and fiscal 2002 are to the 52 weeks
ended May 30, 2003 and May 31, 2002, respectively. Our fiscal year ends on the
Friday closest to May 31. The first quarter is comprised of 16 weeks and ended
on September 20, 2002 in fiscal 2003 and September 21, 2001 in fiscal 2002. The
second, third and fourth quarters are each comprised of 12 weeks.
Goodwill and Other Intangible Assets. Effective June 1, 2002, we adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. As a result, we ceased amortization of goodwill at June 1,
2002. Amortization of goodwill for the sixteen weeks ended September 21, 2001
was $0.7 million, pre-tax. In accordance with the provisions of SFAS No. 142, we
will perform a transitional impairment test during the second quarter of fiscal
2003. In addition, the goodwill attributable to each of our reporting units will
be tested, at least annually, for impairment by comparing the fair value of each
reporting unit to its carrying value.
If SFAS No. 142 had been adopted in the prior period, our pro forma net
loss and net loss per share for the sixteen weeks ended September 21, 2001 would
have been as follows, with dollars in thousands, except per share amounts:
Sixteen weeks ended
September 21, 2001
------------------------------
Basic and
Diluted Net
Loss per
Net Loss Share
------------- -------------
Reported................................ $ 1,770 $ 0.09
Goodwill amortization, net of taxes..... 409 0.02
------------- -------------
Adjusted.............................. $ 1,361 $ 0.07
============= =============
At September 20, 2002 and May 31, 2002, we had approximately $2.7 million
of finite-lived intangible assets, which had associated accumulated amortization
of approximately $2.5 million and $2.3 million, respectively. These intangible
assets are noncompetition agreements, which are included in other assets in the
unaudited consolidated balance sheets. These intangible assets are amortized on
a straight-line basis over their contractual lives that range from 4 to 5 years.
Amortization expense was $0.1 million in each of the sixteen weeks ended
September 20, 2002 and September 21, 2001.
Stock-Based Compensation. We measure compensation expense for our
stock-based employee compensation plans using the method prescribed by
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and provide, if material, pro forma disclosures of net income and
earnings per share as if the method prescribed by SFAS No. 123, Accounting for
Stock-Based Compensation, had been applied in measuring compensation expense.
Discontinued Operations. Effective June 1, 2002, we adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of and the accounting and reporting
provisions of APB No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the disposal of a segment of
business. SFAS No. 144 modifies the accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions.
We closed 12 centers in the sixteen weeks ended September 20, 2002, which
included four owned and eight leased centers. These center closures meet the
criteria of discontinued operations in SFAS No. 144. Therefore, the operating
results for these 12 centers were classified as discontinued operations, net
7
of tax, in the unaudited consolidated statements of operations for all periods
presented. Net revenues reclassified to discontinued operations were $0.7 and
$1.4 million during the sixteen weeks ended September 20, 2002 and September 21,
2001, respectively. The owned centers were closed and are currently held for
sale. As a result, $1.4 million of property and equipment has been classified as
current in the unaudited consolidated balance sheet at September 20, 2002.
Net Income (Loss) per Share. The difference between basic and diluted net
income (loss) per share was a result of the dilutive effect of options, which
are considered potential common shares. A summary of the weighted average common
shares was as follows:
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
Basic weighted average common shares
outstanding............................. 19,771,203 19,819,352
Dilutive effect of options................ 202,574 --
------------- -------------
Diluted weighted average common shares
outstanding............................. 19,973,777 19,819,352
============= =============
Shares excluded from potential shares
due to their anti-dilutive effect....... 1,022,910 1,772,378
============= =============
Comprehensive Income (Loss). Comprehensive income (loss) is comprised of
the following, for the periods indicated, with dollars in thousands:
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
Net income (loss)......................... $ 457 $ (1,770)
Cumulative translation adjustment......... 209 66
------------- -------------
$ 666 $ (1,704)
============= =============
Recently Issued Accounting Pronouncements. SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, requires that costs
associated with exit or disposal activities be recorded at their fair values
when a liability has been incurred, rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 is effective for disposal activities
initiated after December 31, 2002. We are evaluating SFAS No. 146 and have not
yet determined the impact of adoption, if any, on our financial position and
results of operations.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 under different conditions or if our assumptions change.
Reclassifications. Certain prior period amounts have been reclassified to
conform to the current period's presentation.
8
3. Acquisitions
In April 2001, we acquired Mulberry Child Care Centers, Inc., referred to
as Mulberry, a child care and early education company based in Dedham,
Massachusetts. We acquired 100% of Mulberry's stock in exchange for 860,000
shares of our common stock valued at $11.8 million. In connection with the
transaction, we paid $13.1 million to the sellers and assumed $3.3 million of
Mulberry's debt. In August 2002, 119,838 of the 860,000 shares were returned to
us, which included 99,152 shares that were released from an indemnity escrow and
20,686 shares that were repurchased from certain former shareholders of
Mulberry. All 119,838 shares have been cancelled.
4. Commitments and Contingencies
In fiscal year 2000, we entered into a $100.0 million synthetic lease
facility under which a syndicate of lenders financed the construction of new
centers for lease to us for a three to five year period, which may be extended,
subject to the consent of the lessors. A total of 44 centers were constructed
for $97.9 million. The related leases are classified as operating leases for
financial reporting purposes. We do not consolidate the assets or liabilities
related to the synthetic lease in our consolidated financial statements.
The synthetic lease facility closed to draws on February 13, 2001 and, at
September 20, 2002, $97.9 million had been funded through the facility. We have
the option to purchase the centers for $97.9 million at the end of the lease
term, which is February 13, 2004. We are required to notify the lessors by May
14, 2003, as to whether or not we will be exercising our option to purchase the
centers at the end of the lease term. If we do not elect to exercise our
purchase option, then we are required to market the leased centers for sale to
third parties. In addition, we would pay the lessors a guaranteed residual
amount of up to $82.2 million. The guaranteed residual amount that we may have
to pay would be reduced to the extent the net sales proceeds from the centers
exceed $15.7 million. Any such payment of the guaranteed residual amount to the
lessors would be recognized as rental expense when and if payment becomes
probable.
The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. In the event of certain
defaults under the terms of the synthetic lease facility, all amounts under the
synthetic lease facility, including the full property cost of the leased
centers, may become immediately due and payable.
In June 2002, the Financial Accounting Standards Board ("FASB") issued an
Exposure Draft of a proposed Interpretation, Consolidation of Certain Special
Purpose Entities. If the Interpretation is issued as proposed, we expect to be
required to consolidate the synthetic lease facility. It is currently uncertain
as to when the Exposure Draft would be effective. Upon consolidation, we would
record the assets as property and equipment and the lease liability as an
obligation. The impact to our statement of operations would be reduced rent
expense and increased depreciation and interest expense.
We are presently, and are from time to time, subject to claims and
litigation arising in the ordinary course of business. We believe that none of
the claims or litigation of which we are aware will materially affect our
financial position, operating results or cash flows, although assurance cannot
be given with respect to the ultimate outcome of any such actions.
5. Stock Split
On July 15, 2002, the Board of Directors authorized a 2-for-1 stock split
of our $0.01 par value common stock effective August 19, 2002 for stockholders
of record on August 9, 2002. All references to
9
the number of common shares and per share amounts within these unaudited
consolidated financial statements and notes thereto for the sixteen weeks ended
September 20, 2002 and September 21, 2001 and the fiscal year ended May 31, 2002
have been restated to reflect the stock split. Concurrent with the stock split,
the number of authorized common shares was increased from 20.0 million to 100.0
million shares.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes included elsewhere in
this report. Our fiscal year ends on the Friday closest to May 31. The
information presented refers to the sixteen weeks ended September 20, 2002 as
"the first quarter of fiscal 2003" and the sixteen weeks ended September 21,
2001 as "the first quarter of fiscal 2002." Our first fiscal quarter includes 16
weeks and the remaining quarters each include 12 weeks.
We calculate the average weekly tuition rate as net revenues, exclusive of
fees and non-tuition income, divided by FTE attendance for the related time
period. The average weekly tuition rate represents the approximate weighted
average weekly tuition rate at all of the centers paid by parents for children
to attend the centers five full days during a week. However, the occupancy mix
between full- and part-time children at each center can significantly affect
these averages with respect to any specific center. FTE attendance is not a
strict head count. Rather, the methodology determines an approximate number of
full-time children based on weighted averages. For example, an enrolled
full-time child equates to one FTE, while a part-time child enrolled for five
half-days equates to 0.5 FTE. The FTE measurement of center capacity utilization
does not necessarily reflect the actual number of full- and part-time children
enrolled. Occupancy is a measure of the utilization of center capacity. We
calculate occupancy as the full-time equivalent, or FTE, attendance at all of
the centers divided by the sum of the centers' licensed capacity.
A center is included in comparable center net revenues when it has been
open and operated by us at least one year and it has not been rebuilt or
permanently relocated within that year. Therefore, a center is considered
comparable during the first quarter it has prior year net revenues.
Non-comparable centers include those that have been closed during the past year.
First Quarter of Fiscal 2003 compared to First Quarter of Fiscal 2002
The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except the average weekly tuition rate:
Sixteen Sixteen Change
Weeks Ended Percent Weeks Ended Percent Amount
September 20, of September 21, of Increase/
2002 Revenues 2001 Revenues (Decrease)
------------ ---------- ------------ ---------- ------------
Revenues, net............................... $ 256,782 100.0% $ 247,068 100.0% $ 9,714
------------ ---------- ------------ ---------- ------------
Operating expenses:
Salaries, wages and benefits:
Center expense.......................... 136,713 53.2 131,757 53.3 4,956
Region and corporate expense............ 9,973 3.9 9,906 4.0 67
------------ ---------- ------------ ---------- ------------
Total salaries, wages and benefits.... 146,686 57.1 141,663 57.3 5,023
Depreciation and amortization............. 17,269 6.7 16,581 6.7 688
Rent...................................... 15,605 6.1 15,258 6.2 347
Other..................................... 63,458 24.7 62,230 25.2 1,228
------------ ---------- ------------ ---------- ------------
Total operating expenses................ 243,018 94.6 235,732 95.4 7,286
------------ ---------- ------------ ---------- ------------
Operating income...................... $ 13,764 5.4% $ 11,336 4.6% $ 2,428
============ ========== ============ ========== ============
Average weekly tuition rate................. $ 143.17 $ 135.75 $ 7.42
Occupancy................................... 62.5% 65.2% (2.7)
11
Revenues, net. Net revenues increased $9.7 million, or 3.9%, from the same
period last year to $256.8 million in the first quarter of fiscal 2003. The
increase was due to higher average weekly tuition rates as well as additional
net revenues generated by the newly opened centers. Comparable center net
revenues increased $2.9 million, or 1.2%. During the first quarter of fiscal
2003 and 2002, we opened and closed centers as follows:
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
Number of centers at the beginning of the
period....................................... 1,264 1,242
Openings....................................... 12 14
Closures....................................... (12) (4)
------------- -------------
Number of centers at the end of the period... 1,264 1,252
============= =============
The average weekly tuition rate increased $7.42, or 5.5%, to $143.17 in the
first quarter of fiscal 2003 due primarily to tuition increases. Occupancy
declined to 62.5% from 65.2% for the same period last year due to reduced
full-time equivalent attendance within the older center population. Total center
licensed capacity was 166,000 and 162,000 at the end of the first quarter of
fiscal 2003 and 2002, respectively.
Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $5.0 million, or 3.5%, from the same period last year to $146.7
million. Total salaries, wages and benefits expense as a percentage of net
revenues was 57.1% for the first quarter of fiscal 2003 compared to 57.3% for
the first quarter of fiscal 2002.
The expense directly associated with the centers was $136.7 million, an
increase of $5.0 million from the same period last year. The increase was
primarily due to costs from newly opened centers and overall higher wage rates.
See "Wage Increases." At the center level, salaries, wages and benefits expense
as a percentage of net revenues declined slightly to 53.2% from 53.3% for the
same period last year due primarily to improved labor productivity, offset
partially by higher medical insurance costs.
Depreciation and amortization. Depreciation and amortization expense
increased $0.7 million from the same period last year to $17.3 million.
Depreciation increased $1.4 million due to newly opened centers.
Amortization of goodwill decreased $0.7 million as a result of the adoption
of SFAS No. 142 in the first quarter of fiscal 2003. See "Note 1. Summary of
Significant Accounting Policies, Goodwill and Intangible Assets" to the
unaudited consolidated financial statements.
Rent. Rent expense increased $0.3 million from the same period last year to
$15.6 million primarily due to our recently initiated sales leaseback program.
See "Liquidity and Capital Resources." In addition, the rental rates experienced
on new and renewed center leases are higher than those experienced in previous
fiscal periods.
Other operating expenses. Other operating expenses increased $1.2 million,
or 2.0%, from the same period last year, to $63.5 million. The increase was due
primarily to additional center level costs for newly opened centers and higher
insurance costs. Other operating expenses as a percentage of net revenues
declined to 24.7% from 25.2% for the same period last year as a result of cost
controls over variable center and corporate expenditures.
Other operating expenses include costs directly associated with the
centers, such as food, insurance, transportation, janitorial, maintenance,
utilities and marketing costs, and expenses related to field management and
corporate administration.
12
Operating income. Operating income was $13.8 million, an increase of $2.4
million, or 21.4%, from the same period last year. Operating income increased
due to higher tuition rates, the cessation of goodwill amortization and control
of labor productivity and other variable expenditures. Operating income as a
percentage of net revenues was 5.4% compared to 4.6% for the same period last
year.
Interest expense. Interest expense was $12.8 million compared to $14.1
million for the same period last year. The decrease was substantially
attributable to lower interest rates, offset partially by additional borrowings.
Our weighted average interest rate on our long-term debt, including amortization
of deferred financing costs, was 7.4% and 8.5% for the first quarter of fiscal
2003 and fiscal 2002, respectively.
Income tax (expense) benefit. Income tax expense was $0.4 million, or 39.6%
of pretax income, in the first quarter of fiscal 2003. In the first quarter of
fiscal 2002, the income tax benefit was $1.0 million, or 37.1% of pretax income.
The increase in the effective tax rate was due to a reduction in the expected
benefit from the federal Work Opportunity Tax Credit and increased state income
taxes. Income tax expense was computed by applying estimated effective income
tax rates to the income before income taxes. Income tax expense varies from the
statutory federal income tax rate due primarily to state and foreign income
taxes, offset by tax credits.
Discontinued operations. Discontinued operations were $0.2 million in each
period, which represents the operating results for all periods presented of the
12 centers closed during the first quarter of fiscal 2003. Net revenues included
in discontinued operations were $0.7 and $1.4 million in the first quarter of
fiscal 2003 and 2002, respectively.
Net income (loss). Net income was $0.5 million in the first quarter of
fiscal 2003 compared to a net loss of $1.8 million in the same period last year.
The improvement was due to increased operating income and lower interest costs.
Basic and diluted net income per share were both $0.02 for the first quarter of
fiscal 2003. For the first quarter of fiscal 2002, basic and diluted net loss
per share were both $0.09.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow generated from operations
and borrowings under a $300.0 million revolving credit facility. At September
20, 2002, we had drawn $195.0 million under the revolving credit facility, had
committed to outstanding letters of credit totaling $33.3 million and had funded
$97.9 million under the synthetic lease facility discussed below. Our
availability under the revolving credit facility at September 20, 2002 was $71.7
million. The revolving credit facility is scheduled to terminate on February 13,
2004.
Our consolidated net cash provided by operating activities for the first
quarter of fiscal 2003 was $5.9 million compared to $4.1 million in the same
period last year. The increase in net cash flow was due to the increase in
earnings; see the calculation of EBITDAR below. Cash and cash equivalents
totaled $9.3 million at September 20, 2002, compared to $8.6 million at May 31,
2002.
13
EBITDAR is earnings before interest, taxes, depreciation, amortization,
rent and discontinued operations. EBITDAR was calculated as follows, with
dollars in thousands:
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
Net income (loss)........................ $ 457 $ (1,770)
Interest expense, net.................... 12,731 13,908
Income tax expense (benefit)............. 409 (954)
Depreciation and amortization............ 17,269 16,581
Discontinued operations.................. 167 152
------------- -------------
EBITDA............................... 31,033 27,917
Rent expense............................. 15,605 15,258
------------- -------------
EBITDAR................................ $ 46,638 $ 43,175
============= =============
EBITDAR - percentage of net revenues... 18.2% 17.5%
During the first quarter of fiscal 2003, EBITDAR increased $3.5 million, or
8.0%, from the same period last year due to higher tuition rates and control
over labor productivity and other variable expenditures. EBITDAR is not intended
to indicate that cash flow is sufficient to fund all of our cash needs or
represent cash flow from operations as defined by accounting principles
generally accepted in the United States of America. In addition, EBITDAR should
not be used as a tool for comparison as the computation may not be the same for
all companies.
In fiscal year 2001, we issued 860,000 shares of our common stock and paid
$13.1 million to the sellers of Mulberry and assumed $3.3 million of debt. In
August 2002, 119,838 of the 860,000 shares were returned to us, which included
99,152 shares that were released from an indemnity escrow and 20,686 shares that
were repurchased from certain former shareholders of Mulberry. All 119,838
shares have been cancelled.
In fiscal year 2000, we entered into a $100.0 million synthetic lease
facility under which a syndicate of lenders financed the construction of new
centers for lease to us for a three to five year period, which may be extended,
subject to the consent of the lessors. A total of 44 centers were constructed
for $97.9 million. The related leases are classified as operating leases for
financial reporting purposes. We do not consolidate the assets or liabilities
related to the synthetic lease in our consolidated financial statements.
The synthetic lease facility closed to draws on February 13, 2001 and, at
September 20, 2002, $97.9 million had been funded through the facility. We have
the option to purchase the centers for $97.9 million at the end of the lease
term, which is February 13, 2004. We are required to notify the lessors by May
14, 2003, as to whether or not we will be exercising our option to purchase the
centers at the end of the lease term. If we do not elect to exercise our
purchase option, then we are required to market the leased centers for sale to
third parties. In addition, we would pay the lessors a guaranteed residual
amount of up to $82.2 million. The guaranteed residual amount that we may have
to pay would be reduced to the extent the net sales proceeds from the centers
exceed $15.7 million. Any such payment of the guaranteed residual amount to the
lessors would be recognized as rental expense when and if payment becomes
probable.
The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. In the event of certain
defaults under the terms of the synthetic lease facility, all amounts under the
synthetic lease facility, including the full property cost of the leased
centers, may become immediately due and payable.
14
In June 2002, the FASB issued an Exposure Draft of a proposed
Interpretation, Consolidation of Certain Special Purpose Entities. If the
Interpretation is issued as proposed, we expect to be required to consolidate
the synthetic lease facility. It is currently uncertain as to when the Exposure
Draft would be effective. Upon consolidation, we would record the assets as
property and equipment and the lease liability as an obligation. The impact to
our statement of operations would be reduced rent expense and increased
depreciation and interest expense.
During the fourth quarter of fiscal year 2002, we began marketing efforts
to sell centers to individual real estate investors and then lease them back.
The Board of Directors has authorized sales of up to $150.0 million, which we
expect will represent 60 to 70 centers. The resulting leases are expected to be
classified as operating leases. We will continue to manage the operations of any
centers that are sold in such transactions. By September 20, 2002, we had
completed sales totaling $22.2 million, which represented 11 centers. Subsequent
to September 20, 2002, we closed $11.3 million in sales and are currently in the
process of negotiating another $51.9 million of sales. We expect this effort to
continue into fiscal year 2004, assuming the market for such transactions
remains favorable.
Our principal uses of liquidity are meeting debt service requirements,
financing capital expenditures and providing working capital. We expect to fund
future new center development through the revolving credit facility and
sale-leaseback proceeds, although alternative forms of funding continue to be
evaluated and new arrangements may be entered into in the future.
We have certain contractual obligations and commercial commitments.
Contractual obligations are those that will require cash payments in accordance
with the terms of a contract, such as a borrowing or lease agreement. Commercial
commitments represent potential obligations for performance in the event of
demands by third parties or other contingent events, such as lines of credit.
Our contractual obligations and commercial commitments at September 20, 2002
were as follows, with dollars in thousands:
Remainder Fiscal Year
of Fiscal --------------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt.............. $ 352,705 $ 1,729 $ 1,041 $ 4,555 $ 46,418 $ 263 $ 298,699
Capital lease obligations... 31,792 1,715 2,529 2,234 2,277 2,396 20,641
Operating leases............ 407,081 32,726 136,189 32,945 28,924 25,529 150,768
Line of credit.............. 195,000 -- 195,000 -- -- -- --
Standby letters of credit... 33,306 18,383 14,923 -- -- -- --
Other commitments........... 10,712 10,698 14 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$1,030,596 $ 65,251 $ 349,696 $ 39,734 $ 77,619 $ 28,188 $ 470,108
========== ========== ========== ========== ========== ========== ==========
Other commitments include center development commitments, obligations to
purchase vehicles and other purchase order commitments.
We may experience decreased liquidity during the summer months and the
calendar year-end holidays due to decreased attendance during these periods. New
enrollments are generally highest during the traditional fall "back to school"
period and after the calendar year-end holidays. Enrollment generally decreases
5% to 10% during the summer months and calendar year-end holidays.
We believe that cash flow generated from operations and borrowings under
the revolving credit facility will adequately provide for our working capital
and debt service needs and will be sufficient to fund our expected capital
expenditures for the foreseeable future. Any future acquisitions, joint ventures
or similar transactions may require additional capital, and such capital may not
be available to us on acceptable terms or at all. Although no assurance can be
given that such sources of capital will be sufficient, the capital expenditure
program has substantial flexibility and is subject to revision based on
15
various factors, including but not limited to, business conditions, cash flow
requirements, debt covenants, competitive factors and seasonality of openings.
If we experience a lack of working capital, it may reduce our future capital
expenditures. If these expenditures were substantially reduced, in management's
opinion, our operations and cash flow would be adversely impacted.
Capital Expenditures
During the first quarter of fiscal 2003 and 2002, we opened 12 and 14 new
centers, respectively. We expect to open 30 new centers in fiscal 2003 and to
continue our practice of closing centers that are identified as not meeting
performance expectations. In addition, we may acquire existing centers from
local or regional early childhood education and care providers. We may not be
able to successfully negotiate and acquire sites and/or previously constructed
centers, meet our targets for new center additions or meet targeted deadlines
for development of new centers.
New centers are located based upon detailed site analyses that include
feasibility and demographic studies and financial modeling. The length of time
from site selection to construction and, finally, the opening of a community
center ranges from 16 to 24 months. Frequently, new site negotiations are
delayed or canceled or construction is delayed for a variety of reasons, many of
which are outside our control. The average total cost per community center
typically ranges from $1.8 million to $2.6 million depending on the size and
location of the center. However, the actual costs of a particular center may
vary from such range.
Our new centers typically have a licensed capacity of 180, while the
centers constructed during fiscal 1997 and earlier have an average licensed
capacity of 125. When mature, these larger centers are designed to generate
higher revenues, operating income and margins than our older centers. These new
centers also have higher average costs of construction and typically take three
to four years to reach maturity. On average, our new centers should begin to
produce positive EBITDAR by the end of the first year of operation and begin to
produce positive net income by the end of the second year of operation.
Accordingly, as more new centers are developed and opened, profitability will be
negatively impacted in the short-term but is expected to be enhanced in the
long-term once these new centers achieve anticipated levels of occupancy.
We continue to make capital expenditures in connection with a renovation
program, which includes interior and playground renovations and signage
replacements. The program is designed to bring all of our existing facilities to
a company standard for plant and equipment and to enhance the curb appeal of
these centers.
Capital expenditures included the following, with dollars in thousands:
Sixteen Weeks Ended
------------------------------
September 20, September 21,
2002 2001
------------- -------------
New center development.................. $ 25,304 $ 24,465
Renovation of existing facilities....... 5,387 5,052
Equipment purchases..................... 3,378 2,131
Information systems purchases........... 670 1,416
------------- -------------
$ 34,739 $ 33,064
============= =============
Capital expenditure limits under our credit facilities for fiscal year 2003
are $190.0 million. The capital expenditure limit may be increased by carryover
of a portion of unused amounts from previous periods and are subject to
exceptions. Also, we have some ability to incur additional indebtedness,
16
including through mortgages or sale-leaseback transactions, subject to the
limitations imposed by the indenture under which our senior subordinated notes
were issued and the credit facilities.
Application of Critical Accounting Policies
Critical Accounting Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires that management make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Predicting
future events is inherently an imprecise activity and as such requires the use
of judgment. Actual results may vary from estimates in amounts that may be
material to the financial statements.
For a description of our significant accounting policies, see "Note 2.
Summary of Significant Accounting Policies" to the unaudited consolidated
financial statements. For a more complete description, please refer to our
Annual Report on Form 10-K for the fiscal year ended May 31, 2002. The following
accounting estimates and related policies are considered critical to the
preparation of our financial statements due to the business judgment and
estimation processes involved in their application. Management has reviewed the
development and selection of these estimates and their related disclosure with
the Audit Committee of the Board of Directors.
Revenue recognition. Tuition revenues, net of discounts, and other revenues
are recognized as services are performed. Payments may be received in advance of
services being rendered, in which case the revenue is deferred and recognized
during the appropriate time period, typically a week. Our non-refundable
registration and education fees are amortized over the average enrollment
period, not to exceed one year. The recognition of our net revenues meets the
criteria of the Securities and Exchange Commission Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, including the existence of an
arrangement, the rendering of services, a determinable fee and probable
collection.
Accounts receivable. Our accounts receivable are comprised primarily of
tuition due from governmental agencies, parents and employers. Accounts
receivable are presented at estimated net realizable value. We use estimates in
determining the collectibility of our accounts receivable and must rely on our
evaluation of historical experience, governmental funding levels, specific
customer issues and current economic trends to arrive at appropriate reserves.
Material differences may result in the amount and timing of bad debt expense if
actual experience differs significantly from management estimates.
Long-lived and intangible assets. During the first quarter of fiscal 2003,
we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Please refer to "Initial Adoption of Accounting Policies" below. Under
the requirements of SFAS No. 144, we assess the potential impairment of property
and equipment and finite-lived intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An
asset's value is impaired if our estimate of the aggregate future cash flows,
undiscounted and without interest charges, to be generated by the asset is less
than the carrying value of the asset. Such cash flows consider factors such as
expected future operating income and historical trends, as well as the effects
of demand and competition. To the extent impairment has occurred, the loss will
be measured as the excess of the carrying amount of the asset over its fair
value. Such estimates require the use of judgment and numerous subjective
assumptions, which, if actual experience varies, could result in material
differences in the requirements for impairment charges. Impairment charges were
$0.1 million in each of the first quarters of fiscal 2003 and 2002 and were
included as a component of depreciation expense. During the first quarter of
fiscal 2003, we adopted SFAS No. 142, which addresses the evaluation of goodwill
and other indefinite-lived intangibles for impairment. Please refer to "Initial
Adoption of Accounting Policies" below.
17
Self-insurance obligations. We self-insure a portion of our general
liability, workers' compensation, auto, property and employee medical insurance
programs. We purchase stop loss coverage at varying levels in order to mitigate
our potential future losses. The nature of these liabilities, which may not
fully manifest themselves for several years, requires significant judgment. We
estimate the obligations for liabilities incurred but not yet reported or paid
based on available claims data and historical trends and experience, as well as
future projections of ultimate losses, expenses, premiums and administrative
costs. The accrued obligations for these self-insurance programs were $36.0 and
$35.5 million at September 20, 2002 and May 31, 2002, respectively. Our internal
estimates are reviewed annually by a third party actuary. While we believe that
the amounts accrued for these obligations are sufficient, any significant
increase in the number of claims and costs associated with claims made under
these programs could have a material adverse effect on our financial position,
cash flows or results of operations.
Income taxes. Accounting for income taxes requires us to estimate our
future tax liabilities. Due to timing differences in the recognition of items
included in income for accounting and tax purposes, deferred tax assets or
liabilities are recorded to reflect the impact arising from these differences on
future tax payments. With respect to recorded tax assets, we assess the
likelihood that the asset will be realized. If realization is in doubt because
of uncertainty regarding future profitability or enacted tax rates, we provide a
valuation allowance related to the asset. Should any significant changes in the
tax law or our estimate of the necessary valuation allowance occur, we would be
required to record the impact of the change. This could have a material effect
on our financial position or results of operations.
Initial Adoption of Accounting Policies. During the first quarter of fiscal
2003, we adopted the following new accounting pronouncements. Please also refer
to "Note 2. Summary of Significant Accounting Policies, Goodwill and Other
Intangibles and Discontinued Operations" to the unaudited consolidated financial
statements.
Goodwill and Other Intangible Assets. Effective June 1, 2002, we adopted
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
discontinuing the amortization of goodwill and other intangible assets with
indefinite useful lives. Therefore, we ceased amortization of goodwill at June
1, 2002. Goodwill amortization was $0.7 million during the first quarter of
fiscal 2002. These assets must now be tested at least annually for impairment
and written down to their fair market values if necessary. We will perform a
transitional impairment test during the second quarter of fiscal 2003 and annual
tests commencing in the fourth quarter of fiscal 2003.
Impairment of Long-Lived Assets and Discontinued Operations. Effective June
1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
the accounting and reporting provisions of APB No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of business. SFAS No. 144 modifies the accounting and
reporting for long-lived assets to be disposed of by sale and it broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 does not apply to goodwill and other indefinite-lived intangible
assets. Please refer to the discussion of SFAS No. 142 above.
Adopting SFAS No. 144 did not materially change the results of our
impairment analysis during the first quarter of fiscal 2003. Refer to "Critical
Accounting Estimates" above. However, we did revise our policy to estimate
future cash flows over the remaining useful life of the principal asset. In most
cases, this is a longer time period than the 10-year estimate we used
previously. Therefore, the adoption of SFAS No. 144 may materially impact our
assessment of impairment in the future.
18
We have determined that the 12 centers closed during the first quarter of
fiscal 2003 meet the criteria of discontinued operations. Therefore, the
operating results for these 12 centers were classified as discontinued
operations for all periods presented. Discontinued operations were $0.2 million
in each of the first quarters of fiscal 2003 and 2002. We believe that most of
our future center closures will now be categorized as discontinued operations.
The four owned centers that were closed are being held for sale. At September
20, 2002, $1.4 million of property and equipment has been classified as current
assets held for sale in the unaudited consolidated balance sheet.
Recently Issued Accounting Pronouncements
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires costs associated with exit or disposal activities be
recorded at their fair values when a liability has been incurred, rather than at
the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for disposal activities initiated after December 31, 2002. We are evaluating
SFAS No. 146 and have not yet determined the impact of adoption on our financial
position and results of operations.
Wage Increases
Expenses for salaries, wages and benefits represented approximately 57.1%
of net revenues for the first quarter of fiscal 2003. We believe that, through
increases in our tuition rates, we can recover any future increase in expenses
caused by adjustments to the federal or state minimum wage rates or other market
adjustments. However, we may not be able to increase our rates sufficiently to
offset such increased costs. We continually evaluate our wage structure and may
implement changes at targeted local levels.
Forward-Looking Statements
We have made statements in this report that constitute forward-looking
statements as that term is defined in the federal securities laws. These
forward-looking statements concern our operations, economic performance and
financial condition and include statements regarding: opportunities for growth;
the number of early childhood education and care centers expected to be added in
future years; the profitability of newly opened centers; capital expenditure
levels; the ability to refinance or incur additional indebtedness; strategic
acquisitions, investments, alliances and other transactions; changes in
operating systems and policies and their intended results; our expectations and
goals for increasing center revenue and improving our operational efficiencies;
changes in the regulatory environment; the potential benefit of tax incentives
for child care programs; our projected cash flow; and our marketing efforts to
sell and lease back centers. The forward-looking statements are subject to
various known and unknown risks, uncertainties and other factors. When we use
words such as "believes," "expects," "anticipates," "plans," "estimates" or
similar expressions we are making forward-looking statements.
Although we believe that our forward-looking statements are based on
reasonable assumptions, our expected results may not be achieved. Actual results
may differ materially from our expectations. Important factors that could cause
actual results to differ from expectations include, among others:
o the effects of general economic conditions;
o competitive conditions in the child care and early education
industries;
o various factors affecting occupancy levels, including, but not limited
to, the reduction in or changes to the general labor force that would
reduce the need for child care services;
19
o the availability of a qualified labor pool, the impact of labor
organization efforts and the impact of government regulations
concerning labor and employment issues;
o federal and state regulations regarding changes in child care
assistance programs, welfare reform, transportation safety, minimum
wage increases and licensing standards;
o the loss of government funding for child care assistance programs;
o our inability to successfully execute our growth strategy;
o the availability of financing or additional capital;
o our difficulty in meeting or inability to meet our obligations to
repay our indebtedness;
o the availability of sites and/or licensing or zoning requirements that
may make us unable to open new centers;
o our ability to integrate acquisitions;
o our inability to successfully defend against or counter negative
publicity associated with claims involving alleged incidents at our
centers;
o our inability to obtain insurance at the same levels, or at costs
comparable to those incurred historically;
o the effects of potential environmental contamination existing on any
real property owned or leased by us; and
o other risk factors that are discussed in this report and, from time to
time, in our other Securities and Exchange Commission reports and
filings.
We caution you that these risks may not be exhaustive. We operate in a
continually changing business environment and new risks emerge from time to
time.
You should not rely upon forward-looking statements except as statements of
our present intentions and of our present expectations that may or may not
occur. You should read these cautionary statements as being applicable to all
forward-looking statements wherever they appear. We assume no obligation to
update or revise the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risk in the areas of interest rates and foreign currency exchange rates.
Interest Rates
Our exposure to market risk for changes in interest rates relates primarily
to debt obligations. We have no cash flow exposure due to rate changes on our
9.5% senior subordinated notes aggregating $290.0 million at September 20, 2002.
We also have no cash flow exposure on certain industrial revenue bonds,
mortgages and notes payable aggregating $6.7 million at September 20, 2002.
However, we have cash flow exposure on our revolving credit facility, our term
loan facility and certain industrial revenue bonds subject to variable LIBOR or
adjusted base rate pricing aggregating $251.0 million at September 20, 2002.
Accordingly, a 1% (100 basis points) change in the LIBOR rate and the adjusted
base rate would have resulted in interest expense changing by approximately $0.7
and $0.8 million in the first quarter of fiscal 2003 and 2002, respectively.
We have cash flow exposure on our synthetic lease facility subject to
variable LIBOR pricing. We also have cash flow exposure on our vehicle leases
with variable interest rates. A 1% (100 basis points) change in the synthetic
lease LIBOR rate and the interest rate defined in the vehicle lease agreement
would have resulted in rent expense changing by approximately $0.5 million in
the first quarters of fiscal 2003 and 2002.
Foreign Exchange Risk
We are exposed to foreign exchange risk to the extent of fluctuations in
the United Kingdom pound sterling. Based upon the relative size of our
operations in the United Kingdom, we do not believe that the reasonably possible
near-term change in the related exchange rate would have a material effect on
our financial position, results of operations and cash flows.
ITEM 4. CONTROLS AND PROCEDURES
In October 2002, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.
21
PART II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective August 9, 2002, affiliates of Kohlberg Kravis Roberts & Co.
acting by consent and representing 15,657,894 shares or 79.5% of our outstanding
common stock, approved a 2-for-1 stock split of our $0.01 par value common stock
effective August 19, 2002 for stockholders of record on August 9, 2002. The
stock split was authorized by the Board of Directors, subject to shareholder
approval, on July 15, 2002. Notice to the non-voting shareholders was sent on
August 16, 2002, in accordance with Section 228 of the Delaware General
Corporation Law.
All references to the number of common shares and per share amounts within
this report have been restated to reflect the stock split. Concurrent with the
stock split, the number of authorized common shares was increased from 20.0
million to 100.0 million shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed with this report or incorporated
herein by reference:
10(a)* Form of letter regarding the Fiscal Year 2003 Management Bonus Plan.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K: None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 1, 2002.
KINDERCARE LEARNING CENTERS, INC.
By: DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: DAN R. JACKSON
----------------------------------
Dan R. Jackson
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
CERTIFICATION
I, David J. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of KinderCare Learning
Centers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 1, 2002
By: DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
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CERTIFICATION
I, Dan R. Jackson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of KinderCare Learning
Centers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 1, 2002
By: DAN R. JACKSON
----------------------------------
Dan R. Jackson
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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