================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
-------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 7, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the registrant's common stock, $.01 par value per
share, outstanding at April 18, 2003 was 19,661,216.
================================================================================
KinderCare Learning Centers, Inc. and Subsidiaries
Index
Part I. Financial Information............................................ 2
Item 1. Unaudited consolidated financial statements:
Consolidated balance sheets at March 7, 2003 and
May 31, 2002 (unaudited)................................ 2
Consolidated statements of operations for the twelve and
forty weeks ended March 7, 2003 and
March 8, 2002 (unaudited)................................ 3
Consolidated statements of stockholders' equity and
comprehensive income for the forty weeks
ended March 7, 2003 and the fiscal year ended
May 31, 2002 (unaudited)................................. 4
Consolidated statements of cash flows for the forty
weeks ended March 7, 2003 and March 8, 2002
(unaudited)........................................... 5
Notes to unaudited consolidated financial statements........ 6
Item 2. Management's discussion and analysis of financial
condition and results of operations......................... 12
Item 3. Quantitative and qualitative disclosures about market risk.. 26
Item 4. Controls and Procedures..................................... 26
Part II. Other Information............................................... 28
Item 4. Submission of matters to a vote of security holders......... 28
Item 6. Exhibits and reports on Form 8-K............................ 28
Signatures................................................................ 29
Certifications............................................................ 30
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
March 7, 2003 May 31, 2002
-------------- -------------
Assets
Current assets:
Cash and cash equivalents.................. $ 13,565 $ 8,619
Receivables, net........................... 30,656 31,657
Prepaid expenses and supplies.............. 9,430 9,948
Deferred income taxes...................... 11,132 13,904
Assets held for sale....................... 685 1,787
-------------- -------------
Total current assets.................... 65,468 65,915
Property and equipment, net.................. 678,771 700,373
Deferred income taxes........................ 199 8
Goodwill..................................... 42,565 42,565
Other assets................................. 32,926 35,324
-------------- -------------
$ 819,929 $ 844,185
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts............................ $ 10,470 $ 9,779
Accounts payable........................... 7,513 9,836
Current portion of long-term debt.......... 136,129 6,237
Accrued expenses and other liabilities..... 93,959 105,108
-------------- -------------
Total current liabilities............... 248,071 130,960
Long-term debt............................... 350,084 526,080
Long-term self-insurance liabilities......... 17,217 15,723
Deferred income taxes........................ 15,251 12,208
Other noncurrent liabilities................. 57,520 35,945
-------------- -------------
Total liabilities....................... 688,143 720,916
-------------- -------------
-- --
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 19,661,216 and 19,819,352
shares, respectively.................... 197 198
Additional paid-in capital................. 25,909 28,107
Notes receivable from stockholders......... (1,085) (1,426)
Retained earnings.......................... 106,937 96,882
Accumulated other comprehensive loss....... (172) (492)
-------------- -------------
Total stockholders' equity.............. 131,786 123,269
-------------- -------------
$ 819,929 $ 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)
Twelve Weeks Ended Forty Weeks Ended
------------------------- -------------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
------------ ----------- ------------ -----------
Revenues, net........... $ 193,061 $ 185,611 $ 644,992 $ 621,224
------------ ----------- ------------ -----------
Operating expenses:
Salaries, wages and
benefits.............. 105,884 101,706 361,616 348,050
Depreciation and
amortization.......... 12,615 12,640 44,220 41,622
Rent.................. 12,814 11,264 40,261 37,201
Provision for doubtful
accounts............ 1,410 1,629 4,777 4,670
Other................. 41,369 36,783 145,368 137,125
------------ ----------- ------------ -----------
Total operating
expenses......... 174,092 164,022 596,242 568,668
------------ ----------- ------------ -----------
Operating income.... 18,969 21,589 48,750 52,556
Investment income....... 35 159 215 458
Interest expense........ (9,338) (9,983) (31,791) (34,436)
------------ ----------- ------------ -----------
Income before income
taxes and discontinued
operations.......... 9,666 11,765 17,174 18,578
Income tax expense...... (3,828) (4,523) (6,801) (7,310)
------------ ----------- ------------ -----------
Income before discontinued
operations.......... 5,838 7,242 10,373 11,268
Discontinued operations,
net of income tax benefit
of $354, $59, $209 and
$284, respectively.... (540) (94) (318) (437)
------------ ----------- ------------ -----------
Net income.......... $ 5,298 $ 7,148 $ 10,055 $ 10,831
============ =========== ============ ===========
Basic net income per share:
Income before discontinued
operations.......... $ 0.30 $ 0.37 $ 0.53 $ 0.57
Discontinued operations,
net................. (0.03) (0.01) (0.02) (0.02)
------------ ----------- ------------ -----------
Net income.......... $ 0.27 $ 0.36 $ 0.51 $ 0.55
============ =========== ============ ===========
Diluted net income per share:
Income before discontinued
operations.......... $ 0.29 $ 0.36 $ 0.52 $ 0.56
Discontinued operations,
net................. (0.02) (0.01) (0.01) (0.02)
------------ ----------- ------------ -----------
Net income.......... $ 0.27 $ 0.35 $ 0.51 $ 0.54
============ =========== ============ ===========
Weighted average common
shares outstanding:
Basic................ 19,664,442 19,819,352 19,712,790 19,819,352
Diluted.............. 19,836,207 20,014,932 19,900,641 20,171,300
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......................... -- -- -- -- 10,055 -- 10,055
Cumulative translation adjustment.. -- -- -- -- -- 320 320
----------
Total comprehensive income....... 10,375
Retirement of common stock........... (119,838) (1) (1,645) -- -- -- (1,646)
Repurchase of common stock........... (38,298) -- (553) -- -- -- (553)
Proceeds from collection of
stockholders' notes receivable..... -- -- -- 341 -- -- 341
---------- ------- ---------- ------------ ---------- ------------- ----------
Balance at March 7, 2003......... 19,661,216 $ 197 $ 25,909 $ (1,085) $ 106,937 $ (172) $ 131,786
========== ======= ========== ============ ========== ============= ==========
See accompanying notes to unaudited consolidated financial statements.
4
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
-----------------------------
March 7, 2003 March 8, 2002
-------------- -------------
Cash flows from operations:
Net income............................... $ 10,055 $ 10,831
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 44,686 39,818
Amortization of deferred financing
costs, goodwill and other intangible
assets and deferred gain on
sale-leasebacks...................... 1,669 4,253
Provision for doubtful accounts....... 4,910 4,728
Gain on sales and disposals of
property and equipment............... (1,881) (407)
Deferred tax expense.................. 5,624 188
Changes in operating assets and
liabilities:
Increase in receivables............. (5,555) (9,716)
Decrease in prepaid expenses and
supplies........................... 518 700
Increase in other assets............ (249) (348)
Decrease in accounts payable,
accrued expenses and other current
and noncurrent liabilities......... (11,636) (2,477)
Other, net............................ 320 (10)
-------------- -------------
Net cash provided by operating
activities............................ 48,461 47,560
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment...... (69,731) (76,190)
Proceeds from sales of property and
equipment............................... 72,516 2,206
Proceeds from collection of notes
receivable............................. 68 --
-------------- -------------
Net cash provided (used) by investing
activities............................ 2,853 (73,984)
-------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings....... 48,000 57,060
Payments on long-term borrowings......... (94,104) (21,197)
Payments on capital leases............... (743) (792)
Proceeds from collection of
stockholders' notes receivable.......... 341 35
Issuance of stockholders' notes
receivable.............................. -- (107)
Repurchase of common stock............... (553) --
Bank overdrafts.......................... 691 (605)
-------------- -------------
Net cash (used) provided by financing
activities............................ (46,368) 34,394
-------------- -------------
Increase in cash and cash equivalents. 4,946 7,970
Cash and cash equivalents at the
beginning of the period................. 8,619 3,657
-------------- -------------
Cash and cash equivalents at the end of
the period.............................. $ 13,565 $ 11,627
============== =============
Supplemental cash flow information:
Interest paid............................ $ 35,980 $ 37,588
Income taxes paid, net................... 6,257 7,653
Non-cash financial activities:
Retirement of common stock............... $ 1,646 $ --
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 services in
the United States. At March 7, 2003, we served approximately 130,000 children
and their families at 1,264 child care centers. At our child care centers,
education and care services are provided 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
167,000 at March 7, 2003.
We operate child care centers under two brands as follows:
o KinderCare - At March 7, 2003, we operated 1,194 KinderCare centers.
The brand was established in 1969 and includes centers in 39 states,
as well as two centers located in the United Kingdom.
o Mulberry - We operated 70 Mulberry centers and 12 before- and
after-school programs at March 7, 2003. Mulberry operates primarily in
the northeast region of the United States and southern California.
We also partner with companies to provide on- or near-site care to help
employers attract and retain employees. Included in the 1,264 centers, at March
7, 2003, are 47 employer-sponsored centers. In addition to our center-based
child care operations, our wholly-owned subsidiary owns and operates a distance
learning company serving teenagers and young adults. The subsidiary, KC Distance
Learning, Inc., 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., a developer of educational curricula for
elementary and middle schools and a provider of a public school teacher
retraining program.
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 March 7, 2003, and
our results of operations for each of the twelve and forty week periods ended
March 7, 2003 and March 8, 2002, and cash flows for the forty weeks ended March
7, 2003 and March 8, 2002. 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. We utilize a fiscal reporting
schedule comprised of 13 four-week periods. Our fiscal year ends on the Friday
closest to May 31. The first fiscal quarter includes 16 weeks and the remaining
quarters each include 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 twelve and forty weeks ended March 8,
2002 was $0.5 million and $1.6 million, pre-tax, respectively. These assets must
now be tested at least annually for impairment and written down to their fair
market values, if necessary. As of June 1, 2002, we had $42.6 million of
goodwill recorded on our consolidated balance sheet. We performed a transitional
impairment test in the second quarter of fiscal 2003, as required by SFAS No.
142. Although quoted market prices are the best evidence in determining fair
value, we used the value of our stock, as determined by the Board of Directors,
as it was a more practical measure to perform the transitional impairment test.
The fair value of the reporting unit related to the recorded goodwill, as of
June 1, 2002, exceeded the carrying value at the same date, hence there was no
evidence of impairment. We will perform our annual impairment test in the fourth
quarter of fiscal 2003.
If SFAS No. 142 had been adopted in the prior fiscal year, our pro forma
net income and net income per share for the twelve and forty weeks ended March
8, 2002 would have been as follows, with dollars in thousands, except per share
amounts:
Twelve Weeks Ended Forty Weeks Ended
March 8, 2002 March 8, 2002
------------------------------ ------------------------------
Net income per share Net income per share
Net -------------------- Net --------------------
Income Basic Diluted Income Basic Diluted
-------- --------- --------- -------- --------- --------
Reported....... $ 7,148 $ 0.36 $ 0.35 $ 10,831 $ 0.55 $ 0.54
Goodwill
amortization,
net of taxes.. 295 0.02 0.02 984 0.05 0.05
-------- --------- --------- -------- --------- --------
Adjusted.... $ 7,443 $ 0.38 $ 0.37 $ 11,815 $ 0.60 $ 0.59
======== ========= ========= ======== ========= ========
At March 7, 2003 and May 31, 2002, we had approximately $2.7 million of
finite-lived intangible assets, which had associated accumulated amortization of
approximately $2.6 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 3 to 5 years.
Amortization expense was $0.1 million and $0.3 million for the twelve weeks
ended March 7, 2003 and March 8, 2002, respectively, and $0.3 million and $0.6
million for the forty weeks ended March 7, 2003 and March 8, 2002, respectively.
Amortization of these intangibles will be substantially complete in the second
quarter of fiscal 2004.
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.
See "Recently Issued Accounting Pronouncements."
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.
7
We closed 24 centers in the forty weeks ended March 7, 2003, which included
five owned and 19 leased centers. These center closures meet the criteria of
discontinued operations in SFAS No. 144. The operating results for these 24
centers were classified as discontinued operations, net of tax, in the unaudited
consolidated statements of operations for all periods presented. A summary of
discontinued operations follows, with dollars in thousands:
Twelve Weeks Ended Forty Weeks Ended
----------------------- -----------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
----------- ---------- ---------- -----------
Revenues, net................ $ 275 $ 1,989 $ 3,115 $ 6,974
Operating expenses........... 1,169 2,141 3,641 7,693
----------- ---------- ---------- -----------
Operating loss............. (894) (152) (526) (719)
Interest expense............. -- (1) (1) (2)
----------- ---------- ---------- -----------
Discontinued operations (894) (153) (527) (721)
before income tax........
Income tax benefit........... 354 59 209 284
----------- ---------- ---------- -----------
Discontinued operations,
net of tax................. $ (540) $ (94) $ (318) $ (437)
=========== ========== ========== ===========
Operating expenses included impairment charges of $0.1 million and $0.2
million for the twelve and forty weeks ended March 7, 2003, respectively, and
gains on closed center sales in the amount of $1.2 million for the forty weeks
ended March 7, 2003. The owned centers that meet the criteria of held for sale
have been classified as current in the unaudited consolidated balance sheets for
all periods presented. As a result, property and equipment of $0.7 million and
$1.8 million was classified as current assets held for sale at March 7, 2003 and
May 31, 2002, respectively.
Exit or Disposal Activities. In the second quarter of fiscal 2003, we
adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 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
was effective for disposal activities initiated after December 31, 2002. This
adoption did not have a material impact on our financial position or results of
operations.
Guarantees. Financial Accounting Standards Board ("FASB") Interpretation 45
("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantee,
Including Indirect Guarantees of Indebtedness of Others, requires expanded
disclosures by guarantors in interim and annual financial statements about
obligations under certain guarantees. See "Note 4. Commitments and
Contingencies" for a discussion of the guarantee under our synthetic lease
facility. In addition, FIN 45 requires guarantors to recognize, at the inception
of a guarantee, a liability for the obligation it has undertaken in issuing the
guarantee. The recognition and initial measurement provision is applicable to
guarantees issued or modified after December 31, 2002.
8
Net Income per Share. The difference between basic and diluted net income
per share was a result of the dilutive effect of options, which are considered
potential common shares. A summary of the weighted average common shares
outstanding follows:
Twelve Weeks Ended Forty Weeks Ended
-------------------------- --------------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Basic weighted average
common shares
outstanding.............. 19,664,442 19,819,352 19,712,790 19,819,352
Dilutive potential common
shares................... 171,765 195,580 187,851 351,948
------------ ------------ ------------ ------------
Diluted weighted average
common shares
outstanding.............. 19,836,207 20,014,932 19,900,641 20,171,300
============ ============ ============ ============
Shares excluded from
potential shares due to
their anti-dilutive
effect................... 2,271,994 1,651,798 2,255,908 1,495,421
============ ============ ============ ============
Comprehensive Income. Comprehensive income is comprised of the following,
for the periods indicated, with dollars in thousands:
Twelve Weeks Ended Forty Weeks Ended
-------------------------- --------------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income................... $ 5,298 $ 7,148 $ 10,055 $ 10,831
Cumulative translation
adjustment................. 30 (66) 320 (10)
------------ ------------ ------------ ------------
$ 5,328 $ 7,082 $ 10,375 $ 10,821
============ ============ ============ ============
Recently Issued Accounting Pronouncements. SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, amends the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to
require prominent disclosures in annual and interim financial statements about
the method of accounting for stock-based compensation and the effect in
measuring compensation expense. SFAS No. 148 is effective for interim periods
beginning after December 15, 2002, with early application encouraged. We will
provide the required disclosures commencing with our Annual Report on Form 10-K
for the fiscal year ending May 30, 2003. We do not anticipate an impact to our
financial position or results of operations.
FASB FIN 46, Consolidation of Variable Interest Entities, requires
consolidation where there is a controlling financial interest in a variable
interest entity, previously referred to as a special-purpose entity. Under this
requirement our $97.9 million synthetic lease facility will be consolidated in
our consolidated balance sheet. Property and equipment financed in the synthetic
lease facility will be recorded as assets and the related lease obligation will
be recorded as a liability. The impact to our future statement of operations
will be reduced rent expense and increased depreciation and interest expense.
See "Note 4. Commitments and Contingencies." FIN 46 will become effective during
the second quarter of our fiscal year 2004.
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.
The most significant estimates underlying the accompanying unaudited
consolidated financial statements include the timing of revenue recognition, the
allowance for doubtful accounts, long-lived and intangible asset valuations and
any resulting impairment, the adequacy of our self-insurance obligations and
future tax liabilities.
9
Reclassifications. Certain prior period amounts have been reclassified to
conform to the current period's presentation.
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 currently do not consolidate the assets or
liabilities relating to the synthetic lease in our consolidated financial
statements. See "Note 2. Summary of Significant Accounting Policies, Recently
Issued Accounting Pronouncements."
The synthetic lease facility closed to draws on February 13, 2001 and, at
March 7, 2003, $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. We plan to repay amounts borrowed and repurchase the properties under
the synthetic lease facility in connection with our refinancing plans. See "Note
5. Refinancing."
The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our existing 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. We were in compliance
with these covenants at March 7, 2003.
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.
10
5. Refinancing
We are pursuing new senior secured credit facilities to replace our $300.0
million revolving credit facility and our synthetic lease facility, which
terminate on February 13, 2004 and our term loan facility, which terminates on
February 13, 2006. We may use a portion of the proceeds from these facilities to
redeem a portion of our outstanding senior subordinated notes.
6. 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 the number of common shares and
per share amounts within these unaudited consolidated financial statements and
notes thereto for the twelve and forty weeks ended March 7, 2003 and March 8,
2002 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.
11
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 twelve weeks ended March 7, 2003 as "the
third quarter of fiscal 2003" and the twelve weeks ended March 8, 2002 as "the
third quarter of fiscal 2002." Our first fiscal quarter includes 16 weeks and
the remaining quarters each include twelve weeks.
We calculate the average weekly tuition rate as net revenues, exclusive of
fees and non-tuition income, divided by the full-time equivalent, or 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 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.
Third Quarter of Fiscal 2003 compared to Third Quarter of Fiscal 2002
The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except the average weekly tuition rate:
Change
Twelve Weeks Percent Twelve Weeks Percent Amount
Ended of Ended of Increase/
March 7, 2003 Revenues March 8, 2002 Revenues (Decrease)
------------- -------- ------------- -------- ----------
Revenues, net................ $ 193,061 100.0% $ 185,611 100.0% $ 7,450
------------- -------- ------------- -------- ----------
Operating expenses:
Salaries, wages and benefits:
Center expense............ 98,027 50.8 94,015 50.7 4,012
Region and corporate
expense................ 7,857 4.0 7,691 4.1 166
------------- -------- ------------- -------- ----------
Total salaries, wages
and benefits.......... 105,884 54.8 101,706 54.8 4,178
Depreciation and
amortization............. 12,615 6.6 12,640 6.8 (25)
Rent....................... 12,814 6.6 11,264 6.1 1,550
Other...................... 42,779 22.2 38,412 20.7 4,367
------------- -------- ------------- -------- ----------
Total operating expenses.. 174,092 90.2 164,022 88.4 10,070
------------- -------- ------------- -------- ----------
Operating income........ $ 18,969 9.8% $ 21,589 11.6% $ (2,620)
============= ======== ============= ======== ==========
Average weekly tuition rate.. $ 144.69 $ 138.47 $ 6.22
Occupancy.................... 61.2% 62.9% (1.7)
12
Revenues, net. Net revenues increased $7.5 million, or 4.0%, from the same
period last year to $193.1 million in the third quarter of fiscal 2003. The
increase was due to higher average weekly tuition rates as well as additional
net revenues generated by newly opened centers. The average weekly tuition rate
increased $6.22, or 4.5%, to $144.69 in the third quarter of fiscal 2003 due
primarily to tuition increases. Occupancy declined to 61.2% from 62.9% for the
same period last year due to reduced full-time equivalent attendance within the
population of older centers. Comparable center net revenues increased $3.2
million, or 1.8%. During the third quarter of fiscal 2003 and 2002, we opened
and closed centers as follows:
Twelve Weeks Ended
------------------------------
March 7, 2003 March 8, 2002
------------- -------------
Number of centers at the beginning of
the period.......................... 1,266 1,257
Openings............................... 6 9
Closures............................... (8) (1)
------------- -------------
Number of centers at the end of the
period............................. 1,264 1,265
============= =============
Total center licensed capacity at the
end of the period................... 167,000 166,000
Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $4.2 million, or 4.1%, from the same period last year to $105.9
million. Total salary, wage and benefit expense as a percentage of net revenues
was 54.8% for both the third quarter of fiscal 2003 and 2002.
Salary, wage and benefit expense directly associated with the centers was
$98.0 million, an increase of $4.0 million from the same period last year. The
increase was primarily due to costs from newly opened centers, overall higher
wage rates and higher medical insurance costs. See "Wage Increases." At the
center level, salaries, wages and benefits expense as a percentage of net
revenues increased slightly to 50.8% from 50.7% for the same period last year
due primarily to higher medical insurance costs and wage rates, partially offset
by improved labor productivity. At the region and corporate level, salaries,
wages and benefits as a percentage of net revenues decreased to 4.0%, compared
to 4.1% in the same period last year.
Depreciation and amortization. Depreciation and amortization expense
remained flat in the third quarter of fiscal 2003 at $12.6 million. Although
depreciation increased primarily as a result of newly opened centers, it was
offset by the impact of the cessation of goodwill amortization of $0.5 million
as a result of the adoption of SFAS No. 142. See "Note 2. Summary of Significant
Accounting Policies, Goodwill and Other Intangible Assets." For the twelve weeks
ended March 7, 2003, depreciation included impairment charges of $0.4 million
for two under-performing centers and certain undeveloped property that were
determined to be impaired. Under-performing centers are those with estimated
future cash flows, undiscounted and without interest, less than the carrying
value of the asset. Impairment charges of $0.1 million were recorded in the
twelve weeks ended March 8, 2002 for certain undeveloped properties.
Rent. Rent expense increased $1.6 million from the same period last year to
$12.8 million primarily due to our sale-leaseback program. See "Liquidity and
Capital Resources." In addition, the rental rates experienced on new and renewed
center leases were higher than those experienced in previous fiscal periods.
Other operating expenses. Other operating expenses increased $4.4 million,
or 11.4%, from the same period last year, to $42.8 million. Other operating
expenses as a percentage of net revenues increased to 22.2% from 20.7% for the
same period last year. The increase was due primarily to higher insurance costs.
13
Other operating expenses include costs directly associated with the
centers, such as food, insurance, transportation, janitorial, maintenance,
utilities and marketing costs, and expenses relating to region management and
corporate administration.
Operating income. Operating income was $19.0 million, a decrease of $2.6
million, or 12.1%, from the same period last year. Operating income decreased
primarily due to increased insurance costs and higher rent expense due to our
sale-leaseback program. These additional costs were partially offset by the
impact from higher tuition rates. Operating income as a percentage of net
revenues was 9.8% compared to 11.6% for the same period last year.
Interest expense. Interest expense was $9.3 million compared to $10.0
million for the same period last year. The decrease was attributable to a
decrease in the outstanding principal balance and lower interest rates on our
revolving credit facility. The weighted average interest rate on our long-term
debt, including amortization of deferred financing costs, was 7.6% and 7.2% for
the third quarter of fiscal 2003 and fiscal 2002, respectively.
Income tax expense. Income tax expense was $3.8 million, or 39.6% of pretax
income, in the third quarter of fiscal 2003 and $4.5 million, or 38.4% of pretax
income, in the second quarter of fiscal 2002. The increase in the effective tax
rate was due to a change in our estimate of necessary tax expense, the relative
impact of disallowed expenses at different levels of taxable income and the
estimate of income tax credits available. Income tax expense was computed by
applying estimated effective income tax rates to income before income taxes.
Income tax expense varies from the statutory federal income tax rate due
primarily to state and foreign income taxes, offset by tax credits.
Discontinued operations. Discontinued operations resulted in a loss of $0.5
million and $0.1 million in the third quarter of fiscal 2003 and 2002,
respectively. Discontinued operations represents the operating results for all
periods presented of the centers closed during the twelve and forty weeks ended
March 7, 2003.
Discontinued operations included the following, with dollars in thousands:
Twelve Weeks Ended
----------------------------
March 7, 2003 March 8, 2002
------------- -------------
Revenues, net.......................... $ 275 $ 1,989
------------- -------------
Operating expenses:
Salaries, wages and benefits......... 297 1,310
Depreciation......................... 526 90
Rent................................. 89 292
Provision for doubtful accounts...... 27 12
Other................................ 230 437
------------- -------------
Total operating expenses.......... 1,169 2,141
------------- -------------
Operating loss..................... (894) (152)
Interest expense...................... -- (1)
------------- -------------
Discontinued operations before income
tax.................................. (894) (153)
Income tax benefit.................... 354 59
------------- -------------
Discontinued operations, net of tax.. $ (540) $ (94)
============= =============
Depreciation expense related to discontinued operations for the twelve
weeks ended March 7, 2003 included impairment charges of $0.1 million.
14
Net income. Net income was $5.3 million in the third quarter of fiscal
2003, a decrease of $1.9 million, or 25.9% from the same period last year. The
decline was primarily due to higher insurance costs and rent expense, discussed
above, offset in part by reduced interest costs. Basic and diluted net income
per share were both $0.27 for the third quarter of fiscal 2003. For the third
quarter of fiscal 2002, basic and diluted net income per share were $0.36 and
$0.35, respectively.
Forty weeks ended March 7, 2003 compared to forty weeks ended March 8, 2002
The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except the average weekly tuition rate:
Change
Forty Weeks Percent Forty Weeks Percent Amount
Ended of Ended of Increase/
March 7, 2003 Revenues March 8, 2002 Revenues (Decrease)
------------- -------- ------------- -------- ----------
Revenues, net............ $ 644,992 100.0% $ 621,224 100.0% $ 23,768
------------- -------- ------------- -------- ----------
Operating expenses:
Salaries, wages and benefits:
Center expense........ 335,502 52.0 323,163 52.0 12,339
Region and corporate
expense............ 26,114 4.1 24,887 4.0 1,227
------------- -------- ------------- -------- ----------
Total salaries,
wages and benefits. 361,616 56.1 348,050 56.0 13,566
Depreciation and
amortization......... 44,220 6.8 41,622 6.7 2,598
Rent................... 40,261 6.2 37,201 6.0 3,060
Other.................. 150,145 23.3 141,795 22.8 8,350
------------- -------- ------------- -------- ----------
Total operating
expenses............ 596,242 92.4 568,668 91.5 27,574
------------- -------- ------------- -------- ----------
Operating income.... $ 48,750 7.6% $ 52,556 8.5% $ (3,806)
============= ======== ============= ======== ==========
Average weekly tuition
rate................... $ 143.85 $ 136.92 $ 6.93
Occupancy................ 62.5% 65.0% (2.5)
Revenues, net. Net revenues increased $23.8 million, or 3.8%, from the same
period last year to $645.0 million in the forty weeks ended March 7, 2003. The
increase was due to higher average weekly tuition rates as well as additional
net revenues generated by newly opened centers. The average weekly tuition rate
increased $6.93, or 5.1%, to $143.85 in the forty weeks ended March 7, 2003, due
primarily to tuition increases. Occupancy declined to 62.5% from 65.0% for the
same period last year due to reduced full-time equivalent attendance within the
population of older centers. Comparable center net revenues increased $7.6
million, or 1.2%. During the periods indicated, we opened and closed centers as
follows:
Forty Weeks Ended
-----------------------------
March 7, 2003 March 8, 2002
------------- -------------
Number of centers at the beginning of
the period.......................... 1,264 1,242
Openings............................... 24 31
Closures............................... (24) (8)
------------- -------------
Number of centers at the end of the
period............................. 1,264 1,265
============= =============
Total center licensed capacity at the
end of the period.................... 167,000 166,000
Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $13.6 million, or 3.9%, from the same period last year to $361.6
million. Total salary, wage and benefit expense as a percentage of net revenues
was 56.1% and 56.0% for the forty week periods ended March 7, 2003 and March 8,
2002, respectively.
Salary, wage and benefit expense directly associated with the centers was
$335.5 million, an increase of $12.3 million from the same period last year. The
increase was primarily due to costs from newly opened centers, overall higher
wage rates and higher medical insurance cost. At the center level, salaries,
wages and benefits expense as a percentage of net revenues remained flat at
52.0% for both periods.
15
Depreciation and amortization. Depreciation and amortization expense
increased $2.6 million from the same period last year to $44.2 million.
Depreciation increased primarily due to newly opened centers and higher
impairment charges. During the forty weeks ended March 7, 2003, 13
under-performing centers and certain undeveloped properties were determined to
be impaired, which resulted in impairment charges of $1.1 million.
Under-performing centers are those with estimated future cash flows,
undiscounted and without interest charges, less than the carrying value of the
asset. The impairment of 13 centers in the forty weeks ended March 7, 2003, was
primarily the result of electing to exit the leases at these centers. In the
forty weeks ended March 8, 2002, we recorded impairment charges of $0.4 million
for certain undeveloped properties.
Amortization of goodwill decreased $1.6 million as a result of the adoption
of SFAS No. 142 in the first quarter of fiscal 2003. See "Note 2. Summary of
Significant Accounting Policies, Goodwill and Other Intangible Assets."
Rent. Rent expense increased $3.1 million from the same period last year to
$40.3 million primarily due to our sale-leaseback program. In addition, the
rental rates experienced on new and renewed center leases were higher than those
experienced in previous fiscal periods.
Other operating expenses. Other operating expenses increased $8.4 million,
or 5.9%, from the same period last year, to $150.1 million. Other operating
expenses as a percentage of net revenues were 23.3% and 22.8% for the forty week
periods ended March 7, 2003 and March 8, 2002, respectively. The increase was
due primarily to higher insurance costs.
Operating income. Operating income was $48.8 million, a decrease of $3.8
million, or 7.2%, from the same period last year. Operating income decreased
primarily due to higher insurance costs, rent and depreciation expense.
Operating income as a percentage of net revenues was 7.6% compared to 8.5% for
the same period last year.
Interest expense. Interest expense was $31.8 million compared to $34.4
million for the same period last year. The decrease was substantially
attributable to lower interest rates and a decrease in the principal balance on
our revolving credit facility. The weighted average interest rate on our
long-term debt, including amortization of deferred financing costs, was 7.8% for
both of the forty weeks ended March 7, 2003 and March 8, 2002.
Income tax expense. Income tax expense was $6.8 million, or 39.6% of pretax
income, in the forty weeks ended March 7, 2003 and $7.3 million, or 39.3% of
pretax income, in the forty weeks ended March 8, 2002. The increase in the
effective tax rate was due to a change in our estimate of necessary tax expense,
the relative impact of disallowed expenses at different levels of taxable income
and the estimate of income tax credits available. Income tax expense was
computed by applying estimated effective income tax rates to income before
income taxes. Income tax expense varies from the statutory federal income tax
rate due primarily to state and foreign income taxes, offset by tax credits.
Discontinued operations. Discontinued operations resulted in a loss of $0.3
million and $0.4 million in the forty weeks ended March 7, 2003 and March 8,
2002, respectively. Discontinued operations represents the operating results for
all periods presented of the 24 centers closed during the forty weeks ended
March 7, 2003.
16
Discontinued operations included the following, with dollars in thousands:
Forty Weeks Ended
-----------------------------
March 7, 2003 March 8, 2002
------------- -------------
Revenues, net.......................... $ 3,115 $ 6,974
------------- -------------
Operating expenses:
Salaries, wages and benefits......... 2,236 4,577
Depreciation......................... 768 431
Rent................................. 576 970
Provision for doubtful accounts...... 134 58
Other................................ (73) 1,657
------------- -------------
Total operating expenses.......... 3,641 7,693
------------- -------------
Operating loss..................... (526) (719)
Interest expense...................... (1) (2)
------------- -------------
Discontinued operations before income (527) (721)
tax..................................
Income tax benefit.................... 209 284
------------- -------------
Discontinued operations, net of tax.. $ (318) $ (437)
============= =============
Depreciation expense, related to discontinued operations, included
impairment charges of $0.2 million and other operating expense, related to
discontinued operations, included gains on closed center sales of $1.2 million
in the forty weeks ended March 7, 2003.
Net income. Net income was $10.1 million in the forty weeks ended March 7,
2003, a decrease of $0.8 million, or 7.2%, from the same period last year. The
decline was due to decreased operating income as a result of higher insurance
costs, rent and depreciation expense offset in part by lower interest costs.
Basic and diluted net income per share were both $0.51 for the forty weeks ended
March 7, 2003. For the forty weeks ended March 8, 2002, basic and diluted net
income per share were $0.55 and $0.54, respectively.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow generated from operations,
proceeds received from our sale-leaseback program and borrowings under a $300.0
million revolving credit facility. At March 7, 2003, we had drawn $135.0 million
under the revolving credit facility, had committed to outstanding letters of
credit totaling $33.4 million and had funded $97.9 million under the synthetic
lease facility discussed below. Our availability under the revolving credit
facility at March 7, 2003 was $98.8 million. The revolving credit facility is
scheduled to terminate on February 13, 2004.
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 currently do not consolidate the assets or
liabilities relating to the synthetic lease in our consolidated financial
statements. In January 2003, the FASB issued FIN 46, see "Note 2. Summary of
Significant Accounting Policies, Recently Issued Accounting Pronouncements." We
expect to have to consolidate the assets and liabilities of the synthetic lease
facility during the second quarter of our fiscal year 2004.
The synthetic lease facility closed to draws on February 13, 2001 and, at
March 7, 2003, $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.
17
The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. We were in compliance
with these covenants at March 7, 2003. 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.
We are pursuing new senior secured credit facilities to replace our $300.0
million revolving credit facility and our synthetic lease facility, which
terminate on February 13, 2004 and our term loan facility, which terminates on
February 13, 2006. We may use a portion of the proceeds from the refinancing to
redeem a portion of our outstanding senior subordinated notes.
Our consolidated net cash provided by operating activities for the forty
weeks ended March 7, 2003 was $48.5 million compared to $47.6 million in the
same period last year. The increase in net cash flow was due to the change in
working capital. Cash and cash equivalents totaled $13.6 million at March 7,
2003, compared to $8.6 million at May 31, 2002.
Twelve Weeks Ended Forty Weeks Ended
----------------------- -----------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
----------- ---------- ---------- -----------
Net income................... $ 5,298 $ 7,148 $ 10,055 $ 10,831
Interest expense, net........ 9,303 9,824 31,576 33,978
Income tax expense........... 3,828 4,523 6,801 7,310
Depreciation and amortization 12,615 12,640 44,220 41,622
Discontinued operations:
Interest expense........... -- 1 1 2
Income tax benefit......... (354) (59) (209) (284)
Depreciation............... 526 90 768 431
----------- ---------- ---------- -----------
EBITDA.................... $ 31,216 $ 34,167 $ 93,212 $ 93,890
=========== ========== ========== ===========
EBITDA - percentage of net
revenues................. 16.2% 18.4% 14.5% 15.1%
EBITDA, which is a non-GAAP financial measure, is defined as earnings
before interest, taxes, depreciation, amortization and the related components of
discontinued operations. EBITDA was calculated as follows, with dollars in
thousands:
EBITDA reflects a non-GAAP financial measure of our liquidity. A non-GAAP
financial measure is a numerical measure of historical or future financial
performance, financial position or cash flow that excludes or includes amounts,
or is subject to adjustments that have the effect of excluding or including
amounts, from the most directly comparable measure calculated and presented in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). A reconciliation of EBITDA, a non-GAAP financial measure of
our liquidity, to cash provided by operating activities was as follows for the
periods indicated, with dollars in thousands:
18
Third Quarter Ended Forty Weeks Ended
---------------------------- ----------------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net cash provided by
operating activities.. $ 12,594 $ 22,625 $ 48,461 $ 47,560
Income tax expense...... 3,828 4,523 6,801 7,310
Deferred income taxes... (54) (139) (5,624) (188)
Interest expense, net... 9,303 9,824 31,576 33,978
Effect of discontinued
operations on
interest and taxes.... (354) (58) (208) (282)
Change in operating
assets and liabilities 5,736 (2,739) 12,188 5,608
Other non-cash items.... 163 131 18 (96)
------------- ------------- ------------- -------------
EBITDA................ $ 31,216 $ 34,167 $ 93,212 $ 93,890
============= ============= ============= =============
EBITDA was $31.2 million for the twelve weeks ended March 7, 2003, a
decrease of $3.0 million from the same period last year. For the forty weeks
ended March 7, 2003 EBITDA decreased $0.7 million to $93.2 million from the same
period last year. The decreases in both periods were primarily due to higher
insurance costs and rent expense, offset in part by higher tuition rates and
control over center labor productivity.
We believe EBITDA is a useful tool for certain investors and creditors for
measuring our ability to meet debt service requirements. Additionally,
management uses EBITDA for purposes of reviewing our results of operations on a
more comparable basis. We have provided EBITDA in previous filings and continue
to provide this measure for comparability between periods. EBITDA does not
represent cash flow from operations as defined by GAAP, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered an alternative to net income under GAAP for purposes of evaluating
our results of operations.
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. At March 7, 2003, we had completed
sales totaling $76.9 million, which represented 35 centers. These sales have
resulted in deferred gains in the amount of $25.5 million, of which $22.3
million was recorded in fiscal 2003. These deferred gains are being amortized
over 15 years. Subsequent to March 7, 2003, we closed $6.0 million in sales and
are currently in the process of negotiating another $53.1 million of sales. We
expect our sale-leaseback efforts to continue into fiscal year 2004, assuming
the investment 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 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.
19
We believe that cash flow generated from operations, proceeds from our
sale-leaseback program 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 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.
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.
Capital Expenditures
During the forty weeks ended March 7, 2003 and March 8, 2002, we opened 24
and 31 new centers, respectively. We expect to open 28 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 EBITDA by the end of the first year of operation and begin to
produce positive net income by the end of the second year of operation.
Accordingly, as more new centers are developed and opened, profitability will be
negatively impacted in the short-term but is expected to be enhanced in the
long-term once these new centers achieve anticipated levels of occupancy.
Capital expenditures included the following, with dollars in thousands:
Forty Weeks Ended
-----------------------------
March 7, 2003 March 8, 2002
------------- -------------
New center development........... $ 44,274 $ 52,578
Renovation of existing facilities 14,648 15,120
Equipment purchases.............. 9,516 6,050
Information systems purchases.... 1,293 2,442
------------- -------------
$ 69,731 $ 76,190
============= =============
20
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 is subject to
exceptions. Also, we have some ability to incur additional indebtedness,
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. Covenants under the new credit facility
we are pursuing may be more restrictive than our current limitations, see "Note
5. Refinancing."
Application of Critical Accounting Policies
Critical Accounting Estimates. The preparation of financial statements in
conformity with GAAP 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, specific customer issues, governmental
funding levels 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. 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. Please refer to "Initial
Adoption of Accounting Policies" below.
21
Impairment charges were as follows, with dollars in thousands:
Twelve Weeks Ended Forty Weeks Ended
----------------------- -----------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
----------- ---------- ---------- -----------
Impairment charges included
in depreciation expense.... $ 352 $ 81 $ 1,101 $ 357
Impairment charges included
in depreciation expense in
discontinued operations.... 72 -- 178 --
----------- ---------- ---------- -----------
Total impairment charges.. $ 424 $ 81 $ 1,279 $ 357
=========== ========== ========== ===========
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.
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 $39.7
million and $35.5 million at March 7, 2003 and May 31, 2002, respectively.
Insurance expense for our self-insurance programs was $10.7 million and $6.9
million for the twelve weeks ended March 7, 2003 and March 8, 2002,
respectively, and $33.8 million and $23.7 million for the forty weeks ended
March 7, 2003 and March 8, 2002, respectively. Rising costs for medical care and
stop loss coverage have resulted in significant increases in workers'
compensation and medical insurance. 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 for 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 forty weeks ended March
7, 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.
22
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 $0.5 million and $1.6 million, pretax, during
the twelve and forty week periods ended March 8, 2002, respectively. These
assets must now be tested at least annually for impairment and written down to
their fair market values, if necessary. As of June 1, 2002, we had $42.6 million
of goodwill recorded on our consolidated balance sheet. We performed a
transitional impairment test in the second quarter of fiscal 2003, as required
by SFAS No. 142. Although quoted market prices are the best evidence in
determining fair value, we used the value of our stock, as determined by the
Board of Directors, as it was a more practical measure to perform the
transitional impairment test. The fair value of the reporting unit related to
the recorded goodwill, as of June 1, 2002, exceeded the carrying value at the
same date, hence there was no evidence of impairment. We will perform our annual
impairment test 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.
Under the requirements of SFAS No. 144, we revised our procedure with
respect to assessing property and equipment to estimate future cash flows over
the remaining useful life of the principal asset, which, in most cases, is a
longer time period than the 10-year estimate used previously. Therefore, the
adoption of SFAS No. 144 may materially impact our assessment of impairment in
the future. During the forty weeks ended March 7, 2003, we committed to exit
leases at 13 under-performing centers, resulting in impairment charges. Refer to
"Critical Accounting Estimates" above.
We have determined that the 24 centers closed during the forty weeks ended
March 7, 2003, which included five owned and 19 leased centers, meet the
criteria of discontinued operations. Therefore, the operating results for these
24 centers were classified as discontinued operations, net of tax, in the
unaudited consolidated statements of operations for all periods presented.
Discontinued operations were as follows, with dollars in thousands:
Twelve Weeks Ended Forty Weeks Ended
----------------------- -----------------------
March 7, March 8, March 7, March 8,
2003 2002 2003 2002
----------- ---------- ---------- -----------
Revenues, net................ $ 275 $ 1,989 $ 3,115 $ 6,974
Operating expenses........... 1,169 2,141 3,641 7,693
----------- ---------- ---------- -----------
Operating loss............. (894) (152) (526) (719)
Interest expense............. -- (1) (1) (2)
----------- ---------- ---------- -----------
Discontinued operations (894) (153) (527) (721)
before income tax........
Income tax benefit........... 354 59 209 284
----------- ---------- ---------- -----------
Discontinued operations,
net of tax................. $ (540) $ (94) $ (318) $ (437)
=========== ========== ========== ===========
We believe that most of our future center closures will now be categorized
as discontinued operations. The owned centers that meet the criteria of held for
sale have been classified as current in the unaudited consolidated balance
sheets for all periods presented. As a result, property and equipment of $0.7
million and $1.8 million was classified as current assets held for sale at March
7, 2003 and May 31, 2002, respectively.
23
In the second quarter of fiscal 2003 we adopted SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. SFAS No. 146 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 was effective for disposal activities
initiated after December 31, 2002. This adoption did not have a material impact
on our financial position or results of operations.
FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantee,
Including Indirect Guarantees of Indebtedness of Others, requires expanded
disclosures by guarantors in interim and annual financial statements about
obligations under certain guarantees. See "Note 4. Commitments and
Contingencies" for a discussion of the guarantee under our synthetic lease
facility. In addition, FIN 45 requires guarantors to recognize, at the inception
of a guarantee, a liability for the obligation it has undertaken in issuing the
guarantee. The recognition and initial measurement provision is applicable to
guarantees issued or modified after December 31, 2002.
Recently Issued Accounting Pronouncements
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect in measuring compensation expense. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002, with early application encouraged.
We will provide the required disclosures commencing with our Annual Report on
Form 10-K for the fiscal year ending May 30, 2003. We do not anticipate an
impact to our financial position or results of operations.
FIN 46, Consolidation of Variable Interest Entities, requires consolidation
where there is a controlling financial interest in a variable interest entity,
previously referred to as a special-purpose entity. Under this requirement our
synthetic lease facility will be consolidated in our consolidated balance sheet.
Property and equipment financed in the synthetic lease facility will be recorded
as assets and the related lease obligation will be recorded as a liability. The
impact to our future statement of operations will be reduced rent expense and
increased depreciation and interest expense. See "Note 4. Commitments and
Contingencies." FIN 46 is effective during the second quarter of our fiscal year
2004.
Wage Increases
Expenses for salaries, wages and benefits represented approximately 56.1%
of net revenues for the forty weeks ended March 7, 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.
24
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;
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 the availability of sites and/or licensing or zoning requirements that
may make us unable to open new centers;
o our inability 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.
25
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 March 7, 2003. We
also have no cash flow exposure on certain industrial revenue bonds, mortgages
and notes payable aggregating $5.7 million at March 7, 2003. 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 $190.5 million at March 7, 2003. 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 $0.5 million and $0.6
million in the twelve weeks ended March 7, 2003 and March 8, 2002, respectively.
Assuming the same 1% change in the forty weeks ended March 7, 2003 and March 8,
2002, interest expense would have changed by $1.6 million and $1.9 million,
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 $0.4 million in
both of the twelve week periods ended March 7, 2003 and March 8, 2002. Assuming
the same 1% change in the forty weeks ended March 7, 2003 and March 8, 2002,
interest expense would have changed by $1.2 million in both periods.
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 or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of the filing of this quarterly report
on Form 10-Q, we carried out an evaluation, under the supervision and with the
participation of our senior management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of our disclosure controls and procedures and our internal
controls and procedures for financial reporting, pursuant to Securities Exchange
Act Rule 13a-14.
The purpose of disclosure controls is to ensure that information required
to be disclosed in our periodic reports filed with the Securities and Exchange
Commission ("SEC") is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure controls are
designed with the objective of ensuring that such information is accumulated and
communicated to our senior management, including our CEO and CFO, to allow
timely decisions regarding required disclosure. The purpose of internal controls
is to provide reasonable assurance that our transactions are properly
authorized, our assets are safeguarded against unauthorized or improper use and
our transactions are properly recorded and reported to permit the preparation of
our financial statements in conformity with GAAP.
26
Our management, including the CEO and CFO, does not expect that our
disclosure controls and internal controls for financial reporting will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable rather than absolute assurance that the
objectives of the control system are met. The design of any system of controls
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitation in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected.
Based on their evaluation, our CEO and CFO concluded that both our
disclosure controls and procedures and internal controls and procedures for
financial reporting are effective in timely alerting them to material
information required to be included in our periodic filings and that our
internal controls and procedures are effective to provide reasonable assurance
that our financial statements are fairly presented in conformity with GAAP.
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
this evaluation.
27
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 6, 2002, at our annual meeting of stockholders, the following
persons were reelected directors of KinderCare: David J. Johnson, Chairman,
Henry R. Kravis, George R. Roberts, Michael W. Michelson, Scott C. Nuttall and
Richard J. Goldstein.
Proxies representing 15,854,480, or 80.6%, of eligible voting shares voted
in favor of each of the nominees. There were no votes cast against the nominees
and no abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed with this report or incorporated
herein by reference:
99.1 Certifications of the Chief Executive Officer and Chief Financial
Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
regarding facts and circumstances relating to the Exchange Act filing.
(b) Reports on Form 8-K: Filed April 21, 2003 for earnings released on April
21, 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 21, 2003.
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)
29
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: April 21, 2003
By: DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
30
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: April 21, 2003
By: DAN R. JACKSON
----------------------------------
Dan R. Jackson
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31