KinderCare Learning Centers, Inc.

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KinderCare Learning Centers, Inc.

2400 Presidents Drive
Montgomery, Alabama 36116
U.S.A.
(334) 277-5090
Fax: (334) 271-1210

Public Company
Incorporated: 1970
Employees: 21,000
Total Assets: $456.9 million
Stock Exchanges: NASDAQ
SICs: 8351 Child Day Care Services

KinderCare Learning Centers, Inc. is the largest chain of childcare facilities in the United States, based upon number of centers, children served, and revenues. Following a rapid rise to prominence in the 1970s, the company began to diversify, incurring significant debt along the way that prompted its 1992 filing for bankruptcy. In April 1993, however, KinderCare emerged from bankruptcy and looked forward to renewed success, focusing on filling the specific needs of niche markets, including infant care and facilities for older children of working parents. By the end of the year, 1,165 KinderCare centers were operating in 39 states.

The company traces its history to the late 1960s, when Perry Mendel, a real estate developer from Montgomery, Alabama, speculated that the increasing numbers of women entering the work force might prompt a rise in demand for preschool child care. Remarking on his inspiration, Mendel later recalled in a Management Review article that one morning as he breakfasted with a group of associates, he noticed a man “not in our group, who drove a Lincoln Continental and read The Wall Street Journal. ... I asked my friends what he did for a living. They replied, ‘Nothing, but his wife has two daycare centers for children.’ That set off bells in my head.” Mendel reportedly began talking with the man and eventually purchased one of the two centers. New to the business, Mendel spent about a year researching the industry, touring child care centers across the country and reading up on state regulations.

Mendel discovered that many working parents insisted on more than just babysitters. Specifically, they wanted centers that provided individual attention, nutritious foods, exercise, and education. Thus, Mendel planned to open a facility in which children would not only be safe and loved, but would also learn. Prior to the opening of the first center, Mendel spent many months drawing up a detailed plan of how the corporation should function. His plan covered such details as classroom size and required length of naps. Moreover, Mendel sought out the advice of experts; nutrition experts from Vanderbilt University planned hot-meal menus, and education specialists developed learning programs. Tight quality-control measures were planned to ensure programs would be carried out as prescribed.

The company began as Kinder-Care Nursery Schools, and the first facility was opened on July 14, 1969. Accommodating 70 children, the center featured a distinctive exterior decorated with a Humpty-Dumpty motif and a red bell tower that would eventually be incorporated as the company’s logo. Future centers would adopt the readily identifiable exterior design, helping to create brand name recognition along the same principles developed by McDonald’s restaurants and Holiday Inn hotels. Unlike such popular chains, however, Kinder-Care discontinued the idea of franchising in 1970, when Mendel determined that most people interested in the child care business lacked the expertise or were unable to arrange the financing.

Nevertheless, the success of Kinder-Care was just as Mendel had envisioned; the demand was there and the company began to flourish. A second facility was opened within the year, and in 1970 the company changed its name to Kinder-Care Learning Centers, Inc. to better reflect its emphasis on education. By 1971, 19 centers were in operation, the first infant care was offered, and the company had extended its services to include transportation for those school-aged who needed it, via rented Volkswagen vans.

Expansion of the centers continued apace, as the company went public in 1972. Soon thereafter Kinder-Care established a new corporate headquarters in Montgomery and began to invest in television advertising. To help with the mass marketing of the concept, Mendel employed Richard Grassgreen, an IRS attorney and tax expert, whose financial knowledge and experience complemented Mendel’s marketing strengths. By 1974 there were 60 centers located in 17 states and over 500 employees nationwide. Growth prompted the company to divide its operations into six geographical regions, managed by regional directors, in 1975.

Continuing to expand the scope of their operations, Mendel began acquiring other child care center companies in the late 1970s. The company’s first major acquisition came in 1977, when it purchased the 15 facilities of Playcare. In 1979, as Kinder-Care celebrated its tenth anniversary, three more major acquisitions took place: Mini-Skools, Living and Learning, and American Pre-Schools. Moreover, the company opened its 300th center that year. Such activity prompted the national media to take notice of Kinder-Care; business periodicals began to feature coverage of the company’s rapid rise and founder Mendel even made an appearance on NBC’s Today Show.

While increasing its national presence, the company also focused on providing valuable programs for the children entrusted to their care as well as their employees. Kinder-Care began publishing activity books and calendars for children. Moreover, the centers established health and safety coordinators, an educational assistance program for employees, and Quality Focus, a program emphasizing quality and professionalism in child care. The KinderCare Kindustry centers, a child care concept first established at Walt Disney World and later renamed Kinder-Care at Work, were established either near companies or within companies to cater specifically to working parents. In 1985, Kinder-Care opened its 1,000th center. Competition in the industry was comprised chiefly of La Petite Academy and Daybridge/Children’s World, but neither approached Kinder-Care’s size.

In 1987, Kinder-Care was reporting annual revenues of $900 million, and analysts were remarking on the company’s rapid growth, observing that stock had soared from 12 cents a share to $20 at its high in mid-1987. Management Review magazine stated in a 1988 article that the investment community watched a $100 investment in the company’s stock in 1972 grow into $7,000 in 1987. In fact, during this time, Kinder-Care was expanding at the rate of one new center every three days.

This trend was soon to sour, however, as Mendel and Grassgreen begun widening the scope of their plans for the company. Years before, the men had been approached by Michael Milken, an investor from the firm of Drexel Burnham Lambert, who suggested that the company begin diversifying its equity and building an investment portfolio. Toward that end, Kinder-Care acquired a wide variety of companies in the 1980s, including chains of photo studios, shoe stores, other retail operations, and two savings and loan associations. Late in 1987, Kinder-Care acquired Sylvan Learning Centers, a provider of supplemental instruction to children and adults, and the largest franchiser of its kind. The company also made a $10 million investment in Trans-Resources Inc., an Israel-based chemical and fertilizer manufacturer.

In a 1989 article in Business Week, one reporter noted, “Kinder-Care Learning Centers Inc., once a successful pioneer in day care, has become one of the most confused stock investments of the decade.” By this time, Kinder-Care stockholders and the banks that had lent it money were also sharply criticizing the diversification program, complaining that they had intended to invest in a day care operation and not the repository of other interests that now comprised the company. In fact, according to a 1988 Forbes article, less than half of Kinder-Care’s sales and profits for the year were expected to come from its child care centers. Moreover, investors now found that they held stock in a new company all together: the Enstar Group Inc., which was formed as a holding company during this time for Kinder-Care and the myriad other companies now associated with it.

With guidance from Drexel, Enstar had financed expansion by diluting its stock through public offerings and purchasing junk bonds. As a result, the company’s debt load increased from $10 million to about $620 million in 1988. While some of the money was used to expand the child care centers, much of it was used to make further investments, and following some initial payoffs from the plan, the company found itself in deep financial trouble, particularly after the stock market crash in October 1987.

With declining stock prices and desperate for cash, Mendel and Grassgreen set up Enstar’s Kinder-Care division as a subsidiary and sold stock in Kinder-Care at $7 per share. Although the offering raised $42 million, Enstar’s debts remained exceedingly high. Next, Mendel and Grassgreen accepted a 1989 offer from the Lodestar Group, a New York investment banking firm, for a rights offering, in which shareholders would generate new equity capital through their purchase of Kinder-Care stock from Enstar at a discount price.

As a result, Kinder-Care was finally disassociated from Enstar, and 63 percent of its stock was held by Lodestar. Unfortunately however, the company was still $400 million in debt and, moreover, was entangled in several lawsuits involving Mendel, Grassgreen, Michael Milken, and angry stockholders.

During this difficult period, Tull Gearreald took command of the company as president and CEO. Gearreald, an investment banker, was a founder of Lodestar and had served on the board of directors at Kinder-Care. He promptly declared the company would remain focused on what it was originally established to do: care for children.

In the early 1990s, Gearreald oversaw a program focusing on “Helping America’s Busiest Families,” which offered additional services for parents of Kinder-Care kids. Specifically, Kinder-Care centers began extending their hours and also stocked their centers with hairdressers for children, as well as dry-cleaning drop-off and pick-up stations, shoe repair services, and postal facilities for their busy parents. During this time, the company also established a computer network so that each of its 1,196 centers was directly linked to a central computer in Montgomery.

Curriculum during this time was bolstered through the development of programs designed to reestablish Kinder-Care’s focus on social, physical, emotional, and intellectual growth for the child. For example, the “Let Me Do It!” program focused on teaching two-year olds to learn at their own pace and through play; preschoolers were taught through a program called “One Upon a Time,” built around motivational and interesting stories from children’s literature; and “Your Big Backyard” used the National Wildlife Federation magazine for preschooler curriculum activities. In 1992, the company updated its bell tower logo and removed the hyphen in the spelling of Kinder-Care.

However, still faltering under its high debt load, KinderCare filed for Chapter 11 bankruptcy protection on November 10, 1992. The company continued operating, and in January 1993, in a move that may have helped bring new life to their balance sheet, KinderCare sold off Sylvan Learning Centers for $8 million. Five months later, KinderCare emerged from bankruptcy, when its creditors took on a portion of its debt in exchange for an 86.5 percent share in the company and three positions on the board of directors. Thereafter, the company followed a strict reorganization plan, adopted a new stock policy, and elected a new board of directors, with Gearreald continuing as CEO and director and Philip Maslowe, formerly of Thrifty Corporation, serving as chief financial officer. The company was also given new life as several national demographic trends led to an increased demand for KinderCare’s services; while the number of babies born to American households was on the rise, the demand for child care was also increasing rapidly.

KinderCare focused on niche markets to help it recover. Kid’s Choice Centers were developed to cater to those parents with older children in need of supervision after school. Moreover, the KinderCare at Work on-site corporate centers were thriving, gaining patronage by parents employed by Citicorp, Delco Electronics, Ford Motor Company, Lego Systems, and The Walt Disney Company, as well as at several universities and hospitals.

By 1994, KinderCare was preparing to open its first center in the United Kingdom and expected to open five to seven more centers within the next two years. At mid-year the company operated 1,132 child care centers in 38 states and had enrollment of approximately 114,000 full-time and part-time children. The company was also continuing its tradition of fund-raising for the Muscular Dystrophy Association, for which it become a national corporate sponsor in 1985. With a new focus and enthusiasm for the future, Gearreald declared in the company newsletter, CenterLine, on occasion of the company’s 25th anniversary: “Twenty-five years old is the beginning of a new Golden Age for KinderCare. ... We’re mature but youthful, energetic yet self-controlled—self-sufficient, productive and caring. We are a Family with lots of children!” He predicted that KinderCare would expand to include 2,000, or perhaps 3,000, centers with over 300,000 children over the next ten years, with further expansion in the United Kingdom, Scandinavia, and the Far East. By remaining focused on day care and providing innovated programs for children, KinderCare was likely to continue as the industry leader.