Excerpts: KinderCare Learning Centers, Inc.
- 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.
- To help with the mass marketing of the concept, Perry Mendel employed Richard Grassgreen, an IRS attorney and tax expert, whose financial knowledge and experience complemented Mendel’s marketing strengths.
- 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.
- 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.
- 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.
- 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.