Kinder-care's Standard Formula For Success

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Mendel's fast-food approach to child care was accepted and proved to be profitable. But the fast-paced growth caused cash flow problems. "The difficulty of coordinating growth and capital is a common problem in any business," says Mendel. "We had quite a hassle trying to get it all together."

"We knew we were developing a new industry," says Dick Grassgreen, a tax attorney who joined Kinder-Care in 1969 as chief operating officer and executive vice-president. "This wasn't shoes or steel. There was nothing to look at. Had we not worked hard at our public position, it would have been very difficult to raise the money we needed to grow." The company obtained a $3.75-million mortgage commitment from the Eagle Savings Association, a Cincinnati bank, contingent on Kinder-Care's ability to show one dollar in net worth for every three it drew in loans. Somehow Kinder-Care had to come up with $1.25 million.

To meet that goal, Mendel decided to take Kinder-Care public late in 1969, hoping to raise $2.8 million. During the registration period before the public offering, the company drew $800,000 in construction financing to develop centers. The loan was drawn against the mortgage commitment in anticipation of the money to be derived from the public offering.

Unfortunately, the firm that was handling Kinder-Care's offering was acquired by Bache, which refused to go through with the offering because Kinder-Care was too small and still in the concept stage. The company found a new underwriter, but the Securities and Exchange Commission ruled that Kinder-Care would have to maeke a best efforts offering (an offering in which the underwriter does not guarantee to place the entire amount) because of the commitment of some of the directors to purchase stock in the offering.

With no guarantee of the offering, Mendel backed off. "We found ourselves with no more money," Grassgreen says. "We'd spent at least a couple of hundred thousand dollars just getting everything printed up and prepared for the public offering."

The most attractive alternative then was to sell out to Warner National Corp. Warner provided Kinder-Care $300,000 in capital and promised assistance for future growth. But within six months of the merger, Mendel and Grassgreen were unhappy about the arrangement. Warner was putting money into other interests and leaving Kinder-Care to fend for itself. Mendel and Grassgreen convinced Warner to allow them to take Kinder-Care public, and in June 1972 the offering was made.

Still, Mendel and Grassgreen were frustrated. "In our eyes, Warner's major position was a detriment to Kinder-Care," Grassgreen says. "We were a hybrid -- a public company in name only. We weren't growing; we were just stalled there." In 1973, Mendel and Grassgreen renegotiated the merger contract, which had included an earn-out: If Kinder-Care met certain growth goals, it would -- and it did -- earn additional Warner stock. That May, the original Kinder-Care investors exchanged the Warner stock they'd earned for Kinder-Care stock.

Still chafing under Warner's control -- it owned the largest percentage of Kinder-Care stock -- Mendel and associates finally decided to regain control in 1976. They raised $2.25 million from banks and another $2.25 million from investors and bought back Warner's Kinder-Care stock. Then they were stuck with the problem of raising money to pay off the bank loan.

Along came an offer by Taft Broadcasting to buy the company. Mendel and Grassgreen had been that route once and declined, but asked if Taft would be interested in a minority position. As it turned out, the idea appealed to Taft's chairman, Charles Mechem, Jr. So Taft picked up a 20% interest in Kinder-Care.

The remaining excursions into the public market were successful: $10 million in a convertible subordinated debenture offering in 1978; $4.5 million from a public offering of 490,000 shares of common stock in March 1980, and another $13 million from the sale of 825,000 shares in October 1980.

"We're very happy with our financial position today," says Grassgreen with the slightest of smiles. "We're sitting with a substantial amount of cash and a strong balance sheet." Investors are happy too: Since 1972, the stock has split three times (twice at 2 for 1 and once at 5 for 4), for a 15 times enhancement on the original investment.

In 1970, Mendel considered franchising, which would allow Kinder-Care to grow quickly with upfront cash. "But we abandoned franchises," says Mendel, because we weren't attracting business people. Those who were interested didn't know how to run a business or how to arrange financing. If we were going to end up managing the franchises, why should we settle for only a royalty?"

Mendel turned to leasing, which helped Kinder-Care preserve its capital and reduce the risk. Developers built centers to Kinder-Care specifications and gave the company 20-year leases with two 5-year renewal options. Kinder-Care has never closed a center, so the risk to the developers has proved negligible.

When interest rates started to climb in 1979, Kinder-Care began to grow through acquisition as well as through leasing. In 1980, Kinder-Care acquired or leased another 205 centers and in 1981 added another 168. "Acquisitions are very attractive," says Mendel. "We get an existing enrollment in quality physical facilities, with more favorable financing terms. We've expanded into Canada with the acquisition of Mini-Skools Ltd. That involved 88 centers."

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