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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17098
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.)
2400 Presidents Drive
Montgomery, Alabama 36116
(Address of principal executive offices)
(334) 277-5090
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
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 required for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's known information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for purposes of this calculation, without conceding,
that all executive officers and directors are "affiliates") at July 29, 1997 was
$182,684,000.
The number of shares of Registrant's Common Stock, $.01 par value per
share, outstanding at July 29, 1997 was 9,368,421.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmation by the court. Yes [X] No [ ]
Part III incorporates information by reference from the definitive Proxy
Statement in connection with the Registrant's Annual Meeting of Shareholders to
be held on November 11, 1997.
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PART 1
ITEM 1. BUSINESS
General
KinderCare Learning Centers, Inc. ("KinderCare" or the "Company"), founded
in 1969, is the largest provider of for-profit preschool educational and child
care services in the United States based upon number of centers operated,
children served and operating revenues. The Company provides center-based
preschool educational and child care services five days a week throughout the
year to children between the ages of six weeks and twelve years. At July 25,
1997, the Company operated a total of 1,144 child care centers, of which 728 are
owned, 413 are leased and three are operated under management contracts. The
centers are located in 38 states in the United States and two centers are
located in the United Kingdom. At July 25, 1997, enrollment in all centers was
approximately 105,000 full-time and part-time children. The Company's total
licensed center capacity, at July 25, 1997, was approximately 143,000 full-time
children.
KinderCare seeks to differentiate its educational and other child care
services through its Whole Child Development concept with professionally
planned, age-specific educational programs provided in a caring, nurturing and
safe environment. This concept includes programs that provide children with
activities that support physical, intellectual, emotional and social
development. New programs are developed and existing programs are frequently
enhanced by the Company's education department, under the leadership of a
professional with a Ph.D. in early childhood education.
The Company operates three types of child care centers - KinderCare
community centers, KinderCare At Work(R) centers and Kid's Choice(TM) centers.
KinderCare community centers, which comprise approximately 93% of the Company's
centers, and KinderCare At Work(R) centers typically provide educational and
child care services to children between the ages of six weeks and 12 years.
Kid's Choice(TM) centers are for school age children and are provided in
separate facilities designed specifically for this age group. The Company has
limited the development of its Kids Choice(TM) centers to contracts in progress.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company's centers are open throughout the year,
generally Monday through Friday from 6:30 a.m. to 6:00 p.m., although hours vary
by location. Children are usually enrolled on a weekly basis for either full-day
or half-day sessions and are accepted, where capacity permits, on an hourly
basis. The Company's tuition rates vary for children of different ages and by
location.
On October 3, 1996, the Company and KCLC Acquisition Corp. ("KCLC")
entered into an Agreement and Plan of Merger (the "Merger Agreement"). KCLC was
a wholly owned subsidiary of KLC Associates, L.P. (the "Partnership"), a
partnership formed at the direction of Kohlberg Kravis Roberts & Co., a private
investment firm ("KKR"). Pursuant to the Merger Agreement, on February 13, 1997,
KCLC was merged with and into the Company (the "Merger"), with the Company
continuing as the surviving corporation. Upon completion of the Merger, the
Partnership owned 7,828,947 shares, or approximately 83.6%, of the Company's
common stock outstanding after the Merger.
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The principal executive offices of the Company are presently located at
2400 Presidents Drive, Montgomery, Alabama 36116, and its telephone number is
(334) 277-5090. The Company is in the process of relocating its principal
executive offices to Portland, Oregon and expects to complete the relocation in
November 1997. The Company's Portland telephone number is (503) 872-1300. The
interim address is 825 N.E. Multnomah, Suite 1050, Portland, Oregon 97232. The
permanent address will be 600 N.E. Holladay, Suite 1400, Portland, Oregon 97232.
When used in this report, press releases and elsewhere by management or the
Company from time to time, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify forward-looking statements
concerning the Company's operations, economic performance and financial
condition, including, in particular, the likelihood of the Company's success in
developing and expanding its business. These statements are based on a number of
assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. A
variety of factors could cause actual results to differ materially from those
anticipated in the Company's forward-looking statements, some of which include
federal and state legislation regarding welfare reform or impending minimum wage
increases, unforeseen changes in occupancy levels and other risk factors that
are discussed from time to time in the Company's Securities and Exchange
Commission ("SEC") reports and other filings. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date thereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof, or thereof, as the case
may be, or to reflect the occurrence of unanticipated events.
Business Strategy
The Company's objective is to build on its position as the nation's leading
preschool educational and child care services provider by offering high quality
services in a caring, nurturing and safe environment. To meet this objective,
management's business strategy includes the following:
Accelerate New Center Development and Pursue Selective Acquisitions. The
Company plans to expand by accelerating the development of new child care
centers in attractive markets and selectively acquiring child care businesses.
The Company seeks to identify attractive sites for its centers in large
metropolitan and smaller, growth markets that meet the Company's operating and
financial goals and where the Company believes the market for child care
services will support higher tuition rates than the Company's existing rates.
In addition to accelerating new center development, the Company may
seek to acquire existing child care centers where demographics, operating
standards and customer services complement the KinderCare business strategy.
Management believes that the Company's competitive position, economies of scale
and financial strength will allow it to capitalize on selective acquisition
opportunities in the fragmented child care industry.
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Increase Occupancy. The Company plans to increase center occupancy by: (i)
enhancing marketing programs targeted to local markets prior to major enrollment
periods, (ii) enhancing recruiting, retention and training of staff, and (iii)
improving customer retention and loyalty. The Company's marketing activities are
currently designed to increase new enrollments primarily through local marketing
efforts, including direct mail solicitation, telephone directory yellow pages
and customer referrals. See "---Marketing, Advertising and Promotions." These
methods communicate to parents the Company's commitment to quality preschool
education and child care by emphasizing KinderCare's nurturing environment,
educational programs, quality staff and excellent facilities and equipment.
Moreover, in late fiscal year 1997, the Company began implementation of an
automated consumer inquiry tracking system to provide efficient responses to
inquiries from potential customers and began development of a comprehensive and
useable consumer database.
Because a high quality teaching and administrative staff is a key factor in
maintaining and increasing center occupancy, the Company emphasizes recruiting
and retaining qualified center personnel. KinderCare's recruiting process seeks
to identify high quality candidates for its teaching, center director and area
manager positions. Additionally, the Company rewards center directors and area
managers through an annual bonus program which is based on center operating
profit performance.
The Company also strives to increase occupancy by improving its customers'
retention and loyalty by strengthening its current parents' emotional commitment
to KinderCare. During fiscal year 1997, the Company initiated parent orientation
meetings at centers during the fall enrollment season, introduced organized
parent involvement programs and parent advisory forums and began conducting
ongoing market research on customer satisfaction. The Company believes that
retention and loyalty will be enhanced by a renewed focus on quality and
consistency in its centers.
Enhance Educational Programs and Quality of Services. The Company
continually evaluates and strives to improve the quality of its preschool
educational and child care services. KinderCare has invested significant
resources in formulating a proprietary educational program, maintaining safe and
up-to-date facilities and hiring, training and retaining high quality employees.
The Company plans to continue to test and implement innovative services and
offerings, such as its new continuous curriculum for infants and toddlers called
Welcome To Learning(TM) and its new program for school-aged children called KC
Imagination Highway(R), which encourages children to engage in meaningful,
purposeful, long-lasting projects that require an active imagination. The
Company also plans to continue encouraging its centers to become accredited by
the National Association for the Education of Young Children, a national
organization that has established comprehensive criteria for providing quality
child care and has implemented a formal, though voluntary, child care center
accreditation process.
Improve Operational Effectiveness. In May 1997, the Company began to
implement several organizational changes, including the addition of 22 area
managers to reduce the span of control of field management and, thereby, provide
more support and supervision to centers. The Company also created regional human
resource manager and controller positions to provide more effective support for
field operations.
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The Company plans to continue to improve its operating performance
primarily by reducing center labor costs through improved staff scheduling. The
Company also plans to continue to leverage its economies of scale and purchasing
power.
Investment in Facilities. The Company plans to invest in a renovation
program designed to bring all centers to a standard for physical plant and
equipment over the next three to four years. The Company also plans to improve
the delivery of required maintenance services to its centers.
Capitalize on KinderCare's Strong Brand Identity. KinderCare's strong brand
identity plays a significant role in the Company's continued growth of its
preschool education and child care business, as management believes that, among
other benefits, this factor contributes to higher enrollment for new child care
centers. Furthermore, management believes there are opportunities to leverage
the Company's brand identity. Possibilities include licensing of the KinderCare
name for educational materials, clothes, toys and other consumer products, as
well as potential brand extensions into other forms of educational or child care
services, such as the operation of primary and private schools.
Educational Programs
The Company's educational programs are designed to provide opportunities
for the development of the whole child, as embraced in the Company's slogan, The
Whole Child Is The Whole Idea(R). The child-centered environment consists of
classrooms that have been designed and furnished to meet the creative and
developmental needs of young children. Classrooms encourage children to explore
and learn at their own pace. The schedule of activities provides for quiet,
active, group and individual participation with opportunities for outdoor play
or specially designed Playscapes. The Company's age-specific programs offer a
wide variety of curriculum activities based upon monthly topics and weekly
themes such as transportation, seasons, colors, numbers, pets, safety, shapes
and sizes.
Each KinderCare center is designed to function as a neighborhood operation
where the center director has the necessary autonomy to tailor the programs to
the needs of the local community. The Company emphasizes selection of staff who
are responsive to children and each teacher is given the opportunity, training
and resources to plan active and creative programs. Opportunity for professional
growth is available through company-wide training programs, the Certification of
Excellence Program (a professional development program established by the
Company) and tuition reimbursement for employment-related college course work or
course work in connection with obtaining a Child Development Associate
certificate. The Company also maintains an Education and Training Department in
its corporate headquarters. This department is led by a professional with a Ph.D
in early childhood education and is staffed by curriculum specialists.
KinderCare's new program for infants and toddlers, Welcome To Learning(TM),
is a continuous curriculum designed for children six weeks to thirty-six months
and encourages children to learn with age and stage appropriate learning
environments and activities. The new program replaces KinderCare's infant care
program, Look At Me(R) and Let Me Do It(R). Welcome To Learning(TM), Level I is
designed for infants (ages six weeks through fifteen
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months) and Level II is designed for toddlers (ages twelve months to thirty-six
months). Welcome To Learning(TM) is built upon four important components which
provide the foundation or cornerstones of the new program: environment,
interactions, parent involvement and developmental activities. Welcome To
Learning(TM) involves parents in many ways including the daily My Day form,
weekly and monthly parent activities and Welcome To Learning(TM) for Parents--a
combination resource book, baby book and diary designed just for them.
The Company has two preschool programs suitable for multi-age groups (ages
three to five years). My Window On The World(R) is designed to encourage
inquisitive children to discover questions and formulate answers using the world
of nature. KinderCare utilizes Your Big Backyard, the National Wildlife
Federation's magazine for preschoolers, as a resource for this program. Through
this program, children learn expression through art, dramatic play, science,
table games, books and music, as well as important language, literacy and math
skills. The Company's Once Upon A Time...(TM) program based on children's
literature, both classic and modern, is the second preschool program. The
concepts developed in the stories provide a foundation for learning math
relationships, colors and shapes, language and literacy skills, comparisons,
social awareness, fine-motor skills and creative expression.
Approximately two-thirds of the Company's centers have a Kindergarten at
KinderCare program where children learn through play, as well as activities and
experiences that are hands-on and sensory in nature. Children participate
primarily in small group instruction and carefully designed free exploration
activities that promote specific skills. Language arts, math, science, physical
education, fine arts and music, health and safety and social studies are all
curriculum components of the nationally recognized curriculum that supports
Kindergarten at KinderCare, developed by Development Learning Materials, a
division of Science Research Associates, Inc.
The Company's KC Imagination Highway(R) program is designed to meet the
needs of school-aged children. Because six to twelve-year-olds spend most of
their school day sitting at desks and tables engaged in relatively quiet,
traditional academic activities, the program is designed to include a number of
stimulating and challenging activities and projects, ranging from loud and
active to quiet, thoughtful and social. The foundation of this program is based
upon group or individual involvement in projects. The goal is for children to
use their imaginations to complete projects and present a culminating event or
finale to parents.
Tuition
The Company determines tuition charges based upon a number of factors
including age of child, full or part-time attendance, location and competition.
Tuition is generally collected on a weekly basis in advance, and tuition rates
are generally adjusted company-wide in the first week of November each year. For
the fiscal years ended May 30, 1997 and May 31, 1996, the Company's weighted
average weekly tuition rate was $103 and $101, respectively.
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Seasonality
New enrollments are generally highest in September and January. Enrollment
generally decreases 5% to 10% during holiday periods and summer months.
Marketing, Advertising and Promotions
Management believes that its national presence and reputation for high
quality preschool educational and child care services have created valuable and
strong name recognition and parent loyalty. In an industry where personal trust
and word-of-mouth referrals play a key role in attracting new customers, the
Company believes that its reputation and strong name recognition are important
competitive advantages.
The Company intends to continue its marketing efforts through various
promotional activities and customer retention and customer referral programs.
Having implemented a lower cost marketing program in fiscal year 1997, in part
by discontinuing national television advertising, the fall enrollment period in
fiscal year 1998 will be supported by a direct mail and local merchandising
campaign, as well as national magazine advertisements and radio advertisements
in select markets. When new centers are opened, they receive the benefit of
pre-opening direct mail support as well as local public relations support and
newspaper advertisements. Every new center hosts an open house and provides for
center tours where parents have opportunities to talk with staff, visit
classrooms and play with educational toys and computers. Other aspects of the
marketing programs offered by each KinderCare center include morning coffee for
parents, periodic extended evening hours and a five o'clock snack that is
provided to the children as they are picked up by their parents. Moreover, the
Company sponsors a referral program under which parents receive free tuition for
a week for every new customer referral that leads to a new enrollment and a new
program for the 1997 fall season under which parents can give a free week to a
newly referred customer.
Center directors and staff also are trained to market to parents via
telephone, local speaking engagements and interaction with local regulatory
agencies that may then refer potential customers to the Company. A telephone
inquiry tracking system is employed and center tours and "meet the teachers"
events are held periodically. New parent orientation meetings are held in the
fall at which center directors and staff explain educational and development
programs as well as policies and procedures. In addition, the Company has
established parent programs in centers to involve parents in center activities
and events. At these events, the Company is able to build a high awareness of
the center in the local community. In addition, each center has a five to seven
member parent forum which functions as a sounding board for new ideas.
Site Selection
The Company seeks to identify attractive new sites for its centers in
large, metropolitan markets and smaller, growth markets that meet the Company's
operating and financial goals and where the Company believes the market for
child care services will support higher tuition rates than the Company's
existing rates. The Company's real estate department performs comprehensive
studies of geographic markets to determine potential
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areas for new center development. These studies include analyses of existing
center areas, competitors, tuition pricing and demographic and marketplace data.
Population, age, household income, employment levels, growth, land prices and
development costs are all considered, as well as long-term growth opportunities
for that market. In addition, the Company reviews state and local laws,
including zoning requirements, development regulations and child care licensing
regulations to determine the timing requirements and probability of receiving
the necessary approvals to construct and operate a new child care center. The
Company may identify several new specific areas from each broader geographical
market study.
KinderCare makes location decisions for new centers based upon a detailed
site analysis that includes feasibility and demographic studies, as well as
comprehensive financial modeling. Within a prospective specific area, the
Company often analyzes several alternative sites. Each potential site is
evaluated against the Company's standards for location, convenience, visibility,
traffic patterns, size, layout, affordability and functionality, as well as
potential competition. The real estate and development staff, working closely
with operations, marketing and financial personnel, aims to open new centers
with the highest achievable occupancy and profitability levels.
Employer-Sponsored Child Care Services
The Company organized its employer-sponsored child care services, referred
to as KinderCare At Work(R), to offer businesses, universities and hospitals
alternatives for providing on-site/near-site child care. These alternatives
include developing and operating on-site/near-site centers, managing
drop-in/back-up care centers and operating employers' on-site centers through
management contracts.
At July 25, 1997, the Company operated 38 on-site/near-site
employer-sponsored child centers for corporations such as Delco Electronics
Corp., Fred Meyer, Inc., Lego Systems, Inc., The Walt Disney Company, Inc. and
several universities and hospitals. Of the 38 on-site/near-site centers, 35 are
Company-owned or leased, with three operated by the Company under management fee
contracts. The management contracts for KinderCare At Work(R) centers generally
provide for a three-to-five-year initial period with renewal options ranging
from two to five years. The Company's compensation under such agreements is
generally based on a fixed fee with annual escalations. One KinderCare At
Work(R) center was opened in fiscal year 1997.
Human Resources
Currently, the Company's center operations are organized into four regions
and 53 areas reporting to a vice president of operations. The Company is
currently adding 22 area manager positions and additional regional support
personnel to support field management's focus on quality.
Individual centers are managed by a director and an assistant director. All
center directors participate in periodic training programs or meetings and must
comply with applicable state and local licensing regulations. All center
teachers and other
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nonmanagement staff are required to attend an initial half-day training session
prior to beginning work and to complete a six week on-the-job basic training
program. Additionally, the Company has developed and implemented extensive
training programs to certify personnel as teachers of various age groups in
accordance with the Company's internal standards and in connection with its
age-specific educational programs.
Due to high employee turnover rates in the child care industry in general,
the Company focuses on and emphasizes recruiting and retaining qualified
personnel. The turnover of personnel experienced by the Company results in part
from the fact that a significant portion of the Company's employees earn
entry-level wages and are part-time employees. Management believes, however,
that the turnover of the Company's employees is in line with other companies in
the industry. Corporate Human Resources monitors salaries and benefits for
competitiveness. The Company plans to develop an assessment program which will
aid in identification of high quality area manager and center director
candidates.
The Company strives to ensure the care and safety of the children enrolled
in its centers. Extensive precautions are taken to ensure the safety and
well-being of all children; however, a small number of incidents of alleged
child abuse have been reported. It is the Company's policy to report any
allegation of abuse to the appropriate authorities, to investigate all
allegations of abuse, and, if appropriate, to place any accused employee on
administrative leave pending resolution of the incident. Although no assurances
can be made that allegations of abuse will not occur in the future, the
Company's procedures are designed to prevent child abuse and the Company has not
historically experienced a material adverse impact from allegations of child
abuse.
Competition
The U.S. child care and preschool education industry is highly fragmented
and competitive. The Company's competition consists principally of local nursery
schools and child care centers, some of which are nonprofit (including
church-affiliated centers), providers of services that operate out of their
homes and other for-profit companies which may operate a number of centers. Many
church-affiliated and other local nonprofit nursery schools and child care
centers have no or lower rental costs than the Company and may receive donations
or other funding to cover operating expenses. Consequently, tuition rates at
these facilities are commonly less than the Company's rates. Additionally, fees
for home-based care are normally lower than fees for center-based care because
providers of home care are not always required to satisfy the same health,
safety or operational regulation as the Company's centers.
The Company's competition also consists of other large, national,
for-profit child care companies that may have more aggressive tuition
discounting and other pricing policies than the Company. The Company competes by
offering professionally planned educational and recreational programs,
contemporary, well-equipped facilities, trained teachers and supervisory
personnel and a range of services, including infant and toddler care, drop-in
service and the transportation of older children enrolled in the Company's
before and after-school program between the Company's child care centers and
schools.
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Employees
At July 25, 1997, the Company employed approximately 22,400 persons, of
whom 270 were employed at corporate headquarters, 170 were regional or area
managers and support personnel and the remainder were employed at the centers.
Center employees include center directors; assistant directors; regular
full-time and part-time teachers; temporary and substitute teachers; teachers'
aides and non-teaching staff, including cooks and van drivers. Approximately 10%
of the 22,400 employees, including all management and supervisory personnel are
salaried, all other employees are paid on an hourly basis. The Company does not
have an agreement with any labor union and believes that its relations with its
employees are good.
Governmental Laws and Regulation
Child care centers are subject to numerous state and local regulations and
licensing requirements and the Company has policies and procedures in place in
order to comply with such regulations and requirements. Although these
regulations vary from jurisdiction to jurisdiction, government agencies
generally review the fitness and adequacy of buildings and equipment, the ratio
of staff personnel to enrolled children, staff training, record keeping, the
dietary program, the daily curriculum and compliance with health and safety
standards. In most jurisdictions, these agencies conduct scheduled and
unscheduled inspections of the centers and licenses must be renewed
periodically. Repeated failures of a center to comply with applicable
regulations can subject it to sanctions, which might include probation or, in
more serious cases, suspension or revocation of the center's license to operate.
The Company believes that its operations are in substantial compliance with all
material regulations applicable to its business.
There are certain tax incentives for child care programs. Section 21 of the
Internal Revenue Code of 1986, as amended (the "Code"), provides a federal
income tax credit ranging from 20% to 30% of certain child care expenses for
"qualifying individuals" (as defined therein). The fees paid to the Company for
child care services by eligible taxpayers qualify for the tax credit, subject to
the limitations of Section 21 of the Code. During fiscal year 1997,
approximately 13% of the Company's net operating revenues were generated from
federal and state child care assistance programs, primarily the Child Care and
Development Block Grant and At-Risk Programs. These programs are designed to
assist low-income families with child care expenses and are administered through
various state agencies. Although, under new legislation signed by President
Clinton in August 1996, additional funding for child care will be available for
low income families as part of welfare reform, no assurance can be given that
the Company will benefit from any such additional funding.
The Federal Americans With Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations and
employment. The Disabilities Act became effective as to public accommodations in
January, 1992 and as to employment in July, 1992. Since effectiveness of the
Disabilities Act, the Company has not experienced any material adverse impact as
a result of the legislation.
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Insurance
The Company's insurance program currently includes the following types of
policies: workers' compensation, comprehensive general liability, automobile
liability, property, excess "umbrella" liability and a medical payment program
for accidents which applies to each child enrolled in a Company center. The
policies provide for a variety of coverages, are subject to various limits, and
include substantial deductibles or self-insured retention. Special insurance is
sometimes obtained with respect to specific hazards, when and if deemed
appropriate and available at reasonable cost. At July 25, 1997, the Company had
approximately $7.5 million of letters of credit available to secure its
obligations under retrospective and self-insurance programs. There is no
assurance that claims in excess of, or not included within, the Company's
coverage will not be asserted, the effect of which could have an adverse effect
on the Company.
Communication and Information Systems
The Company has a fully automated information, communication and financial
reporting system for its centers. The system uses personal computers and links
every center and regional office to the corporate headquarters. This system
provides timely information on such items as weekly revenues, expenses,
enrollments, attendance, payroll and staff hours. The Company is also updating
its financial reporting and human resources systems to provide more
comprehensive and timely information throughout the Company.
The Company also seeks to improve its operating efficiencies by continually
reviewing the effectiveness and coverage of its support services and providing
management with more timely information through its nationwide communications
network and its automated information systems. The Company employs company-wide
e-mail and on-line inquiry for all managers.
KinderCare has also expanded its nationwide network to include the Internet
and company-wide Intranet applications. Through the use of Netscape Navigator(R)
software, the Company's intranet, called "KinderNet," allows center directors to
have immediate access to corporate information and provides center directors
with the ability to distribute reports and questionnaires, update databases and
revise center listings on a daily basis. The Company believes that the
sophistication and scope of its communications network and information system
makes its system one of the more advanced in the child care industry and enables
it to improve further the efficiency and quality of child care and enhance the
educational experience of KinderCare students.
Trademarks
The Company has various registered and unregistered trademarks covering the
name KinderCare, its schoolhouse logo, and a number of other names, slogans and
designs, including, but not limited to: KinderCare At Work(R), My Window On The
World(R), Helping America's Busiest Families(R), Look At Me(R), Let Me Do It(R),
Let's Move, Let's Play(R), Small Talk(R), The Whole Child Is The Whole Idea(R),
Once Upon A Time...(TM), Kid's Choice(TM), KC Imagination Highway(R), Playscapes
At KinderCare(R) and Welcome To
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Learning(TM). A federally registered trademark in the United States is effective
for ten years subject only to a required filing and the continued use of the
mark by the registrant. A federally registered trademark provides the
presumption of ownership of the mark by the registrant in connection with its
goods or services and constitutes constructive notice throughout the United
States of such ownership. In addition, the Company has registered various
trademarks in certain other countries, including Canada, Germany, Japan, the
Peoples Republic of China and the United Kingdom. The Company believes that its
name and logo are important to its operations and intends to continue to renew
the trademark registrations thereof.
ITEM 2. PROPERTIES
The Company's home office is presently located in Montgomery, Alabama, in a
68,000 square foot building owned by the Company. The Company is in the process
of relocating its corporate headquarters to Portland, Oregon.
The Company currently expects to sell its Montgomery headquarters building
following relocation of its headquarters functions. The Company has entered into
a 10-year lease of approximately 70,000 square feet of office space currently
under construction in Portland, Oregon. The lease term will run from the date of
occupancy, currently expected to be early November 1997. The lease calls for
annual rental payments of $22.50 per square foot for the first five years of the
lease term and $26.50 for the final five years, with one five-year extension
option at market rent. At July 25, 1997, the Company owned 728 of its operating
child care centers, leased or subleased 413 operating child care centers and
operated three child care centers under management contracts. The Company owns
or leases certain other child care centers which have not yet been opened or
which are being held for disposition. In addition, the Company owns certain real
property held for future development of centers.
A typical KinderCare community center is a one-story, air-conditioned
building located on approximately one acre of land (larger capacity centers are
situated on parcels ranging from one to four acres of land) constructed in
accordance with model designs generally developed by the Company. The community
centers contain open classroom and play areas and complete kitchen and bathroom
facilities and can accommodate from 130 to 280 children, with most centers able
to accommodate 90 to 135 children. Over the past few years, the Company opened
community centers that are larger in size with a capacity ranging from 165 to
280 children. New prototype community centers accommodate approximately 180
children, depending on site and location. Each center is equipped with a variety
of audio and visual aids, educational supplies, games, puzzles, toys and
vehicles used for field trips and transporting children enrolled in the
Company's after-school program. All KinderCare community centers are equipped
with computers for children's educational programs.
KinderCare At Work(R) provides child care programs individualized for each
corporate sponsor. Facilities are on or near the corporate sponsor's site and
range in capacity from 80 to 220 children. Kid's Choice(TM) centers contain
homework, computer and game rooms and are able to accommodate from 75 to 180
children. Each provides school-age children with areas to perform activities of
interest to them.
12
<PAGE>
The KinderCare community, KinderCare At Work(R) and Kid's Choice(TM)
centers operated by the Company at July 25, 1997 were located as follows:
<TABLE>
<CAPTION>
Kids
Community KinderCare At Choice(TM)
Location Centers Work(R) Centers Centers Total
--------------------- --------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Alabama 11 -- 1 12
Arizona 16 2 -- 18
Arkansas 4 -- -- 4
California 92 -- 2 94
Colorado 24 -- 1 25
Connecticut 13 2 -- 15
Delaware 5 -- -- 5
Florida 67 6 2 35
Georgia 37 -- 2 39
Illinois 73 3 8 84
Indiana 26 1 1 28
Iowa 7 2 1 10
Kansas 18 -- -- 18
Kentucky 13 1 1 15
Louisiana 13 2 -- 15
Maryland 23 -- 1 24
Massachusetts 17 -- -- 17
Michigan 32 2 1 35
Minnesota 31 -- 1 32
Mississippi 4 -- -- 4
Missouri 48 -- -- 48
Nebraska 10 1 -- 11
Nevada 10 -- -- 10
New Jersey 29 4 -- 33
New Mexico 7 -- -- 7
New York 2 1 -- 3
North Carolina 33 -- 2 35
Ohio 56 3 6 65
Oklahoma 10 -- -- 10
Oregon 13 3 -- 16
Pennsylvania 41 -- -- 41
Rhode Island -- 1 -- 1
Tennessee 27 1 2 30
Texas 121 1 7 129
Utah 6 1 -- 7
Virginia 52 -- 2 54
Washington 47 -- 2 49
Wisconsin 23 1 -- 24
United Kingdom 2 -- -- 2
--------- --------------- --------- ---------
Total 1,063 38 43 1,144
========= =============== ========= =========
</TABLE>
Subsequent to January 1, 1993, the Company renegotiated approximately 70
leases related to under-performing centers in order to amend the terms and allow
the Company to terminate these leases at any time with minimal notice. In
connection with the termination option, the Company, in certain instances,
prepaid rent totaling approximately $3.2 million. Such amounts are being
amortized over the termination period or over the appropriate remaining months
of the lease period. Commitments under these amended leases totaled
13
<PAGE>
approximately $16.8 million over the original lease terms. Upon giving the
landlord termination notice of at least six months, the amendments provide that
the Company would be permitted to utilize the facilities for the final six-month
period rent-free, as well as relieve itself of all future commitments remaining
under the lease. At July 25, 1997, the Company has elected to close 34 of these
centers and the remaining unamortized prepaid balance is $2.3 million.
The Company utilizes a centralized maintenance program to ensure consistent
high-quality maintenance of its facilities located across the country. The
department's maintenance technicians, each with a van stocked with spare parts,
handle routine and preventative maintenance functions through the central
telephone dispatch and systematic checklist system. Each technician is
responsible for the support of approximately 25 centers. A level of supervision
also has been added to provide guidance and additional technical support to the
technicians. Specific geographic areas are supervised by four regional directors
and nine facility managers, each of whom manages between three and eight
technicians.
The Company plans to undertake a renovation program to ensure that all of
its centers meet specified standards to be established by the Company. The
Company anticipates that it will take three to four years to complete this
planned renovation. The Company believes that its properties are in good
condition and are adequate to meet its current and reasonably anticipated future
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of business, including suits alleging child
abuse. In certain of such actions, plaintiffs request damages that are covered
by insurance. The Company believes that none of the claims or suits of which it
is aware will materially affect its financial position, operating results or
cash flows, although absolute assurance cannot be given with respect to the
ultimate outcome of any such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions with the Company and
employment history of each of the executive officers of the Company, together
with certain other key personnel:
<TABLE>
<CAPTION>
Year First
Elected
Director or
Name Age Position with Company Officer
- ---- --- --------------------- -----------
<S> <C> <C> <C>
David J. Johnson 51 Chief Executive Officer and Chairman of the Board 1997
Beth A. Ugoretz 42 Executive Vice President, Corporate Services 1997
Bruce Walters 40 Senior Vice President and Chief Development Officer 1997
Edward L. Brewington 54 Vice President, Human Resources 1997
Robert H. Fries 48 Vice President, Treasurer 1996
Marcia P. Guddemi, Ph.D. 44 Vice President, Education, Research and Training 1991
Mark F. Hoffmann 33 Vice President, Real Estate 1996
S. Wray Hutchinson 36 Vice President, Operations 1996
Dan R. Jackson 43 Vice President, Financial Controls and Planning 1997
Eva M. Kripalani 38 Vice President, General Counsel and Secretary 1997
Bobby J. Willey 56 Vice President, Information Services 1995
</TABLE>
Mr. Johnson joined the Company as Chief Executive Officer and Chairman in
February 1997. Between September 1991 and November 1996, Mr. Johnson served as
President, Chief Executive Officer and Chairman of the Board of Red Lion Hotels,
Inc. (formerly a KKR affiliate) or its predecessor. From 1989 to September 1991,
Mr. Johnson was a general partner of Hellman & Friedman, a private equity
investment firm based in San Francisco. From 1986 to 1988, he served as
President, Chief Operating Officer and director of Dillingham Holdings, a
diversified company headquartered in San Francisco. From 1984 to 1987, Mr.
Johnson was President and Chief Executive Officer of Cal Gas Corporation, a
principal subsidiary of Dillingham Holdings.
Ms. Ugoretz joined the Company as Executive Vice President of Corporate
Services in March 1997. Ms. Ugoretz served as Senior Vice President, General
Counsel and Secretary of Red Lion Hotels, Inc. or its predecessor from June 1993
to December 1996. Prior to that time, Ms. Ugoretz was a partner with the law
firm of Stoel Rives LLP in Portland, Oregon, where she had worked since 1983.
Mr. Walters joined the Company as Senior Vice President and Chief
Development Officer in July 1997. From June 1995 to February 1997, Mr. Walters
served as the Executive Vice President of Store Development for Hollywood
Entertainment Corporation in Portland, Oregon. Prior to that time, Mr. Walters
spent 14 years with McDonald's Corporation in various domestic and international
development positions.
Mr. Brewington joined the Company as Vice President of Human Resources in
April 1997. From June 1993 to April 1997 Mr. Brewington was with Times Mirror
Training Group where his last position held was Vice President, Human Resources.
Prior to that time, Mr. Brewington spent 25 years with IBM in various human
resource, sales and marketing positions.
15
<PAGE>
Mr. Fries was promoted to Vice President and Treasurer in April 1996. Mr.
Fries began his employment with the Company in March 1994 as Assistant
Treasurer, Debt and Income Taxes and Assistant Secretary. Prior to joining
KinderCare, Mr. Fries served as Director of Taxes for Blount, Inc. from 1986
until 1994.
Dr. Guddemi joined the Company in August 1991 as Vice President of
Education and Research. For over five years prior to joining the Company, she
was an assistant professor of early childhood education at the University of
South Florida and at the University of South Carolina.
Mr. Hoffmann joined the Company in February 1996 as Vice President of Real
Estate. Prior to joining the Company, Mr. Hoffmann served as the Director of
Real Estate for B.C. Great Lakes, LLC from 1993 until 1996 and in various real
estate management positions of increased responsibility with Taco Bell
Corporation from 1989 through 1993.
Mr. Hutchinson was promoted to Vice President of Operations in April 1996.
He began his employment with the Company in 1992 as a District Manager in New
Jersey and was later promoted to Region Manager for the Chicago area. From 1990
until 1992, Mr. Hutchinson was self-employed.
Mr. Jackson joined the Company in February 1997 as Vice President of
Financial Controls and Planning. Prior to that time, Mr. Jackson served as Vice
President Controller for Red Lion Hotels, Inc., or its predecessor, from
September 1985 to January 1997. From 1978 to 1985, Mr. Jackson held several
financial management positions with Harsch Investment Corporation, a real estate
holding company based in Portland, Oregon.
Ms. Kripalani joined the Company as Vice President, General Counsel and
Secretary in July 1997. Prior to joining the Company, Ms. Kripalani was a
partner in the law firm of Stoel Rives LLP in Portland, Oregon, where she had
worked since 1987.
Mr. Willey joined the Company in June 1995 as Vice President of Information
Services. From 1992 to 1995, Mr. Willey served as MIS Director for PETSTUFF,
Inc. and was Corporate Information Officer for ANCO Management Service, Inc.
from 1989 to 1992.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCK HOLDER MATTERS
Price Range of Common Stock
Until February 13, 1997, the date of the Merger, the common stock traded on
the Nasdaq National Market System under the symbol KCLC. Following the Merger,
the common stock was delisted from the Nasdaq National Market System and
thereafter has been traded only in the over-the-counter market under the symbol
KDCR. The following table sets forth, for the fiscal periods indicated, the high
and low sales prices, rounded to the nearest eighth, reported by the Nasdaq
National Market System with respect to sales of the common stock prior to
February 13, 1997:
<TABLE>
<CAPTION>
Common Stock
---------------------------
High Low
----------- ---------
<S> <C> <C>
Fiscal year ended May 30, 1997
First Quarter $ 15 11/16 $ 13 7/8
Second Quarter 20 15 1/4
Third Quarter (through February 13, 1997) 20 18 1/8
Fiscal year ended May 31, 1996
First Quarter $ 14 5/8 $ 12 1/4
Second Quarter 14 1/4 11 3/4
Third Quarter 13 3/8 11 3/4
Fourth Quarter 15 2/5 12 1/4
</TABLE>
Since February 13, 1997, the Company's common stock has been traded in the
over-the-counter market, in the "pink sheets" published by the National
Quotation Bureau, and has been listed on the OTC Bulletin Board under the symbol
KDCR. The market for the Company's common stock must be characterized as a
limited market due to the relatively low trading volume and the small number of
brokerage firms acting as market makers. The following table sets forth, for the
periods indicated, certain information with respect to the high and low bid
quotations for the common stock as reported by a market maker for the Company's
common stock. The quotations represent inter-dealer quotations without retail
markups, markdowns or commissions and may not represent actual transactions. No
assurances can be given that the prices for the Company's common stock will be
maintained at their present levels.
<TABLE>
<CAPTION>
Common Stock
-----------------------------
High Bid Low Bid
------------ ------------
<S> <C> <C>
Fiscal year ended May 30, 1997
February 13, 1997 to March 7, 1997 $ 19 $ 19
Fourth Quarter N/A* N/A*
* The Company was unable to identify any trades in the common stock
in the over-the counter market during this period.
</TABLE>
17
<PAGE>
Approximate Number of Security Holders
At July 25, 1997, there were approximately 80 holders of record of the
Company's common stock. All warrants outstanding prior to the Merger were
cancelled and converted into the right to receive an amount in cash determined
as specified in the Merger Agreement at the effective time of the Merger.
Dividend Policy
During the past three fiscal years, the Company has not declared or paid
any cash dividends or distributions on its capital stock. The Company currently
intends to retain earnings of the Company for operations and does not anticipate
paying cash dividends on the common stock in the foreseeable future. Further,
the 9-1/2% senior subordinated notes due 2009 and the credit facilities entered
into by the Company in connection with the Merger restrict any payment of
dividends.
18
<PAGE>
ITEM 6. SELECTED HISTORICAL CONSOLIDATED
FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated financial
and other data for the Company. This information should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and the
information set forth in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The consolidated statement of operations for the year ended May 28, 1993 is
presented for comparison to the fiscal years ended May 30, 1997, May 31, 1996,
June 2, 1995 and June 3, 1994 to reflect the Company's change in fiscal year. On
November 10, 1992, the Company filed a pre-arranged petition under Chapter 11 of
the United States Bankruptcy Code. On March 31, 1993 the Company emerged from
bankruptcy pursuant to its plan of reorganization. Due to the implementation on
April 2, 1993 of fresh start reporting in accordance with AICPA Statement of
Position 90-7 Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code ("SOP 90-7"), the consolidated statement of operations for the
year ended May 28, 1993 includes both pre- and post-bankruptcy amounts, and is
therefore not comparable to the other periods presented.
The consolidated balance sheet data for the Company at May 30, 1997, May
31, 1996, June 2, 1995, June 3, 1994 and May 28, 1993 and the consolidated
statements of operations data for the fiscal years ended May 30, 1997, May 31,
1996, June 2, 1995, June 3, 1994 and the eight weeks ended May 28, 1993, after
giving effect to the Company's plan of reorganization, pursuant to which it
emerged from bankruptcy on March 31, 1993, are not comparable to the historical
financial condition or results of operations of the Company prior to the plan of
reorganization.
19
<PAGE>
<TABLE>
<CAPTION>
Selected Historical Consolidated Financial and Other Data
KinderCare Learning Centers, Inc. and Subsidiaries
(Dollars in thousands, except per share amounts and child care center data)
Post-Confirmation
------------------------------------------------------------------------
Fiscal Year Ended
--------------------------------------------------------- Eight Weeks
June 3, 1994 Ended
May 30, 1997 May 31, 1996 June 2, 1995 (53 Weeks) May 28, 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (b):
Operating revenues, net $ 563,135 $ 541,264 $ 506,505 $ 488,726 $ 72,612
Operating expenses, exclusive of
recapitalization expenses,
restructuring and other
charges (income), net 515,481 488,071 456,607 441,560 68,609
Recapitalization expenses (d) 17,277 -- -- -- --
Restructuring and other charges
(income), net (e) 10,275 1,484 (888) -- --
------------------------------------------------------------------------
Operating income (loss) 20,102 51,709 50,786 47,166 4,003
Net investment income 232 250 2,635 3,176 140
Interest expense 22,394 16,727 17,318 17,675 3,253
Reorganization items -- -- -- -- --
------------------------------------------------------------------------
Income (loss) before taxes and
extraordinary items (2,060) 35,232 36,103 32,667 890
Income tax expense (benefit) 3,375 13,549 14,037 12,837 273
------------------------------------------------------------------------
Income (loss) before extraordinary items (5,435) 21,683 22,066 19,830 617
Extraordinary items, net of income taxes (7,532)(h) -- -- (2,397)(h) --
------------------------------------------------------------------------
Net income (loss) $ (12,967) $ 21,683 $ 22,066 $ 17,433 $ 617
========================================================================
Earnings (loss) per share (b):
Primary - Income (loss) before
extraordinary item, net $ (0.33) $ 1.10 $ 1.07 $ 0.97 $ 0.03
Extraordinary item, net (0.46) -- -- (0.12) --
------------------------------------------------------------------------
Net income (loss) $ (0.79) $ 1.10 $ 1.07 $ 0.85 $ 0.03
========================================================================
Fully diluted - Net income (loss) $ 1.05
===============
Other Financial Data (b):
EBITDA (j) $ 47,055 $ 85,931 $ 81,492 $ 73,093 $ 8,373
Adjusted EBITDA (j) 81,907(k) 87,165(k) 77,969 72,314 8,233
Adjusted EBITDA margin 14.5% 16.1% 15.4% 14.8% 11.3%
Capital expenditures $ 43,748 $ 67,304 $ 74,376 $ 35,710 $ 5,839
Child Care Center Data (b):
Number of centers at end of period 1,144 1,148 1,137 1,132 1,166
Center licensed capacity at end of
period 143,000 141,000 N/C(1) N/C(1) N/C(1)
Occupancy (m) 70% 70% N/C(1) N/C(1) N/C(1)
Average tuition rate (n) $ 103 $ 101 N/C(1) N/C(1) N/C(1)
Balance Sheet Data (at end of period) (b):
Total assets $ 569,878 $ 527,476(o) $ 503,274(o) $ 458,920(o) $ 459,388(o)
Total debt (p) 394,889 146,617 160,394 178,692 218,037
Shareholders' equity 27,707(q) 262,435(o) 241,216(o) 203,882(o) 176,464(o)
See accompanying notes to selected historical consolidated financial and other data.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Selected Historical Consolidated Financial and Other Data, cont'd.
KinderCare Learning Centers, Inc. and Subsidiaries
(Dollars in thousands, except per share amounts and child care center data)
Pre-Confirmation
------------------------------------------
Thirteen Fiscal Year
Year Ended Weeks Ended Ended
May 28, April 2, January 1,
1993(a) 1993(a) 1993(a)
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data (b):
Operating revenues, net $ 447,243 $ 114,705 $ 437,203
Operating expenses, exclusive of
recapitalization expenses,
restructuring and other
charges (income), net 423,841 104,675 413,800(c)
Recapitalization expenses (d) -- -- --
Restructuring and other charges
(income), net (e) -- -- --
------------------------------------------
Operating income (loss) 23,402 10,030 23,403
Net investment income 8,686 3,309 5,908
Interest expense 24,709(f) 692(f) 38,400(f)
Reorganization items 103,483(g) 101,604(g) 1,879
------------------------------------------
Income (loss) before taxes and
extraordinary items (96,104) (88,957) (10,968)
Income tax expense (benefit) (216) 404 (246)
------------------------------------------
Income (loss) before extraordinary items (95,888) (89,361) (10,722)
Extraordinary items, net of income taxes 157,573(i) 157,573(i) --
------------------------------------------
Net income(loss) $ 61,685 $ 68,212 $ (10,722)
==========================================
Earnings (loss) per share (b):
Primary - Income (loss) before
extraordinary item, net N/A(a) $ (1.71) $ (0.21)
Extraordinary item, net N/A(a) 3.01 --
------------------------------------------
Net income (loss) N/A(a) $ 1.30 $ (0.21)
==========================================
Fully diluted - Net income (loss)
Other Financial Data (b):
EBITDA (j) $ 114,175 $ 76,173 $ 54,281
Adjusted EBITDA (j) 51,399 16,895 50,252
Adjusted EBITDA margin 11.5% 14.7% 11.5%
Capital expenditures 38,112 5,927 34,498
Child Care Center Data (b):
Number of centers at end of period 1,166 1,166 1,196
Center licensed capacity at end of period N/C(1) N/C(1) N/C(1)
Occupancy (m) N/C(1) N/C(1) N/C(1)
Average tuition rate (n) N/C(1) N/C(1) N/C(1)
Balance Sheet Data (at end of period) (b):
Total assets $ 459,388(o)
Total debt (p) 218,037
Shareholders' equity 176,464(o)
See accompanying notes to selected historical consolidated financial and other data.
</TABLE>
21
<PAGE>
Notes to Selected Historical Consolidated
Financial and Other Data
(a) Due to the implementation of fresh start reporting, the consolidated
financial statements of the Company after April 2, 1993 are not comparable
in all material respects to any financial statements prior to that time and
the operating results for the year ended May 28, 1993 include both pre- and
post-bankruptcy amounts. Additionally, the presentation of historical
earnings per share information for periods including both pre- and
post-bankruptcy amounts are not meaningful. Primary earnings (loss) per
share data on a pro-forma basis, assuming 20,000,000 shares of new common
stock (issued at April 2, 1993, the effective time of the plan of
reorganization) had been outstanding since the beginning of the year ended
May 28, 1993 would be as follows:
Loss before extraordinary item, net $(4.79)
Extraordinary item, net 7.87
------
Net income $ 3.08
======
(b) The Company's fiscal year ends on the Friday closest to May 31.
(c) In fiscal year 1992, $4.0 million of the 1990 closed center reserves were
recaptured which reduced operating expenses. In addition, debt
restructuring costs incurred in connection with the Company's efforts to
reorganize its debt prior to filing for Chapter 11 on November 10, 1992 of
$5.3 million are included in operating expenses for fiscal year 1992.
(d) In fiscal year 1997, the Company incurred non-recurring recapitalization
costs in order to fund the transactions contemplated by the Merger.
(e) Restructuring and other charges (income), net, include restructuring
charges of $3.4 million and $6.5 million in fiscal years 1997 and 1996,
respectively, losses on asset impairments of $6.9 million and $6.3 million
in fiscal years 1997 and 1996, respectively, gains on litigation
settlements of $(1.5) million, $(11.3) million and $(0.9) million in fiscal
years 1997, 1996 and 1995, respectively, and charges of $1.5 million to
write-off certain assets in fiscal year 1997.
(f) During the Chapter 11 petition from November 10, 1992 through March 31,
1993, the Company did not pay or accrue interest on approximately $356.5
million of debt obligations classified as liabilities subject to settlement
under reorganization proceedings.
(g) Reorganization items for the year ended May 28, 1993 and the 13 weeks ended
April 2, 1993 include $97.7 million of net adjustments to state assets and
liabilities at fair value in connection with the adoption of fresh start
reporting.
(h) In fiscal years 1994 and 1997, the Company retired debt prior to maturity,
the losses on which were recorded as extraordinary items.
(i) In connection with the Company's emergence from bankruptcy in fiscal year
1993, the value of cash distributed, new debt and equity securities issued
and liabilities assumed was $157.6 million less than the allowed claims of
$457.6 million and the resulting gain was recorded as an extraordinary
item.
(j) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. "Adjusted EBITDA" represents EBITDA
exclusive of recapitalization
22
<PAGE>
expenses, restructuring and other charges (income), net, investment income
and extraordinary items. Neither EBITDA nor Adjusted EBITDA is intended to
represent cash flow from operations as defined by generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. Adjusted EBITDA is presented because the
Company believes that Adjusted EBITDA represents a more consistent
financial indicator of the Company's ability to service its debt.
(k) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(l) Prior to June 3, 1995, the Company utilized average occupancy and the three
year old tuition rate to measure performance. Average occupancy was defined
as actual operating revenues for the respective period divided by the
building capacity of each of the Company's centers multiplied by such
center's basic tuition rate for full-time, three-year-old students for the
respective period. The three-year-old tuition rate represents the weekly
tuition rate paid by a parent for a three-year-old child to attend a
KinderCare center five full days during one week. The three-year-old
tuition rate represented an approximate average of all tuition rates at
each center. The child care center data utilized in prior fiscal years to
measure performance is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
May 31,1996 June 2, 1995 June 3, 1994 Year Ended
(53 weeks) May 28, 1993
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Center building capacity
at end of period 141,000 137,000 136,000 138,000
Average occupancy 76% 76% 77% 74%
Average three-year-old
tuition rate $ 100 $ 96 $ 90 $ 83
</TABLE>
At June 3, 1995, the Company changed its method of measuring performance to
the utilization of occupancy and average tuition rate (see notes (m) and
(n) below).
(m) Occupancy, a measure of the utilization of center capacity, is defined by
the Company as the full-time equivalent ("FTE") attendance at all of the
Company's centers divided by the sum of the licensed capacity of all of the
Company's centers. FTE attendance is not a strict head count. Rather, the
methodology is to determine 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 a half-day would
equate 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.
(n) Average tuition rate is defined by the Company as actual net operating
revenues, exclusive of fees (primarily reservation and registration),
divided by FTE attendance for the respective period. The average tuition
rate represents the approximate weighted average tuition rate, at each
center, paid by a parent for a child to attend a KinderCare center five
full days during one week. Center occupancy mix, however, can significantly
affect these averages with respect to any specific child care center.
(o) At the Company's emergence from bankruptcy in 1993, the Company did not
record a liability for accrued but untaken employee vacation. Accordingly,
the accompanying financial statements for periods prior to June 1, 1996 and
subsequent to the Company's
23
<PAGE>
emergence from bankruptcy have been restated. The net effect of the
restatement was to decrease additional paid-in capital by $3.0 million,
reflecting the vacation accrual of $5.0 million net of the deferred tax
effect of $2.0 million. The effect of the restatement is not material to
the results of operations.
(p) Total debt includes long-term debt, current portion of long-term debt and,
at January 1, 1993, debt obligations of $356.5 million classified as
liabilities subject to settlement under reorganization proceedings.
(q) As part of the Merger and related transactions, KKR, through KCLC,
contributed $148.75 million in common equity for approximately 83.6% of the
shares outstanding immediately after the Merger and existing stockholders
retained approximately 16.4% of the shares outstanding immediately after
the Merger.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
document. The Company's fiscal year ends on the Friday closest to May 31. The
information presented herein refers to the years ended May 30, 1997 ("fiscal
1997"), May 31, 1996 ("fiscal 1996"), and June 2, 1995 ("fiscal 1995"), each of
which was a 52-week fiscal year.
Occupancy, a measure of the utilization of center capacity, is defined by
the Company as the full-time equivalent ("FTE") attendance at all of the
Company's centers divided by the sum of the licensed capacity of all of the
Company's centers. FTE attendance is not a strict head count. Rather, the
methodology is to determine 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 a half-day would equate 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.
Average tuition rate is defined by the Company as actual net operating
revenues, exclusive of fees (primarily reservation and registration), divided by
FTE attendance for the respective period. The average tuition rate represents
the approximate weighted average tuition rate at each center paid by a parent
for a child to attend a KinderCare center five full days during one week. Center
occupancy mix, however, can significantly affect these averages with respect to
any specific child care center.
Fiscal 1997 compared to Fiscal 1996
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Fiscal Change
Year Ended Percent Year Ended Percent Amount
May 30, of May 31, of Increase/
1997 Revenues 1996 Revenues (Decrease)
---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues, net $ 563,135 100.0% $ 541,264 100.0% $ 21,871
---------- ---------- ----------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 300,580 53.4 284,115 52.5 16,465
Depreciation 34,253 6.1 33,972 6.3 281
Rent 28,140 4.9 26,515 4.9 1,625
Other 152,508 27.1 143,469 26.5 9,039
Recapitalization expenses 17,277 3.1 -- -- 17,277
Restructuring and other charges
(income), net 10,275 1.8 1,484 0.2 8,791
---------- ---------- ----------- ---------- ----------
Total operating expenses 543,033 96.4 489,555 90.4 53,478
---------- ---------- ----------- ---------- ----------
Operating income $ 20,102 3.6% $ 51,709 9.6% $ (31,607)
========== ========== =========== ========== ==========
</TABLE>
Operating revenues, net - Net operating revenues increased $21.9 million,
or 4.0%, to $563.1 million in fiscal 1997 versus fiscal 1996. The increase in
net operating revenues is primarily attributable to a 4.7% weighted average
tuition increase implemented in the fall of
25
<PAGE>
1996 and to new center openings and acquisitions. The average tuition rate
increased to $103 in fiscal 1997 from $101 in fiscal 1996. The positive effect
of those factors on net operating revenues was offset in part by declines in
total company average occupancy and center closings.
Total Company occupancy decreased slightly to 70.0% in fiscal 1997 from
70.3% in fiscal 1996. The Company believes the decline in occupancy was caused
by a variety of factors including, in particular, the following recently
implemented initiatives: (a) a reduced, lower cost marketing program, (b) an
expanded employee child care discount program that may have precluded the
enrollment of tuition paying children, and (c) changes in field operations
management which provided less direct center supervision. The Company is in the
process of evaluating such initiatives and has made certain revisions including
funding a targeted marketing program for early fiscal year 1998, limiting the
employee child care discount effective July 1997 and adding certain area manager
positions and additional regional field support to increase center supervision
and support.
During fiscal 1997, the Company opened 16 new centers: 15 KinderCare
community centers and one KinderCare At Work(R) center; and closed or sold 20
centers. During fiscal 1996, the Company opened 37 new centers: 22 KinderCare
community centers, six KinderCare At Work(R) centers and nine Kid's Choice(TM)
centers (including the conversion of one community center to a Kid's Choice(TM)
center); and closed or sold 26 centers. Consequently, total licensed capacity
increased to 143,000 at the end of fiscal 1997 from 141,000 at the end of fiscal
1996.
Salaries, wages and benefits - Salaries, wages and benefits expense
increased $16.5 million, or 5.8%, to $300.6 million in fiscal 1997 versus fiscal
1996. Approximately $7.0 million and $7.7 million of the year-to-date increases
are attributable to increased center staff hours and wage rates, respectively.
Average hourly center staff wages increased approximately 4.1% for fiscal 1997
versus fiscal 1996. Further, benefit costs have increased slightly due to the
partial implementation of new employee health insurance plans. As a percentage
of net operating revenues, salaries, wages and benefits expense increased to
53.4% in fiscal 1997 from 52.5% in fiscal 1996.
Depreciation - Depreciation expense increased to $34.3 million in fiscal
1997 from $34.0 million in fiscal 1996 due to asset additions related to
renovations of existing centers, purchases of short lived assets and to the
opening of 16 new centers, offset partially by the closing of 20 older centers
in fiscal 1997 and by a reduction in depreciation expense related to certain
assets reaching the end of their estimated depreciable lives.
Rent - Rent expense increased to $28.1 million in fiscal 1997 from $26.5
million in fiscal 1996. The increase is primarily a result of lease renewals at
current market rates. During fiscal 1997, five leased centers were opened and 17
leased centers were closed. The rental rates experienced on leases entered into
in fiscal 1997 are higher than those experienced in previous years. For fiscal
year 1998, rent expense will include rent associated with the Company's new
corporate headquarters in Portland, Oregon. See "Item 2. Properties."
26
<PAGE>
Other operating expenses - Other operating expenses increased to $152.5
million in fiscal 1997 from $143.5 million in fiscal 1996. As a percentage of
net operating revenues, other operating expenses increased to 27.1% in fiscal
1997 from 26.5% in fiscal 1996. This increase is principally due to increased
center level operating and insurance costs and a provision for lease termination
costs, offset partially by a reduced, lower cost marketing program and improved
administrative and center support efficiencies from re-engineering efforts
initiated during fiscal 1996.
Recapitalization expenses - During fiscal 1997 and in connection with the
merger of the Company and KCLC Acquisition Corp. ("KCLC"), a wholly owned
subsidiary of a partnership formed at the direction of Kohlberg Kravis Roberts &
Co., a private investment firm ("KKR") (the "Merger"), the Company repaid the
$91.6 million balance on the Company's previous $150.0 million credit facility
and paid $382.4 million to redeem common stock, warrants and options. In order
to fund the transactions contemplated by the Merger (the "Recapitalization"),
the Company issued $300.0 million principal amount 9-1/2% senior subordinated
notes ("9-1/2% Senior Subordinated Notes"), entered into a $300.0 million
revolving credit facility, executed a term loan facility of $90.0 million,
against which $50.0 million was immediately drawn, and issued 7,828,947 shares
of common stock to KKR affiliates. Non-recurring recapitalization costs of
approximately $17.3 million were incurred and expensed and financing costs of
approximately $27.2 million have been deferred and will be amortized over the
lives of the new debt facilities (see Notes 2 and 8 to the Company's
Consolidated Financial Statements).
Restructuring and other charges (income), net - During the fourth quarter
of fiscal 1997, the Company decided to relocate its corporate offices from
Montgomery, Alabama to Portland, Oregon in fiscal year 1998. In connection with
the relocation, the Company recognized $3.4 million in restructuring costs,
primarily severance related, and recorded a $5.0 million charge to write-down
its Montgomery, Alabama headquarters facility to net realizable value. During
fiscal 1997, $0.2 million was paid in relation to the relocation. The Company
anticipates incurring an additional $5.8 million in restructuring charges
related to the relocation in fiscal year 1998. Additionally, the Company
recorded impairment losses of $1.9 million comprised of $1.3 million with
respect to a certain long-lived assets and $0.6 million related to Kids
Choice(TM) anticipated lease termination costs. The Company also recorded
charges of approximately $1.5 million to write-off marketing materials and
deferred pre-opening costs on new centers. Finally, in the second quarter of
fiscal 1997, the Company received a $1.5 million interest payment from Enstar
Group, Inc. ("Enstar"), the Company's former parent, in connection with a
settlement of the Company's claim against Enstar in the U.S. Bankruptcy Court in
Montgomery, Alabama.
During the first quarter of fiscal 1996, the Company received a cash
distribution of $11.3 million from Enstar in connection with the Company's claim
against Enstar referred to above, the Company limited the development of its
Kid's Choice(TM) centers to contracts in process until the concept is more fully
developed and recorded an impairment loss of $6.3 million, consisting of a
writedown of $5.3 million for the recoverability of certain long lived assets,
primarily leasehold improvements (which were valued based on anticipated
discounted cash flows), and $1.0 million for anticipated lease termination
costs. Additionally, during fiscal 1996, the Company made substantial changes to
its field
27
<PAGE>
operations and facilities management and to its support functions. As a result
of these changes, the Company provided $6.5 million for restructuring costs,
primarily to cover severance arrangements for the approximately 100 positions
which were eliminated. Currently, the Company is in the process of evaluating
these operational changes and certain other support functions and systems in an
effort to improve the quality of services and future operating effectiveness and
efficiency.
Operating income - Operating income decreased $31.6 million, or 61.1%, to
$20.1 million for fiscal 1997 as compared to fiscal 1996. Operating income
before recapitalization expenses, restructuring and other charges (income), net,
decreased $5.5 million, or 10.3%, to $47.7 million in fiscal 1997 as compared to
fiscal 1996 due to decreased occupancy, increases in employee child care
discounts and increased labor expenses, as discussed above. The Company has
taken certain steps to address these issues including funding a targeted
marketing program for early fiscal year 1998, limiting the employee child care
discount effective July 1997 and adding 22 area manager positions and additional
regional field support to increase center supervision and support.
Fiscal 1997 EBITDA, defined as earnings before interest expense, income
taxes, depreciation and amortization, of $47.1 million was $38.9 million below
fiscal 1996. As a percentage of net operating revenues, EBITDA for fiscal 1997
was 8.4% versus 15.9% for fiscal 1996. Adjusted EBITDA, defined as EBITDA
exclusive of recapitalization expenses, restructuring and other charges
(income), net, investment income and extraordinary items was $81.9 million in
fiscal 1997, a decrease of $5.3 million from fiscal 1996. In addition to the
factors discussed above, as part of the Company's normal review of the adequacy
of reserves, during fiscal 1996, self insurance reserves were reduced by $2.0
million, the impact of which was to increase EBITDA and Adjusted EBITDA by a
like amount. In fiscal 1997, as part of the normal review of the adequacy of
reserves, the Company increased self insurance reserves, which reduced EBITDA
and Adjusted EBITDA by $2.0 million. In addition, during fiscal 1997, the
Company recorded provisions of $1.2 million for anticipated lease termination
costs which are included in other operating expenses. As a percentage of net
operating revenues, Adjusted EBITDA declined to 14.5% in fiscal 1997 from 16.1%
in fiscal 1996. Neither EBITDA nor Adjusted EBITDA is intended to indicate that
cash flow is sufficient to fund all of the Company's cash needs or represent
cash flow from operations as defined by generally accepted accounting
principles.
Net investment income - Net investment income was $0.2 million in each of
fiscal 1997 and fiscal 1996.
Interest expense - Interest expense increased to $22.4 million in fiscal
1997 from $16.7 million in fiscal 1996. This increase is substantially
attributable to the increase of approximately $350.0 million of long-term debt
which was incurred in the third quarter of fiscal 1997 to fund the Merger and
repay $91.6 million on the Company's then existing line of credit. The Company's
weighted average interest rate on its long-term debt, including amortization of
debt issuance costs, was 8.5% for fiscal 1997 versus 10.8% for fiscal 1996. As a
result of the Recapitalization, the Company expects to incur higher interest
expense in fiscal year 1998 than in prior fiscal years.
28
<PAGE>
Income tax expense - Income tax expense for fiscal 1997 of $3.4 million was
in excess of amounts computed by applying statutory federal income tax rates to
income before income taxes due primarily to non-deductible recapitalization
expenses and state income taxes, reduced by tax credits.
Fiscal 1996 compared to Fiscal 1995
The following table shows the comparative operating results of the
Company (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Change
Ended Percent Year Ended Percent Amount
May 31, of June 2, of Increase
1996 Revenues 1995 Revenues (Decrease)
----------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues, net $ 541,264 100.0% $ 506,505 100.0% $ 34,759
----------- ---------- ------------ -------- ----------
Operating expenses:
Salaries, wages and benefits 284,115 52.5 263,527 52.0 20,588
Depreciation 33,972 6.3 28,071 5.5 5,901
Rent 26,515 4.9 26,099 5.2 416
Other 143,469 26.5 138,910 27.5 4,559
Restructuring and other charges
(income), net 1,484 0.2 (888) (0.2) 2,372
----------- ---------- ------------ -------- ----------
Total operating expenses 489,555 90.4 455,719 90.0 33,836
----------- ---------- ------------ -------- ----------
Operating income $ 51,709 9.6% $ 50,786 10.0% $ 923
=========== ========== ============ ======== ==========
</TABLE>
Operating revenues, net - Fiscal 1996 net operating revenues increased
$34.8 million or 6.9% over fiscal 1995. The increase in net operating revenues
was primarily attributable to a 4.2% weighted average tuition increase
implemented during the second quarter fiscal of 1996 and to new center openings
and acquisitions, offset by center closings.
Total Company occupancy decreased slightly in fiscal 1996 from fiscal 1995.
The Company believes the slight decrease in occupancy was attributable to heavy
competitor promotional activities and increasing market price sensitivities
during the fall of 1995.
During fiscal 1996, the Company opened 37 new centers: 22 KinderCare
community centers, six KinderCare At Work(R) centers and nine Kid's Choice(TM)
centers (including the conversion of one community center to a Kid's Choice(TM)
center); and closed or sold 26 centers. During fiscal 1995, the Company opened
or acquired 45 new centers: 29 KinderCare community centers (including 12
acquired centers), three KinderCare At Work(R) centers and 13 Kid's Choice(TM)
centers (including the conversion of three community centers to Kid's Choice(TM)
centers); and closed or sold 40 centers. Total licensed capacity increased
to141,000 at the end of fiscal 1996 from 136,000 at the end of fiscal 1995.
Salaries, wages and benefits - Salaries, wages and benefits increased, as a
percentage of net operating revenues, to 52.5% in fiscal 1996 from 52.0% in
fiscal 1995. The increase was attributable to increased hours and wage rates
since the end of fiscal 1995, offset partially by improvements in field overhead
and administrative costs due to management reorganizations.
Depreciation - Depreciation expense increased $5.9 to $34.0 million in
fiscal 1996 million from $28.1 million in fiscal 1995. This increase was
primarily attributable to the
29
<PAGE>
opening of 36 new centers and to the expenditure of $27.3 million in fiscal 1996
for center renovations and short-lived assets, such as the computers for
children's educational programs, offset somewhat by the closing of 25 older
centers in fiscal 1996.
Rent - Rent expense increased $0.4 million in fiscal 1996 from fiscal 1995.
This increase was attributable to rent incurred on new Kid's Choice(TM) and
community center leases, offset partially by the closing of 17 leased community
centers and the favorable effects of the disposal of some leased vehicles.
Other operating expenses - Other operating expenses, as a percentage of net
operating revenues, decreased to 26.5% in fiscal 1996 from 27.5% in fiscal 1995.
This improvement was mostly due to: (a) a decrease in insurance costs due to
improving claims experience, (b) gains on the sales of assets and (c)
improvements associated with the field management reorganization, such as,
decreases in travel costs and office supplies. These improvements were partially
offset by increased costs associated with upgrades in the food and educational
programs and increased marketing costs.
Restructuring and other charges (income), net - During fiscal 1995, the
Company received $0.9 million in connection with litigation settlements with
Enstar and KinderCare's former Chairman of the Board.
Operating income - Fiscal 1996 operating income increased 1.8% or $0.9
million. As a percentage of net operating revenues, fiscal 1996 operating margin
of 9.6% decreased from the prior year operating income margin of 10.0% for the
reasons discussed above. Before restructuring and other charges (income), net,
as discussed above, fiscal 1996 operating income of $53.2 million was $3.3
million greater than fiscal 1995 operating income of $49.9 million and, as a
percentage of net operating revenues, operating income margin remained about
flat at 9.8%.
Fiscal 1996 EBITDA increased 5.4% or $4.4 million over fiscal 1995. As a
percentage of net operating revenues, EBITDA decreased to 15.9% for fiscal 1996
from 16.1% for fiscal 1995. Adjusted EBITDA increased 11.8% or $9.2 million to
$87.2 million from $78.0 million in fiscal 1995, and, as a percentage of net
operating revenues, improved to 16.1% from 15.4%. Neither EBITDA nor Adjusted
EBITDA is intended to indicate that cash flow is sufficient to fund all of the
Company's cash needs or represent cash flow from operations as defined by
generally accepted accounting principles.
Net investment income - Net investment income was $0.2 million for fiscal
1996 compared to $2.6 million for fiscal 1995. The decrease was primarily due to
gains on the sale of certain securities during fiscal 1995.
Interest expense - Interest expense decreased to $16.7 million for fiscal
1996 from $17.3 million for fiscal 1995. This decrease was attributable to a
reduction of long-term debt obligations offset by higher average interest rates.
The Company's weighted average interest rate on its long-term debt, including
amortization of debt issuance costs, was 10.8% for fiscal 1996 versus 10.0% for
fiscal 1995.
30
<PAGE>
Income tax expense - Income tax expense for fiscal 1996 of $13.5 million
was in excess of amounts computed by applying statutory federal income tax rates
to income before income taxes due primarily to state income taxes. Additional
paid-in capital was increased by $4.1 million for tax benefits recognized in
fiscal 1996 relating to valuation allowances established for deferred taxes at
April 2, 1993, the effective date of the Company's emergence from bankruptcy.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flow generated from
operations and future borrowings under the $300.0 million revolving credit
facility. The Company's principal uses of liquidity are meeting debt service
requirements, financing the Company's capital expenditures and renovations and
providing working capital.
In connection with the Merger, the Company's consolidated indebtedness has
increased to approximately $394.9 million at May 30, 1997 from $146.6 million at
May 31, 1996. This indebtedness includes $390.0 million under credit facilities
comprised of a $90.0 million term loan facility (the "Term Loan Facility"), of
which $50.0 million was drawn at the time of the Merger, and a $300.0 million
revolving credit facility (the "Revolving Credit Facility," and, together with
the Term Loan Facility, the "Credit Facilities"), of which, at May 30, 1997,
$42.2 million was committed on outstanding letters of credit, and $300.0 million
of 9-1/2% Senior Subordinated Notes.
The Term Loan Facility is subject to mandatory repayment with the proceeds
of certain asset sales and certain debt offerings and a portion of excess cash
flow (as defined in the Credit Facilities). The Term Loan Facility will mature
on February 13, 2006 and provides for nominal annual amortization. The Revolving
Credit Facility will terminate on February 13, 2004.
The Company utilized approximately $64.8 million of net operating loss
carryforwards to offset taxable income in its 1994 through 1997 fiscal years.
Approximately $12.1 million of net operating loss carryforwards are available to
be utilized in the 1998 and future fiscal years. If such net operating loss
carryforwards were reduced, the Company would be required to pay additional
taxes and interest, thereby reducing available cash.
The Company's consolidated net cash flow from operations for fiscal 1997
was $50.2 million, compared to $75.9 million for fiscal 1996. The decrease in
net cash flow from operations is primarily a result of the net loss before
extraordinary items, net, of $5.4 million in fiscal 1997 as compared to net
income of $21.7 million in fiscal 1996, the components of which are discussed
above. Cash and cash equivalents totaled $24.2 million at May 30, 1997 compared
to $15.6 million at May 31, 1996 and the ratio of current assets to current
liabilities was .67 to one at May 30, 1997, versus .57 to one at May 31, 1996.
During the first quarter of fiscal 1997, the Company repurchased $30.0
million aggregate principal amount of its 10-3/8% senior subordinated notes
("10-3/8% Senior Subordinated Notes") at an aggregate price of $31.5 million
which resulted in an extraordinary loss of $1.2 million, net of income taxes.
During the second quarter of fiscal
31
<PAGE>
1997 and in connection with the Merger, the Company announced and completed a
tender offer and consent solicitation for the remainder of its outstanding
10-3/8% Senior Subordinated Notes seeking the elimination of substantially all
of the restrictive covenants, and 99.7% of the notes were purchased at an
aggregate price of $76.8 million. This second transaction resulted in an
extraordinary loss of $5.2 million, net of income taxes.
On June 3, 1996, the Board of Directors authorized the repurchase of $23.0
million of the Company's common stock. At the end of the first quarter of fiscal
1997, 842,500 shares and 370,000 warrants had been repurchased for $14.1
million. All shares that were repurchased have been retired. Other than in
connection with the Merger, no shares of common stock or warrants have been
purchased by the Company since July 22, 1996 and the stock buyback programs were
terminated at the effective time of the Merger.
Capital Expenditures
The Company anticipates substantial increases in its capital expenditures
budget over the next several years. During fiscal year 1998, the Company
anticipates opening 20 to 25 new centers. Over the next three years, the Company
expects to increase its rate of opening and/or acquiring new centers to between
50 and 75 new centers per year in the aggregate (excluding center closings),
which the Company expects will be primarily community centers, and to continue
its practice of closing centers that are identified as underperforming. The
length of time from site selection to the opening of a center ranges from 18 to
24 months. The average total cost per community center ranges from $1.5 million
to $1.8 million depending on the size and location of the center; however, the
actual costs of a particular center may vary from such range. New centers are
based upon detailed site analyses that include feasibility and demographic
studies and financial modeling. No assurance can be given by the Company that it
will be able to successfully negotiate and acquire properties, or meet targeted
deadlines. Frequently, new site negotiations are delayed or canceled or
construction delayed for a variety of reasons, many outside the control of the
Company.
The Company also plans to make significant capital expenditures in
connection with the renovation of its existing facilities. The Company expects
to make these improvements over the next three to four years.
During fiscal 1997, the Company opened 15 community centers and one
KinderCare At Work(R) center. There are no planned additions to the Company's
Kids' Choice(TM) format as management does not believe that the concept is
meeting its full potential and needs further refinement. The Company currently
anticipates that any Kid's Choice(TM) center that is underperforming when its
lease expires will be closed at that time. Fiscal 1996 new center openings
totaled 37 centers; consisting of 22 KinderCare community centers, six
KinderCare At Work(R) centers and nine Kid's Choice(TM) centers (including the
conversion of one community center to a Kid's Choice(TM)). This total compares
to 45 center openings or acquisitions in fiscal 1995; consisting of 29
KinderCare community centers (including 12 acquired centers of which 10 centers
were acquired in a single transaction), three KinderCare At Work(R) centers and
13 Kid's Choice(TM) centers.
32
<PAGE>
Capital expenditures during fiscal 1997 amounted to approximately $43.7
million. Approximately $27.8 million was spent on new center development, $12.1
million was spent in renovations and improvements to existing facilities, $3.0
million was spent on corporate information systems and the remaining $0.8
million was spent on computers for children's educational programs.
Capital expenditures during fiscal 1996 amounted to approximately $67.3
million. Approximately $40.0 million was spent on new center development, $14.9
million was spent in renovations and improvements to existing facilities and the
remaining $12.4 million was spent on equipment purchases, including $0.5 million
on computers for children's educational programs. Capital expenditures during
fiscal 1995 amounted to approximately $74.4 million. During fiscal 1995,
approximately $43.5 million was spent on new center development, $13.5 million
was spent on renovations and improvements to existing facilities and the
remaining $17.4 million was spent on equipment purchases, including $6.8 million
on computers for children's educational programs.
Capital expenditure limits under the Credit Facilities for fiscal years
1997 and 1998 are $95 million and $100 million, respectively. Capital
expenditure limits may be increased by carryover of a portion of unused amounts
from previous periods and are subject to certain exceptions. Also, the Company
is permitted greater flexibility under the provisions of the indenture under
which the Senior Subordinated Notes were issued (the "Indenture") and the Credit
Facilities with respect to the incurrence of additional indebtedness, including
through certain mortgages or sale-leaseback transactions.
Management believes that cash flow generated from operations and future
borrowings under the Revolving Credit Facility will adequately provide for its
working capital and debt service needs and will be sufficient to fund the
Company's expected capital expenditures over the next several years. Although no
assurance can be given that such sources 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, changing
time constraints, cash flow requirements, debt covenants, competitive factors
and seasonality of openings. If the Company experiences a lack of working
capital, it may reduce its capital expenditures. In the long term, if these
expenditures were substantially reduced, in management's opinion, its operations
and its cash flow would be adversely impacted.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, which requires companies to present two new measures of earnings per
share, basic and diluted. If SFAS No. 128 had been adopted for all periods
presented, basic and diluted earnings per share would not have materially
differed from reported earnings per share. The Company will adopt SFAS No. 128
in the third quarter of fiscal year 1998 and, at that time, will restate all
prior periods presented.
33
<PAGE>
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes requirements for disclosure of comprehensive income.
The new standard becomes effective for the Company's fiscal year 1999 and
requires reclassification of earlier financial statements for comparative
purposes.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and requires
disclosure of selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement supercedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's fiscal year 1999 and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not believe any substantial
changes to its disclosures will be made at the time SFAS No. 131 is adopted.
Seasonality
New enrollments are generally highest in September and January, with
attendance declining 5% to 10% during the summer months and the year-end holiday
period. The decreased attendance in the summer months and during the year-end
holiday period may result in decreased liquidity during these periods.
Governmental Law & Regulations
There are certain tax incentives for child care programs. Section 21 of the
Internal Revenue Code of 1986, as amended (the "Code"), provides a federal
income tax credit ranging from 20% to 30% of certain child care expenses for
"qualifying individuals" (as defined therein). The fees paid to the Company for
child care services by eligible taxpayers qualify for the tax credit, subject to
the limitations of Section 21 of the Code. During fiscal 1997, approximately 13%
of the Company's net operating revenues are generated from federal and state
child care assistance programs, primarily the Child Care and Development Block
Grant and At-Risk Programs. These programs are designed to assist low-income
families with child care expenses and are administered through various state
agencies. Although under new legislation, signed by President Clinton in August
1996, additional funding for child care will be available for low income
families as part of welfare reform, no assurance can be given that the Company
will benefit from any such additional funding.
Inflation and Wage Increases
Management does not believe that the effect of inflation on the results of
the Company's operations has been significant in recent periods.
Approximately 55% of operating expenses during fiscal 1997 consisted of
salary, wages and benefits. At May 30, 1997, the Company's average wage rate for
hourly employees was $6.45 per hour, compared to the current federal minimum
wage rate of $4.75 per hour. During 1996, Congress enacted an increase in the
minimum hourly wage from
34
<PAGE>
$4.25 to $4.75 effective October 1, 1996, with an additional increase to $5.15
to be effective on September 1, 1997. Management currently believes that the
increase to the $4.75 minimum wage rate, including the effects of wage
compression (commensurate wage increase granted to certain hourly employees
(with two or more years experience at KinderCare at the time of such increase)
earning more than minimum wage), resulted in increased expenses of approximately
$0.3 million in fiscal 1997 and, in fiscal year 1998, will add an additional
$0.2 million in increased expenses. Management currently believes that the
increase to the $5.15 minimum wage rate, including the effects of wage
compression, will result in increased expenses of approximately $0.7 million in
fiscal year 1998.
The Company believes that, through increases in its tuition rates, it can
recover any increase in expenses caused by the 1996 to 1997 wage adjustments and
additional compensation adjustments necessitated by such increases in the
minimum wage rate. However, there can be no assurance that the Company will be
able to increase its rates sufficiently to offset such increased costs. The
Company continually evaluates its wage structure and may implement further
changes in addition to those discussed above.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
May 30, 1997 May 31, 1996
------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 24,150 $ 15,597
Receivables 13,649 15,129
Prepaid expenses and supplies 6,114 9,116
Deferred income taxes 14,127 6,664
------------ ------------
Total current assets 58,040 46,506
Property and equipment, net 471,558 468,525
Deferred income taxes 11,621 4,422
Deferred financing costs and other assets 28,659 8,023
------------ ------------
$ 569,878 $ 527,476
============ ============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 10,746 $ 14,330
Bank overdrafts 5,357 9,768
Current portion of long-term debt 1,760 853
Accrued expenses and other liabilities 69,056 56,186
------------ ------------
Total current liabilities 86,919 81,137
Long-term debt 393,129 145,764
Self insurance liabilities 21,880 17,652
Other noncurrent liabilities 40,243 20,488
-------------- ------------
Total liabilities 542,171 265,041
-------------- ------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding -- --
Common stock, $.01 par value; authorized 40,000,000 shares;
Issued 9,368,421 shares at May 30, 1997 and 19,981,807 shares
at May 31, 1996; outstanding 9,368,421 shares at May 30, 1997
and 19,946,807 shares at May 31, 1996 94 199
Additional paid-in capital -- 200,980
Retained earnings 27,753 61,799
Cumulative translation adjustment (140) (20)
-------------- ------------
27,707 262,958
Treasury stock, at cost; 35,000 shares at May 31, 1996 -- (523)
-------------- ------------
Total shareholders' equity 27,707 262,435
============== ============
$ 569,878 $ 527,476
============== ============
See accompanying notes to consolidated financial statements.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
May 30, 1997 May 31, 1996 June 2, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues, net $ 563,135 $ 541,264 $ 506,505
------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 300,580 284,115 263,527
Depreciation 34,253 33,972 28,071
Rent 28,140 26,515 26,099
Provision for doubtful accounts 4,697 3,908 3,612
Other 147,811 139,561 135,298
Recapitalization expenses 17,277 -- --
Restructuring and other charges
(income), net 10,275 1,484 (888)
------------ ------------ ------------
Total operating expenses 543,033 489,555 455,719
------------ ------------ ------------
Operating income 20,102 51,709 50,786
Investment income, net 232 250 2,635
Interest expense 22,394 16,727 17,318
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item (2,060) 35,232 36,103
Income tax expense 3,375 13,549 14,037
------------ ------------ ------------
Income (loss) before extraordinary item (5,435) 21,683 22,066
Extraordinary item - loss on early
retirement of debt, net of
income taxes of $4,815 (7,532) -- --
------------ ------------ ------------
Net income (loss) $ (12,967) $ 21,683 $ 22,066
============ ============ ============
Primary income (loss) per common share:
Income (loss) before extraordinary item $ (0.33) $ 1.10 $ 1.07
Extraordinary item - loss on early
retirement of debt, net of income taxes (0.46) -- --
------------ ------------ ------------
Net income (loss) $ (0.79) $ 1.10 $ 1.07
============ ============ ============
Weighted average common and common
equivalent shares outstanding 16,479,000 19,752,000 20,683,000
============ ============ ============
Fully-diluted income per common share:
Net income $ 1.05
===========
Weighted average common and common
equivalent shares outstanding 20,683,000
===========
See accompanying notes to consolidated financial statements.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except share amounts)
Common Stock Additional Cumulative
--------------------------- Paid-in Retained Translation Treasury
Shares Amount Capital Earnings Adjustment Stock Total
------------ ------------ -------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 3, 1994,
as previously presented 20,009,517 $ 200 $ 188,655 $ 18,050 $ -- $ -- $ 206,905
Prior period adjustment -- -- (3,023) -- -- -- (3,023)
------------ ------------ -------------- ------------ ------------ ---------- ------------
Balance at June 3, 1994,
as restated 20,009,517 200 185,632 18,050 -- -- 203,882
Net income -- -- -- 22,066 -- -- 22,066
Tax benefits of the valuation
allowance for deferred
tax assets -- -- 13,932 -- -- -- 13,932
Cumulative translation
adjustment -- -- -- -- 32 -- 32
Exercise of stock
options and warrants 110,301 1 1,303 -- -- -- 1,304
------------ ------------ -------------- ------------ ------------ ---------- ------------
Balance at June 2, 1995 20,119,818 201 200,867 40,116 32 -- 241,216
Net income -- -- -- 21,683 -- -- 21,683
Tax benefits of the
valuation allowance
for deferred tax assets -- -- 4,121 -- -- -- 4,121
Cumulative translation
adjustment -- -- -- -- (52) -- (52)
Repurchase and retirement
of stock and warrants (969,883) (10) (13,477) -- -- (523) (14,010)
Exercise of stock
options and warrants 831,872 8 8,476 -- -- -- 8,484
Tax benefit of option
exercises -- -- 993 -- -- -- 993
------------ ------------ -------------- ------------ ------------ ---------- ------------
Balance at May 31, 1996 19,981,807 199 200,980 61,799 (20) (523) 262,435
Net loss -- -- -- (12,967) -- -- (12,967)
Cumulative translation
adjustment -- -- -- -- (120) -- (120)
Issuance of common stock 7,986,842 80 151,670 -- -- -- 151,750
Purchase and retirement
of common stock (20,217,416) (201) (361,685) (21,079) -- 523 (382,442)
Purchase of outstanding -- -- (11,143) -- -- -- (11,143)
warrants
Exercise of stock
options and warrants 1,617,188 16 19,735 -- -- -- 19,751
Tax benefit of
option exercises -- -- 443 -- -- -- 443
------------ ------------ -------------- ------------ ------------ ---------- ------------
Balance at May 30, 1997 9,368,421 $ 94 $ -- $ 27,753 $ (140) $ -- $ 27,707
============ ============ ============== ============ ============ ========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
May 30, 1997 May 31, 1996 June 2, 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss) $ (12,967) $ 21,683 $ 22,066
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 34,253 33,972 28,071
Write-down of property and equipment 6,300 5,312 --
Amortization of deferred financing costs and
intangibles 1,822 1,533 1,681
Gain on sales and disposals of property and
equipment, net (12) (1,684) --
Deferred tax expense 1,982 12,285 9,862
Extraordinary item - loss on early retirement of 7,532 -- --
debt, net of income taxes
Changes in operating assets and liabilities:
Decrease (increase) in receivables 1,616 (2,473) 4,440
Decrease (increase) in prepaid expenses 3,002 (1,354) 2,900
and supplies
Decrease (increase) in other assets 2,604 116 (978)
Increase in accounts payable, accrued expenses
and other liabilities 4,418 7,735 7,813
Other, net (313) (1,228) (2,892)
-------------- -------------- ---------------
Net cash provided by operating activities 50,237 75,897 72,963
-------------- -------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (43,748) (67,304) (74,376)
Proceeds from sales of property and equipment 12,438 3,883 12,454
Proceeds from sales or redemption of
investments -- 3,396 2,211
Proceeds from collection of notes receivable
and other 396 2,042 82
-------------- -------------- ---------------
Net cash used by investing activities (30,914) (57,983) (59,629)
-------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from long-term borrowings 350,000 -- --
Deferred financing costs (27,160) -- --
Proceeds from issuance of common stock 151,750 -- --
Exercise of stock options and warrants 20,194 8,484 1,303
Purchase and retirement of common stock (382,442) -- --
Payments on long-term borrowings (107,558) (13,777) (18,298)
Purchases of treasury stock and warrants (11,143) (14,010) --
Bank overdrafts (4,411) 2,753 5,931
-------------- -------------- ---------------
Net cash used by financing activities (10,770) (16,550) (11,064)
-------------- -------------- ---------------
Increase in cash and cash equivalents 8,553 1,364 2,270
Cash and cash equivalents at the beginning
of the fiscal year 15,597 14,233 11,963
-------------- -------------- ---------------
Cash and cash equivalents at the end of the
fiscal year $ 24,150 $ 15,597 $ 14,233
============== ============== ===============
Supplemental cash flow information:
Interest paid $ 14,325 $ 8,944 $ 14,850
Income taxes paid, net of refunds received 3,160 3,795 2,551
See accompanying notes to consolidated financial statements.
</TABLE>
39
<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
KinderCare Learning Centers, Inc. ("KinderCare" or the "Company") is the
largest provider of for-profit preschool educational and child care services in
the United States. At the end of fiscal 1997, KinderCare operated 1,142 centers
in 38 states in the United States and two centers are located in the United
Kingdom. The consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries: Mini-Skools Limited;
KinderCare Development Corporation; KinderCare Real Estate; KinderCare Learning
Centres, Limited and KinderCare Properties, Limited. All significant
intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the Friday closest to May 31. The first
quarter is 16 weeks long and the second, third and fourth quarters are each
twelve weeks long. The fiscal years ended May 30, 1997 ("fiscal 1997"), May 31,
1996 ("fiscal 1996") and June 2, 1995 ("fiscal 1995") were 52-week fiscal years.
Revenue Recognition
The Company recognizes revenue for child care services as earned.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in banks and liquid
investments with original maturities not exceeding 90 days.
Property and Equipment
Property and equipment are stated at cost. Depreciation on buildings and
equipment is provided on the straight-line basis over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter of the
estimated useful life of the improvements or the lease term, including expected
lease renewal options where the Company has the unqualified right to exercise
the option.
The Company's property and equipment is depreciated using the following
estimated useful lives:
<TABLE>
<CAPTION>
Life
-----------
<S> <C>
Buildings 10-40 years
Building renovations 5-10 years
Leasehold improvements 5-10 years
Computer equipment 3 years
All other equipment 5-10 years
</TABLE>
40
<PAGE>
Asset Impairments
Effective June 3, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has evaluated all its assets based upon SFAS No. 121
and has recorded all material adjustments as required.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
lives of the related debt facilities.
Pre-Opening Costs
Pre-opening costs include training salaries, grand opening and promotion
expenses and the initial purchase of forms and supplies needed to operate the
center. During fiscal 1997, the Company changed its method of accounting for
pre-opening costs to the direct write-off method, resulting in expense of
approximately $0.7 million (see Note 3). Prior to fiscal 1997, pre-opening costs
were deferred and amortized over one year.
Self-Insurance Programs
The Company is self-insured for certain levels of general liability,
workers' compensation, property and employee medical coverage. Estimated costs
of these self-insurance programs are accrued at the undiscounted value of
projected settlements for known and anticipated claims.
Income Taxes
Income taxes are accounted for under the provisions of SFAS No. 109,
Accounting for Income Taxes.
Stock-Based Compensation
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
effective June 1, 1996. The Company will continue to measure compensation
expense for its stock-based employee compensation plans using the method
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and
will, if material, provide pro forma disclosures of net income and earnings per
share as if the method prescribed by SFAS No. 123 had been applied in measuring
compensation expense.
Net Income (Loss) Per Share
Net income (loss) per share is computed on the basis of the weighted
average number of common and common equivalent shares outstanding. Outstanding
options for common stock, if
41
<PAGE>
dilutive to earnings per share, have been included in the calculation of common
and common equivalent shares outstanding using the treasury stock method.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share, which requires companies to present two new
measures of earnings per share, basic and diluted. If SFAS No. 128 had been
adopted for all periods presented, basic and diluted earnings per share would
not have materially differed from reported earnings per share. The Company will
adopt SFAS No. 128 in the third quarter of fiscal year 1998 and, at that time,
will restate all prior periods presented.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes requirements for disclosure of comprehensive income.
The new standard becomes effective for the Company's fiscal year 1999 and
requires reclassification of earlier financial statements for comparative
purposes.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and requires
disclosure of selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement supercedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's fiscal year 1999 and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not believe any substantial
changes to its disclosures will be made at the time SFAS No. 131 is adopted.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year's presentation.
2. Recapitalization
On October 3, 1996, the Company and KCLC Acquisition Corp. ("KCLC") entered
into an Agreement and Plan of Merger (the "Merger Agreement"). KCLC was a wholly
owned subsidiary of KLC Associates, L.P. (the "Partnership"), a partnership
formed at the direction of Kohlberg Kravis Roberts & Co., a private investment
firm ("KKR"). Pursuant to the Merger Agreement, on February 13, 1997, KCLC was
merged with and into the Company (the
42
<PAGE>
"Merger"), with the Company continuing as the surviving corporation. Upon
completion of the Merger, affiliates of KKR owned 7,828,947 shares, or
approximately 83.6% of the Company's common stock outstanding after the Merger.
Subject to certain provisions of the Merger Agreement, each issued and
outstanding share of common stock was converted, at the election of the holder,
into either the right to receive $19.00 in cash or the right to retain one share
of common stock, subject to proration.
In connection with the Merger, the Company repaid the outstanding $91.6
million balance on the Company's previous $150.0 million credit facility and
paid $382.4 million to redeem common stock, warrants and options. In order to
fund the transactions contemplated by the Merger (the "Recapitalization"), the
Company issued $300.0 million 9 1/2% senior subordinated notes, executed a
revolving credit facility of $300.0 million, executed a term loan facility of
$90.0 million, against which $50.0 million was immediately drawn, and issued
7,828,947 shares of common stock to KKR affiliates for $148.8 million.
During fiscal 1997, non-recurring costs in connection with the
Recapitalization of approximately $17.3 million were incurred and expensed.
Additionally, financing costs of approximately $27.2 million have been deferred
and classified as other assets and will be amortized over the lives of the new
debt facilities (see Note 8).
3. Restructuring and Other Charges (Income), Net
During the fourth quarter of fiscal 1997, the Company decided to relocate
its corporate offices from Montgomery, Alabama to Portland, Oregon in fiscal
year 1998. In connection with the relocation, the Company recognized $3.4
million in restructuring costs, primarily severance related, and recorded a $5.0
million charge to write-down its Montgomery, Alabama headquarters facility to
net realizable value. During fiscal 1997, $0.2 million was paid in relation to
the relocation. The Company anticipates incurring an additional $5.8 million in
restructuring charges related to the relocation in fiscal year 1998.
Additionally, the Company recorded impairment losses of $1.9 million comprised
of $1.3 million with respect to a certain long-lived assets and $0.6 million
related to Kids Choice(TM) anticipated lease termination costs. The Company also
recorded charges of approximately $1.5 million to write-off marketing materials
and deferred pre-opening costs on new centers. Finally, in the second quarter of
fiscal 1997, the Company received a $1.5 million interest payment from Enstar
Group, Inc. ("Enstar"), the Company's former parent, in connection with a
settlement of the Company's claim against Enstar in the U.S. Bankruptcy Court in
Montgomery, Alabama.
During the first quarter of fiscal 1996, the Company received a cash
distribution of $11.3 million from Enstar in connection with the Company's claim
against Enstar referred to above, the Company limited the development of its
Kid's Choice(TM) centers to contracts in process until the concept is more fully
developed and recorded an impairment loss of $6.3 million, consisting of a
writedown of $5.3 million for the recoverability of certain long lived assets,
primarily leasehold improvements (which were valued based on anticipated
discounted cash flows), and $1.0 million for anticipated lease termination
costs. Additionally, during fiscal 1996, the Company made substantial changes to
its field operations and facilities management and to its support functions. As
a result of these changes, the Company provided $6.5 million for restructuring
costs, primarily to cover severance arrangements for the approximately 100
positions which were eliminated. Currently, the Company is in the process of
evaluating these
43
<PAGE>
operational changes and certain other support functions and systems in an effort
to improve the quality of services and future operating effectiveness and
efficiency.
In the third quarter of 1995, the Company received approximately $0.9
million in connection with litigation settlements with Enstar and KinderCare's
former Chairman of the Board.
4. Receivables
Receivables consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
May 30, 1997 May 31, 1996
----------------- -----------------
<S> <C> <C>
Tuition $15,383 $16,450
Allowance for doubtful accounts (2,133) (1,884)
----------------- -----------------
13,250 14,566
Other 399 563
----------------- -----------------
$13,649 $15,129
================= =================
</TABLE>
5. Prepaid Expenses and Supplies
Prepaid expenses and supplies consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
May 30, 1997 May 31, 1996
----------------- -----------------
<S> <C> <C>
Prepaid rent $ 3,233 $ 3,676
Inventories 1,862 2,491
Other 1,019 2,949
----------------- -----------------
$ 6,114 $ 9,116
================= =================
</TABLE>
6. Property and Equipment
Property and equipment, at cost, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
May 30, 1997 May 31, 1996
----------------- -----------------
<S> <C> <C>
Land $ 139,481 $ 142,856
Buildings and leasehold improvements 337,010 305,292
Equipment 91,354 82,594
Construction in progress 7,947 16,825
----------------- ----------------
575,792 547,567
Accumulated depreciation and amortization (104,234) (79,042)
----------------- ----------------
$ 471,558 $ 468,525
================= ================
</TABLE>
44
<PAGE>
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
May 30, 1997 May 31, 1996
-------------- --------------
<S> <C> <C>
Accrued compensation and related taxes $ 22,481 $ 22,305
Accrued interest 8,902 5,585
Deferred revenue 8,704 6,451
Accrued property taxes 6,622 5,633
Accrued restructuring and lease termination 7,320 3,091
Self insurance 5,707 6,707
Accrued income taxes 3,136 2,402
Other 6,184 4,012
-------------- --------------
$ 69,056 $ 56,186
============== =============
</TABLE>
8. Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
May 30, 1997 May 31, 1996
----------------- -----------------
<S> <C> <C>
Secured:
Borrowings under term loan facility, interest at adjusted LIBOR
plus 3.00% (8.69% at May 30, 1997) $ 50,000 $ --
Industrial refunding revenue bonds at variable rates of interest
from 4.15% to 5.79% at May 30, 1997 and 3.85% to 5.57% at
May 30, 1996; supported by letters of credit, maturing 33,025 33,025
1999 to 2009
Real and personal property mortgages payable in monthly
installments through 2004, interest rates of 8.75% to 12.25% 6,161 7,854
Industrial revenue bonds secured by real property with maturities
to 2005 at interest rates of 4.20% to 12.75% 5,492 5,738
Unsecured:
Senior subordinated notes due 2009, interest at 9-1/2%,
payable semi-annually 300,000 --
Senior subordinated notes due 2001, interest at 10-3/8%,
payable semi-annually 211 100,000
------------- -------------
394,889 146,617
Less current portion of long-term debt 1,760 853
------------- -------------
$ 393,129 $ 145,764
============= =============
</TABLE>
Credit Facilities
The Company has credit facilities which are provided by a syndicate of
financial institutions and include a Term Loan Facility of up to $90.0 million
and a Revolving Credit Facility of $300.0 million (the "Credit Facilities"). The
Company must pay an annual commitment fee equal to 1/2 of 1% per annum of the
undrawn portion of the commitments in respect of the Credit Facilities, subject
to reduction under a performance-based pricing grid, and a letter of credit fee
based on the aggregate face value of the outstanding letters of credit under the
Revolving Credit Facility.
The Term Loan Facility will mature on February 13, 2006 and provides for
$0.5 million annual interim amortization. The initial interest rate, at the
option of the Company, is adjusted LIBOR (as defined) plus 3.00% or ABR (as
defined) plus 1.75%, subject to reduction under a
45
<PAGE>
performance-based pricing grid. The Company drew $50.0 million under the Term
Loan Facility and the availability of the remaining $40.0 million expired on
August 13, 1997. The Term Loan Facility is subject to mandatory prepayment from
(i) 100% of the net cash proceeds on the sale of certain non-ordinary-course
assets, (ii) 100% of the net cash proceeds from certain sale/leaseback
transactions, (iii) 50% of excess cash flow (as defined) and (iv) 100% of the
net proceeds from the issuance of certain debt obligations.
The Revolving Credit Facility commitment will mature February 13, 2004. The
initial interest rate, at the option of the Company, is adjusted LIBOR plus 2.5%
or ABR plus 1.25%, subject to reduction under a performance-based pricing grid.
At May 30, 1997, of the $300.0 million available under the Revolving Credit
Facility, the Company had approximately $42.2 million utilized by outstanding
letters of credit.
The Company's obligations under the Credit Facilities are secured by a
perfected first priority pledge of and security interest in the common stock of
each existing and subsequently acquired direct domestic subsidiary of the
Company and 65% of the common stock of each existing and subsequently acquired
direct foreign subsidiary and, in certain circumstances, non-cash consideration
received for certain sales of assets.
The Credit Facilities contain customary covenants and restrictions on the
Company's ability to engage in certain activities and include customary events
of default. In addition, the Credit Facilities provide that the Company must
meet or exceed defined interest coverage ratios and must not exceed defined
leverage ratios. The Company was in compliance with such covenants at May 30,
1997.
Industrial Revenue Bonds
Series A Through E Industrial Revenue Bonds - The Company is obligated to
various issuers of industrial revenue bonds (the "Refunded IRBs") in an amount
totaling approximately $33.0 million outstanding at May 30, 1997 and May 31,
1996. The Refunded IRBs were issued to provide funds for refunding an equal
principal amount of industrial revenue bonds which were used to finance the cost
of acquiring, constructing and equipping certain facilities of the Company. The
Refunded IRBs bear interest at variable rates from 4.15% to 5.79% and each is
secured by a letter of credit under the Revolving Credit Facility.
Other IRBs - The Company also is obligated to various issuers of other
industrial revenue bonds (the "IRBs") in the aggregate principal amount of
approximately $5.5 million and $5.7 million at May 30, 1997 and May 31, 1996,
respectively. The principal amount of such IRBs was used to finance the cost of
acquiring, constructing and equipping certain child care facilities and the IRBs
are secured by these facilities. The IRBs bear interest at rates of 4.20% to
12.75%.
Senior Subordinated Notes
In fiscal 1997, the Company issued $300.0 million in unsecured senior
subordinated notes due February 15, 2009 (the "9-1/2% Senior Subordinated
Notes") under an indenture (the "Indenture") between the Company and Marine
Midland Bank, as trustee. The 9-1/2% Senior Subordinated Notes bear interest at
the fixed rate of 9-1/2% per annum, payable semi-annually
46
<PAGE>
on February 15 and August 15 of each year, and are effectively subordinated to
the secured indebtedness of the Company, including indebtedness under the Credit
Facilities.
The 9-1/2% Senior Subordinated Notes are callable by the Company at
104.750% of par from February 15, 2002 through February 15, 2003. The redemption
price is reduced to 103.167% of par on February 15, 2003, to 101.583% of par on
February 15, 2004 and on February 15, 2005, until maturity, the notes may be
redeemed at par. Upon a change of control, as defined in the Indenture, each
holder of the 9-1/2% Senior Subordinated Notes may require the Company to
repurchase all or a portion of such holder's notes for a cash purchase price
equal to 101% of par, together with accrued and unpaid interest to the date of
repurchase.
The 9-1/2% Senior Subordinated Notes contain a number of covenants similar
to those of the Credit Facilities and include certain limitations with respect
to payment of dividends, incurrence of additional indebtedness, creation of
liens, asset or subsidiary sales, transactions with affiliates, investments and
guarantees, all of which are described in the Indenture.
In fiscal 1994, the Company issued $100.0 million in unsecured senior
subordinated notes due June 1, 2001, which bear interest at a fixed rate of
10-3/8% per annum, payable semi-annually on December 1 and June 1 of each year
("the 10-3/8% Senior Subordinated Notes"). The 10-3/8% Senior Subordinated Notes
were issued under an indenture between the Company and AmSouth Bank N.A. as
trustee (the "AmSouth Indenture") and are effectively subordinated to the
secured indebtedness of the Company, including indebtedness under the Credit
Facilities.
The 10-3/8% Senior Subordinated Notes are callable by the Company at
105.1875% of par from June 1, 1998 through June 1, 1999. On June 1, 1999, the
redemption price is reduced to 102.5940% of par, and on June 1, 2000, until
maturity, the notes may be redeemed at par. Upon a change of control, as defined
in the AmSouth Indenture, each holder of the 10-3/8% Senior Subordinated Notes
may require the Company to repurchase all or a portion of such holder's notes at
a purchase price in cash equal to 101% of par, together with accrued and unpaid
interest to the date of repurchase. In a series of transactions preceding and in
contemplation of the Merger, the Company retired 99.7% of the 10-3/8% Senior
Subordinated Notes.
Principal Payments
The aggregate minimum annual maturities of long-term debt for the five
fiscal years subsequent to May 30, 1997 are as follows (dollars in thousands):
Fiscal Year:
1998 $ 1,760
1999 1,853
2000 11,646
2001 14,786
2002 822
Thereafter 364,022
----------------
Total $394,889
================
47
<PAGE>
9. Income Taxes
The provision (benefit) for income taxes attributable to income (loss)
before income taxes and extraordinary items consists of the following (dollars
in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------
May 30, 1997 May 31, 1996 June 2, 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ 3,980 $ 832 $ 2,909
State 815 (132) 662
Foreign 562 564 604
--------------- ---------------- ----------------
5,357 1,264 4,175
--------------- ---------------- ----------------
Deferred:
Federal (1,390) 10,292 8,293
State (530) 2,137 1,859
Foreign (62) (144) (290)
--------------- ---------------- ----------------
(1,982) 12,285 9,862
--------------- ---------------- ----------------
$ 3,375 $ 13,549 $ 14,037
=============== ================ ================
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective income tax rates on income (loss) before income taxes and
extraordinary items is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------
May 30, 1997 May 31, 1996 June 2, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Expected tax provision (benefit) on income
(loss) before income taxes and
extraordinary item at federal rate - 35% $ (721) $12,334 $12,636
State income taxes, net of federal tax (235) (1,303) 1,639
benefit
Non-deductible recapitalization 4,594 -- --
expenses
Tax credits (620) (465) (508)
Other, net 357 377 270
--------------- --------------- ---------------
$3,375 $13,549 $14,037
=============== =============== ===============
</TABLE>
48
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 30, 1997
and May 31, 1996 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
May 30, 1997 May 31, 1996
----------------- ----------------
<S> <C> <C>
Deferred tax assets:
Self-insurance reserves $ 11,282 $ 9,099
Net operating loss carryforwards 4,760 7,895
Capital loss carryforwards 4,818 4,818
Tax credits 6,547 3,172
Property and equipment, basis differences 1,355 2,458
Other 13,058 8,098
----------------- ----------------
Total gross deferred tax assets 41,820 35,540
Less valuation allowance (7,050) (10,310)
----------------- ----------------
Net deferred tax assets 34,770 25,230
----------------- ----------------
Deferred tax liabilities:
Property and equipment, basis differences of
foreign subsidiary (8,944) (9,088)
Stock basis of foreign subsidiary (3,622) (3,622)
Other (2,056) (1,434)
----------------- ----------------
Total gross deferred tax liabilities (14,622) (14,144)
================= ================
Financial statement net deferred tax assets $ 20,148 $ 11,086
================= ================
</TABLE>
The valuation allowance decreased by $3.3 million during fiscal 1997.
Deferred tax assets have been recognized to the extent of existing deferred tax
liabilities and income taxes paid that are subject to recovery through
carryback. Future recognized tax benefits relating to the valuation allowance of
$7.1 million, which was created in fiscal year 1993, will be recorded as direct
additions to additional paid-in capital.
At May 30, 1997, the Company had $12.1 million of net operating losses
available for carryforward which expire in 2008. Utilization of the net
operating losses is subject to an annual limitation of $9.6 million. The Company
also has capital losses of $8.7 million, which are available to offset future
capital gains, and expire in varying amounts through 2000. Additionally, the
Company has tax credits available for carryforward for federal income tax
purposes of $6.5 million, which are available to offset future federal income
taxes through 2010.
10. Employee Benefit Plans
Stock Option Plans
During 1993, the Company adopted the KinderCare Learning Centers, Inc. 1993
Stock Option and Incentive Plan (the "1993 Plan"). Prior to the Merger, this
plan authorized a committee of the Board of Directors of the Company to grant or
award to eligible employees of the Company and its subsidiaries and affiliates,
stock options and restricted stock and related warrants of the Company beginning
on March 31, 1993. In connection with the 1993 Plan, the Company reserved
approximately 1.9 million shares of common stock for issuance to employees of
the Company upon exercise of options available for grants made by the Board of
Directors of the Company.
At the effective time of the Merger, all stock options granted by the
Company under the 1993 Plan were cancelled and each option was exchanged for a
payment from the Company
49
<PAGE>
after the Merger (subject to any applicable withholding taxes) equal to the
product of (i) the total number of shares of common stock previously subject to
such stock option and (ii) the excess of $19.00 over the exercise price per
share of the common stock previously subject to such stock option. The
cancellation of the stock options resulted in payments of approximately $3.8
million. The 1993 Plan was terminated at the effective time of the Merger.
During the fiscal year ended May 30, 1997, the Company adopted the 1997
Stock Purchase and Option Plan for Key Employees of KinderCare Learning Centers,
Inc. and Subsidiaries (the "1997 Plan"), subject to stockholder approval. The
1997 Plan authorizes grants of stock or stock options covering 2,500,000 shares
of the Company's common stock. Grants or awards under the 1997 Plan may take the
form of purchased stock, restricted stock, incentive or nonqualified stock
options or other types of rights specified in the 1997 Plan. During fiscal 1997,
the Board of Directors granted 421,053 stock options under the 1997 Plan, all of
which were nonqualified options. Each of such options had a weighted average
fair value, calculated using the Black Scholes option pricing model, of
approximately $8.35 on the date of grant. All of the stock options granted vest
20% per year over a five-year period. No other options were outstanding at May
30, 1997.
Grants or awards under the 1997 Plan are made at prices determined by the
Board of Directors. All options granted under the 1997 Plan during the fiscal
year ended May 30, 1997 have an exercise price of $19.00 per share.
A summary of options outstanding is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------- ----------------
<S> <C> <C>
Outstanding June 3, 1994 1,295,008 $ 9.74
Granted 196,500 12.66
Exercised (108,110) 10.02
Canceled (75,760) 10.57
-------------- ----------------
Outstanding June 2, 1995 1,307,638 10.11
Granted 256,700 13.03
Exercised (746,560) 9.60
Canceled (73,640) 11.62
-------------- ----------------
Outstanding May 31, 1996 744,138
11.48
Granted 460,053 18.60
Exercised (596,058) 11.70
Canceled (187,080) 11.36
-------------- ----------------
Outstanding May 30, 1997 421,053 $ 19.00
============== ================
</TABLE>
Options outstanding at May 30, 1997 have a remaining contractual life of
9.7 years. No options were exercisable at May 30, 1997.
As discussed in Note 1, the Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for stock options granted with an exercise price equal to the fair
value of the underlying stock on the date of grant. Had compensation cost for
the Company's stock option plans been determined based on
50
<PAGE>
the estimated fair value of the options at the date of grant, the Company's net
income (loss) and net income (loss) per share for the years ended May 30, 1997
and May 31, 1996 would not have materially differed from the amounts reported.
Savings and Investment Plan
The Board of Directors of the Company adopted the KinderCare Learning
Centers, Inc. Savings and Investment Plan (the "Savings Plan") effective January
1, 1990. All full-time employees of the Company and its subsidiaries are
eligible to participate in the Savings Plan upon completion of one year of
service and the attainment of age 18. Participants may contribute, in increments
of 1% up to 10% of their compensation to the Savings Plan. In accordance with
the provisions of the Savings Plan, the Board of Directors has elected, since
April 1, 1991, not to match employee contributions.
Nonqualified Deferred Compensation Plan
The Board of Directors of the Company adopted the KinderCare Learning
Centers, Inc. Nonqualified Deferred Compensation Plan (the "DC Plan") effective
August 1, 1996. Under the DC Plan, certain highly compensated or key management
employees are provided the opportunity to defer receipt and income taxation of
such employees' compensation.
11. Disclosures About Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments at May 30, 1997 and May 31, 1996.
Cash and cash equivalents, receivables and current liabilities
Fair value approximates cost as reflected in the consolidated balance
sheets at May 30, 1997 and May 31, 1996 because of the short-term maturity of
these instruments.
Long-term debt
The carrying value for the Company's 9-1/2% Senior Subordinated Notes, at
May 30, 1997, approximated fair value due to the recent Merger and refinancing.
The carrying value of the 10-3/8% Senior Subordinated Notes, at May 30, 1997,
approximated fair value based on current market activity, while the fair value,
at May 31, 1996, approximated the carrying value based on market activity. The
carrying values for the Company's remaining long-term debt of $94.7 million and
$46.6 million at May 30, 1997, and May 31, 1996, respectively, approximated
market value based on current rates that management believes could be obtained
for similar debt.
12. Commitments and Contingencies
The Company conducts a portion of its operations from leased or subleased
day care centers. Additionally, the Company leases its fleet of vehicles. Each
vehicle in the Company's fleet is leased pursuant to the terms of a 12-month
non-cancelable master lease which may be renewed on a month-to-month basis after
the initial 12 month lease period. Payments under the
51
<PAGE>
vehicle leases vary with the number of vehicles leased and changes in interest
rates. The vehicle leases require that the Company guarantee specified residual
values upon cancellation. In most cases, management expects that substantially
all of the leases will be renewed or replaced by other leases as part of the
normal course of business. All such leases are classified as operating leases.
Subsequent to January 1, 1993, the Company re-negotiated certain day care
center leases to amend the terms to allow the Company the right to terminate the
lease at any time with minimal notice. In connection with the termination
option, the Company, in certain instances, prepaid up to 12 months rent. Such
amounts, totaling approximately $3.2 million, will be amortized over the
termination transition period or over the appropriate remaining months of the
lease period. At May 30, 1997, the remaining unamortized balance of the prepaid
amount was $2.3 million. In addition, several leases were re-negotiated to
decrease the monthly fixed rental payments.
At May 30, 1997, the Company had a Revolving Credit Facility of $300.0
million, of which $42.2 million was utilized by outstanding letters of credit.
Following is a schedule of future minimum lease payments under operating
leases, that have initial or remaining non-cancelable lease terms in excess of
one year at May 30, 1997 (dollars in thousands):
Fiscal Year:
1998 $ 17,631
1999 17,227
2000 15,255
2001 13,029
2002 11,235
Subsequent years 61,891
Expenses incurred in connection with the fleet vehicle leases were $10.1
million, $10.3 million and $10.1 million for fiscal 1997, fiscal 1996 and fiscal
1995, respectively.
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of business, including suits alleging child
abuse. In certain of such actions, plaintiffs request damages that are covered
by insurance. The Company believes that none of the claims or suits of which it
is aware will materially affect its financial position, operating results or
cash flows, although absolute assurance cannot be given with respect to the
ultimate outcome of any such actions.
13. Stock Repurchase Programs
On February 15, 1995 the Board of Directors of KinderCare authorized the
repurchase of up to $10 million of the Company's common stock. This repurchase
was completed and all shares retired during the second quarter of fiscal 1996.
On May 2, 1996, the Board of Directors authorized an additional repurchase of
$10 million and increased it to $23.0 million on June 3, 1996. At May 31, 1996,
under the second stock buyback program, 259,000 shares and 120,000 warrants had
been repurchased for $4.2 million. At July 27, 1996, under the second stock
buyback program, 1,111,500 shares and 435,000 warrants had been repurchased for
$18.3 million. All shares repurchased were retired. Other than in connection
with the Merger, no
52
<PAGE>
additional shares or warrants were repurchased subsequent to July 27, 1996 and
the stock buyback programs were terminated at the effective time of the Merger.
14. Extraordinary Losses
During the first and second quarters of fiscal 1997, the Company purchased
99.7% of its 10-3/8% Senior Subordinated Notes for an aggregate price of $108.3
million. This transaction included the write off of deferred financing costs of
$1.7 million and resulted in an extraordinary loss of $6.4 million, net of
income taxes.
During the third quarter of fiscal 1997, in connection with the Merger and
retirement of existing debt, an extraordinary loss of $1.1 million, net of
income taxes, was recognized for the write-off of deferred financing costs
relating to the Company's previous credit facility.
15. Prior Period Adjustment
At the Company's emergence from bankruptcy in 1993, the Company did not
record a liability for accrued but untaken employee vacation. Accordingly, the
accompanying financial statements for periods prior to June 1, 1996 have been
restated. The net effect of the restatement on the accompanying financial
statements was to decrease additional paid-in capital as of June 3, 1994 by $3.0
million reflecting the vacation accrual of $5.0 million net of the deferred tax
effect of $2.0 million. The effect of the restatement is not material to the
results of operations.
53
<PAGE>
16. Quarterly Results (Unaudited)
A summary of results of operations for fiscal 1997 and fiscal 1996 is as
follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter (a) Quarter (b) Quarter (b) Quarter(b)
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fiscal year ended May 30, 1997:
Operating revenues $ 171,427 $ 128,324 $ 126,657 $ 136,727
Operating income (loss) 9,751 14,366 (3,074) (941)
Income (loss) before extraordinary
items 2,978 6,820 (10,455) (4,778)
Income (loss) before extraordinary
items per share 0.15 0.33 (0.61) (0.51)
Net income (loss) 1,749 1,569 (11,507) (4,778)
Net income (loss) per share 0.09 0.08 (0.67) (0.51)
Fiscal year ended May 31, 1996:
Operating revenues $ 161,313 $ 124,079 $ 123,641 $ 132,231
Operating income 11,141 11,222 13,514 15,832
Net income 3,565 4,551 5,868 7,699
Net income per share (primary) 0.17 0.23 0.30 0.39
Net income per share (fully-diluted) N/A N/A N/A 0.37
N/A - Not applicable
(a) Sixteen week quarter
(b) Twelve week quarters
</TABLE>
The computation of fully-diluted earnings per share is based on the higher
of the average or year-end market price of the Company's common stock.
54
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
KinderCare Learning Centers, Inc.:
We have audited the consolidated balance sheet of KinderCare Learning Centers,
Inc. and subsidiaries as of May 30, 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KinderCare Learning
Centers, Inc. and subsidiaries as of May 30, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
August 15, 1997
55
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
KinderCare Learning Centers, Inc.:
We have audited the accompanying consolidated balance sheet of KinderCare
Learning Centers, Inc. and subsidiaries as of May 31, 1996 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended May 31, 1996 and June 2, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KinderCare Learning
Centers, Inc. and subsidiaries as of May 31, 1996, and the results of their
operations and their cash flows for the years ended May 31, 1996 and June 2,
1995, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Atlanta, Georgia
August 9, 1996
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 14, 1997, the Company engaged Deloitte & Touche LLP as independent
accountants to audit the Company's financial statements for the fiscal year
ending May 30, 1997 and elected not to renew the engagement of the Company's
previous accountants, KPMG Peat Marwick LLP. The decision was approved by the
Company's Board of Directors.
In connection with the audits of the fiscal years ended May 31, 1996 and
June 2, 1995, and for all subsequent periods through April 14, 1997, there were
no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement. No adverse opinions or disclaimers of opinions were
given by KPMG Peat Marwick LLP during the fiscal years ended May 31, 1996 and
June 2, 1995, and for all subsequent periods through April 14, 1997, nor were
any of their opinions qualified or modified as to uncertainty, audit scope, or
accounting principle during the time KPMG Peat Marwick LLP was engaged.
The Company requested that KPMG Peat Marwick LLP furnish it with a letter
addressed to the SEC stating whether or not it agreed with the above statements.
A copy of such letter, dated April 17, 1997, was filed as Exhibit 16 to the
above referenced filing on Form 8-K.
57
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information contained
under the headings "Certain Information Concerning Nominees and Directors,"
"Meetings of the Board of Directors and Committees" and "Beneficial Ownership
Reporting--Section 16(a) Compliance" from its definitive proxy statement to be
delivered to the shareholders of the Company in connection with the 1997 annual
meeting of shareholders to be held on November 11, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information contained
under the heading "Executive Compensation" from its definitive proxy statement
to be delivered to the shareholders of the Company in connection with the 1997
annual meeting of shareholders to be held on November 11, 1997. In no event
shall the information contained in the proxy statement under the sections
entitled "Shareholder Return Analysis" and "Compensation Committee's Report on
Executive Compensation" be included in this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company hereby incorporates by reference the information contained
under the heading "Security Ownership of Certain Beneficial Owners" from its
definitive proxy statement to be delivered to the shareholders of the Company in
connection with the 1997 annual meeting of shareholders to be held on November
11, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information contained
under the heading "Certain Transactions" from its definitive proxy statement to
be delivered to the shareholders of the Company in connection with the 1997
annual meeting of shareholders to be held on November 11, 1997.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is an index of the financial statements, schedules and
exhibits included in this Report or incorporated herein by reference:
(a)(1) Financial Statements.
Page
----
Consolidated Balance Sheets as of May 30, 1997 and
May 31, 1996.................................................36
Consolidated Statements of Operations for the fiscal years
ended May 30, 1997, May 31, 1996 and
June 2, 1995.................................................37
Consolidated Statements of Shareholders' Equity
for the fiscal years ended May 30, 1997, May 31,
1996 and June 2, 1995........................................38
Consolidated Statements of Cash Flows for the fiscal years
ended May 30, 1997, May 31, 1996 and
June 2, 1995.................................................39
Notes to Consolidated Financial Statements....................40-54
Independent Auditors' Reports.................................55-56
(a)(2) Schedules to Financial Statements.
None.
(a)(3) Exhibits.
The following is an index of the exhibits included in this Annual
Report on Form 10-K or incorporated herein by reference.
59
<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
2(a) Agreement and Plan of Merger dated as of October 3, 1996, between
KinderCare Learning Centers, Inc. ("KinderCare") and KCLC
Acquisition Corp. ("KCLC Acquisition") (incorporated by reference
to Exhibit 2.1(a) to KinderCare's Form S-4, filed January 7, 1997,
File no. 333-19345).
2(b) Merger Agreement Amendment dated as of December 27, 1996 between
KinderCare and KCLC Acquisition (incorporated by reference to
Exhibit 2.1(b) to KinderCare's Form S-4, filed January 7, 1997,
File no. 333-19345).
2(c) Voting Agreement, dated as of October 3, 1996, among KCLC
Acquisition and the stockholders parties thereto (incorporated by
reference to Exhibit 2.2(a) to KinderCare's Form S-4, filed
January 7, 1997, File no. 333-19345).
2(d) Voting Agreement Amendment dated as of December 27, 1996 among
KCLC Acquisition and the stockholders parties thereto
(incorporated by reference to Exhibit 2.2(b) to KinderCare's Form
S-4, filed January 7, 1997, File no. 333-19345).
2(e) Stockholders' Agreement between KinderCare and the stockholders
parties thereto (incorporated by reference from Exhibit 2.3 of
Amendment No. 1 to the Registrant's Registration Statement on Form
S-4 dated April 9, 1997, File no. 333-23127).
3(a) Certificate of Merger of KCLC Acquisition into KinderCare
(incorporated by reference from Exhibit 3.1 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
3(b) By-Laws of KinderCare (incorporated by reference from Exhibit 3.2
of Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 dated April 9, 1997, file no. 333-23127).
4(a) Indenture dated as of February 13, 1997 between KinderCare and
Marine Midland Bank, as Trustee (incorporated by reference from
Exhibit 4.1 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 dated April 9, 1997, File no. 333-23127).
4(b) Form of 9 1/2 % Senior Subordinated Note due 2009. (incorporated
by reference from Exhibit 4.2 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
60
<PAGE>
4(c) Form of 9 1/2% Series B Senior Subordinated Note due 2009
(incorporated by reference from Exhibit 4.3 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
10(a) Credit Agreement, dated as of February 13, 1997, among KinderCare,
the several lenders from time to time parties thereto, and the
Chase Manhattan Bank as administrative agent (incorporated by
reference from Exhibit 10.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
10(b) Registration Rights Agreement, dated as of February 13, 1997,
among KCLC Acquisition, KLC Associated L.P. and KKR Partners II,
L.P. (incorporated by reference from Exhibit 10.2 of Amendment No.
1 to the Registrant's Registration Statement on Form S-4 dated
April 9, 1997, File no. 333-23127).
10(c) Registration Rights Agreement dated February 13, 1997 among
KinderCare, Chase Securities, Inc., BT Securities Corporation,
Salomon Brothers Inc and Smith Barney Inc. (incorporated by
reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
10(d) Employment Agreement of Philip L. Maslowe dated May 8, 1995
(incorporated by reference from Exhibit 10(w) of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 2,
1995).
10(e) Letter Agreement relating to termination of employment of
Sandra Scarr dated January 8, 1997.
10(f) Lease between 600 Holladay Limited Partnership and KinderCare
Learning Centers, Inc. dated June 2, 1997.
16 Letter from KPMG Peat Marwick LLP re Change in Certifying
Accountant, hereby incorporated by reference from Exhibit 16 of
the Registrant's Current Report on Form 8-K dated April 17, 1997.
21 Subsidiaries of KinderCare.
27 Financial Data Schedule.
61
<PAGE>
(b) Reports on Form 8-K.
The registrant filed the no reports on Form 8-K during the fourth
quarter of fiscal 1997.
(c) Exhibits Required by Item 601 of Regulation S-K.
The Exhibits to this Report are listed under item 14(a)(3) above.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, on
August 28, 1997.
KINDERCARE LEARNING CENTERS, INC.
By: /s/ DAVID J. JOHNSON
------------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed on the 28th day of August, 1997 by the following
persons in the capacities indicated:
Signature Title
/s/ DAVID J. JOHNSON Chief Executive Officer, and Chairman
- ----------------------------------- of the Board of Directors (Principal
David J. Johnson Executive Officer)
/s/ DAN JACKSON Vice President, Financial Control and
- ----------------------------------- Planning (Principal Financial Accounting
Officer)
/s/ HENRY R. KRAVIS Director
- -----------------------------------
Henry R. Kravis
/s/ GEORGE R. ROBERTS Director
- -----------------------------------
George R. Roberts
/s/ CLIFTON S. ROBBINS Director
- -----------------------------------
Clifton S. Robbins
/s/ NILS P. BROUS Director
- -----------------------------------
Nils P. Brous
/s/ SANDRA W. SCARR, Ph.D. Director
- -----------------------------------
Sandra W. Scarr
/s/ STEPHEN KAPLAN Director
- -----------------------------------
Stephen Kaplan
63
<PAGE>
KinderCare Learning Centers, Inc.
Annual Report on Form 10-K
Fiscal Year Ended May 30, 1997
Exhibit Index
Exhibit
Number Description of Exhibits
- ------ -----------------------
2(a) Agreement and Plan of Merger dated as of October 3, 1996, between
KinderCare Learning Centers, Inc. ("KinderCare") and KCLC
Acquisition Corp. ("KCLC Acquisition") (incorporated by reference
to Exhibit 2.1(a) to KinderCare's Form S-4, filed January 7, 1997,
File no. 333-19345).
2(b) Merger Agreement Amendment dated as of December 27, 1996 between
KinderCare and KCLC Acquisition (incorporated by reference to
Exhibit 2.1(b) to KinderCare's Form S-4, filed January 7, 1997,
File no. 333-19345).
2(c) Voting Agreement, dated as of October 3, 1996, among KCLC
Acquisition and the stockholders parties thereto (incorporated by
reference to Exhibit 2.2(a) to KinderCare's Form S-4, filed
January 7, 1997, File no. 333-19345).
2(d) Voting Agreement Amendment dated as of December 27, 1996 among
KCLC Acquisition and the stockholders parties thereto
(incorporated by reference to Exhibit 2.2(b) to KinderCare's Form
S-4, filed January 7, 1997, File no. 333-19345).
2(e) Stockholders' Agreement between KinderCare and the stockholders
parties thereto (incorporated by reference from Exhibit 2.3 of
Amendment No. 1 to the Registrant's Registration Statement on Form
S-4 dated April 9, 1997, File no. 333-23127).
3(a) Certificate of Merger of KCLC Acquisition into KinderCare
(incorporated by reference from Exhibit 3.1 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
3(b) By-Laws of KinderCare (incorporated by reference from Exhibit 3.2
of Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 dated April 9, 1997, file no. 333-23127).
4(a) Indenture dated as of February 13, 1997 between KinderCare and
Marine Midland Bank, as Trustee (incorporated by reference from
Exhibit 4.1 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 dated April 9, 1997, File no. 333-23127).
64
<PAGE>
4(b) Form of 9 1/2 % Senior Subordinated Note due 2009. (incorporated
by reference from Exhibit 4.2 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
4(c) Form of 9 1/2% Series B Senior Subordinated Note due 2009
(incorporated by reference from Exhibit 4.3 of Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 dated April 9,
1997, File no. 333-23127).
10(a) Credit Agreement, dated as of February 13, 1997, among KinderCare,
the several lenders from time to time parties thereto, and the
Chase Manhattan Bank as administrative agent (incorporated by
reference from Exhibit 10.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
10(b) Registration Rights Agreement, dated as of February 13, 1997,
among KCLC Acquisition, KLC Associated L.P. and KKR Partners II,
L.P. (incorporated by reference from Exhibit 10.2 of Amendment No.
1 to the Registrant's Registration Statement on Form S-4 dated
April 9, 1997, File no. 333-23127).
10(c) Registration Rights Agreement dated February 13, 1997 among
KinderCare, Chase Securities, Inc., BT Securities Corporation,
Salomon Brothers Inc and Smith Barney Inc. (incorporated by
reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
10(d) Employment Agreement of Philip L. Maslowe dated May 8, 1995
(incorporated by reference from Exhibit 10(w) of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 2,
1995).
10(e) Letter Agreement relating to termination of employment of
Sandra Scarr dated January 8, 1997.
10(f) Lease between 600 Holladay Limited Partnership and KinderCare
Learning Centers, Inc. dated June 2, 1997.
16 Letter from KPMG Peat Marwick LLP re Change in Certifying
Accountant, hereby incorporated by reference from Exhibit 16 of
the Registrant's Current Report on Form 8-K dated April 17, 1997.
21 Subsidiaries of KinderCare.
27 Financial Data Schedule.
January 8, 1997
Dr. Sandra Scarr
2626 Capstone Drive
Montgomery, Alabama 36106
Dear Sandra:
As we have discussed, in light of your announced intention to retire
from KinderCare Learning Centers, Inc. (the "Company") on the date of the
closing (the "Closing Date") of the merger (the "Merger") of KCLC Acquisition
Corp. into the Company described in the Agreement and Plan of Merger between the
Company and KCLC Acquisition Corp., dated as of October 3, 1996, the purpose of
this letter is to describe various agreements that have been reached between you
and the Company regarding your retirement from the Company and to further
describe the ongoing relationship between you and the Company after the Closing
Date.
1. For the period commencing on the Closing Date and ending December 15,
1999 (the "Additional Service Period"), and, where appropriate, for any period
before the Additional Service Period, you agree to perform the following
services for the Company:
a. You will assist and cooperate in good faith, whether before or
after the Closing Date, with (i) the meetings with potential investors in
various cities throughout the United States in connection with the offering
of the Company's Senior Subordinated Notes and bank loans in connection
with the Merger, or any other sales or management presentations in
connection therewith, including, but not limited to, sales force and rating
agency presentations, (ii) the consummation of the Merger and (iii) the
transition with the new Chief Executive Officer of the Company.
b. You will make yourself reasonably available for consultation with
the Chief Executive Officer of the Company on business matters from time to
time, and in connection with any litigation and disputes arising out of
actions of the Company of which you have knowledge or information and you
agree that you will cooperate with the Company in supplying data,
information, and expertise within your special knowledge or competence and
otherwise assist the Company in a proper and inappropriate fashion in the
protection of its interests. The Company will reimburse you for reasonable
out-of-pocket expenses (such as hotel and travel expenses) incurred by you
in providing such services, and may provide additional consulting fees to
you as mutually agreed upon;
c. At the Company's request you agree to serve as a member of the
Company's Board of Directors (the "Board"), for which you will be entitled
to receive those directors fees afforded to other outside directors of the
Company.
<PAGE>
Dr. Sandra Scarr -2- January 8, 1997
Subject to paragraph 7 herein, nothing in this Agreement will be
construed as preventing you from obtaining full-time employment elsewhere during
the Additional Service Period.
2. As soon as practicable after the Closing Date, the Company will pay you
a lump sum amount equal to the product of (i) $7,692.31 (1/52 of $400,000) and
(ii) the number of weeks (including fractions thereof) from the Closing Date
until June 15, 1997.
3. For a period of thirty months beginning July 15, 1997 and ending
December 15, 1999 the Company will pay you $36,666.67 per month; provided, that
the first payment will be made on July 15, 1997. If agreed by you and the
Company, these payments may be deferred. The payments provided for in this
paragraph 3 will be in consideration of (i) the services that you will be
required to provide pursuant to paragraph 1.b. herein and (ii) your obligation
not to compete with the Company pursuant to paragraph 7(b) herein.
4. During the period commencing on the Closing Date and ending December 15,
1998 (the "Benefits Period"), the Company will continue to provide you with
medical and disability coverage, as the Company from time to time may provide,
so long as you continue to contribute to the cost of coverage under such plans
in the same manner and at the same level that you would be required to
contribute if you had not retired; provided, however, that if you obtain
employment elsewhere at any time during the Benefits Period, your benefits will
be terminated and you will instead be entitled, at your cost and option, to your
rights under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"); provided, further, that the COBRA period will begin on the earlier of
your termination of employment or the Closing Date. In addition, during the
Benefits Period, the Company will provide you with substantially similar life
insurance coverage as it may from time to time provide for the executives of the
Company.
5. The Company will provide the following fringe benefits and perquisites
on your behalf:
(a) If you so request, the Company will purchase your current
residence in the Montgomery, Alabama area (the "Residence") for a total
amount equal to your original purchase price plus capital improvements;
provided, that such total will not exceed $360,000. The Company will not be
required to purchase the residence for at least 30 days after the Closing
Date or at any time after the Benefits Period has expired.
(b) The Company will reimburse you for any reasonable relocation
expenses that you may incur pursuant to your relocation from the
Montgomery, Alabama area, up to $25,000.
<PAGE>
Dr. Sandra Scarr -3- January 8, 1997
(c) For so long as you are a member of the Board, the Company will
continue to provide you with a BMW 300 series automobile under the same
terms and conditions as under the employment agreement between you and the
Company dated June 16, 1995 (the "Employment Agreement").
(d) The Company will allow you to retain your computer (the
"Computer") subject to paragraph 7(a) herein; provided, however, that after
the Closing Date, you will not be permitted to access or communicate in any
way over the Company's electronic mail system or its intranet system via
the Computer or by any other means unless access is requested in writing by
an officer of the Company.
All claims for reimbursement must be made to the Company in writing,
accompanied by a bill or other appropriate documentation detailing the nature
and the amount of the expense.
6. Your Employment Agreement (including any amendment or modification
thereto) will be terminated as of the Closing Date and will thereafter be of no
further force or effect.
7. (a) You will not, without the prior written consent of the Company,
divulge, disclose or make accessible to any other person, firm, partnership,
corporation or other entity any Confidential Information pertaining to the
business of the Company or any of its affiliates, except (A) while acting as a
consultant for the Company, in the business of and for the benefit of the
Company, or (B) when required to do so by a court of competent jurisdiction, by
any governmental agency having supervisory authority over the business of the
Company, or by any administrative body or legislative body (including a
committee thereof) with jurisdiction to order you to divulge, disclose or make
accessible such information. For purposes of this paragraph 7(a), "Confidential
Information" will mean non-public, information concerning the financial data,
strategic business plans, product development (or other proprietary product
data), customer lists, marketing plans and other non-public proprietary and
confidential information of the Company or its affiliates or customers, that, in
any case, is not otherwise available to the public (other than by your breach of
the terms hereof).
(b) During the Additional Service Period, without the prior written
consent of the Company, (A) you will not, directly or indirectly, either as a
principal, manager, agent, consultant, officer, stockholder, partner, investor,
lender or employee or in any other capacity, carry on, be engaged in or have any
financial interest in, any business which is in competition with the business of
the Company or any group, division or subsidiary of the Company and (B) you will
not, on your own behalf or on behalf of any person, firm or company, directly or
indirectly, hire any person, other than your
<PAGE>
Dr. Sandra Scarr -4- January 8, 1997
administrative assistance and the individual who directly provides cleaning
service to you prior to your retirement date, who has been employed by the
Company at any time during the 12 months immediately preceding such hiring.
(c) For purposes of this paragraph 7, a business will be deemed to be
in competition with the Company if it is principally involved in the purchase,
sale or other dealing in any property or the rendering of any service purchased,
sold, dealt in or rendered by the Company as a part of the business of the
Company at the time of your resignation within the same geographic area in which
the Company effects such purchases, sales or dealings or renders such services.
Nothing in this paragraph 7 will be construed so as to preclude you from
investing in any publicly or privately held company, provided your beneficial
ownership of any class of such company's securities does not exceed 1% of the
outstanding securities of such class.
(d) You agree that this covenant not to compete is reasonable under
the circumstances and will not interfere with your ability to earn a living or
to otherwise meet your financial obligations. You and the Company agree that if
in the opinion of any court of competent jurisdiction such restraint is not
reasonable in any respect, such court will have the right, power and authority
to excise or modify such provision or provisions of this covenant as to the
court will appear not reasonable and to enforce the remainder of the covenant as
so amended. You agree that any breach of the covenants contained in this
paragraph 7 would irreparably injure the Company. Accordingly, you agree that
the Company may, in addition to pursuing any other remedies it may have in law
or in equity, cease making any payments otherwise required by this Agreement and
obtain an injunction against you from any court having jurisdiction over the
matter restraining any further violation of this Agreement by you.
(e) The Company and you each agree that they will not (except as
required by law) directly or indirectly make any statement or release any
information, or encourage others to make any statement or release any
information that is (i) designed to embarrass or criticize the other (or any of
their respective affiliates, associates or shareholders), or (ii) intended to
interfere with the merger contemplated by the Merger Agreement; provided, that
it will not be a violation of this paragraph 7(e) for you to make truthful
statements when required to do so by a court of law, by any governmental agency
having supervisory authority over the business of the Company or by any
administrative or legislative body (including a committee thereof) with
jurisdiction to order you to divulge, disclose or make accessible such
information.
(f) (i) If you breach any of the covenants contained in this paragraph
7, the Company will have no obligation to make any further payments under this
Agreement.
<PAGE>
Dr. Sandra Scarr 5 January 8, 1997
(ii) The Company and you recognize that each party will have no
adequate remedy at law for breach by the other of any of the covenants set forth
in this paragraph 7 and that in the event of any breach of these covenants, the
Company and you hereby agree and consent that the other will be entitled to seek
a decree of specific performance, mandamus or other appropriate remedy to
enforce the performance of such covenants.
8. You agree, to execute a release substantially in the form attached
hereto as a condition to the receipt of any payment hereof.
9. Any dispute or controversy arising under or in connection with this
Agreement will be settled exclusively by arbitration, conducted before an
arbitrator who is mutually agreeable to you and the Company in the Atlanta
metropolitan area in accordance with the rules of the American Arbitration
Association then in effect or, if you and the Company are unable to agree on an
arbitrator, before an arbitrator chosen in accordance with the rules of the
American Arbitration Association. Judgment may be entered on the arbitrator's
award in any court having jurisdiction.
10. The Company will reimburse you for reasonable legal fees and expenses
incurred by you in connection with the negotiation of this Agreement up to a
maximum reimbursement of $30,000.
11. This Agreement will be construed and interpreted in accordance with the
laws of the State of Delaware without regard to rules pertaining to conflict of
laws.
12. You and the Company agree that this Agreement will become effective if
and only if, and at such time as, the closing of the Merger occurs.
13. While this Agreement is with KCLC Acquisition Corp., upon the Closing
Date this Agreement will be binding upon and inure to the benefit of the Company
and any successor of the Company acquiring directly or indirectly all or
substantially all of the assets of the Company whether by merger, consolidation,
sale or otherwise (and such successor will thereafter be deemed embraced within
the term "the company" for purposes of this Agreement) but the Agreement will
not otherwise be assignable by the Company without your consent.
14. This Agreement may be executed in counterparts.
<PAGE>
Dr. Sandra Scarr -6- January 8, 1997
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
SANDRA SCARR
-----------------------------------
SANDRA SCARR
KCLC ACQUISITION CORP.
/s/
-----------------------------------
By:
OFFICE LEASE
between
600 HOLLADAY LIMITED PARTNERSHIP
and
KINDERCARE LEARNING CENTERS, INC.
Date: June 2, 1997
Floors 12 - 15 and a
portion of Floor 11
<PAGE>
Table of Contents
-----------------
Article 1 Basic Lease Information
Article 2 Agreement
Article 3 Use
Article 4 The Premises
Article 5 Monthly Rent
Article 6 Additional Rent for Operating Expenses
Article 7 Additional Rent for Taxes
Article 8 Insurance
Article 9 Requirements of Law and Hazardous Materials
Article 10 Assignment and Subletting
Article 11 Rules and Regulations
Article 12 Common Areas
Article 13 Landlord's Services
Article 14 Tenant's Care of the Premises
Article 15 Alterations
Article 16 Construction Liens
Article 17 End of Term
Article 18 Eminent Domain
Article 19 Damage and Destruction
Article 20 Subordination
Article 21 Entry by Landlord
Article 22 Indemnification, Waiver, and Release
Article 23 Quiet Enjoyment
Article 24 Effect of Sale
Article 25 Default
Article 26 Parking
Article 27 Option to Expand
Article 28 Option to Renew
Article 29 Arbitration
Article 30 Miscellaneous
Exhibit A: The Premises
Exhibit B: Legal Description of the Land
Exhibit C: Rules and Regulations
Exhibit D: Workletter
Exhibit E: HVAC Specifications
Exhibit F: Janitorial Specifications
Exhibit G: Subordination, Non-Disturbance and Attornment Agreement
<PAGE>
OFFICE LEASE
THIS OFFICE LEASE is entered into by Landlord and Tenant as described in
the following Basic Lease Information on the date that is set forth for
reference only in the following Basic Lease Information. Landlord and Tenant
agree:
ARTICLE 1 - BASIC LEASE INFORMATION
1.1 Basic Lease Information. The following terms are referred to in other
provisions of the Lease. Each such reference shall incorporate the applicable
Basic Lease Information. In the event of any conflict between the Basic Lease
Information and the provisions of the Lease, the latter shall control.
(a) LEASE DATE:
(b) LANDLORD: 600 Holladay Limited Partnership
(c) LANDLORD'S ADDRESS:
c/o Ashforth Pacific, Inc.
825 NE Multnomah, Suite 1275
Portland, OR 97232
Attention: Matthew J. Klein
with a copy, in the event that Tenant alleges that
Landlord is in default of its obligations hereunder
or if Tenant claims a right to terminate this Lease,
at the same time to:
The Ashforth Company, Inc.
3003 Summer Street, 5th Floor
Stamford, CT 06905
Attention: Peter E. Hewitt, Esq.
(d) TENANT: KinderCare Learning Centers, Inc.
(e) TENANT'S ADDRESS:
Until Tenant takes occupancy of its temporary space in
Portland, OR:
2400 President's Drive
Montgomery, AL 36116
From the time that Tenant takes occupancy of its
temporary space in Portland, OR until the
Commencement Date of this Lease:
825 NE Multnomah, Suite 1585
Portland, OR 97232
From and after the Commencement Date of this Lease:
650 NE Holladay Street, Suite
Portland, OR 97232
Attention: Beth Ugoretz (in all cases)
with a copy at the same time to:
1
<PAGE>
Thomas R. Page
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
(f) BUILDING ADDRESS: 650 NE Holladay Street, Portland, OR 97232.
(g) PREMISES: All of floors 12 through 15 and approximately 8,500
square feet on the 11th floor.
(h) USABLE AREA OF THE PREMISES: See Section 4.1.
(i) RENTABLE AREA OF THE PREMISES: See Section 4.1.
(j) RENTABLE AREA OF THE BUILDING: 270,728 square feet.
(k) TERM: Beginning on the Commencement Date and expiring on the
Expiration Date.
(l) COMMENCEMENT DATE: Upon substantial completion of the
Tenant's improvements, as described in the Workletter, which is
anticipated to be November 1, 1997.
(m) RENT COMMENCEMENT DATE: Upon the Commencement Date of the
Lease.
(n) EXPIRATION DATE: October 31, 2007, unless the Commencement
Date is delayed as provided in Section 4.2, in which case the
Expiration Date shall be the last day of the month preceding the
month occurring ten (10) years after the Commencement Date.
(o) SECURITY DEPOSIT: None.
(p) PREPAID RENT: First month's rent.
(q) MONTHLY RENT: $22.50 per rentable square foot per annum for
Lease Years 1 through 5, and $26.50 per rentable square foot per
annum for Lease Years 6 through 10.
(r) FIRST MONTHLY RENT ADJUSTMENT DATE: January 1, 1999.
(s) TENANT'S SHARE: To be determined by dividing the Rentable Area
of the Premises by the Rentable Area of the Building.
(t) PARKING: Up to two (2) spaces per 1,000 rentable square feet
of space, subject to the provisions of Article 27.
2
<PAGE>
(u) BROKER: Cushman & Wakefield of Oregon, Inc.
(v) CONCEPTUAL PLAN SUBMISSION DATE: June 20, 1997.
1.2 Definitions:
(a) ADDITIONAL RENT: Any amounts that this Lease requires Tenant
to pay in addition to Monthly Rent.
(b) BASE YEAR: 1998.
(c) BUILDING: The office building known as Liberty Centre
(d) LAND: The Land on which the Project is located and which is
described on Exhibit B.
(e) LEASE YEAR: The twelve month period beginning on the first
day of the month in which the Commencement Date occurs and each
succeeding twelve (12) month period thereafter.
(f) NOTICE: Any notice, request, demand, consent, approval, or
other communication required or permitted under this Lease must
be in writing and will be deemed to have been given when
personally delivered, sent by facsimile with receipt
acknowledged, deposited with any nationally recognized overnight
carrier that routinely issues receipts, or deposited in any
depository regularly maintained by the United States Postal
Service, postage prepaid, certified mail, return receipt
requested, addressed to the party for whom it is intended at its
address set forth in Section 1.1. Either Landlord or Tenant may
add additional addresses or change its address for purposes of
receipt of any such communication by giving ten (10) days prior
Notice of such change to the other party.
(g) PARKING GARAGE: The structure located on the Land, and more
particularly shown on Exhibit B, designed for the parking of
passenger vehicles.
(h) PRIME RATE: The rate of interest from time to time announced
by U.S. National Bank of Oregon ("USB"), or any successor to it,
as its prime rate. If USB, or any successor to it, ceases to
announce a prime rate, the Prime Rate will be a comparable
interest rate designated by Landlord.
(i) PROJECT: The Land and all improvements built on the Land,
including without limitation the Building, Parking Garage,
walkways, driveways, fences, and landscaping.
(j) RENT: The Monthly Rent and Additional Rent.
3
<PAGE>
(k) TAXES: All real and personal property taxes, school taxes,
sewer rates and charges, transit taxes assessed, levied or
imposed upon the Project or other Governmental assessments or
charges, general, specific, ordinary or extraordinary, foreseen
or unforeseen. If at any time during the Term the methods or
standards of taxation prevailing at the date hereof shall be
altered so that in lieu of, or as an addition to, or as a
substitute for the whole or any part of the Taxes now levied,
assessed or imposed, there shall be imposed (a) a tax,
assessment, levy, imposition or charge based on the rents
received (whether or not wholly or partially as a capital levy or
otherwise), or (b) a license fee measured by the Rent, other tax,
levy, imposition, charge or license fee; then all such taxes,
assessments, levies, impositions, charges or license fees or the
part thereof so measured or based, shall be deemed to be Taxes.
(l) UNAVOIDABLE DELAYS: Delays beyond Landlord's reasonable
control resulting from acts of God, governmental restrictions or
guidelines enacted after the date hereof, strikes, labor
disturbances, shortages of materials and supplies of which
Landlord did not know or should not have known on the date hereof
and from any other causes or events whatsoever beyond Landlord's
reasonable control.
(m) WORKLETTER: The workletter attached to this lease as
Exhibit D.
1.3 Exhibits. The following addendum and exhibits are attached to this
Lease and are made part of this Lease:
EXHIBIT A The Premises
EXHIBIT B Legal Description of the Land
EXHIBIT C Rules and Regulations
EXHIBIT D Workletter
EXHIBIT E HVAC Specifications
EXHIBIT F Janitorial Specifications
EXHIBIT G Subordination, Non-Disturbance and Attornment
Agreement
ARTICLE 2 - AGREEMENT
2.1 Leasing. Landlord leases the Premises to Tenant, and Tenant leases the
Premises from Landlord, together with the right to utilize in common with
others, for ingress and egress, the common areas of the Project as described in
Article 12. Nothing herein contained shall be construed to permit Tenant the use
of the roof (except as provided in Section 4.4) or exterior walls of the
Building, of the space above or below the Premises or of any parking or other
areas adjacent to the Building, except as provided in Article 26.
4
<PAGE>
2.2 Restrictive Covenant. Landlord agrees that so long as Tenant is not in
default of any material provision of this Lease nor assigned this, Lease except
as provided in Section 10.5, nor subleased more than 75% of the Premises and
Tenant's corporate headquarters are located in the Premises, Landlord shall not
lease space in the Building to any other tenant for the purpose of operating a
child care facility nor consent to the use of any space in the Building for such
purpose; provided, however, that the foregoing restriction shall not be
applicable to a tenant of the Building that proposes to use a portion of its
premises as a child care facility solely for its own employees.
ARTICLE 3 - USE
3.1 General. The Premises shall be used for general office purposes and for
no other purpose. The Premises are leased together with the appurtenances
thereto, including the non-exclusive right to use the lobbies, elevators,
stairways and other public portions of the Building, the non-exclusive use of
any restrooms on any multi-tenant floors and the exclusive right to use any
restrooms on single-tenant floors included within the Premises. Tenant shall not
do, nor permit anything to be done, in or about the Premises which will in any
way obstruct or interfere with the rights of other tenants of the Building, or
injure or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises or the Building, or commit or
suffer to be committed any waste in, on or about the Premises or the Building.
3.2 Commercial Facility. The Premises will be used only as a commercial
facility and not as a place of public accommodation as defined by the Americans
with Disabilities Act of 1990, as amended ("ADA"). Tenant shall not offer its
goods and services to the general public at the Premises.
3.3 Building Name. Tenant shall not be allowed to use the name of the
Building for any purpose other than as the address of the business to be
conducted by Tenant in the Premises. Landlord reserves the right in its sole
discretion to change the name of the Building at any time.
3.4 Signs and Advertising.
(a) Tenant shall not inscribe, paint, post, place, or in any manner
display any sign, notice, picture, placard, poster, name or advertising matter
anywhere in or about the Building or Premises at places visible (either directly
or indirectly as an outline or shadow on or through a glass pane) from outside
the Premises. In the event that Landlord permits any such signs or notices, upon
expiration or termination of this Lease, Tenant shall, at its expense, promptly
remove all such signs or advertising and shall repair any damage caused by such
removal.
(b) Tenant shall have the right , at its sole cost and expense, to
install Building standard directory signage in the main lobby and, subject to
Landlord's prior approval which shall not be unreasonably withheld or delayed,
Tenant's standard signage in the elevator lobby on each floor on which the
Premises are located, at each exterior entry door to the Premises, and on each
side of the pylon sign to be erected by Landlord at 7th Avenue and Liberty
Place.
5
<PAGE>
3.5 Smoking Prohibited. Tenant acknowledges that smoking is not permitted
within the Project (except in areas specifically designated as smoking areas)
and agrees that it will not allow smoking within the Premises by employees,
invitees or visitors.
ARTICLE 4 - THE PREMISES
4.1 Determination of Premises.The Premises shall contain approximately
70,000 rentable square feet consisting of all of floors 12 through 15 and
approximately 8,500 rentable square feet the 11th floor. Promptly after Tenant
submits the Programming Information, Landlord shall calculate the usable and
rentable area on the 11th floor of the Premises and all other items contained in
this Lease that are dependent on either factor. The parties shall then enter
into a written supplement to this Lease specifying all such items and adding a
floor plan delineating the Premises as Exhibit A to this Lease . The usable area
of the space on the 11th floor shall be computed by measuring from the inside
finished surfaces of the dominant portion of the permanent outer Building walls
to the centerline of the permanent walls separating the Premises from other
tenant spaces and to the inside finished surface of the common corridor
permanent walls. No deductions shall be made for columns or projections
necessary to the Building. The rentable area for each single tenant floor shall
be 15,722 square feet and the rentable area of space on any multi-tenant floor
shall be calculated by multiplying the usable area by 1.14. Any dispute
regarding the calculation of usable or rentable area shall be resolved by
arbitration as provided in Article 29 and shall not render this Lease void or
voidable.
4.2 Delivery of Possession. Landlord will construct or install in the
Premises the improvements to be constructed or installed by Landlord according
to the Workletter. Tenant acknowledges that neither Landlord nor its agents or
employees have made any representations or warranties as to the suitability or
fitness of the Premises for the conduct of Tenant's business or for any other
purpose, nor has Landlord or its agents or employees agreed to undertake any
alterations or construct any tenant improvements to the Premises, except as
expressly provided in this Lease and the Workletter. If for any reason Landlord
cannot deliver possession of the Premises to Tenant on the anticipated
Commencement Date as stated in Section 1.1(l), this Lease will not be void or
voidable, and Landlord will not be liable to Tenant for any resultant loss or
damage; provided, however, in the event delivery of possession is delayed beyond
the anticipated Commencement Date as stated in Section 1.1(l), then the
Commencement Date and Rent Commencement Date shall be delayed on a day-by-day
basis as provided in Paragraph 9 of the Workletter. Once the Commencement Date
and Rent Commencement Date have been established, the parties shall execute and
exchange an agreement specifying the Commencement Date and Rent Commencement
Date, the Expiration Date and any other dates related thereto. If for any reason
other the "Tenant Delays" as defined in Section 8 of the Workletter, Landlord
has not achieved Substantial Completion as defined in Section 1(p) of the
Workletter within 180 days after the anticipated Commencement Date, Tenant shall
have the right to terminate this Lease by giving Landlord Notice of such
election within ten (10) days after the expiration of said 180 days.
4.3 Early Entry. Tenant may be permitted early entry to the Premises by
Landlord prior to the Commencement Date for the purpose of installing fixtures
or any other purpose permitted by Landlord upon reasonable Notice to Landlord
and provided that such entry does not interfere with or delay Landlord's
completion of construction of the improvements. Any such early entry shall be at
Tenant's sole risk and subject to all the terms and provisions of this Lease.
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If at any time in Landlord's reasonable judgment such entry shall cause
interference with the timely completion of the improvements to be constructed by
Landlord, then said license may be withdrawn by Landlord immediately upon Notice
to Tenant.
4.4 Antenna. Tenant shall have the right, at its sole cost and expense, to
install a receiving dish antenna (approximately 24" in diameter) on the frame
that Landlord will provide on the roof or at the mechanical penthouse of the
Building and to utilize, in common with others, the conduits that Landlord shall
provide for such purpose to connect its antenna to communications equipment to
be installed in the Premises. Once installed, such antenna shall be maintained
by Tenant in a first class condition at Tenant's sole cost and expense. If
Tenant elects to install such antenna, Landlord's charge for such antenna usage
shall be $200.00 per month, which charge shall be deemed additional rent
pursuant to this Lease. Upon reasonable Notice to Landlord, Tenant shall be
permitted access to the roof of the Building in order to maintain the antenna.
4.5 Storage Space Tenant shall have the right to lease a separate storage
area of approximately 750 square feet to be constructed by Landlord in the
basement of the Building. Such storage space shall be constructed of wire
fencing or similar materials and not necessarily Building Standard partitioning
and shall be used only for the storage of normal office documents, furniture and
equipment. Such storage area may be leased by Tenant on a month to month basis
during the Term of this Lease, may not be assigned or sublet by Tenant except in
connection with the assignment of this Lease or a sublease of substantially all
of the Premises and shall be a Landlord's standard rates in effect from time to
time, which currently is $10.00 per square foot provided however that such rate
shall not be increased by more than five per cent (5%) per year.
ARTICLE 5 - MONTHLY RENT
5.1 Monthly Rent. Monthly Rent shall be paid beginning on the Rent
Commencement Date and throughout the Term in advance on or before the first day
of each calendar month of the Term except that the Prepaid Rent shall be paid
upon the execution of this Lease. If the Term commences on a day other than the
first day of a calendar month or ends on a day other than the last day of a
calendar month, then Monthly Rent will be appropriately prorated by Landlord
based on a thirty (30) day month. Monthly Rent and all Additional Rent will be
paid to Landlord, without Notice or demand, and without deduction or offset, in
lawful money of the United States of America at Landlord's address, or to such
other address as Landlord may from time to time designate in writing.
5.2 Late Payments. Tenant recognizes that late payment of Rent or any other
sum due hereunder from Tenant to Landlord will result in administrative expenses
to Landlord, the extent of which are difficult and economically impractical to
ascertain. Tenant therefore agrees that if Rent or any other payment due
hereunder from Tenant to Landlord is not paid on the date said amount is due,
then in addition to any other remedy available to Landlord, Tenant shall pay a
late charge in an amount equal to the greater of (i) one percent (1%) of such
delinquent Rent amount or (ii) a daily administrative charge of Twenty Five
Dollars ($25.00) provided that in no event shall such late charge be greater
than that permitted under the laws of the State of Oregon. The payment of such
late charge shall not excuse or cure any default by Tenant under this Lease.
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ARTICLE 6 - ADDITIONAL RENT FOR OPERATING EXPENSES
6.1 General.
(a) Whenever for any calendar year the Operating Expenses (defined
below) exceed the Operating Expenses for the Base Year, then, effective January
1 of such year, Tenant shall pay as Additional Rent the product of Tenant's
Share multiplied by such excess, subject to the provisions of Section 6.2. The
first payment of Additional Rent for increases in Operating Expenses, if any,
shall be effective on the First Monthly Rent Adjustment Date set forth in
Section 1.1(r).
(b) As used in this Lease, the term "Operating Expenses" means:
(1) All reasonable costs paid, payable, or incurred by Landlord
for the management, operation, and maintenance of the Land and Building,
computed in accordance with generally accepted accounting principles, including
wages, salaries, benefits and compensation of employees but not above the level
of property manager; consulting, accounting, legal, janitorial, maintenance,
security, window washing and other services; management fees and costs;
reasonable reserves for operating expenses; that reasonable part of office rent
or rental value of space in the Project used or furnished by Landlord to
enhance, manage, operate, and maintain the Project; reasonable allocation of
costs to provide and operate free or discounted visitor parking for the
Building; power, water, waste disposal, and other utilities; consumable
materials and supplies, tools, and equipment; maintenance and repairs; insurance
obtained with respect to the Land and Building; depreciation or rental on
personal property and equipment used in the management, operation, or
maintenance of the Land and Building, except as set forth in (c) below or which
is or should be capitalized on the books of Landlord; and any other costs,
charges, and expenses that under generally accepted accounting principles would
be regarded as management, maintenance, and operating expenses. The preceding
list is for definitional purposes only and does not impose any obligation to
incur such expenses or provide such services. Any services provided by Landlord
or any affiliate of Landlord shall be at rates competitive with prevailing rates
for comparable services and projects.
(2) The cost (amortized over its useful life for federal income
tax purposes) together with interest (not to exceed Landlord's cost of funds) on
the unamortized balance of any capital improvements that are made to the Project
by Landlord (i) for the purpose of reducing operating expenses (provided that
the annual anticipated savings in the component of operating expenses that such
capital improvement is intended to reduce are reasonably expected to exceed the
annual amortized cost of such improvement,) or (ii) after the Lease Date and by
requirement of any governmental law, code or regulation (including without
limitation the ADA and any provisions of ADA applicable to the Project or any
part thereof as a result of the use, occupancy, or alteration thereof by
Landlord) that was not applicable to the Project at the time it was constructed
and is not as a result of special requirements for any tenant's use of the
Project.
(c) The Operating Expenses will not include:
1. depreciation on the Project (other than depreciation on
personal property, equipment used in the management, operation or maintenance of
the Land and Building;
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2. costs of alterations of space or other improvements made for
tenants of the Project;
3. finders' fees and real estate brokers' commissions;
4. ground lease payments, mortgage principal or interest;
5. capital items other than those referred to in clause (b) (2)
above;
6. costs of replacements to personal property and equipment for
which depreciation costs are included as an operating expense;
7. costs of excess or additional services provided to any tenant
in the Building that are directly billed to such tenants;
8. the cost of repairs due to condemnation or casualties that are
reimbursed by third parties ;
9. any cost due to Landlord's breach of this Lease;
10 all costs, including legal fees, relating to activities for
the solicitation and execution of leases of space in the Building;
11. any legal fees incurred by Landlord in enforcing its rights
under other leases for space in the Building;
12. any costs incurred to correct defects in base Building
construction;
13. any cost associated with in the management, operation or
maintenance of the Parking Garage; and
14. Landlord's income taxes.
(d) If during any calendar year at least ninety-five percent (95%) of
the Building is not provided with full Building standard services or is not at
least ninety-five percent (95%) occupied, in determining Operating Expenses
Landlord shall compute all variable Operating Expenses for such calendar year as
though ninety-five percent (95%) of the Building were provided with full
Building standard services and were ninety-five percent (95%) occupied. For
purposes of this Section, the term variable Operating Expenses shall mean any
Operating Expense (or portion thereof) that increases or decreases with the
level of occupancy of the Building. In the event that Operating Expenses do not
include any specific costs billed to or otherwise incurred for the particular
benefit of specific tenants of the Building, Landlord shall have the right to
increase Operating Expenses by an amount equal to the cost of providing standard
services similar to the services for which such excluded specific costs were
billed or incurred. In no event shall Landlord receive from all tenants of the
Building more than one hundred percent (100%) of the Operating Expenses for any
calendar year.
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(e) Tenant acknowledges that Landlord has not made any representation
or given Tenant any assurances that any estimate of Operating Expenses will
equal or approximate the actual Operating Expenses for any calendar year or
partial calendar year during the Term.
6.2 Estimated Payments.
(a) Commencing with the calendar year in which the First Monthly Rent
Adjustment Date occurs, Landlord will give Tenant Notice of the estimated
Operating Expense increase, if any, for such calendar year. On or before the
first day of each month during each calendar year, Tenant shall pay to Landlord
Additional Rent monthly, in advance, an amount equal to 1/12 of the product of
Tenant's Share multiplied by Landlord's estimate of the excess of the Operating
Expenses for such year over the Operating Expenses for the Base Year. In the
month in each calendar year in which Tenant first makes a payment based upon
such estimate, if not January 1st of such year, Tenant shall pay to Landlord for
each month which has elapsed since January 1st the difference, if any, between
the Additional Rent based upon such estimate of Operating Expenses and the
Additional Rent for Operating Expenses actually paid.
(b) If at any time or times it reasonably appears to Landlord that the
actual Operating Expenses for any calendar year will vary substantially from the
estimated Operating Expenses for such calendar year, Landlord may, by Notice to
Tenant, revise the estimated Operating Expense increase for such calendar year,
and subsequent Additional Rent payments by Tenant in such calendar year will be
based upon such revised estimated Operating Expense increase.
6.3 Annual Settlement. Within one hundred twenty (120) days after the end
of each calendar year or as soon thereafter as practicable, Landlord will
deliver to Tenant a statement with reasonable detail of the actual amounts
payable under Section 6.2 for the prior calendar year. Such statement will be
final and binding upon Landlord and Tenant unless Tenant objects to it in
writing to Landlord within two hundred ten (210) days after delivery to Tenant
or October 31st of each year, whichever is later. Acceptance or resolution of
the first such statement shall constitute acceptance of the Operating Expense
amount for the Base Year. If such statement shows an amount owing by Tenant that
is less than the estimated payments previously made by Tenant for such calendar
year, the excess will be held by Landlord and credited against the next payment
of Rent; however, if the Term has ended and Tenant was not in default at its
end, Landlord will refund the excess to Tenant. If such statement shows an
amount owing by Tenant that is more than the estimated payments previously made
by Tenant for such calendar year, Tenant will pay the deficiency to Landlord
within thirty (30) days after the delivery of such statement. Tenant may review
Landlord's records of the operating expenses, at Tenant's sole cost and expense,
at the place Landlord normally maintains such records during Landlord's normal
business hours upon reasonable advance Notice.
6.4 Final Proration. If this Lease ends on a day other than the last day of
a calendar year, the amount of increase (if any) in the Additional Rent payable
by Tenant applicable to the calendar year in which this Lease ends will be
calculated on the basis of the number of days of the Term falling within such
calendar year. Tenant's obligation to pay any increase or Landlord's obligation
to refund any overage shall survive the expiration or other termination of this
Lease.
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6.5 Decrease in Operating Expenses. Notwithstanding anything contained in
this Article, the Monthly Rent payable by Tenant shall in no event be less than
the Monthly Rent specified in Section 1.1.
6.6 Dispute Resolution. Any dispute regarding the provisions of this
Article shall be resolved by arbitration as provided in Article 29.
ARTICLE 7 - ADDITIONAL RENT FOR TAXES
7.1 Calculation. Tenant shall pay, as Additional Rent, an amount equal to
Tenant's Share of the excess of Taxes due for each calendar year of the Term
which is subsequent to the first calendar year, over the amount of such Taxes
due with respect to the Base Year. The first payment of Additional Rent, if any,
shall be effective on the first Monthly Rent Adjustment Date set forth in
Section 1.1(r).
7.2 Adjustment of Taxes. If in the Base Year and/or any subsequent calendar
year, the Project is less than fully assessed, then the Taxes for such year(s)
shall be appropriately adjusted to reflect what the Taxes for such year(s) would
have been had the Project been fully assessed as completed and fully occupied.
In the event that there are tenants in the Building from time to time that are
entitled to exemptions from Taxes, Taxes for such year(s) shall be appropriately
adjusted to reflect Landlord's estimate of full assessment.
7.3 Tax Appeal. If, by virtue of any application or proceeding brought by
or on behalf of Landlord, there shall be a reduction of the assessed valuation
of the Project for any year, including the Base Year, which affects the Taxes,
or part thereof, for which Additional Rent has been paid by Tenant pursuant to
this Article, such Additional Rent payment shall be recomputed on the basis of
any such reduction and Landlord will credit against the next accruing
installment of Monthly Rent due under this Lease, after receipt by Landlord of a
tax refund or credit, any sums paid by Tenant in excess of the recomputed
amounts, less a sum equal to Tenant's Share of all costs, expenses, and fees,
including reasonable attorney's fees incurred by Landlord in connection with
such application or proceeding.
7.4 Estimated Payments and Annual Settlement. Commencing with the calendar
year in which the First Monthly Rent Adjustment Date occurs, Landlord will give
Tenant Notice of the estimated Additional Rent for Taxes, if any, for such
calendar year. On or before the first day of each month during each such
calendar year, Tenant shall pay to Landlord Additional Rent of one-twelfth
(1/12) of such estimated increase. In the month in each calendar year in which
Tenant first makes a payment based upon such estimate, if not January 1st of
such year, Tenant shall pay to Landlord for each month which has elapsed since
January 1st the difference, if any, between the Additional Rent based upon such
estimate and the Additional Rent for Taxes actually paid. After the end of each
calendar year, there shall be a reconciliation of the Additional Rent for Taxes
actually due and the total of estimated payments for such Additional Rent, as
provided in Section 6.3.
7.5 Final Proration. Any Additional Rent payable pursuant to this Article
for any partial year shall be adjusted in proportion to the number of days in
such partial year during which this Lease is in effect. The obligation of Tenant
with respect to any Additional Rent pursuant to
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this Article applicable to the last fiscal or calendar year of the Term shall
survive the expiration or termination of this Lease.
7.6 Decrease in Taxes. Notwithstanding anything contained in this Article,
the Monthly Rent payable by Tenant shall in no event be less than the Monthly
Rent specified in Section 1.1.
7.7 Dispute Resolution. Any dispute regarding the provisions of this
Article shall be resolved by arbitration as provided in Article 29.
ARTICLE 8 - INSURANCE
8.1 Landlord's Insurance. At all times during the Term, Landlord will carry
insurance coverages and amounts reasonably determined by Landlord, based on
coverages carried by prudent owners of comparable buildings in the vicinity of
the Project.
8.2 Certain Insurance Risks. Tenant will not do or permit to be done any
act or thing upon the Premises or the Project which would jeopardize or be in
conflict with casualty insurance policies covering the Project or increase the
rate of fire or any other insurance applicable to the Project of which Tenant
has knowledge or reasonably should have known.
8.3 Tenant's Insurance.
(a) During the entire Term, and for so long thereafter as Tenant shall
occupy any portion of the Premises, Tenant shall keep in full force and effect,
at its own expense, a policy or policies of:
(i) Commercial General Liability insurance, in occurrence form,
covering bodily injury or death to persons and damage to or destruction of
property, and including contractual liability coverage for Tenant's indemnity
obligations required by this Lease to afford protection of not less than
$2,000,000 per occurrence and $2,000,000 combined single limit in the aggregate
for any one accident and coverage for child abuse claims. Provided, however,
that Tenant shall be permitted to maintain a self-insured retention. Tenant
represents that its current self-insurane retention is $500,000. Tenant shall be
permitted to increase the amount of its self-insured retention to $1,000,000.
Any increase in such self-insured retention in excesss of $1,000,000 shall be
subject to Landlord's consent, which shall not be unreasonably withheld or
delayed.
(ii) Worker's Compensation insurance as required by all state
and/or federal laws.
(b) Such policies will be maintained with companies having a "General
Policyholders Rating" of at least A:IX as set forth in the most current issue of
"Best's Insurance Guide," and will be written as primary policy coverage and not
contributing with, or in excess of, any insurance coverage which Landlord may
carry. Tenant shall have the right to provide the coverages required herein
under blanket policies provided that the coverage afforded Landlord shall not be
diminished by reason thereof.
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8.4 Certificates of Insurance.Tenant shall, prior to the Commencement Date,
cause to be delivered to Landlord an original certificate of insurance providing
a minimum of thirty (30) days prior notice of cancellation or reduction in
coverage. Renewal certificates shall be furnished to Landlord at least ten (10)
days prior to the expiration date of each policy. All such certificates shall
indicate that Landlord is an additional insured with respect to the Commercial
General Liability coverage.
8.5 Waiver of Subrogation. All insurance policies required by this Article
shall contain a waiver by the insurer of any rights of subrogation to any cause
of action (including negligent acts) against the Tenant or Landlord (as the case
may be) and their officers, directors, and employees. Further, each party waives
any claim or cause of action against the other party hereto arising from any
loss or damage which is by such insurance or which could be covered by such
insurance if Tenant self-insures but only insofar as such party is compensated
by such insurance for such loss or damage.
8.6 Tenant's Property. All furnishings, fixtures, equipment and property of
every kind and description of Tenant and of persons claiming by or through
Tenant which may be on the Premises shall be at the sole risk and hazard of
Tenant and no part of loss or damage thereto for whatever cause is to be charged
to or borne by Landlord.
ARTICLE 9 - REQUIREMENTS OF LAW AND HAZARDOUS MATERIALS
9.1 General. At its sole cost and expense, Tenant shall in its use of the
Premises promptly comply with: (i) all laws, statutes, ordinances, and
governmental rules, regulations, or requirements now in force or in force after
the Lease Date, (ii) the requirements of any fire or casualty insurance policy
applicable to the Project now or after the Lease Date known to Tenant, and (iii)
any direction or certificate of occupancy issued pursuant to any law by any
public officer or officers, as well as with the provisions of all recorded
documents affecting the Premises in each case, insofar as they relate to the
condition, use, or occupancy of the Premises, excluding requirements of
structural changes to the Premises or the Building, unless required by the
unique nature of Tenant's use or occupancy of the Premises. Tenant shall
participate in all Building practice fire drills and Building evacuations and
shall prepare and maintain a Fire and Life Safety Plan for its employees and
guests. Landlord shall comply with all laws, statutes, ordinances and
governmental rules, regulations or requirements now in force or in force after
the Lease Date affecting the Project, excluding Tenant's obligations hereunder.
9.2 Americans with Disabilities Act. Tenant shall be responsible for all
modifications to the Premises required for compliance with ADA. Landlord shall
be responsible for insuring that the common areas of the Building and the Base
Building elements are in compliance with ADA on the Commencement Date.
9.3 Hazardous Materials.
(a) For purposes of this Lease, "Hazardous Materials" means any
explosives, radioactive materials, hazardous wastes, or hazardous substances,
including without limitation substances defined as "hazardous substances" in the
Comprehensive Environmental Response,
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Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections
9601-9657; the Hazardous Materials Transportation Act of 1975, 49 U.S.C.
Sections 1801-1812; the Resource Conservation and Recovery Act of 1976, 42
U.S.C. Sections 6901-6987; or any other federal, state, or local statute, law,
ordinance, code, rule, regulation, order, or decree regulating, relating to, or
imposing liability or standards of conduct concerning Hazardous Materials,
waste, or substances now or at any time hereafter in effect (collectively,
"Hazardous Materials Laws").
(b) Tenant will not directly or indirectly cause or permit the
storage, use, generation, or disposition of any Hazardous Materials in, on, or
about the Premises or the Project by Tenant, its agents, employees, or
contractors other than customary office supplies in such quantities and used in
such manner as is consistent with normal office uses. Tenant will not directly
or indirectly use or permit the Premises to be used or operated in a manner that
may cause the Premises or the Project to be contaminated by any Hazardous
Materials in violation of any Hazardous Materials Laws. In the event of the
violation of the foregoing by Tenant, in addition to all other rights and
remedies of Landlord under this Lease, regardless of when the existence of the
Hazardous Materials or violation of any Hazardous Materials Laws is determined,
and whether during the Term or after the Expiration Date, Tenant shall,
immediately upon notice from Landlord, at Tenant's sole cost and expense, at
Landlord's option, either (i) take all action necessary to test, identify and
monitor the Hazardous Materials and to remove the Hazardous Materials from the
Project or Premises and dispose of the same and restore the Project or Premises
to the condition existing prior to such removal, and/or to remedy any violation
of any Hazardous Materials Laws, all in accordance with applicable federal,
state and local statutes, laws, codes, rules, regulations or orders; or (ii)
reimburse Landlord for all costs and expenses incurred by Landlord for
engineering or environmental consultant or laboratory services) in testing,
investigating, identifying and monitoring the Hazardous Materials and in
removing and disposing of the Hazardous Materials and in restoring the Project
or Premises, and/or in remedying any violation of any Hazardous Materials Laws
to the extent that Tenant is responsible for such violation. Tenant shall defend
with legal counsel acceptable to Landlord, indemnify and save harmless Landlord
and Landlord's managing agent against and from all liabilities, obligations,
damages, penalties, claims, costs, charges and expenses, including architects'
and attorneys' fees and disbursements which may be imposed upon or incurred by
or asserted against Landlord or Landlord's managing agent, whether by any
governmental authority, Tenant or other third party, by reason of any violation
or alleged violation of any of the foregoing provisions of this Section by
Tenant. Without Landlord's prior written consent, Tenant will not take any
remedial action or enter into any agreements or settlements in response to the
presence of any Hazardous Materials in, on, or about the Project or the
Premises.
(c) Landlord represents, to the best of its knowledge, and warrants as
of the date of this Lease and the Commencement Date that there are no Hazardous
Materials in or on the Premises or the Project except for equipment and supplies
in such quantities and used in such manner as is consistent with the operation
and maintenance of a first-class office building.
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ARTICLE 10 - ASSIGNMENT AND SUBLETTING
10.1 General. Tenant shall not assign or transfer this Lease, or any
interest therein, by operation of law or otherwise, and shall not sublet the
Premises or any part thereof, or any right or privilege appurtenant thereto, or
suffer any other person to occupy or use the Premises, or any portion thereof,
or agree to any of the foregoing, without in each case first obtaining the
written consent of Landlord in accordance with the provisions of this Article,
except as provided in Section 10.5. Any such assignment, transfer, pledge,
hypothecation, encumbrance, sublease or occupation or use of the Premises by any
other person without such consent, shall be void and shall constitute a default
under this Lease. Any consent to any assignment, transfer, pledge,
hypothecation, encumbrance, sublease or occupation or use of the Premises by any
other person which may be given by Landlord shall not constitute a waiver of the
provisions of this Article or a release of Tenant from the full performance of
the covenants herein contained.
10.2 Consent.
(a) If Tenant desires at any time to assign this Lease or sublet all
or any portion of the Premises, Tenant shall give Landlord Notice of its desire
to do so, which Notice shall contain:
(i) the name of the proposed subtenant or assignee;
(ii) the nature of the proposed subtenant's or assignee's
business to be carried on in the Premises;
(iii) a copy of the final form of the proposed sublease or
assignment;
(iv) financial statements, either audited independently or signed
by an authorized officer or principal, for the two most recent completed fiscal
years of the proposed subtenant or assignee (financial statements furnished to
Landlord which are not independently audited must be in accordance with
generally accepted accounting principles ("GAAP"), and must include all four (4)
GAAP financial statements);
(v) bank references for the proposed subtenant or assignee; and
(vi) such supplemental information as Landlord may reasonably
request concerning the proposed subtenant or assignee.
(b) Within twenty (20) days after Landlord's receipt of all of the
above information, Landlord shall, by Notice to Tenant, elect to:
(I) terminate this Lease as to the portion of the Premises so
proposed to be assigned or subleased, effective as of the date of such proposed
assignment or sublease with a proportionate abatement in Rent payable hereunder
in the event that (i) Tenant proposes to assign the Lease except as provided in
Section 10.5, or (ii) Tenant proposes to sublease space for more than five (5)
years, or (iii) Tenant has subleased or would with the inclusion of the proposed
sublease have subleased 15,722 or more rentable square feet.
(II) consent to the sublease or assignment pursuant to Landlord's
standard form; or
(III) reject the sublease or assignment for any of the following
reasons:
(i) in Landlord's reasonable estimate, the proposed
subtenant
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or assignee has a financial standing, is of a character, is engaged in business,
is of a reputation, or proposes to use any part of the Premises in a manner, not
in keeping with the standards of a first-class office building;
(ii) the sublease or assignment is not expressly subject to
all of the obligations of Tenant pursuant to this Lease and does not
specifically provide that there shall be no further subletting or assignment of
the Premises without the prior written consent of Landlord and that the
subtenant or assignee shall provide Landlord with an insurance certificate
verifying the same coverages as required by Article 8;
(iii) such subletting or assignment shall result in there
being more than five occupants per floor (who are not employed, associated with
or subject to Tenant's control) other than Tenant in the Premises;
(iv) the proposed subtenant or assignee is a person then
negotiating with Landlord for the rental of any space in the Building.
Immediately prior to the time that Tenant lists any space as available for
sublease, it may request from Landlord a list of parties with which Landlord is
engaged in active negotiations for space in the Building. Tenant shall be free
to negotiate with any party not on such list for the subleasing of such space.
(c) If Landlord has available for rent comparable or similar space in
the Building, Tenant shall not solicit any other occupant of the Building.
10.3 Obligation and Liability. Each permitted assignee, shall, in writing,
assume and be deemed to have assumed this Lease and shall be and remain liable
jointly and severally with Tenant for the payment of Rent and for the due
performance or satisfaction of all the provisions, covenants, conditions and
agreements herein contained on Tenant's part to be performed or satisfied. No
permitted assignment shall be binding on Landlord unless such assignee or Tenant
shall deliver to Landlord a counterpart of such assignment which contains a
covenant of assumption by the assignee, but the failure or refusal of the
assignee to execute such instrument of assumption shall not release or discharge
the assignee from its liability as set forth above. No such assumption by an
assignee or subtenant shall relieve Tenant of Tenant's obligation and
liabilities under this Lease.
10.4 ADA Compliance. As a condition to its consent required by this
Article, Landlord may require Tenant, its assignee, or its subtenant, to make
such alterations to the Premises as required in order to comply with ADA as it
applies to the use, occupancy, or alteration of the Premises.
10.5 Corporate Transfers. Anything to the contrary notwithstanding,
Landlord's consent shall not be required for an assignment to any entity which
becomes a successor in interest to Tenant or to a transfer to an affiliate or to
a transfer in connection with a merger, consolidation or sale of all or
substantially all of the stock or assets of Tenant; provided, however, that
Tenant shall give Landlord prompt Notice of such event.
10.6 Processing Fees. Any notice by Tenant to Landlord pursuant to this
Article 10, of a proposed assignment, subletting or other transfer of any kind,
shall be accompanied by a payment of Seven Hundred Fifty ($750.00) Dollars as a
non-refundable fee for Landlord's time
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and the processing of Tenant's request for Landlord's consent
10.7 Lease Termination. The voluntary or other surrender of this Lease by
Tenant or a mutual cancellation thereof shall not work a merger, and shall, at
the option of Landlord, terminate all or any existing subleases or subtenancies,
or may, at the option of Landlord, operate as an assignment to it of any or all
such subleases or subtenancies.
ARTICLE 11 - RULES AND REGULATIONS
Tenant and its employees, agents, licensees, and visitors will at all times
observe faithfully, and comply strictly with, the rules and regulations set
forth in Exhibit C. Landlord may from time to time reasonably amend, delete, or
modify existing rules and regulations, or adopt reasonable new rules and
regulations. In the event of any breach of any rules or regulations, Landlord
will have all remedies that this Lease provides for default by Tenant, and in
addition to any remedies available at law or in equity, including the right to
enjoin any breach of such rules and regulations. Landlord will not be liable to
Tenant for violation of such rules and regulations by any other tenant, its
employees, agents, visitors, or licensees or any other person. In the event of
any conflict between the provisions of this Lease and the rules and regulations,
the provisions of this Lease will govern.
ARTICLE 12 - COMMON AREAS
As used in this Lease, the term "common areas" means the hallways,
entryways, stairs, lobbies, elevators, driveways, walkways, terraces, docks,
loading areas, restrooms, trash facilities, and all other areas and facilities
in the Project that are provided and designated from time to time by Landlord
for the general nonexclusive use and convenience of Landlord, tenants of the
Project, their employees, invitees, licensees, and other visitors. Without
advance Notice to Tenant, except with respect to matters covered by subsection
(a) below, and without any liability to Tenant in any respect, provided Landlord
will take no action permitted under this Article 12 in such a manner as to
impair or adversely affect in any significant way Tenant's substantial benefit
and enjoyment of the Premises, Landlord shall have the right to:
(a) Close off any of the common areas to whatever extent required in
the opinion of Landlord to prevent a dedication of any of the common areas or
the accrual of any rights by any person or the public to the common areas;
(b) Temporarily close any of the common areas for maintenance,
alteration, or improvement purposes provided, however that Tenant shall at all
times, except in the case of an emergency, have reasonable access to the
Premises;
(c) Change the size, use, shape, or nature of any such common areas,
including erecting additional buildings on the common areas, expanding the
existing Building or other buildings to cover a portion of the common areas,
converting common areas to a portion of the Building or other buildings, or
converting any portion of the Building (excluding the Premises) or other
buildings to common areas. Upon erection of any additional buildings or change
in common areas, the portion of the Project upon which buildings or structures
have been erected will no longer be deemed to be a part of the common areas. In
the event of any such changes in the size or use of the Building or common areas
of the Building or Project, Landlord will make an appropriate adjustment in the
rentable area of the Building or the Building's pro rata share of
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exterior common areas of the Project, as appropriate, and a corresponding
adjustment to Tenant's Share; and
(d) Retain control over any common areas for the purposes of enforcing
state trespass laws and shall be the "person in charge" for that purpose as that
phrase is defined in ORS 164.205 (5).
ARTICLE 13 - LANDLORD'S SERVICES
13.1 Landlord's Repair and Maintenance. Landlord will as a cost of
operation maintain, repair and restore the common areas of the Project and
public restrooms (including the restrooms on any single tenant floors included
within the Premises), the exterior windows in the Building, the mechanical,
plumbing and electrical equipment serving the Building, and the structure of the
Building in reasonably good order and condition. Any damage occasioned by Tenant
(or Tenant's employees, agents, contractors, licensees, invitees, customers or
clients) shall be repaired by Landlord at Tenant's expense. Tenant agrees to
notify Landlord of necessity for any repairs of which Tenant may have knowledge
and for which Landlord may be responsible under the provisions of this Section.
13.2 Landlord's Other Services.Landlord shall furnish the Premises with the
following services:
(a) Electricity at the rate of 3.5 watts per usable square foot for
Building Standard lighting and low wattage office equipment including personal
computers, laser printers and copiers, and microwave ovens but excluding
electrical power required for computer rooms, special lighting in excess of
State of Oregon energy standards in effect on the date hereof or any other item
of electrical equipment which (individually) consumes more than 1.8 kilowatts at
rated capacity or which requires a voltage other than 120 volts single phase. If
Tenant installs equipment requiring power in excess of that required for normal
office use as determined by Landlord, Tenant shall pay to Landlord upon billing
for the cost of such excess power as Additional Rent, together with the cost of
installing any additional risers, submeters or other facilities that may be
necessary to furnish such excess power to the Premises. Tenant shall notify
Landlord in writing of any need for any excess power usage. If Tenant fails to
deliver such notice to Landlord, such excess power usage shall be deemed to have
commenced on the first day of occupancy of the Premises by Tenant.
(b) Heat, ventilation, and air conditioning (HVAC) to the extent
reasonably required to provide a standard of comfort customary in other
comparable buildings in the area ("Building Standard HVAC"), during reasonable
and usual business hours of 7:00 a.m. to 6:00 p.m., exclusive of Saturdays,
Sundays, and state and national holidays ("Building Standard Hours"), or such
shorter period specified or prescribed by any applicable policies or regulations
adopted by any utility or government agency. The Building Standard HVAC shall
conform to the HVAC specifications contained in Exhibit E. If Tenant desires
Building Standard HVAC before or after Building Standard Hours, Tenant shall
request such service in advance, and Landlord shall provide such service, at the
then current hourly rate charged to other tenants in the Building, Tenant shall
pay such charges as Additional Rent within ten (10) days of receipt of invoice.
Landlord's initial charge for after hours HVAC shall not exceed $30 per hour per
floor. If Tenant's equipment or office machines require additional air
conditioning capacity above that
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provided by Landlord as Building standard or during other than Building Standard
Hours, such additional air conditioning installation and operating costs shall
be paid by Tenant. Tenant shall not, without Landlord's prior written consent,
use heat generating machines or equipment or lighting other than Building
Standard lights and customary office equipment in the Premises which affect the
temperature otherwise maintained by the Building air conditioning system. If
such consent is given, Landlord shall have the right to install supplementary
air conditioning units servicing the Premises, and the cost thereof, including
the cost of installation and the cost of operation and maintenance thereof,
shall be paid by Tenant to Landlord as Additional Rent.
(c) Full passenger elevator service to all tenant floors during
Building Standard Hours, and freight elevator service for deliveries of large
items to and from tenant floors. At other times, elevator service may be limited
as required for reasons of maintenance, repair or security provided, however,
that passenger service from at least one elevator shall be available at all
times, except in the case of emergencies.
(d) Lighting replacement for Building standard fixtures.
(e) Janitorial service in accordance with Exhibit F five (5) days per
week, excluding holidays; provided, however that if Tenant improvements are not
consistent in quality and/or quantity with Building standard improvements and
therefore require special cleaning or janitorial services, Tenant shall pay any
cleaning and janitorial costs attributable to such special services.
13.3 Manufacturer's Warranty. In the event any special equipment or
appliance is installed by Landlord in the Premises, whether during initial
build-out for Tenant, or at any time subsequent to the Commencement Date, such
equipment or appliance shall be covered only by the manufacturer's warranty.
After the original warranty period on said equipment or appliance has expired,
the servicing, maintenance, repair, or replacement of said equipment or
appliance shall be the sole responsibility and expense of Tenant throughout the
remainder of the Term and any extensions thereof.
13.4 Limitation on Liability. Landlord shall not be in default hereunder or
be liable for any damages directly or indirectly resulting from, nor shall the
Rent herein reserved be abated by reason of (a) the installation, use or
interruption (beyond the reasonable control of Landlord) of use of any equipment
in connection with the furnishing of any of the foregoing services, (b) failure
to furnish or delay in furnishing any such services when such failure or delay
is caused by accident or any condition beyond the reasonable control of Landlord
or by the making of necessary repairs or improvements to the Premises or to the
Building, or (c) the limitation, curtailment, rationing or restrictions on use
of water, electricity, gas or any other form of energy serving the Premises or
the Building. Landlord shall use reasonable efforts to remedy any interruption
in the furnishing of such services.
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ARTICLE 14 - TENANT'S CARE OF THE PREMISES
Tenant will maintain the Premises (including Tenant's equipment, personal
property, and trade fixtures located in the Premises) in the same condition
existing at the time they were delivered to Tenant, reasonable wear and tear
excluded. Tenant shall also be responsible for the maintenance of any special
equipment, such as supplemental air conditioning units, installed at Tenant's
request. Tenant will immediately advise Landlord of any damage to the Premises
or the Project. All damage or injury to the Premises, the Project, or the
fixtures, appurtenances, and equipment in the Premises or the Project that is
caused by Tenant, its agents, employees, or invitees may be repaired, restored,
or replaced by Landlord, at the expense of Tenant. The actual out of pocket cost
of any such repairs plus 12.5% of such expense for Landlord's profit, general
conditions and overhead shall be Additional Rent and will be paid by Tenant
within ten (10) days after delivery of a statement for such expense. Landlord
has no obligation and has made no promise to alter, remodel, improve, repair,
decorate or paint the Premises or any part thereof, except as may be specified
in Article 4. No representations respecting the condition of the Premises or the
Project have been made by or on behalf of Landlord to Tenant, except as
specifically set forth in this Lease.
ARTICLE 15 - ALTERATIONS
15.1 General.
(a) Tenant will not after the Commencement Date make or allow to be
made any alterations, additions, or improvements to or of the Premises, or
attach any fixtures or equipment to the Premises (an "Alteration"), without
first obtaining Landlord's written consent. Prior to commencing any Alterations,
Tenant shall furnish to Landlord:
(i) Copies of all governmental permits and authorizations which
may be required in connection with such Alteration;
(ii) A certificate evidencing that Tenant or its contractors
have procured employers' general liability and worker's
compensation insurance including without limitation
contractors' protective, blanket contractual and completed
operations coverages;
(iii) Such additional bodily injury and property damage insurance
(over and above the insurance required to be carried by
Tenant pursuant to the provisions of Article 8) as Landlord
may reasonably require because of the nature of the work to
be done by Tenant; and
(iv) Plans and specifications for such Alterations.
(b) Landlord's consent to such Alterations shall create no
responsibility or liability on the part of Landlord for the completeness, design
sufficiency, or compliance with laws, rules, and regulations of governmental
agencies or authorities. If Landlord determines that the services of architects
or engineers or other professionals are reasonably required in order to review
Tenant's plans for any Alterations, the fees charged by such professionals shall
be deemed Additional Rent and shall be paid within ten (10) days of the receipt
of an invoice for such
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services. All such Alterations:
(i) Will be performed by contractors approved by Landlord and
subject to conditions specified by Landlord (which may
include requiring the posting of a mechanic's or insurance
construction lien bond);
(ii) At Landlord's option and sole discretion, will be made by
Landlord for Tenant's account in which case Tenant will
reimburse Landlord for the cost of such Alteration plus
percent 12.5% for Landlord's profit, general conditions and
overhead within ten (10) days after receipt of a statement;
(iii) Shall, when completed, be of such a character as not to
lessen the value of the Premises;
(iv) Shall conform to applicable Building codes and shall be
approved by any and all governmental, quasi-governmental or
utility authority having jurisdiction;
(v) Shall be performed promptly in accordance with the plans
and specifications, in a good workmanlike manner and in
full compliance with all applicable permits,
authorizations, building and zoning laws and the Building
Rules in effect at such time; and
(vi) Shall be performed in such a manner so as not to interfere
with any other tenant in the Project or impose any
additional expense upon Landlord in the maintenance or
operation of the Project.
(c) Subject to Tenant's rights and obligations in Article 17.1, all
Alterations, whether temporary or permanent in character, made in or upon the
Premises either by Tenant or Landlord, will immediately become Landlord's
property and at the end of the Term will remain on the Premises without
compensation to Tenant; provided, however, Landlord at its option may require
Tenant to remove any or all Alterations upon expiration or earlier termination
of the Lease. Notwithstanding the foregoing, Landlord shall not require the
removal of the initial improvements to the Premises, except for such
improvements as are in Landlord's opinion not standard office installations,
such as private bathrooms, exercise facilities and internal staircases. In its
approval of the plans for any Alterations, including the initial fit up of the
Premises, Landlord shall indicate in writing which Alterations or improvements
are to be removed.
(d) Landlord shall not be liable for any failure of any Building
facilities or services caused by any Alterations. Tenant shall pay the cost of
correcting any such faulty installation as Additional Rent unless caused by
improper or defective work performed by Landlord or its contractor.
15.2 Free-Standing Partitions. Tenant will have the right to install or
relocate free-standing work station partitions, without Landlord's prior written
consent, so long as no building or other governmental permit is required for
their installation or relocation. However, if a permit is required, Tenant shall
not install or relocate such partitions without Landlord's prior
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written consent which shall not be unreasonably withheld. The free-standing work
station partitions which are paid for by Tenant will be part of Tenant's trade
fixtures for all purposes under this Lease. All other partitions installed in
the Premises are and will be Landlord's property for all purposes under this
Lease.
ARTICLE 16 - CONSTRUCTION LIENS
Tenant will pay or cause to be paid all costs and charges for work all done
by Tenant or caused to be done by Tenant, in or to the Premises, and for all
materials furnished for, or in connection with, such work. Tenant will indemnify
Landlord against and hold Landlord harmless of and from all construction liens
and claims of liens, and all other liabilities on account of such work by or on
behalf of Tenant, other than work performed by Landlord. If any such lien, at
any time, is filed against any part of the Project, Tenant will cause such lien
to be discharged of record within ten (10) days. If Tenant fails to pay any
charge for which a construction lien has been filed, or has not complied with
such statutory procedures as may be available to release the lien, Landlord may,
at its option, pay such charge and related costs and interest without inquiring
into the validity thereof. The amount so paid, together with reasonable
attorneys' fees incurred, will be immediately due from Tenant to Landlord as
Additional Rent. Nothing contained in this Lease will be deemed the consent or
agreement of Landlord to subject Landlord's interest in the Project to liability
under any construction or other lien law. If Tenant receives Notice that a lien
has been or is about to be filed against the Premises or the Project, or that
any action affecting title to the Project has been commenced on account of work
done by, or for, or materials furnished to, or for, Tenant, it will immediately
give Landlord Notice of such lien notice. At least fifteen (15) days prior to
the commencement of any work in or to the Premises, Tenant will give Landlord
Notice of the proposed work and the names and addresses of the persons supplying
labor and materials for the proposed work. Landlord will have the right to post
notices of non-responsibility or similar notices on the Premises in order to
protect the Premises against any such liens.
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ARTICLE 17 - END OF TERM
17.1 Surrender of Premises. Upon the expiration of the Term or earlier
termination of this Lease, Tenant will deliver all keys to Landlord and promptly
quit and surrender the Premises broom-clean, in good order and repair, ordinary
wear and tear, damage by fire and other casualty (if covered or reasonably
should have been covered by insurance the premiums for which were or could have
been included in Operating Expenses) excepted. Tenant, at its sole expense,
shall remove such Alterations as Landlord has requested in accordance with
Article 15, and all of its computer, data, telephone and security equipment
including all computer, data, telephone and security wiring and cables in the
plenum. Tenant will fully repair any damage occasioned by the removal of any
trade fixtures, equipment, furniture or Alterations. All trade fixtures,
equipment, furniture, effects and Alterations remaining on the Premises after
the expiration or termination of this Lease will be deemed conclusively to have
been abandoned and may be appropriated, sold, stored, destroyed, or otherwise
disposed of by Landlord in a commercially reasonable manner without Notice to
Tenant or any other person and without obligation to account for them.
Notwithstanding the foregoing provisions of this Article, in the event that
Tenant fails to comply with the preceding provisions of this Article, Landlord
at its option may perform all or a portion of removals and repairs required of
Tenant hereunder, for Tenant's account, and Tenant will reimburse Landlord for
the costs of doing so (including 12.5% for Landlord's profit, general conditions
and overhead) within ten (10) days after receipt of a statement of such cost.
17.2 Holding Over.
(a) If Tenant fails to vacate the Premises after the expiration of the
Term, such holding over shall be construed as a tenancy from month-to-month,
subject to all the conditions, provisions and obligations of this Lease as
existed during the last month of the Term hereof, so far as applicable to a
month-to-month tenancy except that the Rent shall be the greater of an amount
equal to one hundred twenty five percent (125%) of (i) the Rent in effect
immediately prior to the expiration (or sooner termination) of the Lease, or
(ii) of the current market rent. No such payment shall serve to extend or renew
the Term.
(b) Failure of Tenant to remove any Alterations which Tenant is
required to remove pursuant to Section 15.1 or any substantial amount of
furniture, furnishings, or trade fixtures which Tenant is required to remove
under this Lease shall constitute a failure to vacate.
(c) Notwithstanding the foregoing, Landlord may evict Tenant from the
Premises and recover damages including consequential damages caused by wrongful
holdover.
17.3 Survivorship. The provisions of this Article shall survive the
expiration or sooner termination of this Lease.
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ARTICLE 18 - EMINENT DOMAIN
If all or any part of the Premises shall be taken or conveyed as a result
of the exercise of the power of eminent domain or under threat of the exercise
of such power, this Lease shall terminate as to the part so taken as of the date
of taking. In the case of a partial taking, either Landlord or Tenant shall have
the right to terminate this Lease as to the balance of the Premises by Notice to
the other within thirty (30) days after such date; provided, however, that a
condition to the exercise by Tenant of such right to terminate shall be that the
portion of the Premises taken or conveyed shall be of such extent and nature as
substantially to impede or impair Tenant's use of the balance of the Premises.
In the event of any taking, Landlord shall be entitled to any and all
compensation, damages, income, rent awards or any interest therein whatsoever
which may be paid or made in connection therewith. Tenant shall have no claim
against Landlord for the value of any unexpired Term of this Lease or any other
value whatsoever; provided however, Tenant shall be entitled to any and all
compensation, damages, income, rent or awards paid for, or on account of,
Tenant's moving expenses, trade fixtures and equipment; provided same does not
reduce Landlord's award. In the event of a taking of the Premises which does not
result in a termination of this Lease, Rent will be abated in the proportion of
the rentable area of the Premises so taken to the rentable area of the Premises
immediately before such taking, and Tenant's Share will be appropriately
recalculated.
ARTICLE 19 - DAMAGE AND DESTRUCTION
19.1 Repair. If the Premises or the Building are damaged by fire or other
casualty, Landlord shall forthwith repair the same subject to Unavoidable
Delays, subject to the provisions of this Article 19, provided such repairs can,
in Landlord's opinion, be made within one hundred eighty (180) days, and this
Lease shall remain in full force and effect. If Landlord fails to complete such
repairs within said 180 day period, Tenant shall have the right to terminate
this Lease by giving Landlord Notice of its election to do so within ten (10)
days after the expiration of said 180 day period, time shall be of the essence
with regard to said notice period.
19.2 Option to Repair or Terminate. If such repairs cannot, in Landlord's
opinion, be made within one hundred eighty (180) days, Landlord, at its option,
shall, by Notice to Tenant within thirty (30) days after the date of such fire
or other casualty, either (a) elect to repair or restore such damage subject to
Unavoidable Delays, with this Lease continuing in full force and effect, or (b)
terminate this Lease as of a date specified in the Notice. Landlord's Notice
shall state Landlord's opinion as to the time period necessary to effect such
repairs. If such time period exceeds 180 days, Tenant may terminate this Lease
by Notice to Landlord given within thirty (30) days after receipt of Landlord's
Notice, as to which date time shall be of the essence. If Tenant fails or elects
not to terminate this Lease as provided in the preceding sentence and Landlord
fails to substantially complete such repairs within said 180 day period, Tenant
shall have the right to terminate this Lease by giving Landlord Notice within
ten (10) days after the expiration of said 180 day period, time shall be of the
essence with regard to such notice period.
19.3 Rent Abatement. If such fire or other casualty shall have damaged the
Premises or common areas necessary to Tenant's occupancy and if such damage is
not the result of the negligence or willful misconduct of Tenant or Tenant's
employees or invitees, then during the period the Premises are rendered unusable
by such damage, Tenant shall be entitled to a reduction in Rent in the
proportion that the rentable area of the Premises rendered unusable by
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such damage bears to the total rentable area of the Premises.
ARTICLE 20 - SUBORDINATION
20.1 General.Subject to the provisions of Section 20.3, this Lease and all
of Tenant's rights hereunder shall be subject and subordinate to any mortgage,
deed of trust or other security instrument now or hereafter affecting all or any
portion of the Project and to all renewals, modifications, consolidations,
replacements and extensions thereof (herein referred to as "Security Documents")
and to all of the rights of the holders of any Security Documents. The foregoing
subordination shall be self-operative and no further instrument of subordination
need be obtained by any holder of a Security Document; provided, however, that
upon such holder's request, Tenant shall promptly execute and deliver an
instrument prepared by such holder evidencing and confirming such subordination.
Notwithstanding the foregoing, if the holder of a Security Document shall elect
to have this Lease be superior to the lien of such Security Document, this Lease
shall be deemed to be superior to such Security Document upon the giving of
Notice to such effect by such holder to Tenant, irrespective of the relative
dates of execution of this Lease and such Security Document or the recordation
of either.
20.2. Attornment. In the event the holder of any Security Document (or any
other person or entity) shall come into possession of or acquire title to the
Project as a result of the enforcement or foreclosure (judicial or nonjudicial)
of such Security Document, or by means of the delivery to such holder (or to
such other person or entity) of a deed-in-lieu of foreclosure or as a result of
any other means, or in the event that Landlord's estate in such real property is
conveyed or passes to a person or entity by operation of law or any other means
(a "Successor Owner"), then in any of said events Tenant shall, at the election
and upon the request of such Successor Owner, attorn to such Successor Owner as
its landlord under this Lease. The foregoing attornment requirement shall be
self-operative upon any such request of a Successor Owner without the execution
of any further instruments immediately upon the Successor Owner coming into
possession of, or acquiring title to, the Project. Tenant agrees, however, upon
demand of such Successor Owner, to execute an instrument in confirmation of the
foregoing provisions prepared by such Successor Owner.
20.3 Subordination, Non-Disturbance and Attornment Agreement. Anything to
the contrary contained in Sections 20.1 and 20.2 notwithstanding, this Lease
shall be contingent for a period of five (5) business days upon Landlord
obtaining from its current lender a subordination, non-disturbance and
attornment agreement in substantially the same form as Exhibit G. In the event
that Landlord fails to deliver an executed original of such Subordination,
Non-Disturbance and Attornment Agreement within in said five (5) day period,
Tenant shall have the right to terminate this Lease by giving Landlord Notice.
The provisions contained in Section 20.1 shall be applicable for the benefit of
the holder of any subsequent Security Documents provided that such holder enters
into a subordination, non-disturbance and attornment agreement with Tenant upon
such holder's standard form except that such form must contain provisions that
(i) Tenant shall not be disturbed in its possession of the Premises so long as
it is not in default of the provisions of this Lease; (ii) are commercially
reasonable regarding any limitation of remedies against the holder of any such
Security Documents; and (iii) does not provide for a period of more than 180
days for such holder to cure any of Landlord's default before Tenant can
exercise any right to terminate this Lease. If Tenant fails or refuses to
execute such holder's standard form of subordination, non-disturbance and
attornment agreement, this Lease shall remain subordinate to
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any such subsequent Security Documents.
20.4. Notice. Tenant shall send a copy of any notice given Landlord under
this Lease which alleges that Landlord is in default of its obligations under
this Lease or in which Tenant claims a right to terminate this Lease to the
holder of each Security Document of which it has notice at the same time and in
the same manner such notice is sent to Landlord.
20.5 Documentation. If any mortgagee, trustee or ground lessor shall, in
writing, elect to have this Lease deemed subordinate or prior to the lien of its
mortgage, deed of trust or ground lease, whether this Lease is dated prior or
subsequent to the date of said mortgage, deed of trust or ground lease, or the
date of recording thereof, Tenant agrees to execute any documents required to
effectuate such subordination or to make this Lease prior to the lien of any
mortgage, deed or trust or ground lease, as the case may be.
ARTICLE 21 - ENTRY BY LANDLORD
21.1 Entry. Landlord, its agents, employees, and contractors may enter the
Premises at any time and at reasonable hours after reasonable notice in
non-emergency situations (except as provided in Section 25.2) and without notice
in emergency situations and for purposes of subsection (d) hereof in order to:
(a) Inspect the Premises;
(b) Exhibit the Premises to prospective purchasers, lenders, or,
during the last Lease Year of the Term, tenants;
(c) Determine whether Tenant is complying with its Lease obligations;
(d) Supply cleaning service and any other service to be provided by
Landlord to Tenant according to this Lease;
(e) Post notices of non-responsibility or similar notices; or
(f) Make repairs required of Landlord under the terms of this Lease or
make repairs to any adjoining space or utility services or make repairs,
alterations, or improvements to any other portion of the Building; however, all
such work will be done as promptly as reasonably possible and so as to cause as
little interference to Tenant as reasonably possible.
21.2 Waiver. Tenant hereby waives any claim against Landlord, its agents,
employees, or contractors for damages for any injury or inconvenience to, or
interference with, Tenant's business, any loss of occupancy or quiet enjoyment
of the Premises, or any other loss occasioned by any entry in accordance with
this Article 21, except to the extent caused by the negligence or willful
misconduct of Landlord, its agents, employees or contractors. Landlord will at
all times be provided with a key with which to unlock all of the doors in, on,
or about the Premises (excluding Tenant's vaults, safes, and similar areas
designated in writing by Tenant in advance). Landlord will have the right to use
any and all means Landlord may deem proper to open doors in and to the Premises
in an emergency in order to obtain entry to the Premises,
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provided that Landlord will promptly repair any damages caused by any forced
entry. Any entry to the Premises by Landlord in accordance with this Article 21
will not be construed or deemed to be a forcible or unlawful entry into or a
detainer of the Premises or an eviction, actual or constructive, of Tenant from
the Premises or any portion of the Premises, nor will any such entry entitle
Tenant to damages or an abatement of Rent or other charges Tenant is required to
pay pursuant to this Lease.
ARTICLE 22 - INDEMNIFICATION, WAIVER, AND RELEASE
22.1 Tenant's Indemnification. Except if and to the extent that Tenant is
released from liability to Landlord pursuant to Section 8.5, Tenant shall
indemnify and hold Landlord harmless against and from any and all loss, cost and
expense arising from Tenant's use of the Premises or arising from any act,
neglect, fault, or omission of the Tenant, or of its agents, employees,
visitors, invitees, or licensees. In case any action or proceeding is brought
against Landlord by reason of such claim, Tenant, upon notice from Landlord,
shall defend same, at Tenant's expense, by counsel reasonably satisfactory to
Landlord. Tenant, as a material part of the consideration to Landlord, hereby
assumes all risk of damage to Tenant's property or injury to Tenant's employees,
agents, visitors, invitees, and licensees in or upon the Premises and Tenant
hereby waives all claims in respect thereof, from any cause whatsoever except to
the extent caused by the gross negligence or willful misconduct of Landlord, its
agents, employees or contractors.
22.2 Landlord's Indemnification. Except if and to the extent that Landlord
is released from liability to Tenant pursuant to Section 8.5, Landlord shall
indemnify and hold Tenant harmless against and from any and all loss, cost and
expense arising from any act, neglect, fault, or omission of the Landlord, or of
its agents, employees, visitors, invitees, or licensees. In case any action or
proceeding is brought against Tenant by reason of such claim, Landlord, upon
notice from Tenant, shall defend same, at Landlord's expense, by counsel
reasonably satisfactory to Tenant.
22.3 Release. Landlord shall not be liable to Tenant for any entry of third
parties into the Project, or for any damage to person or property, or loss of
property in and about the Project by or from any unauthorized or criminal acts
of third parties, regardless of any breakdown, malfunction, or insufficiency of
any security measures, practices, or equipment provided by Landlord, except as
provided by law. Tenant shall immediately notify Landlord in writing of any
breakdown or malfunction of any security measures, practices or equipment
provided by Landlord as to which Tenant has knowledge.
22.4 Limitations of Actions. In any situation in which Tenant disputes
Landlord's reasonableness in exercising its judgment or withholding or delaying
its consent or approval, the sole remedies available to Tenant shall be those of
an equitable nature, such as an action for an injunction or specific
performance. Tenant specifically waives the rights to money damages or other
remedies (including the right to claim money damages by way of setoff,
counterclaim or defense). The foregoing shall not be deemed to relieve Landlord
from liability in the event of a judicial determination that Landlord's refusal
to consent was arbitrary or capricious or that Landlord's consent was withheld
in bad faith. Failure by Tenant to seek relief within thirty (30) days of the
date of Landlord's decision or alleged failure to render a decision shall be
deemed a waiver of any right to dispute such action.
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22.5 Survival. The provisions of this Article 22 shall survive the
expiration or earlier termination of this Lease.
ARTICLE 23 - QUIET ENJOYMENT
Landlord covenants and agrees with Tenant that so long as Tenant pays the
Rent and observes and performs all the terms, covenants and conditions of this
Lease on Tenant's part to be observed and performed, Tenant may peaceably and
quietly enjoy the Premises subject, nevertheless, to the terms and conditions of
this Lease, and Tenant's possession will not be disturbed by anyone claiming by,
through, or under Landlord.
ARTICLE 24 - EFFECT OF SALE
A sale or conveyance of the Project and/or assignment by Landlord of this
Lease shall operate to transfer all of Landlord's obligations under the Lease
from and after the effective date of such sale, conveyance, or assignment to
Landlord's successor in interest and shall release Landlord from liability for
all of the covenants, terms, and conditions of this Lease, express or implied.
After the effective date of such sale, conveyance, or assignment, Tenant will
look solely to Landlord's successor in interest in and to this Lease. This Lease
will not be affected by any such sale, conveyance, or assignment, and Tenant
will attorn to Landlord's successor in interest to this Lease.
ARTICLE 25 - DEFAULT
25.1 Events of Default. The occurrence of any one or more of the following
events ("Events of Default") shall constitute a breach of this Lease by Tenant:
(a) if Tenant shall fail to pay Monthly Rent and/or Additional Rent
for increases in Operating Expenses or Taxes and such failure shall continue for
more than five (5) days after receipt of Notice of non-payment; or
(b) if Tenant shall fail to pay any other sum when and as the same
becomes due and payable and such failure shall continue for more than ten (10)
days after receipt of Notice of non-payment; or
(c) if Tenant shall fail to comply with the restrictions and
provisions of Article 10; or
(d) if Tenant shall fail to perform or observe any other term hereof
to be performed or observed by Tenant, and such failure shall continue for more
than thirty (30) days after Notice thereof from Landlord provided, however that
if such default is of such a nature that it cannot be remedied fully within such
thirty (30) day period, the failure by Tenant to begin correction within such
thirty (30) day period and thereafter proceed with diligence and in good faith
to effect the remedy as soon as practicable ; or
(e) if Tenant shall make a general assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due or shall file a petition in
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bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a
petition seeking a reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or shall fail timely to
contest the material allegations of a petition filed against it in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of Tenant or any material part of its
properties; or
(f) if any proceeding against Tenant seeking a reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, and such
proceeding shall not have been dismissed within thirty (30) days after it
commenced, or if, within thirty (30) days after the appointment, without the
consent or acquiescence of Tenant, of any trustee, receiver or liquidator of
Tenant or of any material part of its properties, such appointment shall not
have been vacated; or
(g) vacation or abandonment of the Premises for a continuous period in
excess of five (5) business days unless Tenant continues to pay all sums due
pursuant to this Lease; or
(h) if this Lease or any estate of Tenant hereunder shall be levied
upon under any attachment or execution and such attachment or execution is not
vacated within ten (10) days after levy thereof.
25.2 Landlord's Remedies. If an Event of Default shall occur under this
Lease, then Landlord may exercise any one or more of the remedies set forth in
this Section 25.2, or any other right or remedy available under applicable law
or contained in this Lease:
(a) Landlord may re-enter the Premises and remove all persons and
property to repossess and enjoy the Premises, without any further Notice, either
by summary proceedings, or by any other applicable action or proceeding,
(without being liable to indictment, prosecution, or damages therefore).
Landlord may use the Premises for Landlord's own purposes or relet it, without
prejudice to any other remedies that Landlord may have by reason of Tenant's
default. None of these actions will be deemed an acceptance of surrender by
Tenant. To the extent permitted by law, Tenant expressly waives the service of
any notice of intention to terminate this Lease or to retake the Premises, and
waives service of any demand for payment of Rent or for possession, and of any
and every other notice or demand required or permitted under applicable law.
(b) Landlord, at its option, may relet the whole or any part of the
Premises from time to time, either in the name of Landlord or otherwise, for
terms ending before, on, or after the Expiration Date, at such rent and upon
such other conditions (including concessions and free rent periods) as Landlord,
may determine to be appropriate. Landlord shall have no obligation to relet the
Premises or any part thereof and shall not be liable for failure to relet the
Premises or, in the event of any such reletting, for failure to collect any rent
due upon such reletting. No such failure shall operate to relieve Tenant of any
liability under this Lease. Landlord, at its option, may make such physical
changes to the Premises as it considers advisable or necessary in connection
with any such reletting or proposed reletting, without relieving Tenant of any
liability under this Lease. If there is other vacant space in the Building,
Landlord shall have no obligation to attempt to relet the Premises prior to
leasing other space in the Building.
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(c) Whether or not Landlord retakes possession of or relets the
Premises, Landlord shall have the right to recover unpaid Rent and all damages
caused by the default, including attorneys' fees. Damages shall include, without
limitation: (1) all past due Rent together with interest at a rate equal to five
percent (5%) per annum over the Prime Rate but in no event at a rate greater
than the maximum rate permitted by law, and all future Rent payable to the end
of the Term; (2) all legal expenses and other related costs incurred by Landlord
following Tenant's default; (3) all reasonable costs incurred by Landlord in
restoring the Premises to good order and condition, or in remodeling,
renovating, or otherwise preparing the Premises for reletting; and (4) all costs
incurred by Landlord in reletting the Premises, including, without limitation,
any brokerage commissions and the value of Landlord's time. Landlord may sue
periodically for damages as they accrue without barring a later action for
further damages. Landlord may in one action recover accrued damages plus damages
attributable to the remaining Term equal to the difference between the Rent
reserved in this Lease (including an estimated amount of Additional Rent as
determined by Landlord) for the balance of the Term after the time of award, and
the fair rental value of the Premises for the same period, discounted to the
time of award at the Prime Rate at the time of award. If Landlord has relet the
Premises for the period which otherwise would have constituted the unexpired
portion of the Term, or any part thereof, the amount of Rent reserved upon such
reletting shall be deemed, prima facie, to be the fair and reasonable rental
value for the part or the whole of the Premises so relet during the term of the
reletting.
25.3 Continuation after Default. Even though Tenant has breached this Lease
and abandoned the Premises, this Lease shall continue in effect as long as
Landlord does not terminate this Lease by Notice of termination to Tenant, and
Landlord shall have the right to enforce all of its rights and remedies under
this Lease, including the right to recover the Rent as it becomes due under this
Lease. Acts of maintenance or preservation, efforts to relet the Premises or the
appointment of a receiver upon initiative of Landlord to protect Landlord's
interest under this Lease shall not constitute a termination of this Lease.
25.4 Other Relief. The remedies provided for in this Lease are in addition
to any other remedies available to Landlord at law or in equity, by statute or
otherwise.
25.5 Landlord's Right to Cure Defaults. All agreements and provisions to be
performed by Tenant under any of the terms of this Lease shall be at its sole
cost and expense and without any abatement of Rent. If Tenant shall fail to pay
any sum of money, other than Rent, required to be paid by it hereunder or shall
fail to perform any other act on its part to be performed hereunder and such
failure shall continue for thirty (30) days after Notice thereof by Landlord,
Landlord may, but shall not be obligated to do so, and without waiving or
releasing Tenant from any obligations of Tenant, make any such payment or
perform any such other act on Tenant's part to be made or performed as provided
in this Lease. All sums so paid by Landlord and all necessary incidental costs
shall be deemed Additional Rent hereunder and shall be payable to Landlord on
demand, together with interest thereon from the date of expenditure by Landlord
to the date of repayment by Tenant at a rate of interest equal to five percent
(5%) per annum over the Prime Rate from time to time, but not in any event at a
rate greater than the maximum rate permitted by law. In addition to any other
rights or remedies of Landlord, Landlord shall have the same rights and remedies
in the event of the nonpayment of such sums and interest as in the case of
default by Tenant in the payment of Rent.
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ARTICLE 26 - PARKING
26.1 Visitor Parking. Tenant's visitors, clients, and patrons to the
Premises, in common with visitors, clients, and patrons of other tenants, may
use the visitors' parking area provided by Landlord in the vicinity of the
Building; provided, however, that such parking may be subject to validation,
charge, or other control systems which may be instituted from time to time by
Landlord. As used herein, the Terms "visitors" "clients" and "patrons" shall be
deemed to exclude any employee, agent, salesman, trainee, student or independent
contractor of Tenant, whether employed by Tenant on a full time or part time
basis.
26.2 Monthly Parking.
(a) During the Term, Tenant shall have the non-exclusive right to rent
up to two (2) parking spaces per 1,000 rentable square feet of Premises of which
spaces twenty (20) shall be reserved. Tenant's rental and use of such parking
spaces shall be pursuant to the terms, rules, and regulations provided under
separate parking agreement(s). All such parking spaces will be located within
the Project in the Parking Garage. The parking spaces will be unassigned,
non-reserved, and non-designated, except for twenty (20) reserved spaces.
(b) The parking spaces shall at all times be subject to the exclusive
control and management of Landlord, and Landlord shall have the right from time
to time to establish, modify, and enforce reasonable rules and regulations with
respect to the parking spaces. Tenant agrees after notice thereof, to abide by
such rules and regulations and to cause its employees to conform thereto. The
parking spaces shall be used solely for the parking of normal sized passenger
cars, sport ulitity vechicles and non-commercial vans used by Tenant's employees
while they are working at the Building. No employee shall be permitted to park
more than one (1) vehicle in a parking space and no storage of vehicles shall be
permitted in the parking spaces.
(c) Landlord reserves the right from time to time:
(i) to change the area, location and arrangement of parking areas
and parking spaces;
(ii) to restrict parking by tenants, their officers, agents,
employees, customers and invitees to designated areas;
(iii) to discontinue, restrict or temporarily suspend use of all,
or any portion of, the parking spaces for such period of time as may be
necessary in Landlord's sole discretion to perform maintenance or repairs to the
parking spaces provided, however, that Landlord shall provide temporary
replacement parking or abate the parking changes for the spaces it cannot
provide temporary replacements for;
(iv) to limit the parking of vans, limousines and other large
vehicles to specified areas provided, however that Landlord shall provide
temporary replacement spaces for all such parking spaces;
(v) to exclude any and all vehicles other than normal passenger
cars,
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sport utility vehicles and vans; and
(vi) to designate parking areas and to modify parking lots and
parking garage structures.
(d) Use of the parking spaces by Tenant, its employees and visitors
will be at their own risk and Landlord shall not be liable for any injury to
person or property, or for loss or damage to any vehicle or its contents
resulting from theft, collision, vandalism or any other cause whatsoever.
(e) On or before the Commencement Date, Tenant shall give Landlord
Notice of the number of parking spaces Tenant intends to rent as of the
Commencement Date. If Tenant elects not to rent all or a portion of the parking
spaces available to it under Section 26.2(a) above on the Commencement Date, or
at any time during the Term, Landlord shall have the right to rent such spaces
to others. After the Commencement Date, and throughout the Term, if Tenant later
desires to rent up to its maximum number of parking spaces, including any spaces
not rented on the Commencement Date (or during the Term), Tenant shall give
Landlord at least thirty (30) days prior Notice of the number of parking spaces
it desires to rent; provided parking spaces are available, and not contractually
committed to others, or otherwise encumbered, or required for other uses,
Landlord shall, subject to the provisions of Section 26.2(a), rent the desired
parking spaces to Tenant.
(f) Tenant shall be required to pay for parking spaces rented at
prevailing market rates as determined and adjusted from time-to-time by
Landlord. All parking charges are due and payable in advance at the same time
and place as Monthly Rent. Landlord reserves the right to adjust the parking
charges in Landlord's sole discretion at any time after thirty (30) days prior
Notice. Tenant may, at its option, elect to distribute all or a portion of its
maximum number of parking spaces to individual employees of Tenant who shall be
responsible for paying parking charges directly to Landlord or its operator.
Each employee of Tenant who will be paying directly for parking will be required
to sign a separate parking agreement and abide by all of the terms, conditions,
and provisions therein.
26.3 Government Regulations. If any generally applicable governmental
regulation, restriction, rule or limitation (affecting parking or the
availability or use of spaces within Landlord's available parking inventory)
limits or reduces the number or availability of spaces within Landlord's parking
inventory, then in that event Tenant's parking shall be reduced on a
proportionate basis in order to spread the effects of such limitation or
reduction in spaces or availability or use of spaces among all tenants in
proportion to their then respective allocations.
ARTICLE 27 - OPTION TO EXPAND
27.1 Option. Landlord agrees that it will not lease that portion of the
11th floor of the Building (up to 8,000 rentable square feet) not initially
leased by Tenant (the "Expansion Space") for a term or terms exceeding five (5)
years for the initial leases covering the Expansion Space. Landlord shall have
the right to lease the Expansion Space to one or more tenants. At the time that
the term of each lease for the Expansion Space expires, Tenant shall have the
right to lease the Expansion Space as it becomes available. In the event that
the Expansion Space is leased to more than one tenant, Tenant shall have the
right to lease each
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portion of the Expansion Space as such space becomes available. The foregoing
right shall only be effective upon strict compliance with the following terms
and conditions:
(a) Tenant shall have the right to lease all, but not less than all,
of the portion of the Expansion Space that becomes available.
(b) Landlord will give Tenant no more than twelve (12) and no less
than four (4) months (except in the case of any premature termination of a
lease) prior Notice of the date on which each lease for all or any portion of
the Expansion Space is to expire. In the event that a lease for all or a portion
of the Expansion Space is terminated, Landlord shall give Tenant prompt Notice
of such fact. Such notice shall specify the date on which such space is to
become available, the rentable and usable area of such space, and Landlord's
determination of the Fair Market Rent for such space.
(c) Tenant shall have thirty (30) days after the receipt of Landlord's
Notice within which to exercise its right to lease such space by giving Landlord
Notice. Such Notice shall indicate whether Tenant shall (i) lease that portion
of the Expansion Space described in Landlord's Notice at the rent specified in
such Notice; (ii) lease that portion of the Expansion Space but elect to
arbitrate the rental rate as provided in Sections 28.2 and 28.3; or (iii) elect
not to lease such space. Such Notice once given shall be irrevocable. In the
event that Tenant fails to give Notice within said thirty (30) day period or
elects not to lease the space being offered, Landlord shall be free to lease
such space upon any terms it deems acceptable in its sole and unfettered
discretion.
(d) In the event that Tenant properly exercises its right to lease
some or all of the Expansion Space, such leasing shall be upon the same terms
and conditions contained in this Lease except as follows:
(i) Monthly Rent shall be $26.50 per rentable square foot.
(ii) The Base Year for Operating Expenses and Taxes shall be
calendar year 1998. (iii) Landlord shall deliver the Expansion Space "as is" on
the date that the existing tenant vacates, broom clean and free of all of such
tenant's personal property.
(iv) Rent shall commence on the date such space is available to
Tenant.
(v) Landlord shall give Tenant a fit-up allowance of $10.00 per
usable square foot of space leased for a term of five (5) years, which allowance
shall be prorated on a straight line basis for terms of less than five (5)
years.
(e) In order for Tenant's Notice to be valid it must be in full
compliance with all of the terms and conditions of this Lease on the date that
it gives Notice of intent to lease the Expansion Space.
(f) So long as all or any portion of the Expansion Space is available
for
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lease and/or has not been fitted out, Tenant may lease all or any portion
corresponding to that which Landlord is offering for lease upon the same terms
and conditions as the initial Premises except the Tenant Finish Allowance of
$28.50 per usable square foot shall be prorated on a straight line basis if the
term for which such space is being leased is less than ten (10) years.
27.2 Failure to Vacate. In the event that a tenant fails or refuses to
vacate its portion of the Expansion Space, Landlord shall have no liability or
obligation except to use commercially reasonable efforts to evict such tenant
from its space.
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ARTICLE 28 - OPTION TO EXTEND
28.1 Option. Tenant shall have the option to extend the term of this Lease
for an additional term of five (5) years to commence on the day following the
Expiration Date and to terminate five (5) years thereafter, provided that Tenant
is not in default of any provision of this Lease and has not subleased more than
thirty-five percent (35%) of the area of the Premises during any portion of the
two (2) Lease Years prior to the Expiration Date. Such extension shall be upon
the same terms and conditions as contained in this Lease except that (i) the
Monthly Rent shall be the "Fair Market Rent" as of the Expiration Date,
determined pursuant to Section 28.2, but in no event less per square foot than
the Monthly Rent and Additional Rent for increases in Operating Costs and Taxes
Tenant is paying immediately prior to the Expiration Date; (ii) there shall be
no Landlord's Work or other related concessions granted for such extension,
except that Landlord shall provide Tenant with a refurbishment allowance of
$10.00 per usable square foot of space occupied by Tenant at such time; (iii)
the Base Year for the extension period shall be the calendar year in which such
term commences; and (iv) there shall be no further option to extend. In order to
exercise the option to extend, Tenant shall give notice to Landlord ("Tenant's
Notice") of such exercise not later than twelve (12) months prior to the
Expiration Date, time being of the essence. In order for Tenant's exercise to be
effective, at the time it gives such Tenant's Notice and at the time such
extension term is to commence, Tenant shall not be in default at either time of
any obligation hereunder, beyond any applicable grace period. If Tenant fails to
exercise its option to extend within the time period provided herein, said time
being of the essence, Landlord shall be free to lease such space upon the same
or different terms as set forth in the Landlord's Notice.
28.2 Determination of Rent. Following Tenant's Notice, but no later than
ten (10) months prior to the Expiration Date, Landlord shall give Tenant notice
("Landlord's Notice") of Landlord's determination of the "Fair Market Rent" (as
hereinafter defined) for the extension term. For the purposes of this Article,
the term "Fair Market Rent" shall mean the annual fair market rent per square
foot for comparable space in the Building and in other comparable first-class
office buildings in the Portland, Oregon area paid by tenants pursuant to leases
similar to this Lease and taking into account rent concessions then being
granted, if any, for such leases, as if Landlord and Tenant were entering into a
new lease for comparably improved space for a term of five (5) years. In the
event that Landlord and Tenant are not able to agree upon the Fair Market Rent,
after a period of thirty (30) days in which to negotiate in good faith to do so
as provided in Section 28.3, Tenant shall nevertheless have the right to
exercise its option to extend the term of this Lease under protest by noting its
objections to such Fair Market Rent in a notice to Landlord. In the event that
the determination of Fair Market Rent shall not be resolved by the date of the
initial Expiration Date, Tenant shall continue to pay the Rent in effect
immediate prior to such expiration date. In the event that it is determined that
the Fair Market Rent is greater than the Rent Tenant has been paying, Tenant
shall reimburse Landlord for the amount it has underpaid Monthly Rent plus
interest at the Interest Rate
28.3 Dispute Resolution. In the event that the parties are unable to agree
upon the Fair Market Rent within thirty (30) days of Tenant's receipt of
Landlord's Notice, such rent shall be determined in accordance with the
foregoing definition by two (2) qualified appraisers, one selected by each of
the parties. Each party shall send the other Notice of its choice of appraiser
within sixty (60) days of Tenant's receipt of Landlord's Notice. Failure by
either party to send such notice within such sixty (60) day period shall mean
that the other party's determination of
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Fair Market Rent is accepted. If the two (2) appraisers agree upon such rent,
such decision shall be conclusive and binding upon the parties. Except as
hereinafter provided, if the two (2) appraisers cannot agree upon such rent
within sixty (60) days after the date upon which both have been appointed, the
two (2) appraisers shall then select a third appraiser within ten (10) days
thereafter. The third appraiser shall within thirty (30) days select the value
determined by either Landlord's or Tenant's appraiser as being in his/her
professional opinion closest to the Fair Market Rent of the Premises. If the
rent determined by Landlord's and Tenant's appraisers are not more than $2.00
per square foot apart, for the purposes of this Article, the Fair Market Rent
shall be deemed to be the average of the two (2) rents. The appraisers shall be
licensed real estate brokers or Members of the Appraisal Institute, who are
disinterested and are currently practicing in Portland, Oregon with at least ten
(10) years of experience in leasing or appraising properties similar to the
Building. Each party shall pay the fees charged by the appraiser it selects and
the fees of the third appraiser, if one is required, shall be borne equally. The
foregoing agreement to arbitrate shall be specifically enforceable and shall be
subject to the applicable provisions of Article 29.
ARTICLE 29 - ARBITRATION
29.1 The parties have not agreed to arbitrate all disputes arising pursuant
to this Lease; however, Landlord or Tenant may at any time request final and
binding arbitration of any matter in dispute where arbitration is expressly
provided for in this Lease (Sections 4.1, 6.6 and 7.7). Any party who fails to
submit to binding arbitration following a lawful demand by the other party shall
bear all costs and expenses, including reasonable attorneys' fees, (including
those incurred in any trial, bankruptcy proceeding, appeal or review) incurred
by the other party in obtaining a stay of any pending judicial proceeding
concerning a dispute which by the terms of this Lease has been properly
submitted to mandatory arbitration, and or compelling arbitration of any
dispute. The party requesting arbitration shall do so by giving Notice to that
effect to the other party, specifying in said Notice the nature of the dispute.
All such arbitration hearings shall be held in the City of Portland, Oregon, and
determined by a single arbitrator for matters up to $200,000.00 and by three
arbitrators for any dispute in excess of such amount, in accordance (to the
extent consistent with this Article) with the rules then pertaining to the
Multnomah County Circuit Court Arbitration Program except to the extent provided
otherwise under Oregon laws on arbitration and as otherwise provided herein. If
such program is terminated then the rules of the American Arbitration
Association shall be used.
29.2 A party demanding arbitration of a dispute shall give Notice to that
effect to the other party and shall in such Notice appoint a disinterested
arbitrator if a dispute is to be resolved by three (3) arbitrators. Within ten
(10) business days after delivery of such Notice, the other party will also
appoint a disinterested arbitrator by Notice to the original party. Within ten
(10) business days after the latter appointment, the two arbitrators so
appointed will appoint a third arbitrator (the "Neutral Arbitrator"). If only
one arbitrator is to be used, then such arbitrator shall be selected as provided
by the Rules of the Multnomah County Circuit Court Arbitration Program or
American Arbitration Association, as the case may be. The Neutral Arbitrator
shall conduct the arbitration. The qualification of the arbitrators will vary
depending upon the nature of the matter to be resolved as follows: a real estate
broker with at least ten (10) years experience in office leasing in Portland, a
partner in a national accounting firm's Portland office, or a lawyer
specializing in real estate matters with at least ten (10) years experience in
the Portland area. Selection of the Neutral Arbitrator will be subject to the
following:
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(a) if the second arbitrator is not appointed within said ten (10)
business day period, the first arbitrator will select the Neutral Arbitrator;
and
(b) if the two arbitrators appointed by the parties cannot agree,
within ten (10) business days after the appointment of the second arbitrator,
upon the appointment of the Neutral Arbitrator, they will give Notice to the
parties of such failure to agree, and, if the parties fail to agree upon the
selection of the Neutral Arbitrator within five (5) business days after the
arbitrators appointed by the parties give such Notice, then either of the
parties may apply to the Circuit Court presiding judge of Multnomah County,
Oregon for a court appointment of the Neutral Arbitrator.
29.3 The arbitrator(s) shall resolve all disputes in accordance with the
substantive law of the state of Oregon. The arbitrator(s) shall have no
authority nor jurisdiction to award any damages or any other remedies beyond
those which could have been awarded in a court of law if the parties had
litigated the claims instead of arbitrating them nor to modify the provisions of
this Agreement. The parties shall not assert any claim for punitive damages
except to the extent such awards are specifically authorized by statute. The
Federal Arbitration Act, Title 9 of the United States Code, is applicable to
this Lease transaction and shall be controlling in any judicial proceedings and
in the arbitration itself as to issues of arbitrability and procedure. No
provision of, nor the exercise of any rights under this Article shall limit the
right of the Landlord to evict the tenant, exercise self help remedies or obtain
provisional or ancillary remedies such as an injunction, receivership,
attachment or garnishment. Any arbitration proceeding may proceed in the absence
of any party who, after Notice, fails to be present at such arbitration and, in
such event, an award may be made based solely upon the evidence submitted by the
party that is present. Discovery will be in accordance with the Federal Rules of
Civil Procedure. The arbitrators will render a decision and award in writing,
within thirty (30) days after appointment, and will deliver counterpart copies
of the decision and award to each of the parties. Unless otherwise agreed in
writing by the parties or unless this Agreement has been terminated, during the
pendency of the arbitration, the parties will continue to comply with all the
terms and provisions of this Agreement which are not the subject of the
arbitration proceeding. This agreement to arbitrate will be specifically
enforceable by either party. The decision or award rendered by the arbitrator(s)
shall be final, non-appealable, and binding upon the parties, and judgment may
be entered upon it in accordance with applicable Oregon law in a court of
competent jurisdiction.
29.4 The parties shall use their best efforts to complete any arbitration
within sixty (60) days of initial notice of arbitration. The arbitrator(s) shall
be empowered to impose sanctions for any party's failure to do so. The
provisions of this arbitration provision shall survive any termination,
amendment, or expiration hereof or of the Lease. Each party agrees to keep all
disputes and arbitration proceedings strictly confidential, except for the
disclosure of information required in the ordinary course of business of the
parties or as required by applicable law or regulation. Any time limitation
(such at the statute of limitations or laches) which would bar litigation of a
claim shall also bar arbitration of the claim. If any provision of this Article
is declared invalid by any court, the remaining provisions shall not be affected
thereby and shall remain fully enforceable. The parties understand that they
have decided that upon demand of either of them, their disputes as described
herein will be resolved by arbitration rather than in a court and once so
decided cannot later be brought, filed or pursued in court.
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29.5 Nothing in this Article shall limit the right of either party to
obtain from any court having jurisdiction equitable, provisional or ancillary
remedies such as injunctive relief, attachment, garnishment, or the appointment
of a receiver. Such rights may be exercised at any time, except to the extent
such action is contrary to a final award of decision in any arbitration
proceeding. The institution and maintenance of such action will not constitute a
waiver of the right of either party to submit any dispute under this Agreement
to arbitration, nor render inapplicable the compulsory arbitration provisions
hereof.
29.6 Each party will pay one-half the fees and the costs incurred by the
Neutral Arbitrator, unless the Neutral Arbitrator exercises its discretion, or
is required by this Article, to award fees, costs and expenses to the prevailing
party.
ARTICLE 30 - MISCELLANEOUS
30.1 No Offer. This Lease is submitted to Tenant on the understanding that
it will not be considered an offer and will not bind Landlord in any way until
Tenant has duly executed and delivered triplicate originals to Landlord and
Landlord has executed and delivered one of such originals to Tenant.
30.2 No Construction Against Drafting Party. Landlord and Tenant
acknowledge that each of them and their counsel have had an opportunity to
review this Lease and that this Lease will not be construed against Landlord
merely because Landlord has prepared it. Tenant further acknowledges that it has
been represented (or has had the opportunity to be represented) in the
negotiation and execution of this Lease by independent legal counsel, selected
of Tenant's own free will. Tenant further acknowledges that it has read and
understands the provisions, terms and conditions of this Lease.
30.3 Time of the Essence. Time is of the essence of each and every
provision of this Lease.
30.4 No Recordation. Tenant's recordation of this Lease or any memorandum
or short form of it will be void and a default under this Lease.
30.5 No Waiver. The failure of either party to seek redress for violation
of, or to insist upon the strict performance of any covenant or condition of
this Lease or any of the rules and regulations shall not prevent a subsequent
act which would have originally constituted a violation, from having all the
force and effect of an original violation. No provision of this Lease shall be
deemed to have been waived by either party, unless such waiver be in written
agreement giving such waiver. The receipt by Landlord of Rent with knowledge of
the breach of any covenant of this Lease shall not be deemed a waiver of such
breach. No payment by Tenant or receipt by Landlord of a lesser amount than the
Monthly Rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction. Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such Rent or pursue any
other remedy in this Lease. No act by Landlord or its agent shall be deemed an
acceptance of a surrender of the Premises or an agreement to accept such
surrender unless in writing and signed by Landlord. No employee of Landlord or
its
38
<PAGE>
agent shall have any power to accept the keys to the Premises and the delivery
of the keys shall not operate as a termination of this Lease or surrender of the
Premises. The parties acknowledge that the provisions of this Section are
essential and material terms of this Lease.
30.6 Estoppel Certificates. Tenant agrees that from time to time, upon not
less than seven (7) days prior written request by Landlord, Tenant will, and
Tenant will use reasonable effort to cause any permitted subtenant or assignee,
licensee, concessionaire or other occupant of the Premises to promptly complete,
execute and deliver to Landlord, or any party or parties designated by Landlord,
an estoppel in the form furnished by Landlord certifying: (1) that this Lease is
unmodified and in full force and effect (or if there have been modifications
that the same are in full force and effect as modified and identifying the
modifications); (2) the dates to which the Rent and other charges have been
paid; (3) that the Premises have been unconditionally accepted by the Tenant (or
if not, stating with particularity the reasons why the Premises have not been
unconditionally accepted); (4) the amount of any Security Deposit held
hereunder; (5) that, so far as the party making the certificate knows, Landlord
is not in default under any provisions of this Lease, if such is the case, and
if not, identifying all defaults with particularity; and (6) any other matter
reasonably requested by Landlord. Any purchaser or mortgagee of any interest in
the Building, Land or Project shall be entitled to rely on said statement.
30.7 Attorney's Fees. In the event Landlord places the collection of any
Rent or other sums due or to become due hereunder, or recovery of the possession
of the Premises in the hands of an attorney at law, or files suit upon the same,
then the prevailing party shall be entitled to recover from the other party such
sum as the court may adjudge reasonable as attorneys' fees at trial or on appeal
of such suit or action, in addition to all other sums provided by law.
30.8 Severability. If any provision of this Lease proves to be illegal,
invalid, or unenforceable, the remainder of this Lease will not be affected by
such finding, and in lieu of each provision of this Lease that is illegal,
invalid, or unenforceable a provision will be added as a part of this Lease as
similar in terms to such illegal, invalid, or unenforceable provision as may be
possible and be legal, valid, and enforceable.
30.9 Written Amendment Required. No amendment, alteration, modification of,
or addition to the Lease will be valid or binding unless expressed in writing
and signed by Landlord and Tenant.
30.10 Entire Agreement. This Lease, the exhibits and addenda, if any,
contain the entire agreement between Landlord and Tenant. No promises or
representations, except as expressly contained in this Lease, have been made to
Tenant respecting the condition or the manner of operating the Premises, the
Building, or the Project. The taking possession of the Premises by Tenant shall
be conclusive evidence that Tenant accepts the Premises and the Building and
that, except to the extent set forth in a written "punchlist" or other agreement
between Landlord and Tenant and except for latent defects, the same were good
and satisfactory condition at the time such possession was so taken.
30.11 Captions. The captions of the various articles and sections of this
Lease are for convenience only and do not necessarily define, limit, describe,
or construe the contents of such articles or sections.
39
<PAGE>
30.12 Brokers. Landlord and Tenant respectively represent and warrant to
each other that neither of them has consulted or negotiated with any broker or
finder with regard to the Premises except the broker named in Section 1.1(u), if
any. Each of them will indemnify the other against and hold the other harmless
from any claims for fees or commissions from anyone with whom either of them has
consulted or negotiated with regard to the Premises except the broker. Landlord
will pay any fees or commissions due the broker.
30.13 Governing Law. This Lease will be governed by and construed pursuant
to the laws of the State of Oregon.
30.14 No Easements for Air or Light. Any diminution or shutting off of
light, air, or view by any structure that may be erected on lands adjacent to
the Building will in no way affect this Lease or impose any liability on
Landlord.
30.15 Tax Credits. Landlord is entitled to claim all tax credits and
depreciation attributable to leasehold improvements in the Premises for which
Landlord has paid. Promptly after Landlord's demand, Landlord and Tenant will
prepare a detailed list of the leasehold improvements and fixtures and their
respective costs for which Landlord or Tenant has paid. Landlord will be
entitled to all credits and depreciation for those items for which Landlord has
paid by means of any Tenant Finish Allowance or otherwise. Tenant will be
entitled to any tax credits and depreciation for all items for which Tenant has
paid with funds not provided by Landlord.
30.16 Binding Effect. The covenants, conditions, and agreements contained
in this Lease will bind and inure to the benefit of Landlord and Tenant and
their respective heirs, executors, administrators, successors, and, except as
otherwise provided in this Lease, their assigns.
30.17 Confidentiality. It is hereby agreed that the terms and provisions of
this Lease are confidential and, as such, may not be disclosed to any individual
or entity without the express written consent of Landlord; provided, however
that Tenant may disclose the terms of this Lease to its attorneys, accountants
and other advisors and as may be required by law or regulation.
30.18 Approval. Except as may be specifically otherwise provided in this
Lease, reference in this Lease to "approval," "consent" "judgment" and
"satisfactory" shall not be interpreted as justifying arbitrary rejection, but
rather shall connote a reasonable application of judgment taking into account
long-term leasing practices and commercial customs relating to major real estate
transactions.
30.19 Construction of Terms. Wherever used in this Lease, unless the
context clearly indicates a contrary intent or unless otherwise specifically
provided herein, the word "Lease" shall mean this Lease and any schedules or
supplements hereto. Whether or not specifically stated in any provision of this
Lease, reference therein to (i) any law, statute, ordinance, code, rule,
regulation or the like shall mean and included any and all modifications,
amendments and replacements thereof, (ii) the phrase "including" shall mean
"including without limitation" and (iii) any right of Landlord shall mean unless
expressly provided therein to the contrary, such right without any corresponding
obligation. The term "Tenant" shall mean Tenant
40
<PAGE>
and any subsequent holder or holders of this Lease; and pronouns of any gender
shall include the other gender; and either the singular or plural shall include
the other. The term "Landlord" wherever used in this Lease shall be limited to
mean and include only the owner or owners at the time in question of the
Building or a mortgagee in possession, so that in the event of any sale,
assignment or transfer of the Building, such assigning owner, or mortgagee in
possession shall thereupon be released and discharged from all covenants,
conditions and agreements of Landlord hereunder, but such covenants, conditions
and agreements shall be binding for the time being upon each new owner, or
mortgagee in possession of the Building, until again sold, assigned or
transferred.
30.20 Consequential Damages. In no event shall Landlord be liable for any
consequential, special, punitive or indirect loss or damage which Tenant may
incur or suffer in connection with this Lease or any services to be performed or
provided pursuant hereto.
30.21 Limitation of Liability. Tenant shall look solely to the estate and
interest of Landlord, its successors and assigns, in the Project for the
collection of a judgment (or other judicial process) requiring the payment of
damages or money by Landlord, and no other property or assets of Landlord or any
partner of Landlord shall be subject to levy, execution or other enforcement
procedure for the satisfaction of Tenant's remedies under or with respect to
either this Lease, the relationship of Landlord and Tenant hereunder or Tenant's
use and occupancy of the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
day and year first above written.
LANDLORD: TENANT:
600 HOLLADAY LIMITED PARTNERSHIP KINDERCARE LEARNING
By Ashforth Lloyd Properties, Inc. CENTERS, INC.
Its General Partner
HENRY A. ASHFORTH, III BETH A. UGORETZ
- --------------------------------------- ------------------------------
By Henry A. Ashforth, III By Beth A. Ugoretz
Its Executive Vice President Its Executive Vice President
41
<PAGE>
EXHIBIT A
The Premises
TO BE AGREED UPON AS PROVIDED IN SECTION 4.1
A-1
<PAGE>
EXHIBIT B
Legal Description of the Land
All of Block 82 and Block 83, HOLLADAY'S ADDITION TO EAST PORTLAND, in the
City of Portland, County of Multnomah and State of Oregon.
FURTHER described as follows:
A tract of land being part of the Holladay's Addition to the City of
Portland, Blocks 82 and 83 and the vacated N.E. Pacific Street TOGETHER WITH
portions of vacated N.E. 7th Avenue and N.E. Oregon Street, in Section 35,
Township 1 North, Range 1 East, of the Willamette Meridian, in the City of
Portland, County of Multnomah and State of Oregon, being more particularly
described as follows:
Beginning at the Northwest corner of Block 82 of the recorded plat of
Holladay's Addition; thence East along the North line of Block 82 of said plat a
distance of 200.00 feet to the Northeast corner of Block 82 of said plat; thence
South along the East line of said Block 82 and Block 83 a distance of 450.00
feet to the Southeast corner of said Block 83, said point being in the South
line of that portion vacated along the North line of N.E. Oregon Street as per
vacation Ordinance No. 169326; thence West along said South line of Block 83 and
the said vacated portion of N.E. Oregon Street a distance of 200.00 feet to the
Southwest corner of said Block 83; thence North along the East line of N.E. 6th
Avenue, a distance of 450.00 feet to the point of beginning.
B-1
<TABLE>
<CAPTION>
SUBSIDIARIES OF KINDERCARE LEARNINGS CENTERS, INC.
--------------------------------------------------
State or Jurisdiction of Approximate Percentage
Name of Subsidiary Incorporation of Voting Securities Owned
- ------------------ ------------------------ --------------------------
<S> <C> <C>
KC Development Corp. Delaware 100%
KC Hedging Corp. Delaware 100%
KinderCare Learning Centres Limited Delaware 100%
KinderCare Properties Limited Delaware 100%
KinderCare Real Estate Corp. Delaware 100%
Mini-Skools, Inc. Delaware 100%
Mini-Skools, Limited Manitoba, Canada 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-30-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-30-1997
<EXCHANGE-RATE> 1
<CASH> 24,150
<SECURITIES> 0
<RECEIVABLES> 15,782
<ALLOWANCES> 2,133
<INVENTORY> 0
<CURRENT-ASSETS> 58,040
<PP&E> 570,389
<DEPRECIATION> 98,831
<TOTAL-ASSETS> 569,878
<CURRENT-LIABILITIES> 86,919
<BONDS> 383,129
0
0
<COMMON> 94
<OTHER-SE> 27,613
<TOTAL-LIABILITY-AND-EQUITY> 569,878
<SALES> 0
<TOTAL-REVENUES> 563,135
<CGS> 0
<TOTAL-COSTS> 543,033
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,697
<INTEREST-EXPENSE> 22,394
<INCOME-PRETAX> (2,060)
<INCOME-TAX> 3,375
<INCOME-CONTINUING> (5,435)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,532)
<CHANGES> 0
<NET-INCOME> (12,967)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
