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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 19, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
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.)
650 NE Holladay, Suite 1400
Portland, Oregon 97232
(Address of principal executive offices)
(503) 872-1300
(Registrant's telephone number, including area code)
(Former name, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing required for the past 90 days. Yes [X] No [ ]
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 [ ]
The number of shares of registrant's common stock, $.01 par value per
share, outstanding at October 17, 1997 was 9,368,421.
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<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Index
Page
Part 1. Financial Information
Item 1. Consolidated financial statements (unaudited):
Consolidated balance sheets at September 19, 1997 and
May 30, 1997 (unaudited)..................................1
Consolidated statements of operations for the sixteen
weeks ended September 19, 1997 and September 20,
1996 (unaudited)..........................................2
Consolidated statements of shareholders' equity
for the sixteen weeks ended September 19, 1997
and for the fiscal year ended May 30, 1997 (unaudited)....3
Consolidated statements of cash flows for the sixteen
weeks ended September 19, 1997 and
September 20, 1996 (unaudited)............................4
Notes to unaudited consolidated financial statements........5
Item 2. Management's discussion and analysis of
financial condition and results of operations.............7
Part II. Other Information
Item 1. Legal proceedings..........................................14
Item 6. Exhibits and reports on Form 8-K...........................14
Signatures....................................................................15
i
<PAGE>
PART I
Item 1. Consolidated Financial Statements (unaudited)
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
(Unaudited)
September 19, 1997 May 30, 1997
------------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 13,390 $ 24,150
Receivables 15,242 13,649
Deferred income taxes 14,127 14,127
Prepaid expenses and supplies 7,899 6,114
----------- -----------
Total current assets 50,658 58,040
Property and equipment, net 474,226 471,558
Deferred income taxes 14,660 11,621
Deferred financing costs and other assets 27,142 28,659
----------- -----------
$ 566,686 $ 569,878
=========== ===========
Liabilities and Shareholders' Equity:
Current liabilities:
Bank overdrafts $ 7,829 $ 5,357
Accounts payable 7,691 10,746
Accrued expenses and other liabilities 63,001 69,056
Current portion of long-term debt 1,719 1,760
----------- -----------
Total current liabilities 80,240 86,919
Long-term debt 392,753 393,129
Self insurance liabilities 21,343 21,880
Other noncurrent liabilities 44,543 40,243
----------- -----------
Total liabilities 538,879 542,171
----------- -----------
Commitments and contingencies
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 and outstanding
9,368,421 shares 94 94
Retained earnings 27,781 27,753
Cumulative translation adjustment (68) (140)
----------- -----------
Total shareholders' equity 27,807 27,707
----------- -----------
$ 566,686 $ 569,878
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Sixteen Weeks Ended
-----------------------------------------
September 19, 1997 September 20, 1996
------------------ ------------------
<S> <C> <C>
Operating revenues, net $ 180,562 $ 171,427
-------------- --------------
Operating expenses:
Salaries, wages and benefits 99,529 93,340
Depreciation 11,280 11,857
Rent 8,251 8,650
Provision for doubtful accounts 1,151 1,040
Other 46,139 46,789
Restructuring charges 1,563 --
-------------- --------------
Total operating expenses 167,913 161,676
-------------- --------------
Operating income 12,649 9,751
Investment income, net 348 71
Interest expense (12,954) (4,940)
-------------- --------------
43 4,882
Income before income taxes and
extraordinary item
Income tax expense 15 1,904
-------------- --------------
Income before extraordinary items 28 2,978
Extraordinary item - loss on early retirement of
debt, net of income taxes of $786 -- 1,229
-------------- --------------
Net income $ 28 $ 1,749
============== ==============
Primary earnings per common share:
Income before extraordinary item $ 0.003 $ 0.148
Extraordinary item - loss on early
retirement of debt, net of income taxes -- 0.061
-------------- --------------
Net income $ 0.003 $ 0.087
============== ==============
Weighted average common and common
equivalent shares outstanding 9,368,000 20,039,000
============== ==============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except share amounts)
(Unaudited)
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 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
warrants -- -- (11,143) -- -- -- (11,143)
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
Net income -- -- -- 28 -- -- 28
Cumulative translation
adjustment -- -- -- -- 72 -- 72
----------- ---------- ---------- ----------- ---------- ---------- ----------
Balance at
September 19, 1997 9,368,421 $ 94 $ -- $ 27,781 $ (68) $ -- $ 27,807
=========== ========== ========== =========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Sixteen Weeks Ended
-------------------------------------------
September 19, 1997 September 20, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operations:
Net income $ 28 $ 1,749
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 11,280 11,857
Amortization of deferred financing costs and 981 --
intangibles
Gain on sales and disposals of property and
equipment, net (124) (42)
Extraordinary item - loss on early retirement
of debt, net of income taxes -- 1,229
Changes in operating assets and liabilities:
Decrease (increase) in receivables (1,539) 158
Increase in prepaid expenses and supplies (1,785) (2,121)
Decrease (increase) in other assets (248) 285
Decrease in accounts payable, accrued
expenses and other liabilities (8,222) (6,290)
Other, net 184 (301)
------------- ------------
Net cash provided by operating activities 555 6,524
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (14,696) (16,059)
Proceeds from sales of property and equipment 816 704
Proceeds from collection of notes receivable and other 785 10
------------- ------------
Net cash used by investing activities (13,095) (15,345)
------------- ------------
Cash flows from financing activities:
Bank overdrafts 2,472 866
Revolving credit facility borrowings -- 48,000
Exercise of stock options and warrants -- 508
Payments on long-term borrowings (419) (30,342)
Payments on capital leases (273) --
Purchases of treasury stock and warrants -- (14,251)
------------- ------------
Net cash provided by financing activities 1,780 4,781
------------- ------------
Decrease in cash and cash equivalents (10,760) (4,040)
Cash and cash equivalents at the beginning of the period 24,150 15,597
------------- ------------
Cash and cash equivalents at the end of the period $ 13,390 $ 11,557
============= ============
Supplemental cash flow information:
Interest paid $ 16,633 $ 7,106
Income taxes paid (refunded), net (23) 743
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Unaudited 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 September 19, 1997, KinderCare operated 1,146 centers in
38 states in the United States and two centers 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.
The unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of the Company at September
19, 1997 and the results of operations and cash flows for each of the sixteen
weeks ended September 19, 1997 and September 20, 1996. Interim results are not
necessarily indicative of results to be expected for a full fiscal year. The
unaudited consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and notes thereto included in the
Company's Form 10-K.
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 1998 and 1997 fiscal years are each 52 weeks long.
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 period's presentation.
5
<PAGE>
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., 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, 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.
3. Restructuring Charges
During fiscal year 1997, the Company decided to relocate its corporate
offices from Montgomery, Alabama to Portland, Oregon in fiscal year 1998. During
the first quarter of fiscal year 1998, the Company recognized $1.6 million in
restructuring charges. The charges are primarily comprised of costs incurred in
the recruitment and relocation of employees and travel, computer and
architecture costs related to the office relocation. The Company anticipates
incurring an additional $4.2 million in restructuring charges related to the
relocation during the second and third quarters of fiscal year 1998.
4. Extraordinary Loss
During the first quarter of fiscal year 1997, the Company purchased $30.0
million aggregate principal amount of its 10-3/8% senior subordinated notes for
an aggregate price of $31.5 million. This transaction included the write-off of
deferred financing costs of $0.5 million and resulted in an extraordinary loss
of $1.2 million, net of income taxes of $0.8 million.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and 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 quarters ended September 19, 1997
("first quarter of fiscal 1998") and September 20, 1996 ("first quarter of
fiscal 1997"), each of which was sixteen weeks long.
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) and
non-tuition income, 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.
Results of Operations
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Sixteen Weeks Sixteen Weeks Change
Ended Percent Ended Percent Amount
September 19, of September 20, of Increase/
1997 Revenues 1996 Revenues (Decrease)
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues, net $ 180,562 100.0% $ 171,427 100.0% $ 9,135
---------- ---------- ---------- ---------- ---------
Operating expenses:
Salaries, wages and benefits 99,529 55.1% 93,340 54.5% 6,189
Depreciation 11,280 6.2% 11,857 6.9% (577)
Rent 8,251 4.6% 8,650 5.0% (399)
Other 47,290 26.2% 47,829 27.9% (539)
Restructuring charges 1,563 0.9% -- -- 1,563
---------- ---------- ---------- ---------- ---------
Total operating expenses 167,913 93.0% 161,676 94.3% 6,237
---------- ---------- ---------- ---------- ---------
Operating income $ 12,649 7.0% $ 9,751 5.7% $ 2,898
========== ========== ========== ========== =========
</TABLE>
7
<PAGE>
Operating revenues, net - Net operating revenues increased $9.1 million, or
5.3%, to $180.6 million in the first quarter of fiscal 1998 from the comparable
quarter last year. The increase in net operating revenues is primarily
attributable to a 4.7% weighted average tuition increase implemented in the fall
of 1996 and to new center openings and acquisitions. The average tuition rate
increased to $105.10 in the first quarter of fiscal 1998 from $101.58 in the
first quarter of fiscal 1997. The positive effect of those factors on net
operating revenues was offset in part by a slight decline in occupancy and
center closings.
Total Company occupancy decreased slightly to 67.7% in the first quarter of
1998 from 68.3% in the comparable quarter last year. The Company believes the
decline in occupancy was caused by a variety of factors including, in
particular, the following initiatives implemented in fiscal 1997: (a) a reduced,
lower cost marketing program, (b) changes in field operations management which
provided less direct center supervision and (c) an expanded employee child care
discount program that may have precluded the enrollment of tuition paying
children. The Company is continuing to evaluate such initiatives and has made
certain revisions during the first quarter of fiscal 1998, including funding a
targeted marketing program, adding certain area manager positions and additional
regional field support to increase center supervision and, effective July 1997,
limiting the employee child care discount. Occupancy is typically lower during
the summer months and increases in September in conjunction with the annual
back-to-school drive.
During the first quarter of fiscal 1998, the Company opened seven new
community centers and closed or sold three centers. During the first quarter of
fiscal 1997, the Company opened nine new centers: eight community centers and
one KinderCare At Work(R) center; and closed or sold six centers. Total licensed
capacity increased to 143,000 at the end of the first quarter fiscal 1998 from
141,000 at the end of the first quarter of fiscal 1997. At September 19, 1997,
the Company operated 1,148 centers.
Salaries, wages and benefits - Salaries, wages and benefits expense
increased $6.2 million, or 6.6%, to $99.5 million in the first quarter of fiscal
1998 from the comparable quarter last year. The expense directly associated with
the centers was $93.4 million in the first quarter of fiscal 1998, an increase
of $4.3 million from the first quarter of fiscal 1997. Approximately $3.0
million of the increase is attributable to increased center staff wage rates.
Average hourly center staff wages increased approximately 3.9% for the first
quarter of fiscal 1998 versus the first quarter of fiscal 1997. At the center
level, salaries, wages and benefits expense, as a percentage of net operating
revenues, decreased slightly to 51.7% in the first quarter of fiscal 1998 from
52.0% in the first quarter of fiscal 1997 due to the control of labor hours by
field management. Management bonus expense, at the center level, increased
approximately $1.0 million as a result of the Company's improved operating
performance.
The remaining increase, for the total Company, is principally due to
additional management bonus expense for the field management and corporate
administrative staff of $0.8 million and higher salaries as a result of the
relocation of the corporate office to Portland, Oregon and the addition of
certain field management positions. Payroll taxes have increased commensurate
with the increase in salary and wage expense. As a percentage of net operating
revenues, total salaries, wages and benefits expense increased only slightly to
55.1% in the first quarter of fiscal 1998 from 54.5% in the first quarter of
fiscal 1997.
8
<PAGE>
Depreciation - Depreciation expense decreased to $11.3 million in the first
quarter of fiscal 1998 from $11.9 million in the comparable quarter of last year
due to the impact of certain assets reaching the end of their estimated
depreciable lives, offset slightly by the additional depreciation expense
related to new centers. The Company has opened 15 new centers and closed 17
older centers since the end of the first quarter of fiscal 1997.
Rent - Rent expense decreased to $8.3 million in the first quarter of
fiscal 1998 from $8.7 million in the comparable quarter of last year. The
decrease is primarily a result of the closure of 17 leased centers, offset
slightly by the opening of one leased center, since the end of the first quarter
of fiscal 1997. The rental rates experienced on leases entered into currently
are higher than those experienced in previous periods. The Company anticipates
higher rent expense associated with the Company's new headquarters in Portland,
Oregon beginning in the second quarter of fiscal 1998.
Other operating expenses - Other operating expenses decreased to $47.3
million in the first quarter of fiscal 1998 from $47.8 million in the comparable
quarter of last year. As a percentage of net operating revenues, other operating
expenses decreased to 26.2% in the first quarter of fiscal 1998 from 27.9% in
the first quarter of fiscal 1997. Other operating expenses include costs
directly associated with the centers, such as food, educational materials,
janitorial and maintenance costs, utilities and insurance, and expenses related
to field management and corporate administration. Center direct and corporate
expenses have declined for the most part due to effective cost control by
management. These declines are partially offset by an increase of $1.1 million
in marketing expenses in order to fund a targeted marketing program during the
first quarter of fiscal 1998.
Restructuring charges - During fiscal year 1997, the Company decided to
relocate its corporate offices from Montgomery, Alabama to Portland, Oregon in
fiscal year 1998. During the first quarter of fiscal year 1998, the Company
recognized $1.6 million in restructuring charges. The charges are primarily
comprised of costs incurred in the recruitment and relocation of employees and
travel, computer and architecture costs related to the office relocation. The
Company anticipates incurring an additional $4.2 million in restructuring
charges related to the relocation during the second and third quarters of fiscal
year 1998.
Operating income - Operating income increased $2.9 million, or 29.7%, to
$12.6 million for the first quarter of fiscal 1998 as compared to the comparable
quarter last year. Operating income before restructuring charges increased $4.5
million, or 45.7%, to $14.2 million in the first quarter of fiscal 1998 as
compared to the comparable quarter last year due to the weighted average tuition
rate increase, the effective management of center labor hours and the control of
costs directly associated with the centers and corporate administration
expenses, as discussed above.
First quarter of fiscal 1998 EBITDA, defined as earnings before interest
expense, income taxes, depreciation and amortization, of $24.3 million was $3.8
million above the comparable quarter last year. As a percentage of net operating
revenues, EBITDA for the first quarter of fiscal 1998 was 13.4% compared to
11.9% for the first quarter of fiscal 1997. Adjusted EBITDA, defined as EBITDA
exclusive of restructuring charges, investment income
9
<PAGE>
and extraordinary items was $25.5 million in the first quarter of fiscal 1998,
an increase of $3.9 million from the comparable quarter last year. As a
percentage of net operating revenues, Adjusted EBITDA improved to 14.1% in the
first quarter of fiscal 1998 from 12.6% in the first quarter of fiscal 1997.
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 increased to $0.3 million in
the first quarter of fiscal 1998 from $0.1 million in the comparable quarter
last year due to higher average cash balances outstanding during the period.
Interest expense - Interest expense increased to $13.0 million in the first
quarter of fiscal 1998 from $4.9 million in the comparable quarter last year.
This increase is substantially attributable to the $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 deferred financing costs, was 10.4% for the first quarter of
fiscal 1998 versus 9.3% for the first quarter of fiscal 1997. As a result of the
Recapitalization, the Company expects to incur higher interest expense in fiscal
1998 than in prior fiscal years.
Income tax expense - Income tax expense for the first quarter of fiscal
1998 of $15,000 was computed by applying statutory federal income tax rates to
income before income taxes. Income tax expense varies from the statutory federal
rate due primarily to state income taxes and tax credits.
Extraordinary item - During the first quarter of fiscal 1997, the Company
purchased $30.0 million aggregate principal of its 10-3/8% senior subordinated
notes for an aggregate price of $31.5 million. This transaction included the
write-off of deferred financing costs of $0.5 million and resulted in an
extraordinary loss of $1.2 million, net of income taxes of $0.8 million.
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.
The Company's consolidated net cash flow from operations for the first
quarter of fiscal 1998 was $0.6 million, compared to $6.5 million for the
comparable quarter last year. The decrease in net cash flow from operations is
primarily a result of the payment of $16.6 million of interest expense in the
first quarter of fiscal 1997 as compared to $7.1 million in the first quarter of
fiscal 1996. Cash and cash equivalents totaled $13.4 million at September 19,
1997 compared to $24.2 million at May 30, 1997.
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
10
<PAGE>
decreased attendance in the summer months and during the year-end holiday period
may result in decreased liquidity during these periods.
Capital Expenditures
The Company anticipates substantial increases in its capital expenditures
budget over the next several years. During fiscal 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 typically 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 the second
quarter of fiscal 1998, the Company anticipates spending approximately $15.0
million for educational toys and equipment in order to upgrade the quantity and
quality of such items in each center.
During the first quarter of fiscal 1998, the Company opened seven community
centers. 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. During the first quarter of fiscal 1997, new center openings
totaled nine centers; consisting of eight community centers and one KinderCare
At Work(R) center.
Capital expenditures during the first quarter of fiscal 1998 amounted to
approximately $14.7 million. Approximately $8.4 million was spent on new center
development, $3.2 million was spent on equipment purchases, $2.5 million was
spent in renovations and improvements to existing facilities and the remaining
$0.6 million was spent on corporate information systems. Capital expenditures
during the first quarter of fiscal 1997 amounted to approximately $16.1 million.
Approximately $9.3 million was spent on new center development, $4.0 million was
spent on equipment purchases and the remaining $2.8 million was spent in
renovations and improvements to existing facilities.
Capital expenditure limits under the credit facilities for fiscal 1998
are $100.0 million. 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 a degree of flexibility under the
provisions of the indenture under which the senior subordinated notes
11
<PAGE>
were issued 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.
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 55.1% of operating expenses during the first quarter of
fiscal 1998 consisted of salary, wages and benefits. At September 19, 1997, the
Company's average wage rate for hourly employees was $6.57 per hour, compared to
the current federal minimum wage rate of $5.15 per hour. During 1996, Congress
enacted an increase in the minimum hourly wage from $4.25 to $4.75 effective
October 1, 1996, with an additional increase to $5.15 effective September 1,
1997. The effect of the federal minimum wage increase is not material to the
results of operations.
The Company believes that, through increases in its tuition rates, it can
recover any increase in expenses caused by 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.
Forward Looking Statements
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, within
the meaning of federal securities law, concerning the Company's operations,
economic performance and financial condition, including, in particular the
number of centers expected to be added in future years, planned transactions and
changes in operating systems and policies and their intended results, and
similar statements concerning anticipated future events and expectations that
are not historical facts. The forward-looking 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, including the effects
of economic
12
<PAGE>
conditions; federal and state legislation regarding welfare reform and minimum
wage increases, competitive conditions in the child care and early education
industries; availability of a qualified labor pool and the impact of government
regulations; various factors affecting occupancy levels; availability of sites
and/or licensing or zoning requirements affecting new center development; and
other risk factors that are discussed in this report and, from time to time, in
the Securities and Exchange Commission reports and other filings which would
cause actual results to differ materially from those expressed in or implied by
the statements herein. 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.
13
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10(a) Restated KinderCare Learning Centers, Inc. Nonqualified
Deferred Compensation Plan Effective August 1, 1996
10(b) Form of Letter Regarding 1998 Management Bonus Plan
10(c) 1997 Stock Purchase and Option Plan for Key Employees of
KinderCare Learning Centers, Inc. and Subsidiaries
10(d) Form of Management Stockholder's Agreement
10(e) Form of Non-Qualified Stock Option Agreement
10(f) Form of Sale Participation Agreement
10(g) Form of Term Note
10(h) Form of Pledge Agreement
10(i) Stockholders' Agreement dated as of February 14, 1997
between KinderCare Learning Centers, Inc. and David J.
Johnson
10(j) Nonqualified Stock Option Agreement dated as of
February 14, 1997 between KinderCare Learning Centers,
Inc. and David J. Johnson
10(k) Sale Participation Agreement dated as of February 14,
1997 among KKR Partners II, L.P., KLC Associates, L.P.
and David J. Johnson
27 Financial Data Schedule
(b) Reports on Form 8-K - None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned,
thereunto duly authorized:
KINDERCARE LEARNING CENTERS, INC.
(Registrant)
Date: October 30, 1997 /s/ DAVID J. JOHNSON
-----------------------------------------
David J. Johnson
Chairman of the Board of Directors and
Chief Executive Officer
Date: October 30, 1997 /s/ DAN R. JACKSON
-----------------------------------------
Dan Jackson
Vice President, Financial Control and
Planning (Principal Financial and
Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10(a) Restated KinderCare Learning Centers, Inc. Nonqualified Deferred
Compensation Plan Effective August 1, 1996
10(b) Form of Letter Regarding 1998 Management Bonus Plan
10(c) 1997 Stock Purchase and Option Plan for Key Employees of KinderCare
Learning Centers, Inc. and Subsidiaries
10(d) Form of Management Stockholder's Agreement
10(e) Form of Non-Qualified Stock Option Agreement
10(f) Form of Sale Participation Agreement
10(g) Form of Term Note
10(h) Form of Pledge Agreement
10(i) Stockholders' Agreement dated as of February 14, 1997 between
KinderCare Learning Centers, Inc. and David J. Johnson
10(j) Nonqualified Stock Option Agreement dated as of February 14, 1997
between KinderCare Learning Centers, Inc. and David J. Johnson
10(k) Sale Participation Agreement dated as of February 14, 1997 among KKR
Partners II, L.P., KLC Associates, L.P. and David J. Johnson
27 Financial Data Schedule
RESTATED
KINDERCARE LEARNING CENTERS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
August 1, 1996
KinderCare Learning Centers, Inc.
a Delaware corporation
2400 Presidents Drive
Montgomery, AL 36116 Company
<PAGE>
TABLE OF CONTENTS
Section Page
1. Purposes; Administration; Plan Year.......................................1
2. Eligibility...............................................................1
3. Compensation Deferral.....................................................2
4. Deferred Compensation Account.............................................3
5. Irrevocable Trust.........................................................4
6. Time and Manner of Payment................................................5
7. Withdrawals...............................................................7
8. Death or Disability.......................................................7
9. Termination; Amendment....................................................9
10. Claims Procedure.........................................................10
11. General Provisions.......................................................11
12. Effective Date...........................................................12
<PAGE>
RESTATED
KINDERCARE LEARNING CENTERS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
August 1, 1996
KinderCare Learning Centers, Inc.
a Delaware corporation
2400 Presidents Drive
Montgomery, AL 36116 Company
The Company adopted and maintains the KinderCare Learning Centers,
Inc. Nonqualified Deferred Compensation Plan, effective August 1, 1996. The
Company adopts this Restatement to implement editorial and administrative
changes.
1. Purposes; Administration; Plan Year
1.1 This plan is adopted to permit eligible employees of Employers to
defer all or a portion of what would otherwise be current compensation. The plan
shall apply to the Company and affiliates of the Company designated by the
Committee under 6.5. The term "Employer" refers to the Company and all
designated affiliates.
1.2 This plan shall be administered by an Administrative Committee
(Committee) appointed by the Compensation Committee of the Board of Directors of
the Company. The Committee shall interpret the plan and make determinations
about participation and benefits. Any decision by the Committee within its
authority shall be final and binding on all parties. The Committee may delegate
all or part of its authority.
1.3 The plan year shall be a calendar year.
2. Eligibility
2.1 An employee of an Employer shall be eligible to participate for a
plan year if the employee is designated by the Committee to participate in the
plan. Participation shall be restricted to a select group of management or
highly compensated employees as designated by the Committee
2.2 An employee eligible under 2.1 may participate in elective
deferrals by filing a deferral election as follows:
<PAGE>
(a) An employee who is eligible on the effective date
of the plan or who later becomes eligible during a year may
participate with respect to future compensation by filing an
election within 30 days after being notified of eligibility
by the Committee.
(b) Except as provided in (a), an election for a year
must be filed before the start of the year.
2.3 A person having an account under the plan shall be known as a
participant.
3. Compensation Deferral
3.1 An eligible employee may elect for each plan year (or part plan
year under 2.2(a)) to defer a portion of regular or bonus compensation paid for
the year or part year as follows:
(a) The amount deferred may be expressed as a dollar
amount, a percentage of regular salary or bonus or a
percentage of bonus over a certain dollar amount.
(b) An expressed percentage shall apply to any pay
changes in the year. A stated dollar amount shall not be
affected by pay changes. Separate percentages or dollar
amounts may be stated for salary and bonuses.
(c) A bonus deferral shall be governed by the election
for the year for which the bonus is earned, not the year in
which the bonus is paid.
3.2 Deferral elections under the plan shall be made in writing to the
Committee on a form provided for that purpose. Elections shall be effective as
follows:
(a) An election by a person first becoming eligible for
participation shall be effective for the year the
participant becomes eligible if made within 30 days after
notice of eligibility.
(b) Except as provided in (a), an election shall be
effective for the plan year starting after the plan year
2
<PAGE>
in which the election is received by the Committee. An
election shall be irrevocable for the first plan year for
which it is effective.
(c) An election may be effective indefinitely or for
one or more years as specified in the election. A new
election is required to continue deferrals after an election
expires. A continuing election may be revoked or changed by
a new election under (b).
4. Deferred Compensation Account
4.1 Amounts of deferred compensation shall be credited by Employer on
its books to deferred compensation accounts.
4.2 Employer shall make guideline investment credits to each
participant's account, until the entire account has been paid out, as follows:
(a) The Committee shall establish guideline investment
funds with investment objectives fixed by the Committee. The
guideline funds may parallel the investment funds available
under any irrevocable trust established under Section 5,
below.
(b) Each participant shall, under procedures
established by the Committee, elect the guideline fund or
funds for the participant's account under this plan. In the
absence of a proper election, a balanced guideline fund will
be used. Participant elections may be changed at such times
and subject to such limits as may be fixed by the Committee.
(c) The Committee shall adjust all accounts in
accordance with the elected guidelines at reasonable times
determined by the Committee.
(d) When an account is in pay status, the Committee may
require use of a cash equivalent guideline fund to the
extent necessary to allow more frequent adjustments to
coincide with the timing of pay distributions.
3
<PAGE>
(e) At any time when the Committee has established no
guideline investment funds, each participant's account shall
accrue interest at the Federal overnight funds rate.
4.3 Each participant's account shall be maintained on the books of the
Employer until full payment has been made to the participant or beneficiaries
under Sections 7, 8 and 9 and the following shall apply subject to 5.3:
(a) Employer shall not be obligated to set aside or
earmark any funds for the account, which shall be purely a
bookkeeping device.
(b) All amounts of deferred compensation under this
plan shall remain at all times the unrestricted assets of
Employer, and the promise to pay the deferred amounts shall
at all times remain unfunded as to the participants.
5. Irrevocable Trust
5.1 Employer may but shall not be required to establish an irrevocable
trust to assume the liabilities to participants in certain circumstances, and
may transfer cash to such a trust.
5.2 If Employer creates a trust under 5.1, assets transferred to the
trust shall be invested as follows:
(a) Investment of such assets shall be at the absolute
discretion of the Committee, the trustee, or both on a
shared basis, as provided in the trust.
(b) The guideline investment funds under 4.3 shall be
purely for measuring the amount of time-value credits.
(c) Neither employer nor the trustee shall be required
to invest in such funds in accordance with participants'
elections. Employer and the trustee may, however, choose, in
their discretion, to invest in the elected guideline funds
in accordance with the elections, and shall incur no
liability for doing so.
4
<PAGE>
5.3 The trust under 5.1 shall be a grantor's trust and all assets held
in trust shall be assets of Employer subject to the trust terms. All assets of
the trust shall at all times be subject to the claims of creditors of Employer
in circumstances described in the trust. Participants will not receive a vested
priority interest in the trust assets ahead of such creditors. Participants'
interests in the trust will be governed by the trust terms at all times.
6. Time and Manner of Payment
6.1 Subject to 6.3, 7.1 and 8, a participant's Payment Date shall be
one of the following as selected under 6.3:
(a) The date the participant terminates employment
under 6.5 for any reason.
(b) The date the participant has terminated employment
under 6.5 and has reached an age up to 70 specified in the
deferral election.
(c) A specified date that is not earlier than one year
after the close of the plan year to which the deferral
election applies.
6.2 A participant's account shall be paid in one of the following ways
as selected under 6.3 and 6.4:
(a) In a lump sum within 30 days after the Payment
Date.
(b) In a lump sum within 30 days after the January 1
following the Payment Date.
(c) In installments under 6.4 over a period up to 15
years starting the first of the month after the Payment
Date.
(d) In installments under 6.4 over a period up to 15
years starting the January 1 following the Payment Date.
5
<PAGE>
6.3 In the deferral election a participant shall select the Payment
Date under 6.1 and the form of payment under 6.2, as follows:
(a) Subject to (b), the selection shall be made in the
deferral election.
(b) If a participant has selected a lump sum under 6.3
(a) or (b), the selection may be changed to installment
payments under 6.3 (a) or (b) by a later irrevocable
election made at least one year before the lump sum
otherwise would have been payable.
(c) Except as provided in (b), the selection shall be
irrevocable for the portion of the account attributable to
amounts deferred under the deferral election.
(d) If different selections are made in deferral
elections applicable to different years, the account shall
be appropriately divided for distribution.
6.4 If installments are selected, the payout period shall be specified
in the deferral election. The installment size shall be fixed on the benefit
starting date and each later January 1 as though equal installments were to be
paid for the balance of the payment period including investment guideline
credits at a rate estimated as of the date of calculation. Installments may be
monthly, quarterly or annually, as elected by the participant before payments
start. If a participant fails to make an election within 30 days after
notification that an election must be made, installment payments shall
automatically be made on an annual basis.
6.5 A participant terminates employment when no longer employed by an
Employer or an affiliate of an Employer. An affiliate is a corporation or other
entity that has been designated an affiliate for this purpose by the Committee.
6.6 The Employer may withhold from any payments any income tax or
other amounts as required by law. Payments are generally not subject to FICA or
FUTA tax or related withholding.
6
<PAGE>
7. Withdrawals
7.1 Before the Payment Date, upon approval of the Committee, a
participant may withdraw up to 100 percent of the amount reasonably necessary to
meet an unforeseen emergency under 7.2, as determined by the Committee.
7.2 "Unforseen emergency" means a participant's severe financial
hardship that cannot be met from other reasonably available resources and is
caused by one or more of the following:
(a) Illness or accident of the participant or a
dependent under Internal Revenue Code section 152(a).
(b) Loss of the participant's property due to casualty.
(c) Other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the
control of the participant.
7.3 Other resources are reasonably available if assets can be
liquidated without that itself creating severe financial hardship, if insurance
or other reimbursement is available or if deferrals under this plan can be
stopped.
7.4 The Committee shall establish guidelines and procedures for
implementing withdrawals. An application for withdrawal shall be written, shall
be signed by the participant and shall include a statement of the facts causing
the financial hardship and any other facts as may be required by the Committee.
7.5 The withdrawal date shall be fixed by the Committee. The Committee
may require a minimum advance notice and may limit the amount, time and
frequency of withdrawals.
8. Death, Disability and Change in Control
8.1 A Participant's account shall be payable under this Section as
follows, regardless of the provisions of Section 6:
(a) In the event of the participant's death or
disability.
7
<PAGE>
(b) If selected in the participant's deferral election,
in the event of a change in control under 8.8.
8.2 On death the account shall be paid under 8.3 within 30 days as
follows:
(a) If the recipient is the surviving spouse and the
participant had selected installment payout, by installments
in accordance with the selection.
(b) In all other cases, by a lump sum.
8.3 An amount payable on death of a participant shall be paid to the
participant's beneficiary in the following order of priority:
(a) To the surviving beneficiaries designated by the
participant in writing to the Committee.
(b) To the surviving beneficiaries designated by the
participant to receive death benefits under any retirement
plan maintained by the Company in which the participant
participates.
(c) To the participant's surviving spouse.
(d) To the participant's surviving children in equal
shares.
(e) To the participant's estate.
8.4 If a surviving spouse is receiving installments and dies when a
balance remains, the balance shall be paid in a lump sum to the spouse's estate.
8.5 If a participant is temporarily disabled while employed or is
receiving long-term disability benefits under a plan described in 8.4 the
following shall apply:
(a) The participant shall be treated as employed until
age 65, and no payments will be made from the account before
age 65 except as provided below.
8
<PAGE>
(b) If disability benefits stop and disability
continues, the account shall be paid in accordance with the
election under Section 6.
(c) If the participant dies, the provisions applicable
to death shall be followed.
(d) If the participant ceases to be disabled and does
not resume employment, the provisions applicable to
termination shall be followed.
8.6 A participant is disabled if the Committee determines that either
of the following applies:
(a) The participant is eligible to receive long-term
disability benefits under a plan maintained by Employer or
an affiliate or would have been eligible if covered by the
plan.
(b) In the absence of a plan under (a), the participant
is permanently and totally disabled on the basis of criteria
established by the Committee.
8.7 In the event of a change in control, all unpaid deferred
compensation, including deferred compensation being paid in installments, shall
be paid as soon as administratively feasible after the date of the change in
control.
8.8 For 8.7, a change in control is the acquisition after August 1,
1997 by any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities and Exchange Act of 1934, as amended), together with affiliates and
associates of such person, whether by purchase, tender offer, exchange,
reclassification, recapitalization, merger or otherwise, of a sufficient number
of shares of the voting securities of the Company to provide such person with 50
percent or more of the combined voting power of the Company's then outstanding
voting securities.
9. Termination; Amendment
9.1 The Company may terminate this plan effective the first day of any
month after notice to the participants or earlier as provided in 11.4. On
termination the following shall apply except as provided in 9.3:
9
<PAGE>
(a) Amounts deferred through the last month before the
effective date of termination shall remain deferred and be
credited to the accounts in accordance with the plan.
(b) Deferral elections shall terminate as of the
effective date of termination, and no further deferrals
shall be allowed.
(c) Amounts in an account shall remain to the credit of
the account, shall continue to receive investment guideline
credits and shall be paid out in accordance with Sections 6,
7 and 8.
9.2 The Company may amend this plan effective the first day of any
month by notice to the participants. An amendment may be retroactive within the
plan year in which notice is given except that the right of participants to
defer compensation may not be reduced for the portion of the plan year through
the month in which the notice is given.
9.3 If the Internal Revenue Service issues a final ruling that any
amounts deferred under this plan will be subject to current income tax, all
amounts to which the ruling is applicable shall be paid to the participants
within 30 days.
10. Claims Procedure
10.1 Any person claiming a benefit, requesting an interpretation or
ruling under the plan, or requesting information under the plan shall present
the request in writing to the Committee, which shall respond in writing as soon
as practicable.
10.2 If the claim or request is denied, the written notice of denial
shall state:
(a) The reasons for denial, with specific reference to
the plan provisions on which the denial is based.
(b) A description of any additional materials or
information required and an explanation of why it is
necessary.
10.3 The initial notice of denial shall normally be given within 90
days after receipt of the claim. If special circumstances require an extension
of time, the claimant shall be so notified and the time limit shall be 180 days.
10
<PAGE>
10.4 Any person whose claim or request is denied or who has not
received a response within 30 days may request review by notice in writing to
the Committee. The original decision shall be reviewed by the Committee which
may, but shall not be required to, grant the claimant a hearing. On review,
whether or not there is a hearing, the claimant may have representation, examine
pertinent documents and submit issues and comments in writing.
10.5 The decision on review shall ordinarily be made within 60 days.
If an extension of time is required for a hearing or other special
circumstances, the claimant shall be notified and the time limit shall be 120
days. The decision shall be in writing and shall state the reasons and the
relevant plan provisions. Subject to 10.6, all decisions on review shall be
final and bind all parties concerned.
10.6 If Employer creates a trust under 5.1, a decision of the
Committee shall be subject to review by the Trustee to the extent provided for
under the trust.
11. General Provisions
11.1 If suit or action is instituted to enforce any rights under this
plan, the prevailing party may recover from the other party reasonable
attorneys' fees at trial and on any appeal.
11.2 Any notice or directions under this plan shall be in writing and
shall be effective when actually delivered or, if mailed, when deposited postage
prepaid as first class. Mail shall be directed to the Company at the address
stated in this plan, to the participant at the address stated in the deferral
election or to such other address as a party may specify by notice to the other
parties. Notices to an Employer or the Committee shall be sent to the Company's
address.
11.3 The rights of a participant under this plan are personal. Except
for the limited provisions of 8.3 and 11.5, no interest of a participant or any
beneficiary or representative of a participant may be directly or indirectly
transferred, encumbered, seized by legal process or in any other way subjected
to the claims of any creditor.
11.4 If an Employer merges, consolidates, or otherwise reorganizes or
if its assets or business are acquired by another company, this plan shall
continue with respect to those eligible employees who continue in the employ of
the successor company. The transition of Employers shall not be considered a
termination of employment for purposes of this plan. In such an event, however,
a successor corporation may terminate this plan as to its employees on the
effective date of the succession by notice to eligible employees within 30 days
after the succession.
11
<PAGE>
11.5 The Committee may decide that because of the mental or physical
condition of a person entitled to payments, or because of other relevant
factors, it is in the person's best interest to make payments to others for the
benefit of the person entitled to payment. In that event the Committee may in
its discretion direct that payments be made to one or more of the following:
(a) To a parent or spouse or a child of legal age.
(b) To a legal guardian.
(c) To one furnishing maintenance, support, or
hospitalization.
12. Effective Date
The plan shall be effective as of August 1, 1996.
KinderCare Learning Centers, Inc.
By ______________________________
Executed:
[Logo]
_____________, 19__
___________________
___________________
___________________
Dear _____________:
The 1998 Management Bonus Plan serves as a short-term incentive program for
selected key members of the company. This letter outlines your individual
participation in the plan.
Your total compensation is made up of base salary and bonus percentage.
Your target bonus at plan is _____% of your annual base salary. However, as you
can see from the attached Formula Summary Page, you can earn substantially more
if you and the company exceed plan. Based on your annual salary of __________,
your bonus payout at 100% of plan is __________, making your total compensation
__________.
Your bonus criteria are as follows:
-- EBITDA (Earnings before interest, taxes, depreciation, and
amortization) 90%. EBITDA is a financial indicator of earnings
controllable by operating decisions. Most of us have little control
over the company's interest rates charged, taxes paid, depreciation or
amortization schedules established. Therefore, EBITDA is operating
income prior to deductions for these expenses. 90% of your bonus is
based on overall company EBITDA. Our job as corporate staff is to
lead, create systems, and support operations, helping them to perform
their jobs faster, cheaper, easier and more effectively.
-- Personal Objectives 10%.
Your immediate manager will determine your personal objectives with
the concurrence of the Chief Executive Officer. Your personal
objectives will normally consist of 2 to 4 pre-approved objectives,
which are aligned with overall company goals.
<PAGE>
FY '98 Bonus
_____________, 19__
Page __
EBITDA will be published quarterly after it is released to the public. You then
will be able to calculate your bonus throughout the year.
For employees who have worked less than a full year, the bonus will be adjusted
by the amount of time worked. Payment will be made to those participants on the
payroll at the end of the fiscal year, May 30, 1998 who have met their bonus
criteria.
Questions about the plan should be directed to Paul Knollman, Director of
Compensation (e-mail [email protected] or voice 503/872-1311), or
myself (e-mail [email protected] or voice 503/872-1307).
Again, congratulations on being selected to participate in the 1997-98 bonus
plan. The company offers this to key employees who have the ability to affect
company results. Our company has set targets, which are reachable with a little
stretch. You can achieve double plan target with a great overall year. By
concentrating on overall company performance, eliminating waste, reducing costs,
and being responsive to the needs of our field operations people, and most
importantly, our customers, we can have a great year.
Good Luck!
EDWARD BREWINGTON
Edward Brewington
Vice President/Human Resources
1997 STOCK PURCHASE AND OPTION PLAN
FOR KEY EMPLOYEES OF
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
1. Purpose of Plan
The 1997 Stock Purchase and Option Plan for Key Employees of KinderCare
Learning Centers, Inc. and Subsidiaries (the "Plan") is designed:
(a) to promote the long term financial interests and growth of KinderCare
Learning Centers, Inc. (the "Corporation") and its subsidiaries by attracting
and retaining management personnel with the training, experience and ability to
enable them to make a substantial contribution to the success of the
Corporation's business;
(b) to motivate management personnel by means of growth-related incentives
to achieve long range goals; and
(c) to further the identity of interests of participants with those of the
stockholders of the Corporation through opportunities for increased stock, or
stock-based, ownership in the Corporation.
2. Definitions
As used in the Plan, the following words shall have the following meanings:
(a) "Grant" means an award made to a Participant pursuant to the Plan and
described in Paragraph 5.
(b) "Grant Agreement" means an agreement between the Corporation and a
Participant that sets forth the terms, conditions and limitations applicable to
a Grant.
(c) "Board of Directors" means the Board of Directors of the Corporation.
(d) "Committee" means the Compensation Committee of the Board of Directors.
(e) "Common Stock" or "Share" means common stock of the Corporation which
may be authorized but unissued, or issued and reacquired.
(f) "Employee" means a person, including an officer, in the regular
full-time employment of the Corporation or one of its Subsidiaries who, in the
opinion of the Committee, is, or is expected, to be primarily responsible for
the management, growth
<PAGE>
2
or protection of some part or all of the business of the Corporation.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Fair Market Value" means such value of a Share as reported for stock
exchange transactions and/or determined in accordance with any applicable
resolutions or regulations of the Committee in effect at the relevant time.
(i) "Participant" means an Employee, or other person having a unique
relationship with the Corporation or one of its Subsidiaries, to whom one or
more Grants have been made and such Grants have not all been forfeited or
terminated under the Plan; provided, however, that a non-employee director of
the Corporation or one of its Subsidiaries may not be a Participant.
(j) "Stock-Based Grants" means the collective reference to the grant of
Stock Appreciation Rights, Dividend Equivalent Rights, Restricted Stocks and
Other Stock Based Grants.
(k) "Stock Options" means the collective reference to "Incentive Stock
Options" and "Other Stock Options".
(l) "Subsidiary" means any corporation other than the Corporation in an
unbroken chain of corporations beginning with the Corporation if each of the
corporations other than the last corporation in the unbroken chain owns 50% or
more of the voting stock in one of the other corporations in such chain.
3. Administration of Plan
(a) The Plan shall be administered by the Committee. The members of the
Committee shall qualify to administer the Plan for purposes of Rule 16b-3 (and
any other applicable rule) promulgated under Section 16(b) of the Exchange Act
to the extent that the Corporation is subject to such rule. The Committee may
adopt its own rules of procedure, and the action of a majority of the Committee,
taken at a meeting or taken without a meeting by a writing signed by such
majority, shall constitute action by the Committee. The Committee shall have the
power and authority to administer, construe and interpret the Plan, to make
rules for carrying it out and to make changes in such rules. Any such
interpretations, rules, and administration shall be consistent with the basic
purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer and to other
senior officers of the Corporation its duties under the Plan subject to such
conditions and limitations as the Committee shall prescribe except that only the
Committee may designate and make Grants to Participants who are subject to
Section 16 of the Exchange Act.
<PAGE>
3
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Corporation, and the
officers and directors of the Corporation shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Corporation and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Grants, and all members of the Committee shall be fully
protected by the Corporation with respect to any such action, determination or
interpretation.
4. Eligibility
The Committee may from time to time make Grants under the Plan to such
Employees, or other persons having a relationship with Corporation or any of its
Subsidiaries, and in such form and having such terms, conditions and limitations
as the Committee may determine. No Grants may be made under this Plan to
non-employee directors of Corporation or any of its Subsidiaries. Grants may be
granted singly, in combination or in tandem. The terms, conditions and
limitations of each Grant under the Plan shall be set forth in a Grant
Agreement, in a form approved by the Committee, consistent, however, with the
terms of the Plan; provided, however, that such Grant Agreement shall contain
provisions dealing with the treatment of Grants in the event of the termination,
death or disability of a Participant, and may also include provisions concerning
the treatment of Grants in the event of a change of control of Corporation.
5. Grants
From time to time, the Committee will determine the forms and amounts of
Grants for Participants. Such Grants may take the following forms in the
Committee's sole discretion:
(a) Incentive Stock Options - These are stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), to
purchase Common Stock. In addition to other restrictions contained in the Plan,
an option granted under this Paragraph 5(a), (i) must be granted within ten
years from the earlier of (A) the date the Plan is adopted and (B) the date the
Plan is approved by the stockholders, (ii) may not be exercised more than 10
years after the date it is granted, (iii) may not have an option price less than
the Fair Market Value of Common Stock on the date the option is granted, (iv)
must otherwise comply with Code Section 422 and (v) must be designated as an
"Incentive Stock Option" by the Committee. The maximum aggregate Fair Market
Value of Common Stock (determined at the time of each Grant) with respect to
which any Participant may first exercise Incentive Stock Options under this Plan
and any
<PAGE>
4
Incentive Stock Options granted to the Participant for such year under any plans
of the Corporation or any Subsidiary in any calendar year is $100,000. Payment
of the option price shall be made in cash or in shares of Common Stock, or a
combination thereof, in accordance with the terms of the Plan, the Grant
Agreement, and of any applicable guidelines of the Committee in effect at the
time.
(b) Other Stock Options - These are options to purchase Common Stock which
are not designated by the Committee as "Incentive Stock Options". At the time of
the Grant the Committee shall determine, and shall have contained in the Grant
Agreement or other Plan rules, the option exercise period, the option price, and
such other conditions or restrictions on the grant or exercise of the option as
the Committee deems appropriate, which may include the requirement that the
grant of options is predicated on the acquisition of Purchase Shares under
Paragraph 5(e) by the Optionee. In addition to other restrictions contained in
the Plan, an option granted under this Paragraph 5(b), (i) may not be exercised
more than 10 years after the date it is granted and (ii) may not have an option
exercise price less than 50% of the Fair Market Value of Common Stock on the
date the option is granted. Payment of the option price shall be made in cash or
in shares of Common Stock, or a combination thereof, in accordance with the
terms of the Plan and of any applicable guidelines of the Committee in effect at
the time.
(c) Stock Appreciation Rights - These are rights that on exercise entitle
the holder to receive the excess of (i) the Fair Market Value of a share of
Common Stock on the date of exercise over (ii) the Fair Market Value on the date
of Grant (the "base value") multiplied by (iii) the number of rights exercised
as determined by the Committee. Stock Appreciation Rights granted under the Plan
may, but need not be, granted in conjunction with an Option under Paragraph 5(a)
or 5(b). The Committee, in the Grant Agreement or by other Plan rules, may
impose such conditions or restrictions on the exercise of Stock Appreciation
Rights as it deems appropriate, and may terminate, amend, or suspend such Stock
Appreciation Rights at any time. No Stock Appreciation Right granted under this
Plan may be exercised less than 6 months or more than 10 years after the date it
is granted except in the event of death or disability of a Participant. To the
extent that any Stock Appreciation Right that shall have become exercisable, but
shall not have been exercised or cancelled or, by reason of any termination of
employment, shall have become non-exercisable, it shall be deemed to have been
exercised automatically, without any notice of exercise, on the last day of
which it is exercisable, provided that any conditions or limitations on its
exercise are satisfied (other than (i) notice of exercise and (ii) exercise or
election to exercise during the period prescribed) and the Stock Appreciation
Right shall then have value. Such exercise shall be deemed to specify
<PAGE>
5
that the holder elects to receive cash and that such exercise of a Stock
Appreciation Right shall be effective as of the time of automatic exercise.
(d) Restricted Stock - Restricted Stock is Common Stock delivered to a
Participant with or without payment of consideration with restrictions or
conditions on the Participant's right to transfer or sell such stock; provided
that the price of any Restricted Stock delivered for consideration and not as
bonus stock may not be less than 50% of the Fair Market Value of Common Stock on
the date such Restricted Stock is granted or the price of such Restricted Stock
may be the par value. If a Participant irrevocably elects in writing in the
calendar year preceding a Grant of Restricted Stock, dividends paid on the
Restricted Stock granted may be paid in shares of Restricted Stock equal to the
cash dividend paid on Common Stock. The number of shares of Restricted Stock and
the restrictions or conditions on such shares shall be as the Committee
determines and shall be set forth in the Grant Agreement, and the certificate
for the Restricted Stock shall bear evidence of the restrictions or conditions.
No Restricted Stock may have a restriction period of less than 6 months, other
than in the case of death or disability.
(e) Purchase Stock - Purchase Stock are shares of Common Stock offered to a
Participant at such price as determined by the Committee, the acquisition of
which will make the Participant eligible to receive under the Plan, including,
but not limited to, Other Stock Options; provided, however, that the price of
such Purchase Shares may not be less than 50% of the Fair Market Value of the
Common Stock on the date such shares of Purchase Stock are offered.
(f) Dividend Equivalent Rights - These are rights to receive cash payments
from the Corporation at the same time and in the same amount as any cash
dividends paid on an equal number of shares of Common Stock to shareholders of
record during the period such rights are effective. The Committee, in the Grant
Agreement or by other Plan rules, may impose such restrictions and conditions on
the Dividend Equivalent Rights, including the date such rights will terminate,
as it deems appropriate, and may terminate, amend, or suspend such Dividend
Equivalent Rights at any time.
(g) Other Stock-Based Grants - The Committee may make other Grants under
the Plan pursuant to which shares of Common Stock (which may, but need not, be
shares of Restricted Stock pursuant to Paragraph 5(d)), are or may in the future
be acquired, or Grants denominated in stock units, including ones valued using
measures other than market value. Other Stock-Based Grants may be granted with
or without consideration; provided, however, that the price of any such Grant
made for consideration that provides for the acquisition of shares of Common
Stock or other equity
<PAGE>
6
securities of the Corporation may not be less than 50% of the Fair Market Value
of the Common Stock or such other equity securities on the date of grant of such
Grant. Such Other Stock-Based Grants may be made alone, in addition to or in
tandem with any Grant of any type made under the Plan and must be consistent
with the purposes of the Plan.
6. Limitations and Conditions
(a) The number of Shares available for Grants under this Plan shall be
2,500,000 shares of the authorized Common Stock as of the effective date of the
Plan. The number of Shares subject to Grants under this Plan to any one
Participant shall not be more than 1,000,000 shares. Unless restricted by
applicable law, Shares related to Grants that are forfeited, terminated,
cancelled or expire unexercised, shall immediately become available for Grants.
(b) At the time a Grant is made or amended or the terms or conditions of a
Grant are changed, the Committee may provide for limitations or conditions on
such Grant.
(c) Nothing contained herein shall affect the right of the Corporation to
terminate any Participant's employment at any time or for any reason.
(d) Deferrals of Grant payouts may be provided for, at the sole discretion
of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the amounts of the
Grants for any employee of a Subsidiary, along with interest, dividend, and
other expenses accrued on deferred Grants shall be charged to the Participant's
employer during the period for which the Grant is made. If the Participant is
employed by more than one Subsidiary or by both the Corporation and a Subsidiary
during the period for which the Grant is made, the Participant's Grant and
related expenses will be allocated between the companies employing the
Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the death of a
Participant, or as specifically provided in a Grant Agreement or by the
Committee, no benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to do so shall be void. No such benefit shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements, or torts of the Participant.
(g) Participants shall not be, and shall not have any of the rights or
privileges of, stockholders of the Corporation in respect of any Shares
purchasable in connection with any Grant
<PAGE>
7
unless and until certificates representing any such Shares have been issued by
the Corporation to such Participants.
(h) No election as to benefits or exercise of Stock Options, Stock
Appreciation Rights, or other rights may be made during a Participant's lifetime
by anyone other than the Participant except by a legal representative appointed
for or by the Participant, or as specifically provided in a Grant Agreement.
(i) Absent express provisions to the contrary, any grant under this Plan
shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind or
subsequently in effect under which the availability or amount of benefits is
related to level of compensation. This Plan is not a "Retirement Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
(j) Unless the Committee determines otherwise, no benefit or promise under
the Plan shall be secured by any specific assets of the Corporation or any of
its Subsidiaries, nor shall any assets of the Corporation or any of its
Subsidiaries be designated as attributable or allocated to the satisfaction of
the Corporation's obligations under the Plan.
7. Transfers and Leaves of Absence
For purposes of the Plan, unless the Committee determines otherwise: (a) a
transfer of a Participant's employment without an intervening period of
separation among the Corporation and any Subsidiary shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. Adjustments
In the event of any change in the outstanding Common Stock by reason of a
stock split, spin-off, stock dividend, stock combination or reclassification,
recapitalization or merger, change of control, or similar event, the Committee
may adjust appropriately the number of Shares subject to the Plan and available
for or covered by Grants and Share prices related to outstanding Grants and make
such other revisions to outstanding Grants as it deems are equitably required.
9. Merger, Consolidation, Exchange,
Acquisition, Liquidation or Dissolution
In its absolute discretion, and on such terms and conditions as it deems
appropriate, coincident with or after the grant of
<PAGE>
8
any Stock Option or any Stock-Based Grant, the Committee may provide that such
Stock Option or Stock-Based Grant cannot be exercised after the merger or
consolidation of the Corporation into another corporation, the exchange of all
or substantially all of the assets of the Corporation for the securities of
another corporation, the acquisition by another corporation of 80% or more of
the Corporation's then outstanding shares of voting stock or the
recapitalization, reclassification, liquidation or dissolution of the
Corporation, and if the Committee so provides, it shall, on such terms and
conditions as it deems appropriate in its absolute discretion, also provide,
either by the terms of such Stock Option or Stock-Based Grant or by a resolution
adopted prior to the occurrence of such merger, consolidation, exchange,
acquisition, recapitalization, reclassification, liquidation or dissolution,
that, for some period of time prior to such event, such Stock Option or
Stock-Based Grant shall be exercisable as to all shares subject thereto,
notwithstanding anything to the contrary herein (but subject to the provisions
of Paragraph 6(b)) and that, upon the occurrence of such event, such Stock
Option or Stock-Based Grant shall terminate and be of no further force or
effect; provided, however, that the Committee may also provide, in its absolute
discretion, that even if the Stock Option or Stock-Based Grant shall remain
exercisable after any such event, from and after such event, any such Stock
Option or Stock-Based Grant shall be exercisable only for the kind and amount of
securities and/or other property, or the cash equivalent thereof, receivable as
a result of such event by the holder of a number of shares of stock for which
such Stock Option or Stock-Based Grant could have been exercised immediately
prior to such event.
10. Amendment and Termination
The Committee shall have the authority to make such amendments to any terms
and conditions applicable to outstanding Grants as are consistent with this Plan
provided that, except for adjustments under Paragraph 8 or 9 hereof, no such
action shall modify such Grant in a manner adverse to the Participant without
the Participant's consent except as such modification is provided for or
contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the Plan at any time
from time to time.
11. Foreign Options and Rights
The Committee may make Grants to Employees who are subject to the laws of
nations other than the United States, which Grants may have terms and conditions
that differ from the terms thereof as provided elsewhere in the Plan for the
purpose of complying with foreign laws.
<PAGE>
9
12. Withholding Taxes
The Corporation shall have the right to deduct from any cash payment made
under the Plan any federal, state or local income or other taxes required by law
to be withheld with respect to such payment. It shall be a condition to the
obligation of the Corporation to deliver shares upon the exercise of an Option
or Stock Appreciation Right, upon payment of Performance units or shares, upon
delivery of Restricted Stock or upon exercise, settlement or payment of any
Other Stock-Based Grant that the Participant pay to the Corporation such amount
as may be requested by the Corporation for the purpose of satisfying any
liability for such withholding taxes. Any Grant Agreement may provide that the
Participant may elect, in accordance with any conditions set forth in such Grant
Agreement, to pay a portion or all of such withholding taxes in shares of Common
Stock.
13. Effective Date and Termination Date
The Plan shall be effective on and as of the date of its approval by the
stockholders of the Corporation and shall continue until terminated by the Board
of Directors pursuant to Paragraph 10.
FORM OF MANAGEMENT STOCKHOLDER'S AGREEMENT
This Stockholder's Agreement (this "Agreement") is entered into as of
_____________ __, 199_ between KINDERCARE LEARNING CENTERS, INC., a Delaware
corporation (the "Company"), and _________________ (the "Purchaser") (the
Company and the Purchaser being hereinafter collectively referred to as the
"Parties").
RECITALS
On February 13, 1997, KCLC Acquisition Corp., a Delaware corporation
("KCLC"), merged with and into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger, dated as of October 3, 1996 and as amended as of
December 27, 1996, between KCLC and the Company (the "Merger Agreement"). In
connection with the Merger, the Company proposes to sell shares of its Common
Stock, par value $.01 per share (the "Common Stock"), to key employees of the
Company at a price of $19.00 per share of Common Stock (the "Per Share Purchase
Price").
This Agreement is one of several other agreements ("Other
Purchasers' Agreements") which have been, or which in the future will be,
entered into between the Company and other individuals who are or will be key
employees of the Company or one of its subsidiaries (collectively, the "Other
Purchasers").
The Company has agreed to sell, and the Purchaser has agreed to buy,
___________ shares of Common Stock (the "Purchase Stock") to Purchaser at the
Per Share Purchase Price for an aggregate purchase price of $___________. In
addition, the Company will grant to Purchaser an option or options to purchase
_________ shares of Common Stock ("Options") at an exercise price of $19.00 per
share of Common Stock pursuant to the terms of the 1997 Stock Purchase and
Option Plan for Key Employees of KinderCare Learning Centers, Inc. and
Subsidiaries (the "Option Plan") and the 1997 Non-Qualified Stock Option
Agreement (the "Non-Qualified Stock Option Agreement").
AGREEMENT
To implement the foregoing and in consideration of the mutual
agreements contained herein, the Parties agree as follows:
1. Purchase of Stock.
(a) Subject to the terms and conditions hereinafter set forth, the
Purchaser hereby subscribes for and shall purchase, and the Company shall sell
to the Purchaser, the Purchase Stock at the Per Share Purchase Price on
_____________
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2
____, 199__ (the "Purchase Date"). The Company shall have no obligation to sell
any Purchase Stock to any person who (i) is a resident or citizen of a state or
other jurisdiction in which the sale of the Purchase Stock to him or her would
constitute a violation of the securities or "blue sky" laws of such jurisdiction
or (ii) is not an employee of the Company or any of its subsidiaries on the
Purchase Date.
(b) The aggregate price for the Purchase Stock shall be $__________
(such amount hereinafter sometimes referred to as the "Purchase Price"). The
Purchase Price shall be paid in the following manner: the Purchaser shall
deliver to the Company at least three business days prior to the Purchase Date
cash or a certified bank check or checks payable to the order of the Company in
the aggregate amount of the Purchase Price.<F1> On the Purchase Date, in
consideration of receipt of the Purchase Price, the Company will deliver to the
Purchaser a certificate, registered in the Purchaser's name, for the Purchase
Stock, which shall be subject to the terms and conditions hereinafter set forth.
(c)Subject to the terms and conditions hereinafter set forth and upon
and as of the Purchase Date, the Company shall issue to the Purchaser the
Options and the Parties shall execute and deliver to each other copies of the
Non-Qualified Stock Option Agreement concurrently with the issuance of the
Options.
2. Purchaser's Representations, Warranties and Agreements.
(a) The Purchaser hereby represents and warrants that the Purchaser is
acquiring the Purchase Stock and, at the time of exercise, the Common Stock
issuable upon exercise of the Options (collectively, the "Stock") for investment
for the Purchaser's own account and not with a view to, or for resale in
connection with, the distribution or other disposition thereof. The Purchaser
agrees and acknowledges that the Purchaser will not, directly or indirectly,
offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any
shares of the Stock unless (A) such offer, transfer, sale, assignment, pledge,
hypothecation or other disposition complies with Section 3 of this Agreement and
(B) the offer, transfer, sale, assignment, pledge, hypothecation or other
disposition is in compliance with the Securities Act of 1933, as amended, or the
rules and regulations in effect thereunder (the "Act") and in compliance with
applicable state securities laws. Notwithstanding the foregoing, the Company
acknowledges and agrees that any of the following transfers are deemed to be in
compliance with the Act and this Agreement and no opinion of counsel is required
in
- --------------
<F1> The Purchase Price shall be funded through a combination of cash and
borrowing from the Company, which borrowing shall be pursuant to a Note and
Pledge Agreement.
<PAGE>
3
connection therewith: (x) a transfer made pursuant to Section 4, 5 or 6 hereof,
(y) a transfer upon the death of the Purchaser to the Purchaser's executors,
administrators, testamentary trustees, legatees or beneficiaries (the
"Purchaser's Estate") or a transfer to the executors, administrators,
testamentary trustees, legatees or beneficiaries of a person who has become a
holder of Stock in accordance with the terms of this Agreement, provided that it
is expressly understood that any such transferee shall be bound by the
provisions of this Agreement and (z) a transfer made after the Purchase Date in
compliance with the federal securities laws to a trust or custodianship the
beneficiaries of which may include only the Purchaser, the Purchaser's spouse or
lineal descendants (a "Purchaser's Trust") or a transfer made after the third
anniversary of the Purchase Date to such a trust by a person who has become a
holder of Stock in accordance with the terms of this Agreement, provided that
such transfer is made expressly subject to this Agreement and that the
transferee agrees in writing to be bound by the terms and conditions hereof.
(b) In addition to any legends required by the Act or applicable state
securities laws, the certificate (or certificates) representing the Stock shall
bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE,
ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION
COMPLIES WITH THE PROVISIONS OF THE MANAGEMENT STOCKHOLDER'S
AGREEMENT DATED AS OF _______________ __199_, BETWEEN
KINDERCARE LEARNING CENTERS, INC. (THE "COMPANY") AND THE
PURCHASER NAMED ON THE FACE HEREOF (A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE COMPANY)."
(c) The Purchaser acknowledges that the Purchaser has been advised
that (i) a restrictive legend in the form heretofore set forth shall be placed
on the certificates representing the Stock and (ii) a notation shall be made in
the appropriate records of the Company indicating that the Stock is subject to
restrictions on transfer and appropriate stop transfer restrictions will be
issued to the Company's transfer agent with respect to the Stock. If the
Purchaser is an Affiliate, the Purchaser also acknowledges that (1) Rule 144
promulgated under the Act may not be available with respect to the Stock, and
the Company has made no covenant to make such Rule available (except as provided
in Section 9(b) hereof), (2) when and if shares of the Stock may be disposed of
without registration in reliance on Rule 144, such disposition can be made only
in limited amounts in accordance with the terms and conditions of such Rule and
(3) if the Rule 144 exemption is not available, public sale without registration
will require compliance with Regulation A or some other exemption under the Act.
<PAGE>
4
(d) If any shares of the Stock are to be disposed of in accordance
with Rule 144 under the Act or otherwise, the Purchaser shall promptly notify
the Company of such intended disposition and shall deliver to the Company at or
prior to the time of such disposition such documentation as the Company may
reasonably request in connection with such sale and, in the case of a
disposition pursuant to Rule 144, shall deliver to the Company an executed copy
of any notice on Form 144 required to be filed with the Securities and Exchange
Commission (the "SEC").
(e) The Purchaser agrees that, if any shares of the capital stock of
the Company are offered to the public pursuant to an effective registration
statement under the Act (other than registration of securities issued under an
employee plan), the Purchaser will not effect any public sale or distribution of
any shares of the Stock not covered by such registration statement within 7 days
prior to, or within 180 days after, the effective date of such registration
statement (or such shorter period as may be agreed among the Company's officers,
directors, principal stockholders and the underwriters), unless otherwise agreed
to in writing by the Company.
(f) The Purchaser represents and warrants that the Purchaser has been
given the opportunity to obtain any additional information or documents and to
ask questions and receive answers about such information and documents, the
Company and the business and prospects of the Company which the Purchaser deems
necessary to evaluate the merits and risks related to the Purchaser's investment
in the Stock and to verify the information received as indicated in this Section
2(f), and the Purchaser has relied solely on such information.
(g) Purchaser understands that it is not anticipated that there will
be any public market for the Stock, the Stock must be held indefinitely and the
Purchaser must continue to bear the economic risk of the investment in the
Stock. The Purchaser further represents and warrants that (i) the Purchaser's
financial condition is such that the Purchaser can afford to bear the economic
risk of holding the Stock for an indefinite period of time and has adequate
means for providing for the Purchaser's current needs and personal
contingencies, (ii) the Purchaser can afford to suffer a complete loss of the
Purchaser's investment in the Stock, (iii) all information which the Purchaser
has provided to the Company concerning the Purchaser and the Purchaser's
financial position is correct and complete as of the date of this Agreement,
(iv) the Purchaser has received and read the Prospectus relating to the Stock
and understands and has taken cognizance of all risk factors related to the
purchase of the Stock and (v) the Purchaser's knowledge and experience in
financial and business matters are such that the Purchaser is capable of
evaluating the merits and risks of the purchase of the Stock as contemplated by
this Agreement.
<PAGE>
5
3. Restriction on Transfer.
Except for transfers permitted by clauses (x), (y) and (z) of Section
2(a) or a sale of shares of Stock pursuant to an effective registration
statement under the Act filed by the Company or pursuant to the Sale
Participation Agreement (as defined below), the Purchaser agrees not to
transfer, sell, assign, pledge, hypothecate or otherwise dispose of any shares
of the Stock at any time until the fifth anniversary of __________ __, 199_ (the
"Commencement Date") [which shall be the later of February 14, 1997 and the date
of hire of the Purchaser]. No transfer of any such shares in violation hereof
shall be made or recorded on the books of the Company and any such transfer
shall be void and of no effect.
4. Right of First Refusal.
If at any time after the fifth anniversary of the Commencement Date
and prior to a Public Offering (as defined below), the Purchaser is permitted to
transfer shares of Stock pursuant to Sections 2 and 3 ("Unrestricted Shares")
and the Purchaser (i) receives a bona fide offer (the "Offer") to purchase any
or all of such Unrestricted Shares from a third party (the "Offeror") which the
Purchaser wishes to accept or (ii) if the Purchaser wishes to sell any or all of
the Purchaser's Unrestricted Shares in the open market at the Market Price Per
Share on the date of sale ("Proposed Market Sale"), the Purchaser shall cause
the Offer to be reduced to writing and shall notify the Company in writing of
the Purchaser's wish to accept the Offer or consummate the Proposed Market Sale,
as the case may be. The Purchaser's notice shall constitute an irrevocable offer
to sell such Unrestricted Shares to the Company (in the manner set forth below)
at a purchase price (i) in the case of an Offer, equal to the price contained
in, and on the same terms and conditions of, the Offer, and shall be accompanied
by a true copy of the Offer (which shall identify the Offeror) and (ii) in the
case of a Proposed Market Sale, equal to the Market Price Per Share on the date
of purchase. At any time within 30 days after the date of the receipt by the
Company of the Purchaser's notice, the Company shall have the right and option
to purchase, or to arrange for a third party to purchase, all of the
Unrestricted Shares covered by the Offer or the Proposed Market Sale either (i)
at the same price and on the same terms and conditions as the Offer or the
Proposed Market Sale or (ii) if the Offer includes any consideration other than
cash, then at the sole option of the Company, at the equivalent all cash price,
determined in good faith by the Company's Board of Directors, by delivering a
certified bank check or checks in the appropriate amount to the Purchaser at the
principal office of the Company against delivery of certificates or other
instruments representing the Unrestricted Shares so purchased, appropriately
endorsed by the Purchaser. If at the end of such 30-day period, the Company has
not tendered the purchase price for such Unrestricted Shares in the manner set
forth above, the Purchaser
<PAGE>
6
may during the succeeding 60-day period sell not less than all of the
Unrestricted Shares covered by the Purchaser's notice in the case of an Offer to
the Offeror at a price and on terms no less favorable to the Purchaser than
those contained in the Offer and in the case of a Proposed Market Sale at the
Market Price Per Share at the time of sale. Promptly after such sale, the
Purchaser shall notify the Company of the consummation thereof and shall furnish
such evidence of the completion and time of completion of such sale and of the
terms thereof as may reasonably be requested by the Company. If, at the end of
60 days following the expiration of the 30-day period for the Company to
purchase the Stock, the Purchaser has not completed the sale of such shares of
the Stock as aforesaid, all the restrictions on sale contained in this Section
shall again be in effect with respect to such Unrestricted Shares.
5. Purchaser's Resale of Stock and Options to the Company Upon The
Purchaser's Death or Disability.
(a) Except as otherwise provided herein, if at any time prior to the
fifth anniversary of the Commencement Date, (i) the Purchaser is still in the
employ of the Company and (ii) the Purchaser either dies or becomes permanently
disabled, then the Purchaser or the Purchaser's Estate, as the case may be,
shall have the right, for six months following the date of death or permanent
disability, to (A) sell to the Company, and the Company shall be required to
purchase, on one occasion, all or any portion of the shares of Stock then held
by the Purchaser or the Purchaser's Estate, as the case may be, at the Section 5
Repurchase Price, as determined in accordance with Section 7, and (B) require
the Company to pay, on the same occasion, to the Purchaser or the Purchaser's
Trust, as the case may be, an additional amount equal to the Option Excess Price
determined on the basis of a Section 5 Repurchase Price as provided in Section 8
with respect to the termination of outstanding Options held by the Purchaser.
The Purchaser or the Purchaser's Estate, as the case may be, shall send written
notice to the Company of its intention to sell shares of Stock and to terminate
such Options in exchange for the payment referred to in the preceding sentence
(the "Redemption Notice"). The completion of the purchase shall take place at
the principal office of the Company on the tenth business day after the giving
of the Redemption Notice. The Section 5 Repurchase Price and any payment with
respect to the Options as described above shall be paid by delivery to the
Purchaser or the Purchaser's Estate, as the case may be, of a certified bank
check or checks in the appropriate amount payable to the order of the Purchaser
or the Purchaser's Estate, as the case may be, against delivery of certificates
or other instruments representing the Stock so purchased and appropriate
documents cancelling the Options so terminated, each appropriately endorsed or
executed by the Purchaser or the Purchaser's Estate, or his or her or its duly
authorized representative. For purposes of this Agreement, Purchaser shall be
deemed to have a "permanent disability" if the Purchaser is
<PAGE>
7
unable to engage in the activities required by Purchaser's position by reason of
any medically-determined physical or mental impairment which can be expected to
result in death or which has lasted or can reasonably be expected to last for a
continuous period of not less than 12 months.
(b) Notwithstanding anything in Section 5(a) to the contrary and
subject to Section 11, the Company shall not be obligated to repurchase any of
the Stock or the Options from the Purchaser or the Purchaser's Estate, as the
case may be, if there exists and is continuing, or such repurchase would result
in, (x) a default or an event of default on the part of the Company or any
subsidiary of the Company under any loan, guarantee or other agreement under
which the Company or any subsidiary of the Company has borrowed money or (y) a
violation under any applicable provision of the Delaware General Corporation Law
(or if the Company reincorporates, the corporation law of that state) (such
occurrence being a "Blocking Event"). The Company's obligation to repurchase any
of the Stock or Options as set forth in Section 5(a) shall be suspended until
the first business day which is 5 calendar days after all of the foregoing
Blocking Events have ceased to exist (the "Repurchase Eligibility Date");
provided, however, that (i) the number of shares of Stock subject to repurchase
under Section 5(a) at the time of delivery of the Redemption Notice shall be
that number of shares of Stock, and (ii) the number of Exercisable Option Shares
(as defined in Section 8) for purposes of calculating the Option Excess Price
payable after the termination of all Blocking Events shall be the number of
Exercisable Option Shares, held by the Purchaser or the Purchaser's Estate, as
the case may be, at the time of delivery of a Redemption Notice in accordance
with Section 5(a) hereof; provided, further, that the Repurchase Calculation
Date shall be determined in accordance with Section 7 as of the Repurchase
Eligibility Date (unless the Section 5 Repurchase Price would be greater if the
Repurchase Calculation Date had been determined as if no Blocking Event had
occurred in which case, solely for purposes of this proviso, the Repurchase
Calculation Date shall be determined as if no Blocking Event had occurred). All
Options exercisable as of the date of a Redemption Notice shall continue to be
exercisable until the repurchase pursuant to such Redemption Notice.
(c) Notwithstanding any other provision of this Section 5 to the
contrary and subject to Section 11, the Purchaser or the Purchaser's Estate, as
the case may be, shall have the right to withdraw any Redemption Notice which
has been pending for 60 or more days and which has remained unsatisfied because
of the provisions of Section 5(b).
<PAGE>
8
6. The Company's Option to Repurchase Stock and Options of
Purchaser.
(a) If, prior to the fifth anniversary of the Commencement Date, (i)
the Purchaser's active employment with the Company is either (A) terminated by
the Purchaser without Good Reason or (B) terminated by the Company for Cause,
(ii) a Purchaser's Trust fails to comply with the requirements set forth in
Section 2(a)(z), or (iii) the Purchaser shall effect a transfer of any of the
Stock other than as permitted in this Agreement, the Company shall have the
right to purchase all, but not less than all, of the shares of the Stock then
held by the Purchaser, the Purchaser's Estate or a Purchaser's Trust at the
applicable Section 6(a) Repurchase Price determined in accordance with Section 7
hereof. In the event of the Purchaser's resignation without Good Reason, all
unexercisable Options shall terminate without any payment. In the event of
Purchaser's active employment with the Company is terminated by the Company for
Cause, all Options shall terminate without any payment.
(b) If, prior to the fifth anniversary of the Commencement Date, the
Purchaser's active employment with the Company is terminated by the Purchaser
with Good Reason or terminated by the Company without Cause, the Company shall
have the right to purchase all, but not less than all, of the shares of the
Stock then held by the Purchaser, the Purchaser's Estate or a Purchaser's Trust
at the applicable Section 6(b) Repurchase Price determined in accordance with
Section 7 hereof.
(c) If, prior to the fifth anniversary of the Commencement Date, the
Purchaser either dies or becomes permanently disabled and on the date of such
death or permanent disability the Purchaser was still in the employ of the
Company, the Company shall have the right to purchase all, but not less than
all, of the shares of the Stock then held by the Purchaser, the Purchaser's
Estate or a Purchaser's Trust , provided, however, that the Repurchase Price
shall be the Section 5 Repurchase Price.
(d) The circumstances under which the Company may elect to require the
repurchase of the shares of Stock pursuant to Sections 6(a), (b) and (c) are
hereinafter collectively referred to as "Call Events." The Company shall have a
period of 75 days from the date of a Call Event in which to give notice in
writing to the Purchaser of the exercise of such election ("Call Notice"). In
the event that the Company exercises its right to repurchase shares of the Stock
pursuant to this Section 6, the Company shall also pay the Purchaser an amount
equal to the Option Excess Price determined on the basis of the Section 6(a)
Repurchase Price, the Section 6(b) Repurchase Price or the Section 5 Repurchase
Price, as the case may be, as provided in Section 8, with respect to the
termination of outstanding Options held by the Purchaser.
<PAGE>
9
(e) The completion of the purchases pursuant to the foregoing shall
take place at the principal office of the Company on the tenth business day
after the giving of notice of the exercise of the option to purchase. The
Section 5 Repurchase Price, the Section 6(a) Repurchase Price and the Section
6(b) Repurchase Price, as the case may be, and any payment with respect to the
Options as described above shall be paid by delivery to the applicable seller of
a certified bank check or checks in the appropriate amount payable to the order
of such seller against delivery of certificates or other instruments
representing the Stock so purchased and appropriate documents cancelling the
Options so terminated, appropriately endorsed or executed by the Purchaser, the
Purchaser's Estate, the Purchaser's Trust or his, her or their authorized
representatives.
(f) Notwithstanding any other provision of this Section 6 to the
contrary and subject to Section 11, if there exists and is continuing any
Blocking Event, the Company shall delay the repurchase of any of the Stock or
the Options (pursuant to a Call Notice timely given in accordance with Section
6(a), 6(b) or 6(c) hereof) from the Purchaser, the Purchaser's Estate or the
Purchaser's Trust, as the case may be, until the Repurchase Eligibility Date;
provided, however, that (i) the number of shares of Stock subject to repurchase
under this Section 6 at the time of the delivery of the Call Notice shall be
that number of shares of Stock subject to repurchase after the termination of
all Blocking Events and (ii) the number of Exercisable Option Shares for
purposes of calculating the Option Excess Price payable after the termination of
all Blocking Events shall be the number of Exercisable Option Shares held by the
Purchaser, the Purchaser's Estate or a Purchaser's Trust, as the case may be, at
the time of delivery of a Call Notice in accordance with Section 6(a), 6(b) or
6(c) hereof; provided, further, that the Repurchase Calculation Date shall be
determined in accordance with Section 7 based on the Repurchase Eligibility Date
(unless the applicable Repurchase Price would be greater if the Repurchase
Calculation Date had been determined as if no Blocking Event had occurred, in
which case, solely for purposes of this proviso, the Repurchase Calculation Date
shall be determined as if no Blocking Event had occurred). All Options
exercisable as of the date of a Call Notice shall continue to be exercisable
until the repurchase pursuant to such Call Notice.
(g) For purposes of this Agreement the following definitions shall
apply: "Cause" shall mean (i) the Purchaser's willful and continued failure to
perform Purchaser's duties with respect to the Company or its subsidiaries which
continues beyond ten days after a written demand for substantial performance is
delivered to Purchaser by the Company and which could reasonably result in
demonstrable injury to the Company or (ii) misconduct by Purchaser (x) involving
dishonesty or breach of trust in connection with Purchaser's employment, (y)
which would be a reasonable basis for an indictment of Purchaser for a felony or
<PAGE>
10
for a misdemeanor involving moral turpitude, or (z) which results in
demonstrable injury to the Company; and "Good Reason" shall mean, without the
Purchaser's consent, (i) a reduction in Purchaser's base salary, other than a
reduction which is part of a general salary reduction program affecting all
salaried employees of the Company, (ii) a substantial reduction in Purchaser's
duties and responsibilities or change in the Purchaser's title, (iii) the
elimination or reduction of Purchaser's eligibility to participate in the
Company's benefit programs that is inconsistent with the eligibility of
similarly situated employees of the Company to participate therein or (iv) a
transfer of the Purchaser's primary workplace by more than fifty (50) miles from
the workplace as of the date hereof.
7. Determination of Repurchase Price.
(a) The Section 5 Repurchase Price, the Section 6(a) Repurchase Price
and the Section 6(b) Repurchase Price are hereinafter collectively referred to
as the "Repurchase Price." The Repurchase Price shall be calculated on the basis
of the unaudited financial statements of the Company or the Market Price Per
Share (as defined in Section 7(g)) as of the last day of the month preceding the
later of (i) the month in which the event giving rise to the repurchase occurs
and (ii) the month in which the Repurchase Eligibility Date occurs (hereinafter
called the "Repurchase Calculation Date"). The event giving rise to the
repurchase shall be the death, permanent disability, retirement or termination
of employment, as the case may be, of the Purchaser, not the giving of any
notice required pursuant to Section 5 or 6.
(b) The Section 5 Repurchase Price shall be a per share Repurchase
Price equal to (i) prior to a Public Offering, the greater of (x) $19 and (y)
$19 plus the increase, if any, in Book Value Per Share (as defined in Section
7(e)) from the Commencement Date through the Repurchase Calculation Date or (ii)
after a Public Offering, the Market Price Per Share.
(c) The Section 6(a) Repurchase Price shall be a per share Repurchase
Price equal to (i) prior to a Public Offering, (x) $19 less the decrease in Book
Value Per Share from the Commencement Date through the Repurchase Calculation
Date, if such Book Value Per Share has decreased, (y) $19 plus the product of
(A) the Unrestricted Percentage (as defined below) and (B) the increase in the
Book Value Per Share from the Commencement Date through the Repurchase
Calculation Date, if such Book Value Per Share has increased or (z) $19, if such
Book Value Per Share has neither decreased nor increased and (ii) after a Public
Offering, (x) the Market Price Per Share, if the Market Price Per Share is $19
or less or (y) $19 plus the product of (A) the Unrestricted Percentage and (B)
the Market Price Per Share less $19, if the Market Price Per Share is greater
than $19.
<PAGE>
11
(d) The Section 6(b) Repurchase Price shall be a per share Repurchase
Price equal to (x) prior to a Public Offering, $19 minus any decrease in Book
Value Per Share or plus any increase in Book Value Per Share from the
Commencement Date through the Repurchase Calculation Date or (y) after a Public
Offering, the Market Price Per Share.
(e) For purposes of this Agreement the "Unrestricted Percentage" shall
be determined as follows:
Repurchase Calculation Date Percentage
- --------------------------- ----------
Purchase Date through and including the 0%
first anniversary of the Commencement
Date
After the first anniversary of the 20%
Commencement Date through and including
the second anniversary of the
Commencement Date
After the second anniversary of the 40%
Commencement Date through and including
the third anniversary of the Commencement
Date
After the third anniversary of the 60%
Commencement Date through and including
the fourth anniversary of the
Commencement Date
After the fourth anniversary of the 80%
Commencement Date through and including
the fifth anniversary of the Commencement
Date
After the fifth anniversary of the 100%
Commencement Date
(f) For purposes of this Agreement, "Book Value Per Share" shall mean
book value per share based on generally accepted accounting principles
consistently applied excluding accounting charges, costs and expenses incurred
within 12 months after the Closing related to (i) the separation or severance of
headquarters' personnel, (ii) recruiting and hiring, (iii) the Merger and (iv)
the restructuring of the Company, including all costs related to the moving of
the headquarters of the Company to Portland, Oregon and the closing of the
Company's former headquarters in Montgomery, Alabama, and also excluding, in the
Board of Directors discretion, any extraordinary or unusual charges or credits
such as one time write-offs of goodwill or similar events.
(g) As used herein the term "Public Offering" shall mean the sale of
shares of Common Stock to the public subsequent to the date hereof pursuant to a
registration statement under the
<PAGE>
12
Act which has been declared effective by the SEC (other than a registration
statement on Form S-8) which results in an active trading market of 30% or more
of the outstanding shares of the Common Stock.
(h) As used herein the term "Market Price Per Share" shall mean either
(i) the price per share equal to the average of the last sale price of the
Common Stock on the Repurchase Calculation Date on each national securities
exchange on which the Common Stock may at the time be listed or (ii) if there
shall have been no sales on any of such exchanges on the Repurchase Calculation
Date, the average of the closing bid and asked prices on each such exchange at
the end of the Repurchase Calculation Date or (iii) if there is no such bid and
asked price on the Repurchase Calculation Date, the average of the closing bid
and asked prices on each such exchange on the next preceding date when such bid
and asked price occurred or (iv) if the Common Stock shall not be so listed, the
closing sales price as reported by the NASDAQ National Market System ("NASDAQ")
at the end of the Repurchase Calculation Date or (v) if there shall have been no
sales reported by NASDAQ on the Repurchase Calculation Date, the closing bid and
asked prices reported by NASDAQ at the end of the Repurchase Calculation Date or
(vi) if there is no such bid and asked price on the Repurchase Calculation Date,
the average closing sales price as reported by the National Association of
Securities Dealers, Inc. in the "pink sheets" for the 15-day period immediately
preceding the Repurchase Calculation Date, or (vii) if no such sales occurred
within such 15-day period, the Book Value Per Share.
(i) In determining the Repurchase Price, appropriate adjustments shall
be made for any future issuances of rights to acquire and securities convertible
into Common Stock and any stock dividends, splits, combinations,
recapitalizations or any other adjustment in the number of outstanding shares of
Common Stock.
8. Stock Issued to Purchaser Upon Exercise of Stock Options;
Termination of Options.
(a) The Company may from time to time grant to the Purchaser, in
addition to the Options, options under the Option Plan to purchase shares of
Common Stock at the Per Share Purchase Price or at a different option exercise
price. The term "Stock" as used in this Agreement shall include all shares of
Common Stock of the Company purchased by the Purchaser pursuant to this
Agreement and issued to the Purchaser by the Company upon exercise of the
Options and of any other stock options held by the Purchaser.
(b) All outstanding Options granted to the Purchaser under the Option
Plan or otherwise, whether or not then exercisable, will be automatically
terminated upon the payment by the Company to the Purchaser, pursuant to the
provisions of
<PAGE>
13
Sections 5 or 6 of this Agreement, of an amount equal to the Option Excess
Price. If the Option Excess Price is zero or a negative number, all outstanding
stock options granted to the Purchaser under the Option Plan or otherwise,
whether or not then exercisable, shall be automatically terminated upon the
repurchase of Stock as provided in Sections 5 or 6. The Option Excess Price is
the excess, if any, of the Section 5 Repurchase Price, the Section 6(a)
Repurchase Price or the Section 6(b) Repurchase Price, depending on which
Repurchase Price is being used to repurchase the remainder of the Stock, over
the Option Price (as defined in the Option Plan) multiplied by the number of
Exercisable Option Shares. For purposes hereof, "Exercisable Option Shares"
shall mean the shares of Common Stock which, at the time of determination of the
Option Excess Price, could be purchased by the Purchaser upon exercise of the
Purchaser's outstanding options.
9. The Company's Representations and Warranties.
(a) The Company represents and warrants to the Purchaser that (i) this
Agreement has been duly authorized, executed and delivered by the Company and
(ii) the Stock, when issued and delivered in accordance with the terms hereof,
will be duly and validly issued, fully paid and nonassessable.
(b) If the Company shall have engaged in a Public Offering, (i) the
Company shall use reasonable efforts to register the Options and the Stock to be
acquired on exercise thereof on a Form S-8 Registration Statement or any
successor to Form S-8 to the extent that such registration is then available
with respect to such Options and Stock and (ii) the Company will file the
reports required to be filed by it under the Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder, to the extent required from
time to time to enable the Purchaser to sell shares of Stock without
registration under the Act within the limitations of the exemptions provided by
(A) Rule 144 under the Act, as such Rule may be amended from time to time, or
(B) any similar rule or regulation hereafter adopted by the SEC. Notwithstanding
anything contained in this Section 9(b), the Company may deregister under
Section 12 of the Exchange Act if it is then permitted to do so pursuant to the
Exchange Act and the rules and regulations thereunder. Nothing in this Section
9(b) shall be deemed to limit in any manner the restrictions on sales of Stock
contained in this Agreement.
10. "Piggyback" Registration Rights.
(a) Effective upon the purchase of Common Stock pursuant to this
Agreement until the later of the consummation of a Public Offering and the fifth
anniversary of the Purchase Date, the Purchaser (i) hereby agrees to be bound by
all of the terms, conditions and obligations of the Registration Rights
Agreement dated as of February 13, 1997, among the Company (as successor by
Merger to KCLC Acquisition Corp.) and certain of the KKR Entities
<PAGE>
14
(the "Registration Rights Agreement") and (ii) subject to the limitations set
forth in this Section 10, shall have the right under the Registration Rights
Agreement to participate in offerings that would result in a Public Offering
ratably with the KKR Entities (except that the Purchaser will not have demand
registration rights, but shall have the right to participate ratably with the
KKR Entities parties thereto in any demand registration by the KKR Entities);
provided, however, that the Purchaser shall not be bound by any amendments to
the Registration Rights Agreement unless Purchaser consents thereto.
Notwithstanding anything to the contrary contained in the Registration Rights
Agreement, the Purchaser's rights and obligations under the Registration Rights
Agreement shall be subject to the limitations and additional obligations set
forth in this Section 10. All shares of Stock purchased by the Purchaser
pursuant to this Agreement and held by the Purchaser, the Purchaser's Trust or
the Purchaser's Estate, including shares purchased upon the exercise of Options,
shall be deemed to be Registrable Securities as defined in the Registration
Rights Agreement.
(b) The Company will promptly notify the Purchaser in writing (a
"Notice") of any proposed registration (a "Proposed Registration"). If within 15
days of the receipt by the Purchaser of such Notice, the Company receives from
the Purchaser, the Purchaser's Trust or the Purchaser's Estate a written request
(a "Request") to register shares of Stock held by the Purchaser, the Purchaser's
Estate or the Purchaser's Trust (which Request will be irrevocable unless
otherwise mutually agreed to in writing by the Purchaser and the Company),
shares of Stock will be so registered as provided in this Section 10; provided,
however, that for each such registration statement only one Request, which shall
be executed by the Purchaser, the Purchaser's Trust or the Purchaser's Estate,
as the case may be, may be submitted for all Registrable Securities held by the
Purchaser, the Purchaser's Estate and the Purchaser's Trust.
(c) The maximum number of shares of Stock which will be registered
pursuant to a Request will be the lowest of (i) the number of shares of Stock
then held by the Purchaser (which for purposes of this subparagraph (c) shall
include shares held by the Purchaser's Estate or a Purchaser's Trust), including
all shares of Stock which the Purchaser is then entitled to acquire under an
unexercised Option to the extent then exercisable or (ii) the maximum number of
shares of Stock which the Company can register in the Proposed Registration
without adverse effect on the offering in the view of the managing underwriters
(reduced pro rata with all Other Purchasers) as more fully described in
subsection (d) of this Section 10 or (iii) the maximum number of shares which
the Purchaser (pro rata based upon the aggregate number of shares of Common
Stock the Purchaser and all Other Purchasers have requested be registered) and
all Other Purchasers are permitted to register under the Registration Rights
Agreement.
<PAGE>
15
(d) If a Proposed Registration involves an underwritten offering and
the managing underwriter advises the Company in writing that, in its opinion,
the number of shares of Stock requested to be included in the Proposed
Registration exceeds the number which can be sold in such offering, so as to be
likely to have an adverse effect on the price, timing or distribution of the
shares of Stock offered in such Public Offering as contemplated by the Company,
then the Company will include in the Proposed Registration (i) first, 100% of
the shares of Stock the Company proposes to sell and (ii) second, to the extent
of the number of shares of Stock requested to be included in such registration
which, in the opinion of such managing underwriter, can be sold without having
the adverse effect referred to above, the number of shares of Stock which the
"Holders" (as defined in the Registration Rights Agreement), including, without
limitation, the Purchaser and Other Purchasers have requested to be included in
the Proposed Registration, such amount to be allocated pro rata among all
requesting Holders on the basis of the relative number of shares of Stock then
held by each such Holder (provided that any shares thereby allocated to any such
Holder that exceed such Holder's request will be reallocated among the remaining
requesting Holders in like manner).
(e) Upon delivering a Request the Purchaser, the Purchaser's Estate or
Purchaser's Trust (or his or her or their authorized representative) will, if
requested by the Company, execute and deliver a custody agreement and power of
attorney in form and substance satisfactory to the Company with respect to the
shares of Stock to be registered pursuant to this Section 10 (a "Custody
Agreement and Power of Attorney"). The Custody Agreement and Power of Attorney
will provide, among other things, that the Purchaser the Purchaser's Estate or
Purchaser's Trust (or his or her or their authorized representative) will
deliver to and deposit in custody with the custodian and attorney-in-fact named
therein a certificate or certificates representing such shares of Stock (duly
endorsed in blank by the registered owner or owners thereof or accompanied by
duly executed stock powers in blank) and irrevocably appoint said custodian and
attorney-in-fact as the Purchaser's, Purchaser's Estate's or Purchaser's Trust's
agent and attorney-in-fact with full power and authority to act under the
Custody Agreement and Power of Attorney on its behalf with respect to the
matters specified therein.
(f) The Purchaser will execute such other agreements as the Company
may reasonably request to further evidence the provision of this Section 10.
11. Pro Rata Repurchases.
Notwithstanding anything to the contrary contained in Sections 5 or 6,
if at any time consummation of all purchases and payments to be made by the
Company pursuant to this Agreement,
<PAGE>
16
the Other Purchasers' Agreements and/or the stockholder's agreement dated as of
February 14, 1997 between David J. Johnson ("Johnson") and the Company (the
"Johnson Stockholder's Agreement"), would result in a Blocking Event, then the
Company shall (i) first make purchases from, and payments to, Johnson with
respect to his Side-by-Side Equity (as defined in the Johnson Stockholder's
Agreement) for the maximum number of shares of Side-by-Side Equity without
resulting in a Blocking Event and (ii) after all of Johnson's Side-by-Side
Equity has been purchased and paid for, make purchases from, and payments to,
the Purchaser, the Other Purchasers and Johnson pro rata (on the basis of the
proportion of the number of shares of Stock and the number of Options which
Johnson (with respect to Johnson's Promote Equity (as defined in the Johnson
Stockholder's Agreement)), the Purchaser and all Other Purchasers have elected
or are required to sell to the Company) for the maximum number of shares of
Stock and shall pay the Option Excess Price for the maximum number of Options
permitted without resulting in a Blocking Event. The maximum number of shares of
Stock and the maximum number of Options permitted to be purchased or paid for by
the Company at any time without resulting in a Blocking Event shall be referred
to herein as the "Maximum Repurchase Amount". The provisions of Section 5(b) and
6(f) shall apply in their entirety to payments and repurchases with respect to
Options and shares of Stock which may not be made due to the limits imposed by
the Maximum Repurchase Amount under this Section 11. Until all of such Stock and
Options are purchased and paid for by the Company, Johnson, the Purchaser and
the Other Purchasers whose Stock and Options are not purchased in accordance
with this Section 11 shall have priority, on the basis set forth in this Section
11, over other purchases of Common Stock and Options by the Company pursuant to
this Agreement, the Johnson Stockholder's Agreement and the Other Purchasers'
Agreements, except that any purchase of Johnson's Side-by-Side Equity by the
Company pursuant to the Johnson Stockholder's Agreement shall have a priority
over all other purchases of Stock or Options to be made by the Company under
this Agreement or the Other Purchasers' Agreements.
12. Rights to Negotiate Repurchase Price.
Nothing in this Agreement shall be deemed to restrict or prohibit the
Company from purchasing shares of Stock or Options from the Purchaser, at any
time, upon such terms and conditions, and for such price, as may be mutually
agreed upon between the Parties, whether or not at the time of such purchase
circumstances exist which specifically grant the Company the right to purchase,
or the Purchaser the right to sell, shares of Stock or the Company has the right
to pay, or the Purchaser has the right to receive, the Option Excess Price under
the terms of this Agreement.
<PAGE>
17
13. Covenant Regarding 83(b) Election.
Except as the Company may otherwise agree in writing, the Purchaser
will make an election provided pursuant to Treasury Regulation 1.83-2 with
respect to the Stock, including without limitation, the Stock to be acquired
pursuant to Section 1 and the Stock to be acquired upon each exercise of the
Purchaser's Options; and Purchaser will furnish the Company with copies of the
forms of election the Purchaser files within 30 days after the date hereof, and
within 30 days after each exercise of Purchaser's Non-Qualified Options and with
evidence that each such election has been filed in a timely manner.
14. Notice of Change of Beneficiary.
Immediately prior to any transfer of Stock to a Purchaser's Trust, the
Purchaser shall provide the Company with a copy of the instruments creating the
Purchaser's Trust and with the identity of the beneficiaries of the Purchaser's
Trust. The Purchaser shall notify the Company immediately prior to any change in
the identity of any beneficiary of the Purchaser's Trust.
15. Expiration of Certain Provisions.
The provisions contained in Sections 4, 5 and 6 of this Agreement and
the portion of any other provision of this Agreement which incorporates the
provisions of Sections 4, 5 and 6, shall terminate and be of no further force or
effect with respect to any shares of Stock sold by the Purchaser (i) pursuant to
an effective registration statement filed by the Company pursuant to Section 10
hereof or (ii) pursuant to the terms of the Sale Participation Agreement of even
date herewith, among the Purchaser, KKR Partners II, L.P. and KLC Associates,
L.P.
<PAGE>
18
The rights and obligations of the parties hereto under Sections 3, 4,
5 and 6 hereof shall all terminate if a Change of Control occurs. A "Change of
Control" means (i) a sale of all or substantially all of the assets of the
Company (other than in connection with financing transactions, sale and
leaseback transactions or other similar transactions) to a Person who is not KKR
or an affiliate (as such term is defined in Section 12b-2 of the Securities
Exchange Act of 1934, as amended) of KKR ("KKR Affiliates" and, together with
KKR, the "KKR Entities") (ii) a sale by KKR or any KKR Affiliate resulting in
more than 50% of the voting stock of the Company being held by a person or group
that does not include a KKR Entity or (iii) (a) a merger or consolidation of the
Company into another person which is not a KKR Entity or (b) any dilution of
KKR's beneficial ownership interest in the Company which results in the KKR
Entities owning less than 50% of the outstanding shares of the Common Stock of
the Company; if and only if any such event described in either (iii) (a) or (b)
results in the inability of the KKR Entities to elect a majority of the Board of
Directors of the Company (or the resulting entity).
16. Recapitalizations, etc.
The provisions of this Agreement shall apply, to the full extent set
forth herein with respect to the Stock or the Options, to any and all shares of
capital stock of the Company or any capital stock, partnership units or any
other security evidencing ownership interests in any successor or assign of the
Company (whether by merger, consolidation, sale of assets or otherwise) which
may be issued in respect of, in exchange for, or substitution of the Stock or
the Options, by reason of any stock dividend, split, reverse split, combination,
recapitalization, liquidation, reclassification, merger, consolidation or
otherwise.
17. Purchaser's Employment by the Company.
Nothing contained in this Agreement or in any other agreement entered
into by the Company and the Purchaser contemporaneously with the execution of
this Agreement (i) obligates the Company or any subsidiary of the Company to
employ the Purchaser in any capacity whatsoever or (ii) prohibits or restricts
the Company (or any such subsidiary) from terminating the employment, if any, of
the Purchaser at any time or for any reason whatsoever, with or without cause,
and the Purchaser hereby acknowledges and agrees that neither the Company nor
any other person has made any representations or promises whatsoever to the
Purchaser concerning the Purchaser's employment or continued employment by the
Company.
18. State Securities Laws.
The Company hereby agrees to use its best efforts to comply with all
state securities or "blue sky" laws which might
<PAGE>
19
be applicable to the sale of the Stock and the issuance of the Options to the
Purchaser.
19. Binding Effect.
The provisions of this Agreement shall be binding upon and accrue to
the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. In the case of a transferee permitted
under Section 2(a) hereof, such transferee shall be deemed the Purchaser
hereunder; provided, however, that no transferee (including without limitation,
transferees referred to in Section 2(a) hereof) shall derive any rights under
this Agreement unless and until such transferee has delivered to the Company a
valid undertaking and becomes bound by the terms of this Agreement.
20. Amendment.
This Agreement may be amended only by a written instrument signed by
the Parties hereto.
21. Closing.
Except as otherwise provided herein, the closing of each purchase and
sale of shares of Stock and the payment of the Option Excess Price, if any,
pursuant to this Agreement shall take place at the principal office of the
Company on the tenth business day following delivery of the notice by either
Party to the other of its exercise of the right to purchase or sell such Stock
hereunder or to cause the payment of the Option Excess Price, if any.
22. Applicable Law.
The laws of the state of Delaware (or if the Company reincorporates in
another state, of that state) shall govern the interpretation, validity and
performance of the terms of this Agreement, regardless of the law that might be
applied under principles of conflicts of law. Any suit, action or proceeding
against the Purchaser, with respect to this Agreement, or any judgment entered
by any court in respect of any thereof, may be brought in any court of competent
jurisdiction in the State of Delaware (or if the Company reincorporates in
another state, in that state) or the State in which the Company's headquarters
is located, and the Purchaser hereby submits to the non-exclusive jurisdiction
of such courts for the purpose of any such suit, action, proceeding or judgment.
Nothing herein shall in any way be deemed to limit the ability of the Company to
serve any such writs, process or summonses in any other manner permitted by
applicable law or to obtain jurisdiction over the Purchaser, in such other
jurisdictions and in such manner, as may be permitted by applicable law. The
Purchaser hereby irrevocably waives any objections which the Purchaser may now
or hereafter have to the laying of the venue of any suit, action or proceeding
arising out
<PAGE>
20
of or relating to this Agreement brought in any court of competent jurisdiction
in the State of Delaware (or if the Company reincorporates in another state, in
that state) or the State in which the Company's headquarters is located, and
hereby further irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in any inconvenient forum.
No suit, action or proceeding against the Company with respect to this Agreement
may be brought in any court, domestic or foreign, or before any similar domestic
or foreign authority other than in a court of competent jurisdiction in the
State of Delaware (or if the Company reincorporates in another state, in that
state) or the State in which the Company's headquarters is located, and the
Purchaser hereby irrevocably waives any right which the Purchaser may otherwise
have had to bring such an action in any other court, domestic or foreign, or
before any similar domestic or foreign authority. The Company hereby submits to
the jurisdiction of such courts for the purpose of any such suit, action or
proceeding.
23. Assignability of Certain Rights by the Company.
The Company shall have the right to assign any or all of its
rights or obligations to purchase shares of Stock pursuant to Sections 4, 5 and
6 hereof; provided, however, that the Company shall remain obligated to perform
its obligations notwithstanding such assignment in the event that such assignee
fails to perform the obligations so assigned to it.
24. Miscellaneous.
In this Agreement (i) all references to "dollars" or "$" are to United
States dollars and (ii) the word "or" is not exclusive. If any provision of this
Agreement shall be declared illegal, void or unenforceable by any court of
competent jurisdiction, the other provisions shall not be affected, but shall
remain in full force and effect.
25. Notices.
All notices and other communications provided for herein shall be in
writing and shall be deemed to have been duly given if delivered by hand
(whether by overnight courier or otherwise) or sent by registered or certified
mail, return receipt requested, postage prepaid, to the Party to whom it is
directed:
(a) If to the Company, to it at the following address:
<PAGE>
21
KinderCare Learning Centers, Inc.
825 N.E. Multnomah
Suite 1050
Portland, Oregon 97232
Attn: General Counsel
with copies to:
Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Clifton S. Robbins
and:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3909
Attn: David J. Sorkin, Esq.
(b) If to the Purchaser, to him at the address set forth below under
the Purchaser's signature;
or at such other address as either party shall have specified by
notice in writing to the other.
<PAGE>
22
26. Covenant Not to Compete; Confidential Information.
(a) In consideration of the Company entering into this Agreement with
the Purchaser, the Purchaser hereby agrees effective as of the Purchase Date,
for so long as the Purchaser is employed by the Company or one of its
subsidiaries and (x) in the event of termination or resignation for any reason
other than a termination by the Company without Cause or a resignation by the
Purchaser for Good Reason, for a period of six months thereafter or (y) in the
event of termination by the Company without Cause or resignation by the
Purchaser for Good Reason, for the shorter of (A) a period of six months
thereafter and (B) the period during which the Company pays the Purchaser
severance pay (the period in either (x) or (y), as applicable, being the
"Initial Noncompete Period"), the Purchaser shall not, directly or indirectly,
engage in the production, sale or distribution of any product produced, sold or
distributed by the Company or its subsidiaries on the date hereof or during the
Initial Noncompete Period or during any extension thereof anywhere in the world
in which the Company or its subsidiaries is doing business other than through
the Purchaser's employment with the Company or any of its subsidiaries. At the
Company's option, the Noncompete Period may be extended for an additional six
month period if (i) within three months of the termination of the Purchaser's
employment or if the Initial Noncompete Period is shorter than three months, at
any time prior to the end of the Initial Noncompete Period, the Company gives
the Purchaser notice of such extension and (ii) beginning with the first
business day following the end of the Initial Noncompete Period, the Company
pays the Purchaser during such extension at a rate equal to the rate of the
Purchaser's base salary on the date of the termination of the Purchaser's
employment. Such amount shall be paid in installments in a manner consistent
with the then current salary payment policies of the Company. For purposes of
this Agreement, the phrase "directly or indirectly engage in" shall include any
direct or indirect ownership or profit participation interest in such
enterprise, whether as an owner, stockholder, partner, joint venturer of
otherwise, and shall include any direct or indirect participation in such
enterprise as a consultant, licensor of technology or otherwise, but shall not
include any purchase of less 5% of the stock of a publicly traded company.
(b) Except as required by law or judicial process, the Purchaser will
not disclose or use at any time, any Confidential Information (as defined below)
of which the Purchaser is or becomes aware, whether or not such information is
developed by him, except to the extent that such disclosure or use is directly
related to the Purchaser's performance of duties, if any, assigned to the
Purchaser by the Company. As used in this Agreement, the term "Confidential
Information" means information developed by or on behalf of the Company that is
not known to the public or within the industry and that is used, developed or
obtained by the Company or its subsidiaries in connection with
<PAGE>
23
its business, including but not limited to (i) products or services, (ii) fees,
costs and pricing structures, (iii) designs, (iv) computer software, including
operating systems, applications and program listings, (v) flow charts, manuals
and documentation, (vi) data bases, (vii) accounting and business methods,
(viii) inventions, devices, new developments, methods and processes, whether
patentable or unpatentable and whether or not reduced to practice, (ix)
customers and clients and customer or client lists, (x) other copyrightable
works, (xi) all trade secrets and (xii) all similar and related information in
whatever form. Confidential Information will not include any information that
(a) is a matter of public knowledge through no fault of Purchaser, (b) is
disclosed by Purchaser with the Company's prior written consent to unrestricted
disclosure, (c) was known by Purchaser prior to the date hereof, (d) is
independently developed by Purchaser without using any Confidential Information
or (e) is lawfully obtained by Purchaser from any third party who did not obtain
the information directly from the Company or its representatives or agents. The
Purchaser acknowledges and agrees that all copyrights, works, inventions,
innovations, improvements, developments, patents, trademarks and all similar or
related information which relate to the actual or anticipated business of the
Company and its subsidiaries (including its predecessors) and conceived,
developed or made by the Purchaser while employed by the Company or its
subsidiaries belong to the Company. The Purchaser will perform all actions
reasonably requested by the Company (whether during or after the Noncompete
Period) to establish and confirm such ownership at the Company's expense
(including without limitation assignments, consents, powers of attorney and
other instruments).
(c) Notwithstanding clauses (a) and (b) above, if at any time a court
holds that the restrictions stated in clauses (a) and (b) are unreasonable or
otherwise unenforceable under circumstances then existing, the parties hereto
agree that the maximum period, scope or geographic area of such restrictions
determined to be reasonable under such circumstances by such court will be
substituted for the stated period, scope or area of such restrictions. Because
the Purchaser's services are unique and because the Purchaser has had access to
Confidential Information, the parties hereto agree that money damages will be an
inadequate remedy for any breach of this Agreement. In the event a breach or
threatened breach of this Agreement, the Company or its successors or assigns
may, in addition to other rights and remedies existing in their favor, apply to
any court of competent jurisdiction for specific performance and/or injunctive
relief in order to enforce, or prevent any violations of, the provisions hereof
(without the posting of a bond or other security).
<PAGE>
24
(d) Notwithstanding the foregoing paragraphs (a) and (b), the
provisions of any employment agreement in effect on the date hereof between the
Company and Purchaser which contains covenants relating to confidentiality and
competition shall supersede and replace the provisions of paragraphs (a) and (b)
and shall be deemed incorporated by reference in this Agreement in their
entirety.
<PAGE>
25
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
KINDERCARE LEARNING CENTERS, INC.
By ______________________________
Name: ___________________________
Title: __________________________
_________________________________
[PURCHASER]
_________________________________
_________________________________
Address of Purchaser
October 17, 1997
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of ________________, 1997 is made by and
between KINDERCARE LEARNING CENTERS, INC., an Alabama corporation (hereinafter
referred to as the "Company"), and [_______________], an employee of the Company
or a Subsidiary (as defined below) or Affiliate (as defined below) of the
Company, hereinafter referred to as "Optionee".
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Common Stock ("Common Stock");
WHEREAS, the Company wishes to carry out the Plan (as hereinafter
defined), the terms of which are hereby incorporated by reference and made a
part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Company and its stockholders to grant the Non-Qualified Options
provided for herein to the Optionee as an incentive for increased efforts during
his term of office with the Company or its Subsidiaries or Affiliates, and has
advised the Company thereof and instructed the undersigned officers to issue
said Options;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall
have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
Section 1.1 - Affiliate
"Affiliate" shall mean, with respect to the Company, any corporation
directly or indirectly controlling, controlled by, or under common control with,
the Company or any other entity designated by the Board of Directors of the
Company in which the Company or an Affiliate has an interest.
<PAGE>
2
Section 1.2 - Cause
"Cause" shall mean (i) the Optionee's willful and continued failure to
perform Optionee's duties with respect to the Company or its Subsidiaries which
continues beyond ten days after a written demand for substantial performance is
delivered to Optionee by the Company and which could reasonably result in
demonstrable injury to the Company or (ii) misconduct by Optionee (x) involving
dishonesty or breach of trust in connection with Optionee's employment, (y)
which would be a reasonable basis for an indictment of Optionee for a felony or
a misdemeanor involving moral turpitude or (z) which results in demonstrable
injury to the Company.
Section 1.3 - Change of Control
"Change of Control" shall mean (i) a sale of all or substantially all
of the assets of the Company (other than in connection with financing
transactions, sale and leaseback transactions or other similar transactions) to
a Person who is not an Affiliate of Kohlberg Kravis Roberts & Co., L.P. ("KKR"),
(ii) a sale by KKR or any of its Affiliates resulting in more than 50% of the
voting stock of the Company being held by a Person or Group that does not
include KKR or any of its Affiliates or (iii)(a) a merger or consolidation of
the Company into another Person which is not an Affiliate of KKR or (b) any
dilution of KKR's interest in the Company which results in KKR and any of its
Affiliates owning less than 50% of the Common Stock of the Company; if, and only
if, any such event described in either (iii)(a) or (b) results in (A) the
inability of the KKR Partnerships to elect a majority of the Board of Directors
of the Company (or the resulting entity).
Section 1.4 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.5 - Commencement Date
"Commencement Date" shall mean __________ __, 199_ [which shall be the
later of February 14, 1997 and the date of hire of the Optionee].
Section 1.6 - Committee
"Committee" shall mean the Compensation Committee of the Company.
Section 1.7 - Group
"Group" shall mean two or more Persons acting together as a
partnership, limited partnership, syndicate or other group
<PAGE>
3
for the purpose of acquiring, holding or disposing of securities of the Company.
Section 1.8 - KKR
"KKR" shall mean Kohlberg Kravis Roberts & Co., L.P.
Section 1.9 - KKR Affiliate
"KKR Affiliate" shall mean, with respect to KKR, any corporation
directly or indirectly controlling, controlled by, or under common control with,
KKR.
Section 1.10 - Management Stockholder's Agreement
"Management Stockholder's Agreement" shall mean that certain
Management Stockholder's Agreement dated as of [________] [__], 1997 between the
Optionee and the Company.
Section 1.11 - Options
"Options" shall mean the non-qualified options.
Section 1.12 - Permanent Disability
The Optionee shall be deemed to have a "Permanent Disability" if the
Optionee is unable to engage in the activities required by the Optionee's
position by reason of any medically determined physical or mental impairment
which can be expected to result in death or which has lasted or can reasonably
be expected to last for a continuous period of not less than 12 months.
Section 1.13 - Person
"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
Section 1.14 - Plan
"Plan" shall mean the 1997 Stock Purchase and Option Plan for Key
Employees of KinderCare Learning Centers, Inc. and Subsidiaries.
Section 1.15 - Pronouns
The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.
<PAGE>
4
Section 1.16 - Retirement
"Retirement" shall mean retirement at age 62 or over (or such other
age as may be approved by the Board of Directors of the Company) after having
been employed by the Company or a Subsidiary for at least three years after the
Purchase Date.
Section 1.17 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.18 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations, or group of
commonly controlled corporations, other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
ARTICLE II
GRANT OF OPTIONS
Section 2.1 - Grant of Options
For good and valuable consideration, on and as of the date hereof the
Company irrevocably grants to the Optionee an Option to purchase any part or all
of an aggregate of shares of the Company's $.01 par value Common Stock upon the
terms and conditions set forth in this Agreement.
Section 2.2 - Exercise Price
Subject to Section 2.4, the exercise price of the shares of stock
covered by the Options shall be $19 per share without commission or other
charge.
Section 2.3 - Consideration to the Company
In consideration of the granting of these Options by the Company, the
Optionee agrees to render faithful and efficient services to the Company or a
Subsidiary or Affiliate, with such duties and responsibilities as the Company
shall from time to time prescribe. Nothing in this Agreement or in the Plan
shall confer upon the Optionee any right to continue in the employ of the
Company or any Subsidiary or Affiliate or shall interfere with or restrict in
any way the rights of the Company and its Subsidiaries or Affiliates, which are
hereby expressly reserved, to terminate the employment of the Optionee at any
time for any reason whatsoever, with or without cause.
<PAGE>
5
Section 2.4 - Adjustments in Options
Subject to Section 9 of the Plan, in the event that the outstanding
shares of the stock subject to an Option are, from time to time, changed into or
exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares, or otherwise, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares or other consideration as to which
such Option, or portions thereof then unexercised, shall be exercisable. Any
such adjustment made by the Committee shall be final and binding upon the
Optionee, the Company and all other interested persons.
ARTICLE III
PERIOD OF EXERCISABILITY
Section 3.1 - Commencement of Exercisability
(a) Options shall become exercisable as follows:
Percentage of Option
Date Option Shares Granted As to Which
Becomes Exercisable Option Is Exercisable
- ------------------- ---------------------
After the first anniversary
of the Commencement Date 20%
After the second anniversary
of the Commencement Date 40%
After the third anniversary
of the Commencement Date 60%
After the fourth anniversary
of the Commencement Date 80%
After the fifth anniversary
of the Commencement Date 100%
Notwithstanding the foregoing, the Option shall become immediately
exercisable as to 100% of the shares of Common Stock subject to such Option
immediately prior to a Change of Control (but only to the extent such Option has
not otherwise terminated or become exercisable).
(b) Notwithstanding the foregoing, no Option shall become exercisable
as to any additional shares of Common Stock following the termination of
employment of the Optionee for any
<PAGE>
6
reason other than a termination of employment because of death or Permanent
Disability of the Optionee and any Option (other than as provided in the next
succeeding sentence) which is non-exercisable as of the Optionee's termination
of employment shall be immediately cancelled. In the event of a termination of
employment because of such death or Permanent Disability, the Options shall
immediately become exercisable as to all shares of Common Stock subject thereto.
Section 3.2 - Expiration of Options
The Options may not be exercised to any extent by Optionee after the
first to occur of the following events:
(a) The tenth anniversary of the Commencement Date; or
(b) The first anniversary of the date of the Optionee's termination of
employment by reason of death, Permanent Disability or Retirement; or
(c) The first business day which is fifteen calendar days after the
earlier of (i) 75 days after termination of employment of the Optionee for
any reason other than for Cause, death, Permanent Disability or Retirement
or (ii) the delivery of notice by the Company that it does not intend to
exercise its call right under Section 6 of the Management Stockholder's
Agreement; provided, however, that in any event the Options shall remain
exercisable under this subsection 3.2(c) until at least 45 days after
termination of employment of the Optionee for any reason other than for
death, Permanent Disability or Retirement; or
(d) The date the Option is terminated pursuant to Section 5, 6 or 8(b)
of the Management Stockholder's Agreement;
(e) The date of an Optionee's termination of employment by the Company
for Cause; or
(f) If the Committee so determines pursuant to Section 9 of the Plan,
the effective date of either the merger or consolidation of the Company
into another Person, or the exchange or acquisition by another Person of
all or substantially all of the Company's assets or 80% or more of its then
outstanding voting stock, or the recapitalization, reclassification,
liquidation or dissolution of the Company; provided, that if the Committee
deems it necessary to cancel the Options to facilitate a business
combination, the Optionee shall be paid, in cash or other consideration
that the shareholders receive pursuant to such business combination, the
excess of the fair market value of the Common Stock at the time of such
business combination over the exercise price for the cancelled Options
including any unvested Options which are being cancelled. At least ten
<PAGE>
7
(10) days prior to the effective date of such merger, consolidation,
exchange, acquisition, recapitalization, reclassification, liquidation or
dissolution, the Committee shall give the Optionee notice of such event if
the Option has then neither been fully exercised nor become unexercisable
under this Section 3.2.
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
The Option, and any portion of the Option, may be exercised by
Optionee or any transferee permitted by Section 5.2. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when an
Option becomes unexercisable under Section 3.2, be exercised by Optionee's
personal representative or by any person empowered to do so under the Optionee's
will or under the then applicable laws of descent and distribution or by any
transferee permitted by Section 5.2.
Section 4.2 - Partial Exercise
Any exercisable portion of an Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior to
the time when the Option or portion thereof becomes unexercisable under Section
3.2; provided, however, that any partial exercise shall be for whole shares of
Common Stock only.
Section 4.3 - Manner of Exercise
An Option, or any exercisable portion thereof, may be exercised solely
by delivering to the Secretary or his office all of the following prior to the
time when the Option or such portion becomes unexercisable under Section 3.2:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the Option
or portion thereof is thereby exercised, such notice complying with all
applicable rules established by the Committee;
(b) Full payment (which shall be made (i) in cash, (ii) by check (iii)
by delivery of shares of Common Stock owned by the Optionee or a portion of
the Common Stock then being purchased; provided that any such shares of
Common Stock are not pledged or otherwise encumbered pursuant to a loan
agreement or otherwise, which Common Stock shall be valued at the fair
market value as determined in good faith by the Committee, or (iv) by a
combination thereof), for the shares with respect to which such Option or
portion thereof is exercised;
<PAGE>
8
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the
shares of stock are being acquired for the holder's own account, for
investment and without any present intention of distributing or reselling
said shares or any of them except as may be permitted under the Securities
Act of 1933, as amended (the "Act"), and then applicable rules and
regulations thereunder, and that the Optionee or other person then entitled
to exercise such Option or portion thereof will indemnify the Company
against and hold it free and harmless from any loss, damage, expense or
liability resulting to the Company if any sale or distribution of the
shares by such person is contrary to the representation and agreement
referred to above; provided, however, that the Committee may, in its
absolute discretion, take whatever additional actions it deems appropriate
to ensure the observance and performance of such representation and
agreement and to effect compliance with the Act and any other federal or
state securities laws or regulations;
(d) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option;
and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
option.
Without limiting the generality of the foregoing, the Committee may require an
opinion of counsel acceptable to it to the effect that any subsequent transfer
of shares acquired on exercise of an Option does not violate the Act, and may
issue stop-transfer orders covering such shares. Share certificates evidencing
stock issued on exercise of this Option shall bear an appropriate legend
referring to the provisions of subsection (c) above and the agreements herein.
The written representation and agreement referred to in subsection (c) above
shall, however, not be required if the shares to be issued pursuant to such
exercise have been registered under the Act, and such registration is then
effective in respect of such shares.
Section 4.4 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of an Option, or any
portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Company. Such shares shall
be fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of an Option or portion thereof prior to fulfillment of all of the
following conditions:
<PAGE>
9
(a) The obtaining of approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(b) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may from time to time establish for reasons
of administrative convenience.
Section 4.5 - Rights as Stockholder
The holder of an Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares purchasable
upon the exercise of the Option or any portion thereof unless and until
certificates representing such shares shall have been issued by the Company to
such holder.
ARTICLE V
MISCELLANEOUS
Section 5.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee shall be final and binding upon the Optionee, the Company
and all other interested persons. No member of the Committee shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan or the Options. In its absolute discretion, the Board of
Directors may at any time and from time to time exercise any and all rights and
duties of the Committee under the Plan and this Agreement.
Section 5.2 - Transferability of Options
The Options may be transferred to the same extent that Common stock
subject to the Option may be transferred pursuant to the Management
Stockholder's Agreement. Except for such permitted transfers, neither the
Options nor any interest or right therein or part thereof shall be liable for
the debts, contracts or engagements of the Optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect.
<PAGE>
10
Section 5.3 - Shares to Be Reserved
The Company shall at all times during the term of the Options reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
Section 5.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall
have been deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
Section 5.5 - Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 5.6 - Applicability of Plan and Management Stockholder's
Agreement
The Options and the shares of Common Stock issued to the Optionee upon
exercise of the Options shall be subject to all of the terms and provisions of
the Plan and the Management Stockholder's Agreement, to the extent applicable to
the Options and such shares. In the event of any conflict between this Agreement
and the Plan, the terms of the Plan shall control. In the event of any conflict
between this Agreement or the Plan and the Management Stockholder's Agreement,
the terms of the Management Stockholder's Agreement shall control.
Section 5.7 - Amendment
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
Section 5.8 - Governing Law
The laws of the State of Delaware (or if the Company reincorporates in
another state, the law of that state) shall
<PAGE>
11
govern the interpretation, validity and performance of the terms of this
Agreement regardless of the law that might be applied under principles of
conflicts of laws.
Section 5.9 - Jurisdiction
Any suit, action or proceeding against the Optionee, with respect to
this Agreement, or any judgment entered by any court in respect of any thereof,
may be brought in any court of competent jurisdiction in the State of Delaware
(or if the Company reincorporates in another state, in that state), and the
Optionee hereby submits to the non-exclusive jurisdiction of such courts for the
purpose of any such suit, action, proceeding or judgment. Nothing herein shall
in any way be deemed to limit the ability of the Company to serve any such
writs, process or summonses in any other manner permitted by applicable law or
to obtain jurisdiction over the Optionee, in such other jurisdiction and in such
manner, as may be permitted by applicable law. The Optionee hereby irrevocably
waives any objections which he may now or hereafter have to the laying of the
venue of any suit, action or proceeding arising out of or relating to this
Agreement brought in any court of competent jurisdiction in the State of
Delaware (or if the Company reincorporates in another state, in that state), and
hereby further irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in any inconvenient forum.
No suit, action or proceeding against the Company with respect to this Agreement
may be brought in any court, domestic or foreign, or before any similar domestic
or foreign authority other than in a court of competent jurisdiction in the
State of Delaware (or if the Company reincorporates in another state, in that
state), and the Optionee hereby irrevocably waives any right which he may
otherwise have had to bring such an action in any other court, domestic or
foreign, or before any similar domestic or foreign authority. The Company hereby
submits to the jurisdiction of such courts for the purpose of any such suit,
action or proceeding.
<PAGE>
12
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
KINDERCARE LEARNING CENTERS, INC.
By: _____________________________
__________________________________
[__________]
__________________________________
__________________________________
Address
Optionee's Taxpayer
Identification Number:
__________________________________
FORM OF SALE PARTICIPATION AGREEMENT
__________ __, 1997
[NAME OF EMPLOYEE]
[TITLE]
KinderCare Learning Centers, Inc.
[2400 Presidents Drive]
[Montgomery, Alabama 36116]
Dear [NAME OF EMPLOYEE]:
You have entered into a Stockholder's Agreement, dated as of
__________ __, 199_ between KinderCare Learning Centers, Inc., a Delaware
corporation ("the Company"), and you (the "Stockholder's Agreement") relating to
the purchase from the Company of shares of the common stock, par value $.01 per
share, of the Company (the "Common Stock"). The undersigned, KKR Partners II,
L.P., a Delaware limited partnership ("KKR Partners"), and KLC Associates, L.P.,
a Delaware limited partnership ("KLC Associates"), also have purchased shares of
common stock of the Company and hereby agree with you as follows, effective upon
such purchase of common stock by you:
1. In the event that at any time KKR Partners, or KLC Associates, as
the case may be (each, a "Selling Partnership" and collectively, the "Selling
Partnerships"), proposes to sell for cash or any other consideration any shares
of common stock of the Company owned by it, in any transaction other than a
Public Offering (as defined in the Stockholder's Agreement) or a sale to an
affiliate of KKR Partners or KLC Associates, as the case may be, the Selling
Partnership will notify you or your Purchaser's Estate or Purchaser's Trust (as
such terms are defined in Section 2 of the Stockholder's Agreement), as the case
may be, in writing (a "Notice") of such proposed sale (a "Proposed Sale") and
the material terms of the Proposed Sale as of the date of the Notice (the
"Material Terms") promptly, and in any event not less than 15 days prior to the
consummation of the Proposed Sale and not more than 5 days after the execution
of the definitive agreement relating to the Proposed Sale, if any (the "Sale
Agreement"). If within 10 days of your or your Purchaser's Estate's or
Purchaser's Trust's, as the case may be, receipt of such Notice the Selling
Partnership receives from you or your Purchaser's Estate or Purchaser's Trust,
as the case may be, a written request (a "Request") to include Common Stock held
by you or your Purchaser's Estate or Purchaser's Trust, as the case may be, in
the Proposed Sale (which Request shall be irrevocable unless (a) there shall be
a material adverse change in the Material Terms or
<PAGE>
2
(b) if otherwise mutually agreed to in writing by you or your Purchaser's Estate
or Purchaser's Trust, as the case may be, and the Selling Partnership), the
Common Stock held by you will be so included as provided herein; provided that
only one Request, which shall be executed by you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, may be delivered with respect to any
Proposed Sale for all Common Stock held by you or your Purchaser's Estate or
Purchaser's Trust. Promptly after the consummation of the transactions
contemplated thereby, the Selling Partnership will furnish you, your Purchaser's
Trust or your Purchaser's Estate with a copy of the Sale Agreement, if any. In
the event that both KKR Partners and KLC Associates propose to sell shares of
Common Stock in the Proposed Sale, the term "Selling Partnership" shall refer
only to KLC Associates and not to KKR Partners.
2. The number of shares of Common Stock which you or your Purchaser's
Estate or Purchaser's Trust, as the case may be, will be permitted to include in
a Proposed Sale pursuant to a Request will be the lesser of (a) the sum of the
number of shares of Common Stock then owned by you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, plus all shares of Common Stock which you
are then entitled to acquire under an unexercised option to purchase shares of
Common Stock, to the extent such option is then vested or would become vested as
a result of the consummation of the Proposed Sale and (b) the sum of the shares
of Common Stock then owned by you or your Purchaser's Estate or Purchaser's
Trust, as the case may be, plus all shares of Common Stock which you are
entitled to acquire under an unexercised option to purchase shares of Common
Stock, whether or not fully vested, multiplied by a percentage calculated by
dividing the aggregate number of shares of Common Stock which KKR Partners and
KLC Associates propose to sell in the Proposed Sale by the total number of
shares of Common Stock owned by the Selling Partnership or, in the case both KKR
Partners and KLC Associates propose to sell in the Proposed Sale, KKR Partners
and KLC Associates. If one or more holders of shares of Common Stock who have
been granted the same rights granted to you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, hereunder elect not to include the
maximum number of shares of Common Stock which such holders would have been
permitted to include in a Proposed Sale (the "Eligible Shares"), KKR Partners or
KLC Associates, or such remaining holders of shares of Common Stock, or any of
them, may sell in the Proposed Sale a number of additional shares of Common
Stock owned by any of them equal to their pro rata portion of the number of
Eligible Shares not included in the Proposed Sale, based on the relative number
of shares of Common Stock then held by each such holder, and such additional
shares of Common Stock which any such holder or holders propose to sell shall
not be included in any calculation made pursuant to the first sentence of this
Paragraph 2 for the purpose of determining the number of shares of Common Stock
which you or your Purchaser's Estate or Purchaser's Trust, as the case may be,
will be permitted to include in a Proposed Sale. KKR Partners and KLC
Associates, or
<PAGE>
3
any of them, may sell in the Proposed Sale additional shares of Common Stock
owned by any of them equal to any remaining Eligible Shares which will not be
included in the Proposed Sale pursuant to the foregoing.
3. Except as may otherwise be provided herein, shares of Common Stock
subject to a Request will be included in a Proposed Sale pursuant hereto and in
any agreements with purchasers relating thereto on the same terms and subject to
the same conditions applicable to the shares of Common Stock which the Selling
Partnership proposes to sell in the Proposed Sale. Such terms and conditions
shall include, without limitation: the sale price; the payment of fees,
commissions and expenses; the provision of, and representation and warranty as
to, information requested by the Selling Partnership; and the provision of
requisite indemnifications; provided that any indemnification provided by you,
your Purchaser's Estate or your Purchaser's Trust shall be pro rata in
proportion with the number of shares of Common Stock to be sold.
4. Upon delivering a Request, you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, will, if requested by the Selling
Partnership, execute and deliver a custody agreement and power of attorney in
form and substance satisfactory to the Selling Partnership with respect to the
shares of Common Stock which are to be sold by you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, pursuant hereto (a "Custody Agreement and
Power of Attorney"). The Custody Agreement and Power of Attorney will provide,
among other things, that you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, will deliver to and deposit in custody with the custodian and
attorney-in-fact named therein a certificate or certificates representing such
shares of Common Stock (duly endorsed in blank by the registered owner or owners
thereof) and irrevocably appoint said custodian and attorney-in-fact as your or
your Purchaser's Estate's or Purchaser's Trust's, as the case may be, agent and
attorney-in-fact with full power and authority to act under the Custody
Agreement and Power of Attorney on your or your Purchaser's Estate's or
Purchaser's Trust's, as the case may be, behalf with respect to the matters
specified therein.
5. Your or your Purchaser's Estate's or Purchaser's Trust's, as the
case may be, right pursuant hereto to participate in a Proposed Sale shall be
contingent on your or your Purchaser's Estate's or Purchaser's Trust's, as the
case may be, strict compliance with each of the provisions hereof and your or
your Purchaser's Estate's or Purchaser's Trust's or, as the case may be,
willingness to execute such documents in connection therewith as may be
reasonably requested by the Selling Partnership.
6. In the event of a Proposed Sale pursuant to Section 1 hereof, the
Selling Partnerships may elect, by so specifying in
<PAGE>
4
the Notice, to require you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, to, and you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, will, participate in such Proposed Sale in accordance with the
terms and provisions of Section 2, 3 and 4 hereof.
7. The obligations of KKR Partners and KLC Associates hereunder shall
extend only to you or your Purchaser's Estate or Purchaser's Trust, as the case
may be, and no other of your or your Purchaser's Estate's or Purchaser's
Trust's, as the case may be, successors or assigns shall have any rights
pursuant hereto.
8. This Agreement shall terminate and be of no further force and
effect on the fifth anniversary of the first occurrence of a Public Offering (as
defined in the Stockholder's Agreement).
9. All notices and other communications provided for herein shall be
in writing and shall be deemed to have been duly given when delivered to the
party to whom it is directed:
(a) If to KKR Partners or KLC Associates, to it at the following
address:
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Clifton S. Robbins
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: David J. Sorkin, Esq.
(b) If to you, to you at the address first set forth above herein;
(c) If to your Purchaser's Estate or Purchaser's Trust, at the
address provided to such partnerships by such entity;
or at such other address as any of the above shall have specified by notice in
writing delivered to the others by certified mail.
10. The laws of the State of Delaware (or if the Company
reincorporates in another state, of that state) shall govern the interpretation,
validity and performance of the terms of this Agreement. No suit, action or
proceeding with respect to this Agreement may be brought in any court or before
any similar authority other than in a court of competent jurisdiction in the
States of Delaware (or if the Company reincorporates in another state, of that
state), as the Selling
<PAGE>
5
Partnerships may elect in their sole discretion, and you hereby submit to the
non-exclusive jurisdiction of such courts for the purpose of such suit,
proceeding or judgment. You hereby irrevocably waive any right which you may
have had to bring such an action in any other court, domestic or foreign, or
before any similar domestic or foreign authority.
11. If KKR Partners or KLC Associates transfers its interest in the
Company to an affiliate of KKR Partners or KLC Associates, as the case may be,
such affiliate shall assume the obligations hereunder of KKR Partners or KLC
Associates, as the case may be.
<PAGE>
6
It is the understanding of the undersigned that you are aware that no
Proposed Sale presently is contemplated and that such a sale may never occur.
If the foregoing accurately sets forth our agreement, please
acknowledge your acceptance thereof in the space provided below for that
purpose.
Very truly yours,
KKR PARTNERS II, L.P.
By: KKR Associates L.P., the
General Partner
By: _______________________________
KLC ASSOCIATES, L.P.
By: KKR Associates L.P., the
General Partner
By: _______________________________
Accepted and agreed to:
By: _______________________________
[NAME OF EMPLOYEE]
TERM NOTE
$__________ Portland, Oregon
---------- --, -----
FOR VALUE RECEIVED, the undersigned, _________ (the "Executive"),
hereby unconditionally promises to pay to the order of KINDERCARE LEARNING
CENTERS, INC., a Delaware corporation (the "Company") at its offices, in lawful
money of the United States of America, the principal amount of
_____________________ DOLLARS ($______.00), or, if less, the unpaid principal
amount of the loan made by the Company pursuant to the Management Stockholder's
Agreement (as hereinafter defined). The principal amount shall be paid on the
earliest to occur of (i) the Executive's termination of employment by the
Company for Cause or without Good Reason by the Executive, (ii) one year after
the Executive's termination of employment without Cause by the Company or with
Good Reason by the Executive, (iii) the disposition of the Purchase Stock by the
Executive and (iv) [10 years from the date of the Note] ____________ __, ____
(the "Maturity Date"). The Executive further agrees to pay interest in like
money at such office on the unpaid principal amount hereof from time to time
outstanding at an interest rate equal to ___% per annum on June 30 and December
31 of each year, the Maturity Date and with respect to the amount of any
optional repayment, on the date of any such optional repayment. "Cause" shall
mean (i) the Executive's willful and continued failure to perform Executive's
duties with respect to the Company or its subsidiaries which continues beyond
ten days after a written demand for substantial performance is delivered to
Executive by the Company and which could reasonably result in demonstrable
injury to the Company or (ii) misconduct by Executive (x) involving dishonesty
or breach of trust in connection with Executive's employment, (y) which would be
a reasonable basis for an indictment of Executive for a felony or for a
misdemeanor involving moral turpitude, or (z) which results in demonstrable
injury to the Company; and "Good Reason" shall mean, without the Executive's
consent, (i) a reduction in Executive's base salary, other than a reduction
which is part of a general salary reduction program affecting all salaried
employees of the Company, (ii) a substantial reduction in Executive's duties and
responsibilities or change in the Executive's title, (iii) the elimination or
reduction of Executive's eligibility to participate in the Company's benefit
programs that is inconsistent with the eligibility of similarly situated
employees of the Company to participate therein or (iv) a transfer of the
Executive's primary workplace by more than fifty (50) miles from the workplace
as of the date hereof. Notwithstanding the immediately preceding sentence, the
<PAGE>
2
definitions in any employment agreement in effect on the date hereof between the
Company and Executive of "Cause" and "Good Reason" shall supersede and replace
the definitions of "Cause" and "Good Reason" in the immediately preceding
sentence and shall be deemed incorporated by reference in this Note in their
entirety.
The following shall constitute "Events of Default" under the terms of
this Note:
i) default for thirty (30) days or more in payment when due and
payable, upon acceleration or otherwise, of principal of this
Note;
ii) default for thirty (30) days or more in the payment when due
of interest on the Note.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
This Note is subject to optional prepayment in whole or in part at any
time. Reference is hereby made to the Pledge Agreement for a description of the
properties and assets in which a security interest has been granted
Upon the occurrence of any one or more of the Events of Default, all
amounts then remaining unpaid on this Note shall become, or may be declared to
be, immediately due and payable by the Company.
All parties now and hereafter liable with respect to this Note,
whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Capitalized terms not otherwise defined herein shall have the meanings
assigned to such terms in the Management Stockholder's Agreement dated as of
________ __, ____ between the Company and the Executive (as amended,
supplemented or otherwise modified from time to time, the "Management
Stockholder's Agreement").
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE.
_________________________________________
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of ________ __, 1997, made by
__________________ (the "Executive") in favor of KINDERCARE LEARNING CENTERS,
Inc., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, pursuant to the Management Stockholder's Agreement by and
between the Company and the Executive (as amended, supplemented or otherwise
modified from time to time, the "Management Stockholder's Agreement"), the
Company has agreed to make a loan (the "Loan") to the Executive for the
acquisition of Purchase Stock (as defined in the Management Stockholder's
Agreement), to be evidenced by a note substantially in the form of Exhibit A
hereto (the "Note");
WHEREAS, the Executive will be the legal and beneficial owner of the
shares of Pledged Stock (as hereinafter defined) issued by the Company; and
WHEREAS, it is a condition precedent to the obligation of the Company
to make the Loan to the Executive that the Executive shall have executed and
delivered this Pledge Agreement to the Company.
NOW, THEREFORE, in consideration of the premises and to induce the
Company to make the Loan, the Executive hereby agrees with the Company, as
follows:
1. Defined Terms. (a) Unless otherwise defined herein, terms defined
in the Management Stockholder's Agreement or the Note, as the case may be, and
used herein shall have the meanings assigned to them in the Management
Stockholder's Agreement and the Note, respectively.
(b) The following terms shall have the following meanings:
"Agreement": this Pledge Agreement, as the same may be amended,
modified or otherwise supplemented from time to time.
"Code": the Uniform Commercial Code from time to time in effect in the
State of Delaware.
"Collateral": the Pledged Stock and all Proceeds.
<PAGE>
2
"Collateral Account": any account established to hold money Proceeds,
maintained under the sole dominion and control of the Company.
"Default": any event that is or with the passage of time or the giving
of notice or both would be an Event of Default under the Note.
"Lien": with respect to the Collateral, any mortgage, deed of trust,
lien, pledge, hypothecation, encumbrance, charge of security interest in, on or
of such Collateral.
"Obligations": the collective reference to the unpaid principal of and
interest on the Note (including, without limitation, interest accruing at the
then applicable rate provided in the Note after the maturity of the Loan and
interest accruing at the then applicable rate provided in the Note after the
filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Executive, whether or not a
claim for post-filing or post-petition interest is allowed in such proceeding),
whether direct or indirect, absolute or contingent, due or to become due, or now
existing or hereafter incurred, which may arise under, out of, or in connection
with the Note and this Agreement or any other document made, delivered or given
in connection therewith, in each case whether on account of principal, interest,
costs, expenses or otherwise.
"Person": any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Pledged Stock": the shares of capital stock listed on Schedule 1
hereto, together with all stock certificates received upon exercise of any such
options or rights of any nature whatsoever that may be issued or granted by the
Company to the Executive while this Agreement is in effect.
"Proceeds": all "proceeds" as such term is defined in Section 9-306(1)
of the Uniform Commercial Code in effect in the State of Delaware on the date
hereof and, in any event, shall include, without limitation, all dividends or
other income from the Pledged Stock, collections thereon or distributions with
respect thereto.
"Securities Act": the Securities Act of 1933, as amended.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this
<PAGE>
3
Agreement, and section and paragraph references are to this Agreement unless
otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. Pledge; Grant of Security Interest. The Executive hereby delivers
to the Company all the Pledged Stock and hereby grants to the Company a first
security interest in the Collateral, as collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations.
3. Stock Powers. Concurrently with the delivery to the Company of each
certificate representing one or more shares of Pledged Stock to the Company, the
Executive shall deliver an undated stock power covering such certificate, duly
executed in blank by the Executive with, if the Company so requests, signature
guaranteed.
4. Covenants. The Executive covenants and agrees with the Company
that, from and after the date of this Agreement until this Agreement is
terminated and the security interests created hereby are released:
(a) If the Executive shall (i) as a result of its ownership of the
Pledged Stock, become entitled to receive or shall receive any stock certificate
(including, without limitation, any certificate representing a stock dividend or
a distribution in connection with any reclassification, increase or reduction of
capital or any certificate issued in connection with any reorganization), option
or rights, whether in addition to, in substitution of, as a conversion of, or in
exchange for any shares of the Pledged Stock, or otherwise in respect thereof or
(ii) acquire ownership of shares of Common Stock upon the exercise of stock
options, the Executive shall accept the same as the agent of the Company, hold
the same in trust for the Company, and deliver the same forthwith to the Company
in the exact form received, duly indorsed by the Executive to the Company, if
required, together with an undated stock power covering such certificate duly
executed in blank by the Executive and with, if the Company so requests,
signature guaranteed, to be held by the Company, subject to the terms hereof, as
additional collateral security for the Obligations.
(b) Without the prior written consent of the Company, the Executive
will not (1) sell, assign, transfer, exchange, or otherwise dispose of, or grant
any option with respect to, the Collateral; provided, however, that a transfer
made in compliance with the federal securities laws to a trust or custodianship,
the
<PAGE>
4
beneficiaries of which may include only the Executive, the Executive's spouse or
the Executive's lineal descendants, will be permitted so long as such transfer
is made expressly subject to this Pledge Agreement and that the transferee
agrees in writing to be bound by the terms and conditions hereof; provided,
further, that this clause 4(b)(1) shall not restrict the sale of the Collateral
if (i) such sale is made pursuant to the terms of the Management Stockholder's
Agreement between the Executive and the Company dated as of __________ __, 199_
and (ii) the proceeds from such sale are used solely to pay accrued interest on
and repay the principal of the Note; provided, further, that such proceeds need
not be used solely to pay accrued interest on and repay the principal of the
Note if such proceeds exceed the sum of any accrued interest on and the
principal of the Note and such accrued interest on and the principal of the Note
are paid in full from the proceeds of such sale, (2) create, incur or permit to
exist any Lien or option in favor of, or any claim of any Person with respect
to, any of the Collateral, or any interest therein, except for the security
interests created by this Agreement or (3) enter into any agreement or
undertaking restricting the right or ability of the Executive or the Company to
sell, assign or transfer any of the Collateral.
(c) The Executive shall maintain the security interest created by this
Agreement as a first, perfected security interest and shall defend such security
interest against claims and demands of all Persons whomsoever. At any time and
from time to time, upon the written request of the Company, and at the sole
expense of the Executive, the Executive will promptly and duly execute and
deliver such further instruments and documents and take such further actions as
the Company may reasonably request for the purposes of obtaining or preserving
the full benefits of this Agreement and of the rights and powers herein granted.
If any amount payable under or in connection with any of the Collateral shall be
or become evidenced by any promissory note, other instrument or chattel paper,
such note, instrument or chattel paper shall be immediately delivered to the
Company, duly endorsed in a manner satisfactory to the Company, to be held as
Collateral pursuant to this Agreement.
(d) The Executive shall pay, and save the Company harmless from, any
and all liabilities with respect to, or resulting from any delay in paying, any
and all stamp, excise, sales or other taxes which may be payable or determined
to be payable with respect to any of the Collateral or in connection with any of
the transactions contemplated by this Agreement.
5. Cash Dividends; Voting Rights. Unless an Event of Default shall
have occurred and be continuing and the Company shall have given notice to the
Executive of the Company's intent to exercise its corresponding rights pursuant
to Section 6 below,
<PAGE>
5
the Executive shall be permitted to receive all cash dividends paid in respect
of the Pledged Stock and to exercise all voting and corporate rights with
respect to the Pledged Stock.
6. Rights of the Company. If an Event of Default shall occur and be
continuing and the Company shall give notice of its intent to exercise such
rights to the Executive the Company shall have the right to receive any and all
cash dividends paid in respect of the Pledged Stock and make application thereof
to the Obligations in such order as the Company may determine.
7. Remedies. (a) If an Event of Default shall have occurred and be
continuing, at any time at the Company's election, the Company may apply all or
any part of Proceeds held in any Collateral Account in payment of the
Obligations in such order as the Company may elect.
(b) If an Event of Default shall have occurred and be continuing, the
Company may exercise, in addition to all other rights and remedies granted in
this Agreement and in any other instrument or agreement securing, evidencing or
relating to the Obligations, all rights and remedies of a secured party under
the Code. Without limiting the generality of the foregoing, the Company, without
demand of performance or other demand, presentment, protest, advertisement or
notice of any kind (except any notice required by law referred to below) to or
upon the Executive or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Collateral or any part thereof
(or contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, in the over-the-counter market, at any exchange, broker's
board or office of Company or elsewhere upon such terms and conditions as it may
deem advisable and at such prices as it may deem best, for cash or on credit or
for future delivery without assumption of any credit risk. The Company shall
have the right upon any such public sale or sales, and, to the extent permitted
by law, upon any such private sale or sales, to purchase the whole or any part
of the Collateral so sold, free of any right or equity of redemption in the
Executive, which right or equity is hereby waived or released. The Company shall
apply any Proceeds from time to time held by it and the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred in respect
thereof or incidental to the care or safekeeping of any of the Collateral or in
any way relating to the Collateral or the rights of the Company hereunder,
including, without limitation, reasonable attorneys' fees and disbursements
<PAGE>
6
of counsel to the Company, to the payment in whole or in part of the
Obligations, in such order as the Company may elect, and only after such
application and after the payment by the Company of any other amount required by
any provision of law, including, without limitation, Section 9-504(1)(c) of the
Code, need the Company account for the surplus, if any, to the Executive. To the
extent permitted by applicable law, the Executive waives all claims, damages and
demands it may acquire against the Company arising out of the exercise by them
of any rights hereunder. If any notice of a proposed sale or other disposition
of Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition. The
Executive shall remain liable for any deficiency if the proceeds of any sale or
other disposition of Collateral are insufficient to pay the Obligations and the
reasonable fees and disbursements of any attorneys employed by the Company to
collect such deficiency.
8. Execution of Financing Statements. Pursuant to Section 9-402 of the
Code, the Executive authorizes the Company to file financing statements with
respect to the Collateral without the signature of the Executive in such form
and in such filing offices as the Company reasonably determines appropriate to
perfect the security interests of the Company under this Agreement. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction.
9. Notices. All notices, requests and demands to or upon the Company
or the Executive to be effective shall be in writing (or by telex, facsimile or
similar electronic transfer confirmed in writing) and shall be deemed to have
been duly given or made (1) when delivered by hand or (2) if given by mail, when
deposited in the mails by certified mail, return receipt requested, or (3) if by
telex, facsimile or similar electronic transfer, when sent and receipt has been
confirmed, addressed to the Company or the Executive at its address or
transmission number for notices provided in subsection 25 of the Management
Stockholder's Agreement. The Company and the Executive may change their
addresses and transmission numbers for notices by notice in the manner provided
in this Section.
10. Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE>
7
11. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of
the terms or provisions of this Agreement may be waived, amended, supplemented
or otherwise modified except by a written instrument executed by the Executive
and the Company, provided that any provision of this Agreement may be waived by
the Company in a letter or agreement executed by the Company or by telex or
facsimile transmission from the Company.
(b) The Company shall not by any act (except by a written instrument
pursuant to paragraph 11(a) hereof), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of the
Company, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Company of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Company would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
12. Section Headings. The section headings used in this Agreement are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
13. Successors and Assigns. This Agreement shall be binding upon the
successors and assigns of the Executive and shall inure to the benefit of the
Company and their successors and assigns.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE.
<PAGE>
8
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed and delivered as of the date first above written.
[ ]
By ______________________________________
Title
<PAGE>
1
SCHEDULE 1
TO PLEDGE AGREEMENT
DESCRIPTION OF PLEDGED STOCK
1. Stock certificate No. [ ], representing [ ] shares of common
stock, per value $.01 per share, of KinderCare Learning Centers, Inc.
STOCKHOLDER'S AGREEMENT
This Stockholder's Agreement (this "Agreement") is entered into as of
February 14, 1997 between KINDERCARE LEARNING CENTERS, INC., a Delaware
corporation (the "Company"), and David J. Johnson (the "Purchaser") (the Company
and the Purchaser being hereinafter collectively referred to as the "Parties").
RECITALS
KCLC Acquisition Corp., a Delaware corporation ("KCLC"), was recently
incorporated and merged with and into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger, dated as of October 3, 1996 and as amended as of
December 27, 1996, between KCLC and the Company (the "Merger Agreement"). In
connection with the Merger, the Company proposes to sell shares of its Common
Stock, par value $.01 per share (the "Common Stock"), to Purchaser.
The Company has agreed to sell, and the Purchaser has agreed to buy,
157,895 shares of Common Stock (the "Purchase Stock") to Purchaser for $19 per
share of Common Stock for an aggregate purchase price of $3 million (such amount
referred to herein as the "Initial Equity"). In addition, the Company will grant
to Purchaser an option or options to purchase 421,053 shares of Common Stock
("Options") at an exercise price of $19 per share of Common Stock pursuant to
the terms of a Stock Purchase and Option Plan (the "Option Plan") and a
Non-Qualified Stock Option Agreement (the "Non-Qualified Stock Option
Agreement").
AGREEMENT
To implement the foregoing and in consideration of the mutual
agreements contained herein, the Parties agree as follows:
1. Purchase of Stock.
(a) On or about February 14, 1997 (the "Purchase Date"), the Company
will deliver to the Purchaser two certificates representing in the aggregate the
shares of Purchase Stock described above. The first certificate shall represent
52,632 shares of Common Stock (or $1 million of the Initial Equity) and shall be
referred to herein as the "Side-by-Side Equity" and the second certificate shall
represent 105,263 shares of Common Stock (or $2 million of the Initial Equity)
and shall, together with all shares of Common Stock issued upon the exercise of
Options, be referred to herein as shall the "Promote Equity."
<PAGE>
2
2. Purchaser's Representations, Warranties and Agreements.
(a) The Purchaser hereby represents and warrants that he is acquiring
the Purchase Stock and, at the time of exercise, the Common Stock issuable upon
exercise of the Options (collectively, the "Stock") for investment for his own
account and not with a view to, or for resale in connection with, the
distribution or other disposition thereof. The Purchaser agrees and acknowledges
that he will not, directly or indirectly, offer, transfer, sell, assign, pledge,
hypothecate or otherwise dispose of any shares of the Stock unless (A) such
transfer, sale, assignment, pledge, hypothecation or other disposition complies
with Section 3 of this Agreement and (B) the transfer, sale, assignment, pledge,
hypothecation or other disposition is in compliance with the Securities Act of
1933, as amended, or the rules and regulations in effect thereunder (the "Act").
Notwithstanding the foregoing, the Company acknowledges and agrees that any of
the following transfers are deemed to be in compliance with the Act and this
Agreement and no opinion of counsel is required in connection therewith: (w) a
transfer made pursuant to Section 4, 5 or 6 hereof, (x) a transfer upon the
death of the Purchaser to his executors, administrators, testamentary trustees,
legatees or beneficiaries (the "Purchaser's Estate") or a transfer to the
executors, administrators, testamentary trustees, legatees or beneficiaries of a
person who has become a holder of Stock in accordance with the terms of this
Agreement, provided that it is expressly understood that any such transferee
shall be bound by the provisions of this Agreement, (y) a transfer made after
the Purchase Date in compliance with the federal securities laws to a trust or
custodianship the beneficiaries of which may include only the Purchaser, his
spouse or his lineal descendants (a "Purchaser's Trust") or a transfer made
after the third anniversary of the Purchase Date to such a trust by a person who
has become a holder of Stock in accordance with the terms of this Agreement,
provided that such transfer is made expressly subject to this Agreement and that
the transferee agrees in writing to be bound by the terms and conditions hereof,
and (z) a transfer made after the Purchase Date in compliance with the federal
securities laws to a limited partnership the sole general partner of which shall
be the Purchaser and the only limited partners of which are and will be his
spouse and his lineal descendants (a "Purchaser's L.P."), provided that such
transfer is made expressly subject to this Agreement and that the transferee
agrees in writing to be bound by the terms and conditions hereof.
(b) In addition to any legends required by the Act or applicable state
securities laws, the certificates representing the Stock shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS SUCH
<PAGE>
3
TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION COMPLIES WITH THE PROVISIONS OF THE
STOCKHOLDER'S AGREEMENT DATED AS OF FEBRUARY 14, 1997,
BETWEEN KINDERCARE LEARNING CENTERS, INC. (THE "COMPANY")
AND THE PURCHASER NAMED ON THE FACE HEREOF (A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF THE COMPANY)."
(c) The Purchaser acknowledges that he has been advised that (i) Rule
144 promulgated under the Act is not currently available with respect to the
Stock, and the Company has made no covenant to make such Rule available (except
as provided in Section 9(b) hereof), (ii) when and if shares of the Stock may be
disposed of without registration in reliance on Rule 144, such disposition can
be made only in limited amounts in accordance with the terms and conditions of
such Rule, (iii) if the Rule 144 exemption is not available, public sale without
registration will require compliance with Regulation A or some other exemption
under the Act, (iv) a restrictive legend in the form heretofore set forth shall
be placed on the certificates representing the Stock and (v) a notation shall be
made in the appropriate records of the Company indicating that the Stock is
subject to restriction on transfer and, an appropriate stop transfer
restrictions will be issued to the Company's transfer agent with respect to the
Stock.
(d) If any shares of the Stock are to be disposed of in accordance
with Rule 144 under the Act or otherwise, the Purchaser shall promptly notify
the Company of such intended disposition and shall deliver to the Company at or
prior to the time of such disposition such documentation as the Company may
reasonably request in connection with such sale and, in the case of a
disposition pursuant to Rule 144, shall deliver to the Company an executed copy
of any notice on Form 144 required to be filed with the Securities and Exchange
Commission.
(e) The Purchaser agrees that, if any shares of the capital stock of
the Company are offered to the public pursuant to an effective registration
statement under the Act (other than registration of securities issued under an
employee plan), the Purchaser will not effect any public sale or distribution of
any shares of the Stock not covered by such registration statement within 7 days
prior to, or within 180 days after, the effective date of such registration
statement (or such shorter period as may be agreed among the Company's officers,
directors, principal stockholders and the underwriters), unless otherwise agreed
to in writing by the Company.
(f) The Purchaser represents and warrants that he has been given the
opportunity to obtain any additional information or documents and to ask
questions and receive answers about such documents, the Company and the business
and prospects of the Company which he deems necessary to evaluate the merits and
risks related to his investment in the Stock and to verify the
<PAGE>
4
information received as indicated in this Section 2(f), and he has relied solely
on such information.
(g) Purchaser understands that it is not anticipated that there will
be any public market for the Stock, the Stock must be held indefinitely and the
Purchaser must continue to bear the economic risk of the investment in the
Stock. The Purchaser further represents and warrants that (i) his financial
condition is such that he can afford to bear the economic risk of holding the
Stock for an indefinite period of time and has adequate means for providing for
his current needs and personal contingencies, (ii) he can afford to suffer a
complete loss of his investment in the Stock, (iii) all information which he has
provided to the Company concerning himself and his financial position is correct
and complete as of the date of this Agreement, (iv) he has received and read the
Prospectus relating to the Stock and understands and has taken cognizance of all
risk factors related to the purchase of the Stock and (v) his knowledge and
experience in financial and business matters are such that he is capable of
evaluating the merits and risks of his purchase of the Stock as contemplated by
this Agreement.
3. Restriction on Transfer.
Except for transfers permitted by clauses (w), (x), (y) and (z) of
Section 2(a) or a sale of shares of Stock pursuant to an effective registration
statement under the Act filed by the Company or pursuant to the Sale
Participation Agreement (as defined below), the Purchaser agrees that he will
not transfer, sell, assign, pledge, hypothecate or otherwise dispose of any
shares of the Stock at any time until the earlier of (i) the fifth anniversary
of the Purchase Date and (ii)(a) in the case of the Side-by-Side Equity, the
earlier of (x) the date on which the Purchaser is no longer employed by the
Company and (y) the date that Kohlberg Kravis Roberts & Co., L.P. ("KKR") or its
affiliates (as defined in Section 12b-2 of the Securities Exchange Act of 1934,
as amended) ("KKR Affiliates", and together with KKR, the "KKR Entities") sell
any shares of the Common Stock; provided, however, that with respect to this
clause (y) the transfer restrictions shall lapse only with respect to the number
of Side-by-Side Equity shares equal to (A) the product of (I) 52,632 and (II) a
fraction the numerator of which is the number of shares of the Common Stock
being sold by the KKR Entities and the denominator of which is 7,828,947 less
(B) the number of Side-by-Side Equity shares, if any, for which transfer
restrictions previously lapsed and (b) in the case of the Promote Equity, the
date that the KKR Entities beneficially own less than 50% of the outstanding
shares of Common Stock and the KKR Entities sell, or have sold, any of their
shares of Common Stock; provided, however, that the transfer restrictions shall
lapse only with respect to the number of Promote Equity shares equal to (A) the
product of (I) the number of Promote Equity shares originally held by Purchaser
on the Purchase Date plus the number of shares of Promote Equity subject to
exercisable Options held
<PAGE>
5
by Purchaser and (II) a fraction the numerator of which is the number of shares
of the Common Stock being sold or having been previously sold by the KKR
Entities and the denominator of which is 7,828,947 less (B) the number of
Promote Equity shares, if any, for which transfer restrictions previously
lapsed. No transfer of any such shares in violation hereof shall be made or
recorded on the books of the Company and any such transfer shall be void and of
no effect. In determining the number of shares of Stock which may be transferred
pursuant to this Section 3, appropriate adjustments shall be made for any stock
dividends, splits, combinations or recapitalizations.
4. Right of First Refusal.
If at any time prior to a Public Offering (as defined below), the
Purchaser is permitted to transfer shares of Stock pursuant to Sections 2 and 3
("Unrestricted Shares") and the Purchaser (i) receives a bona fide offer (the
"Offer") to purchase any or all of such Unrestricted Shares from a third party
(the "Offeror") which the Purchaser wishes to accept or (ii) if the Purchaser
wishes to sell any or all of his Unrestricted Shares in the open market at the
Market Price Per Share on the date of sale ("Proposed Market Sale"), the
Purchaser shall cause the Offer or Proposed Market Sale to be reduced to writing
and shall notify the Company in writing of his wish to accept the Offer or
consummate the Proposed Market Sale, as the case may be. The Purchaser's notice
shall constitute an irrevocable offer to sell such Unrestricted Shares to the
Company (in the manner set forth below) at a purchase price (i) in the case of
an Offer, equal to the price contained in, and on the same terms and conditions
of, the Offer, and shall be accompanied by a true copy of the Offer (which shall
identify the Offeror) and (ii) in the case of a Proposed Market Sale, equal to
the Market Price Per Share on the date of purchase. At any time within 30 days
after the date of the receipt by the Company of the Purchaser's notice, the
Company shall have the right and option to purchase, or to arrange for a third
party to purchase, all of the Unrestricted Shares covered by the Offer or the
Proposed Market Sale either (i) at the same price and on the same terms and
conditions as the Offer or the Proposed Market Sale or (ii) if the Offer
includes any consideration other than cash, then at the sole option of the
Company, at the equivalent all cash price, determined in good faith by the
Company's Board of Directors, by delivering a certified bank check or checks in
the appropriate amount to the Purchaser at the principal office of the Company
against delivery of certificates or other instruments representing the
Unrestricted Shares so purchased, appropriately endorsed by the Purchaser. If at
the end of such 30-day period, the Company has not tendered the purchase price
for such Unrestricted Shares in the manner set forth above, the Purchaser may
during the succeeding 60-day period sell not less than all of the Unrestricted
Shares covered by the Purchaser's notice in the case of an Offer to the Offeror
at a price and on terms no less favorable to the Purchaser than those contained
in the Offer and
<PAGE>
6
in the case of a Proposed Market Sale at the Market Price Per Share at the time
of sale. Promptly after such sale, the Purchaser shall notify the Company of the
consummation thereof and shall furnish such evidence of the completion and time
of completion of such sale and of the terms thereof as may reasonably be
requested by the Company. If, at the end of 60 days following the expiration of
the 30-day period for the Company to purchase the Stock, the Purchaser has not
completed the sale of such shares of the Stock as aforesaid, all the
restrictions on sale contained in this Section shall again be in effect with
respect to such Unrestricted Shares.
5. Purchaser's Resale of Stock and Options to the Company Upon The
Purchaser's Death or Disability.
(a) Except as otherwise provided herein, if at any time prior to
February 14, 2002 or, after February 14, 2002, until the consummation of a
Public Offering, (i) the Purchaser is still in the employ of the Company and
(ii) the Purchaser either dies or becomes permanently disabled, then the
Purchaser, the Purchaser's Estate, a Purchaser's Trust or a Purchaser's L.P., as
the case may be, shall have the right, for six months following the date of
death or permanent disability, to (A) sell to the Company, and the Company shall
be required to purchase, on one occasion, all or any portion of the shares of
Stock then held by the Purchaser, the Purchaser's Trust, the Purchaser's L.P.
and/or the Purchaser's Estate, as the case may be, at the Section 5 Repurchase
Price, as determined in accordance with Section 7, and (B) require the Company
to pay, on the same occasion, to the Purchaser the Purchaser's Trust, the
Purchaser's L.P. and/or the Purchaser's Estate, as the case may be, an
additional amount equal to the Option Excess Price determined on the basis of a
Section 5 Repurchase Price as provided in Section 8 with respect to the
termination of outstanding Options held by the Purchaser. The Purchaser, the
Purchaser's Estate, the Purchaser's Trust and/or the Purchaser's L.P., as the
case may be, shall send written notice to the Company of its intention to sell
shares of Stock and to terminate such Options in exchange for the payment
referred to in the preceding sentence (the "Redemption Notice"). The completion
of the purchase shall take place at the principal office of the Company on the
tenth business day after the giving of the Redemption Notice. The Section 5
Repurchase Price and any payment with respect to the Options as described above
shall be paid by delivery to the Purchaser, the Purchaser's Estate, the
Purchaser's Trust and/or the Purchaser's L.P., as the case may be, of a
certified bank check or checks in the appropriate amount payable to the order of
the Purchaser, the Purchaser's Estate, the Purchaser's Trust and/or the
Purchaser's L.P., as the case may be, against delivery of certificates or other
instruments representing the Stock so purchased and appropriate documents
cancelling the Options so terminated, each appropriately endorsed or executed by
the Purchaser, the Purchaser's Estate, the Purchaser's Trust and/or the
Purchaser's L.P., or his or its duly authorized representative. For purposes of
this Agreement,
<PAGE>
7
Purchaser shall be deemed to have a "permanent disability" when the majority of
the Board of Directors of the Company shall, in good faith, determines that
Purchaser is unable to engage in the activities required by Purchaser's position
by reason of any medically-determined physical or mental impairment which can be
expected to result in death or which has lasted or can reasonably be expected to
last for a continuous period of not less than 12 months.
(b) Notwithstanding anything in Section 5(a) to the contrary and
subject to Section 11, the Company shall not be obligated to repurchase any of
the Stock or the Options from the Purchaser, the Purchaser's Estate, the
Purchaser's Trust and/or the Purchaser's L.P., as the case may be, if such
repurchase would result in (x) a default or an event of default on the part of
the Company or any subsidiary of the Company under any loan, guarantee or other
agreement under which the Company or any subsidiary of the Company has borrowed
money or (y) a violation under any applicable provision of the Delaware General
Corporation Law (or if the Company reincorporates, the corporation law of that
state) (such occurrence being a "Blocking Event"), but only if, and so long as,
the Company makes its reasonable best efforts to cure such Blocking Event or, in
the case of an agreement, modify the agreement to permit such repurchase. The
Company's obligation to repurchase any of the Stock or Options as set forth in
Section 5(a) shall be suspended until the first business day which is 5 calendar
days after all of the foregoing Blocking Events have ceased to exist (the
"Repurchase Eligibility Date"); provided, however, that (i) the number of shares
of Stock subject to repurchase under Section 5(a) at the time of delivery of
Redemption Notice shall be that number of shares of Stock, and (ii) the number
of Exercisable Option Shares (as defined in Section 8) for purposes of
calculating the Option Excess Price payable after the termination of all
Blocking Events shall be the number of Exercisable Option Shares, held by the
Purchaser, the Purchaser's Estate, a Purchaser's Trust or a Purchaser's L.P., as
the case may be, at the time of delivery of a Redemption Notice in accordance
with Section 5(a) hereof; provided, further, that the Repurchase Calculation
Date shall be determined in accordance with Section 7 as of the Repurchase
Eligibility Date (unless the Section 5 Repurchase Price would be greater if the
Repurchase Calculation Date had been determined as if no Blocking Event had
occurred in which case, solely for purposes of this proviso, the Repurchase
Calculation Date shall be determined as if no Blocking Event had occurred). All
Options exercisable as of the date of a Redemption Notice shall continue to be
exercisable until the repurchase pursuant to such Redemption Notice.
(c) Notwithstanding any other provision of this Section 5 to the
contrary and subject to Section 11, the Purchaser, the Purchaser's Estate, the
Purchaser's Trust or the Purchaser's L.P., as the case may be, shall have the
right to withdraw any Redemption Notice which has been pending for 60 or
<PAGE>
8
more days and which has remained unsatisfied because of the
provisions of Section 5(b).
6. The Company's Option to Repurchase Stock and Options of
Purchaser.
(a) If, prior to February 14, 2002, (i) the Purchaser's active
employment with the Company is either (A) terminated by the Purchaser without
Good Reason or (B) terminated by the Company for Cause, (ii) a Purchaser's Trust
or a Purchaser's L.P. fails to comply with the requirements set forth in Section
2(a)(y) or (z), as applicable, or (iii) the Purchaser shall effect a transfer of
any of the Stock other than as permitted in this Agreement, the Company shall
have the right to purchase all, but not less than all, of the shares of the
Stock then held by the Purchaser, the Purchaser's Estate, a Purchaser's Trust or
a Purchaser's L.P. at the applicable Section 6(a) Repurchase Price determined in
accordance with Section 7 hereof. In the event of the Purchaser's resignation
without Good Reason, all unexercisable Options shall terminate without any
payment. In the event of Purchaser's termination by the Company for Cause, all
Options shall terminate without any payment.
(b) If, prior to February 14, 2002, the Purchaser's active employment
with the Company is terminated by the Purchaser with Good Reason or terminated
by the Company without Cause, the Company shall have the right to purchase all,
but not less than all, of the shares of the Stock then held by the Purchaser,
the Purchaser's Estate, a Purchaser's Trust or a Purchaser's L.P. at the
applicable Section 6(b) Repurchase Price determined in accordance with Section 7
hereof.
(c) If, prior to February 14, 2002, the Purchaser either dies or
becomes permanently disabled and on the date of such death or permanent
disability the Purchaser was still in the employ of the Company or, if the
Purchaser had retired from the Company's employment and the date of such
retirement was after February 14, 2000, the Company shall have the right to
purchase all, but not less than all, of the shares of the Stock then held by the
Purchaser, the Purchaser's Estate, a Purchaser's Trust or a Purchaser's L.P.,
provided, however, that the Repurchase Price shall be the Section 5 Repurchase
Price and provided, further that if the purchase right provided the Company
under this Section 6(c) arises after February 14, 1999 by reason of the
Purchaser's death, such purchase right may not be exercised by the Company until
February 14, 2002.
(d) The circumstances under which the Company may elect to require the
repurchase of the shares of Stock pursuant to Sections 6(a), (b) and (c) are
hereinafter collectively referred to "Call Events." The Company shall have a
period of 75 days from the date of a Call Event (or in the case of a Call Event
governed by the second proviso of Section 6(c), 75 days after February 14, 2002)
in which to give notice in writing to
<PAGE>
9
the Purchaser of the exercise of such election ("Call Notice"). In the event
that the Company exercises its right to repurchase shares of the Stock pursuant
to this Section 6, the Company shall also pay the Purchaser an amount equal to
the Option Excess Price determined on the basis of the Section 6(a) Repurchase
Price, the Section 6(b) Repurchase Price or the Section 5 Repurchase Price, as
the case may be, as applicable to Promote Equity, as provided in Section 8, with
respect to the termination of outstanding Options held by the Purchaser.
(e) The completion of the purchases pursuant to the foregoing shall
take place at the principal office of the Company on the tenth business day
after the giving of notice of the exercise of the option to purchase. The
Section 5 Repurchase Price, the Section 6(a) Repurchase Price and the Section
6(b) Repurchase Price, as the case may be, and any payment with respect to the
Options as described above shall be paid by delivery to the applicable seller of
a certified bank check or checks in the appropriate amount payable to the order
of such seller against delivery of certificates or other instruments
representing the Stock so purchased and appropriate documents cancelling the
Options so terminated, appropriately endorsed or executed by the Purchaser, the
Purchaser's Estate, the Purchaser's Trust, the Purchaser's L.P. or his or their
authorized representatives.
(f) Notwithstanding any other provision of this Section 6 to the
contrary and subject to Section 11, if there exists and is continuing any
Blocking Event, the Company shall delay the repurchase of any of the Stock or
the Options (pursuant to a Call Notice timely given in accordance with Section
6(a), 6(b) or 6(c) hereof) from the Purchaser, the Purchaser's Estate, the
Purchaser's Trust or the Purchaser's L.P., as the case may be, until the
Repurchase Eligibility Date; provided, however, that (i) the number of shares of
Stock subject to repurchase under this Section 6 at the time of the delivery of
the Call Notice shall be that number of shares of Stock subject to repurchase
after the termination of all Blocking Events and (ii) the number of Exercisable
Option Shares for purposes of calculating the Option Excess Price payable after
the termination of all Blocking Events shall be the number of Exercisable Option
Shares held by the Purchaser, the Purchaser's Estate, a Purchaser's Trust and/or
a Purchaser's L.P., as the case may be, at the time of delivery of a Call Notice
in accordance with Section 6(a), 6(b) or 6(c) hereof; provided, further, that
the Repurchase Calculation Date shall be determined in accordance with Section 7
based on the Repurchase Eligibility Date (unless the applicable Repurchase Price
would be greater if the Repurchase Calculation Date had been determined as if no
Blocking Event had occurred, in which case, solely for purposes of this proviso,
the Repurchase Calculation Date shall be determined as if no Blocking Event had
occurred). All Options exercisable as of the date of a Call Notice shall
continue to be exercisable until the repurchase pursuant to such Call Notice.
<PAGE>
10
(g) For purposes of this Agreement the following definitions shall
apply: "Cause" shall mean (i) the Purchaser's willful and continued failure to
perform Purchaser's duties with respect to the Company or its subsidiaries which
continues beyond ten days after a written demand for substantial performance is
delivered to Purchaser by the Company and which could reasonably result in
demonstrable and substantial injury to the Company or (ii) misconduct by
Purchaser (x) involving dishonesty or breach of trust in connection with
Purchaser's employment, (y) which would be a reasonable basis for an indictment
of Purchaser for a felony or for a misdemeanor involving moral turpitude, or (z)
which results in demonstrable and substantial injury to the Company; and "Good
Reason" shall mean, without the Purchaser's consent, (i) a reduction in
Purchaser's base salary, other than a reduction which is part of a general
salary reduction program affecting senior executives of the Company, (ii) a
substantial reduction in Purchaser's duties and responsibilities or change in
his title as the Chairman and Chief Executive Officer of the Company reporting
directly to the Board of Directors of the parent Company (not a subsidiary),
(iii) any relocation of the headquarters of the Company or (iv) the elimination
or reduction of Purchaser's eligibility to participate in the Company's benefit
programs that is inconsistent with the eligibility of similarly situated
employees of the Company to participate therein.
7. Determination of Repurchase Price.
(a) The Section 5 Repurchase Price, the Section 6(a) Repurchase Price
and the Section 6(b) Repurchase Price are hereinafter collectively referred to
as the "Repurchase Price." The Repurchase Price shall be calculated on the basis
of the unaudited financial statements of the Company or the Market Price Per
Share (as defined in Section 7(g)) as of the last day of the month preceding the
later of (i) the month in which the event giving rise to the repurchase occurs
and (ii) the month in which the Repurchase Eligibility Date occurs (hereinafter
called the "Repurchase Calculation Date"). The event giving rise to the
repurchase shall be the death, permanent disability, retirement or termination
of employment, as the case may be, of the Purchaser, not the giving of any
notice required pursuant to Section 5 or 6.
(b) The Section 5 Repurchase Price shall be a per share Repurchase
Price equal to (i) prior to a Public Offering, the greater of (x) $19 and (y)
$19 plus the increase, if any, in Book Value Per Share (as defined in Section
7(e)) from the Purchase Date through the Repurchase Calculation Date or (ii)
after a Public Offering, the Market Price Per Share.
(c) The Section 6(a) Repurchase Price shall be a per share Repurchase
Price equal (i) in the case of Side-by-Side Equity, to (x) prior to a Public
Offering, $19 minus any decrease
<PAGE>
11
in Book Value Per Share or plus any increase in Book Value Per Share from the
Purchase Date through the Repurchase Calculation Date or (y) after a Public
Offering, the Market Price Per Share and (ii) in the case of Promote Equity, (x)
prior to a Public Offering, (A) $19 less the decrease in Book Value Per Share
from the Purchase Date through the Repurchase Calculation Date, if such Book
Value Per Share has decreased, (B) $19 plus the product of (I) the Unrestricted
Percentage (as defined below) and (II) the increase in the Book Value Per Share
from the Purchase Date through the Repurchase Calculation Date, if such Book
Value Per Share has increased or (C) $19, if such Book Value Per Share has
neither decreased nor increased and (y) after a Public Offering, (A) the Market
Price Per Share, if the Market Price Per Share is $19 or less or (B) $19 plus
the product of (I) the Unrestricted Percentage and (II) the Market Price Per
Share less $19, if the Market Price Per Share is greater than $19.
(d) The Section 6(b) Repurchase Price shall be a per share Repurchase
Price equal (i) in the case of the Side-by-Side Equity, to (x) after a Public
Offering, the Market Price Per Share or (y) prior to a Public Offering, an
amount determined as follows: (x) if such event occurs prior to February 14,
1999, to the greater of (A) $19 and (B) $19 plus the increase, if any, in Book
Value Per Share from the Purchase Date through the Repurchase Calculation Date
and (y) if such event occurs on or after February 14, 1999, $19 minus any
decrease in Book Value Per Share or plus any increase in Book Value Per Share
from the Purchase Date through the Repurchase Calculation Date and (ii) in the
case of Promote Equity, to (x) prior to a public offering, $19 minus any
decrease in Book Value Per Share or plus any increase in Book Value Per Share
from the Purchase Date through the Repurchase Calculation Date or (y) after a
Public Offering, the Market Price Per Share).
(e) For purposes of this Agreement the "Unrestricted Percentage" shall
be determined as follows:
Repurchase Calculation Date Percentage
- --------------------------- ----------
Purchase Date through and including the 0%
first anniversary of the Purchase Date
After the first anniversary of the Purchase 20%
Date through and including the second
anniversary of the Purchase Date
After the second anniversary of the 40%
Purchase Date through and including the
third anniversary of the Purchase Date
After the third anniversary of the Purchase 60%
Date through and including the fourth
anniversary of the Purchase Date
<PAGE>
12
After the fourth anniversary of the 80%
Purchase Date through and including the
fifth anniversary of the Purchase Date
After the fifth anniversary of the Purchase 100%
Date
(f) For purposes of this Agreement, "Book Value Per Share" shall mean
book value per share based on generally accepted accounting principles
consistently applied excluding accounting charges, costs and expenses incurred
within 12 months after the Closing related to (i) the separation or severance of
headquarters' personnel, (ii) recruiting and hiring, (iii) the Merger and (iv)
the restructuring of the Company, including all costs related to the moving of
the headquarters of the Company to Portland, Oregon and the closing of the
Company's former headquarters in Montgomery, Alabama, and also excluding, in the
Board of Directors discretion, any extraordinary or unusual charges or credits
such as one time write-offs of goodwill or similar events.
(g) As used herein the term "Public Offering" shall mean the sale of
shares of Common Stock to the public subsequent to the date hereof pursuant to a
registration statement under the Act which has been declared effective by the
Securities and Exchange Commission (other than a registration statement on Form
S-8) which results in 15% or more of the outstanding shares of the Common Stock
being issued or sold to the public; provided, however, that if shares held both
immediately following the Closing Date and such registered public offering by
stockholders unaffiliated with the KKR Entities and management constitute less
than 5% of the outstanding shares of the Common Stock immediately after such
registered public offering, the "15%" above shall be changed to "20%".
(h) As used herein the term "Market Price Per Share" shall mean either
(i) the price per share equal to the average of the last sale price of the
Common Stock on the Repurchase Calculation Date on each national securities
exchange on which the Common Stock may at the time be listed or (ii) if there
shall have been no sales on any of such exchanges on the Repurchase Calculation
Date, the average of the closing bid and asked prices on each such exchange at
the end of the Repurchase Calculation Date or (iii) if there is no such bid and
asked price on the Repurchase Calculation Date, the average of the closing bid
and asked prices on each such exchange on the next preceding date when such bid
and asked price occurred or (iv) if the Common Stock shall not be so listed, the
closing sales price as reported by the NASDAQ National Market System ("NASDAQ")
at the end of the Repurchase Calculation Date or (v) if there shall have been no
sales reported by NASDAQ on the Repurchase Calculation Date, the closing bid and
asked prices reported by NASDAQ at the end of the Repurchase Calculation Date or
(vi) if there is no such bid and asked price on the Repurchase Calculation Date,
the average
<PAGE>
13
closing sales price as reported by the National Association of Securities
Dealers, Inc. in the "pink sheets" for the 15-day period immediately preceding
the Repurchase Calculation Date, or (vii) if no such sales occurred within such
15-day period, the Book Value Per Share.
(i) In determining the Repurchase Price, appropriate adjustments shall
be made for any future issuances of rights to acquire and securities convertible
into Common Stock and any stock dividends, splits, combinations,
recapitalizations or any other adjustment in the number of shares of outstanding
shares of Common Stock.
8. Stock Issued to Purchaser Upon Exercise of Stock Options;
Termination of Options.
(a) The Company may from time to time grant to the Purchaser, in
addition to the Options, options under the Option Plan to purchase shares of
Common Stock at $19 per share or at a different option exercise price. The terms
"Stock" and "Promote Equity" as used in this Agreement shall include all shares
of Common Stock of the Company purchased by the Purchaser pursuant to this
Agreement and issued to the Purchaser by the Company upon exercise of the
Options and of any other stock options held by the Purchaser.
(b) All outstanding Options granted to the Purchaser under the Option
Plan or otherwise, whether or not then exercisable, will be automatically
terminated upon the payment by the Company to the Purchaser, pursuant to the
provisions of Sections 5 or 6 of this Agreement, of an amount equal to the
Option Excess Price. If the Option Excess Price is zero or a negative number,
all outstanding stock options granted to the Purchaser under the Option Plan or
otherwise, whether or not then exercisable, shall be automatically terminated
upon the repurchase of Stock as provided in Sections 5 or 6. The Option Excess
Price is the excess, if any, of the Section 5 Repurchase Price, the Section 6(a)
Repurchase Price or the Section 6(b) Repurchase Price, depending on which
Repurchase Price is being used to repurchase the remainder of the Stock, over
the Option Price (as defined in the Option Plan) multiplied by the number of
Exercisable Option Shares. For purposes hereof, "Exercisable Option Shares"
shall mean the shares of Common Stock which, at the time of determination of the
Option Excess Price, could be purchased by the Purchaser upon exercise of his
outstanding options.
9. The Company's Representations and Warranties.
(a) The Company represents and warrants to the Purchaser that (i) this
Agreement has been duly authorized, executed and delivered by the Company and
(ii) the Stock, when issued and delivered in accordance with the terms hereof,
will be duly and validly issued, fully paid and nonassessable.
<PAGE>
14
(b) If the Company shall have engaged in a Public Offering, (i) the
Company shall use reasonable efforts to register the Options and the Stock to be
acquired on exercise thereof on a Form S-8 Registration Statement or any
successor to Form S-8 to the extent that such registration is then available
with respect to such Options and Stock and (ii) the Company will file the
reports required to be filed by it under the Act and the Exchange Act and the
rules and regulations adopted by the Securities and Exchange Commission ("SEC")
thereunder, to the extent required from time to time to enable the Purchaser to
sell shares of Stock without registration under the Act within the limitations
of the exemptions provided by (A) Rule 144 under the Act, as such Rule may be
amended from time to time, or (B) any similar rule or regulation hereafter
adopted by the SEC. Notwithstanding anything contained in this Section 9(b), the
Company may deregister under Section 12 of the Exchange Act if it is then
permitted to do so pursuant to the Exchange Act and the rules and regulations
thereunder. Nothing in this Section 9(b) shall be deemed to limit in any manner
the restrictions on sales of Stock contained in this Agreement.
10. "Piggyback" Registration Rights.
(a) Until the later of the consummation of a Public Offering and the
fifth anniversary of the Purchase Date, the Purchaser (i) hereby agrees to be
bound by all of the terms, conditions and obligations of the Registration Rights
Agreement dated as of February 13, 1997, among the Company (as successor by
Merger to KCLC Acquisition Corp.) and certain of the KKR Entities (the
"Registration Rights Agreement") and (ii) subject to the limitations set forth
in this Section 10, shall have the right under the Registration Rights Agreement
to participate in offerings that would result in a Public Offering ratably with
the KKR Entities (except that the Purchaser will not have demand registration
rights, but shall have the right to participate ratably with the KKR Entities
parties thereto in any demand registration by the KKR Entities); provided,
however, that the Purchaser shall not be bound by any amendments to the
Registration Rights Agreement unless Purchaser consents thereto. Notwithstanding
anything to the contrary contained in the Registration Rights Agreement, the
Purchaser's rights and obligations under the Registration Rights Agreement shall
be subject to the limitations and additional obligations set forth in this
Section 10. All shares of Stock purchased by the Purchaser pursuant to this
Agreement and held by the Purchaser, the Purchaser's Trust, the Purchaser's L.P.
or the Purchaser's Estate, including shares purchased upon the exercise of
Options, shall be deemed to be Registrable Securities as defined in the
Registration Rights Agreement.
(b) The Company will promptly notify the Purchaser in writing (a
"Notice") of any proposed registration (a "Proposed Registration"). If within 15
days of the receipt by the Purchaser of such Notice, the Company receives from
the
<PAGE>
15
Purchaser, the Purchaser's Trust, the Purchaser's L.P. or the Purchaser's Estate
a written request (a "Request") to register shares of Stock held by the
Purchaser, the Purchaser's Estate, the Purchaser's Trust or the Purchaser's L.P.
(which Request will be irrevocable unless otherwise mutually agreed to in
writing by the Purchaser and the Company), shares of Stock will be so registered
as provided in this Section 10; provided, however, that for each such
registration statement only one Request, which shall be executed by the
Purchaser, the Purchaser's Trust, the Purchaser's L.P. or the Purchaser's
Estate, as the case may be, may be submitted for all Registrable Securities held
by the Purchaser, the Purchaser's Estate, the Purchaser's Trust and the
Purchaser's L.P.
(c) The maximum number of shares of Stock which will be registered
pursuant to a Request will be the lowest of (i) the number of shares of Stock
then held by the Purchaser (which for purposes of this subparagraph (c) shall
include shares held by the Purchaser's Estate, a Purchaser's Trust or a
Purchaser's L.P.), including all shares of Stock which the Purchaser is then
entitled to acquire under an unexercised Option to the extent then exercisable
or (ii) the maximum number of shares of Stock which the Company can register in
the Proposed Registration without adverse effect on the offering in the view of
the managing underwriters (reduced pro rata with all Other Purchasers) as more
fully described in subsection (d) of this Section 10 or (iii) the maximum number
of shares which the Purchaser (pro rata based upon the aggregate number of
shares of Common Stock the Purchaser and all Other Purchasers have requested be
registered) and all Other Purchasers are permitted to register under the
Registration Rights Agreement.
(d) If a Proposed Registration involves an underwritten offering and
the managing underwriter advises the Company in writing that, in its opinion,
the number of shares of Stock requested to be included in the Proposed
Registration exceeds the number which can be sold in such offering, so as to be
likely to have an adverse effect on the price, timing or distribution of the
shares of Stock offered in such Public Offering as contemplated by the Company,
then the Company will include in the Proposed Registration (i) first, 100% of
the shares of Stock the Company proposes to sell and (ii) second, to the extent
of the number of shares of Stock requested to be included in such registration
which, in the opinion of such managing underwriter, can be sold without having
the adverse effect referred to above, the number of shares of Stock which the
"Holders" (as defined in the Registration Rights Agreement), including, without
limitation, the Purchaser and Other Purchasers have requested to be included in
the Proposed Registration, such amount to be allocated pro rata among all
requesting Holders on the basis of the relative number of shares of Stock then
held by each such Holder (provided that any shares thereby allocated to any such
Holder that exceed such Holder's request will be
<PAGE>
16
reallocated among the remaining requesting Holders in like manner).
(e) Upon delivering a Request the Purchaser, the Purchaser's Estate,
Purchaser's Trust or Purchaser's L.P. (or his or their authorized
representative) will, if requested by the Company, execute and deliver a custody
agreement and power of attorney in form and substance satisfactory to the
Company with respect to the shares of Stock to be registered pursuant to this
Section 10 (a "Custody Agreement and Power of Attorney"). The Custody Agreement
and Power of Attorney will provide, among other things, that the Purchaser the
Purchaser's Estate, Purchaser's Trust or Purchaser's L.P. (or his or their
authorized representative) will deliver to and deposit in custody with the
custodian and attorney-in-fact named therein a certificate or certificates
representing such shares of Stock (duly endorsed in blank by the registered
owner or owners thereof or accompanied by duly executed stock powers in blank)
and irrevocably appoint said custodian and attorney-in-fact as the Purchaser's,
Purchaser's Estate's, Purchaser's Trust's or Purchaser's L.P.'s agent and
attorney-in-fact with full power and authority to act under the Custody
Agreement and Power of Attorney on its behalf with respect to the matters
specified therein.
(f) The Purchaser agrees that he will execute such other agreements as
the Company may reasonably request to further evidence the provision of this
Section 10.
11. Pro Rata Repurchases.
Notwithstanding anything to the contrary contained in Sections 5 or 6,
if at any time consummation of all purchases and payments to be made by the
Company with respect to the this Agreement and/or one of several agreements
("Other Purchasers' Agreements") which in the future will be entered into
between the Company and other individuals who are or will be key employees of
the Company ("Other Purchasers") would result in a Blocking Event, then the
Company shall (i) first make purchases from, and payments to, the Purchaser with
respect to his Side-by-Side Equity for the maximum number of shares of
Side-by-Side Equity without resulting in a Blocking Event and (ii) after all the
Purchasers' Side-by-Side Equity has been purchased and paid for, make purchases
from, and payments to, the Purchaser and Other Purchasers pro rata (on the basis
of the proportion of the number of shares of Stock and the number of Options the
Purchaser (with respect to the Purchasers' Promote Equity) and all Other
Purchasers have elected or are required to sell to the Company) for the maximum
number of shares of Stock and shall pay the Option Excess Price for the maximum
number of Options permitted without resulting in a Blocking Event. The maximum
number of shares of Stock and the maximum number of Options permitted to be
purchased or paid for by the Company at any time without resulting in a Blocking
Event shall be referred to herein as the "Maximum Repurchase Amount". The
provisions of Section 5(b) and
<PAGE>
17
6(f) shall apply in their entirety to payments and repurchases with respect to
Options and shares of Stock which may not be made due to the limits imposed by
the Maximum Repurchase Amount under this Section 11. Until all of such Stock and
Options are purchased and paid for by the Company, the Purchaser and the Other
Purchasers whose Stock and Options are not purchased in accordance with this
Section 11 shall have priority, on the basis set forth in this Section 11, over
other purchases of Common Stock and Options by the Company pursuant to this
Agreement and Other Purchasers' Agreements, except that any purchase of the
Purchaser's Side-by-Side Equity by the Company pursuant to this Agreement shall
have a priority over all other purchases of Stock or Options to be made by the
Company under this Agreement or Other Purchasers' Agreements.
12. Rights to Negotiate Repurchase Price.
Nothing in this Agreement shall be deemed to restrict or prohibit the
Company from purchasing shares of Stock or Options from the Purchaser, at any
time, upon such terms and conditions, and for such price, as may be mutually
agreed upon between the Parties, whether or not at the time of such purchase
circumstances exist which specifically grant the Company the right to purchase,
or the Purchaser the right to sell, shares of Stock or the Company has the right
to pay, or the Purchaser has the right to receive, the Option Excess Price under
the terms of this Agreement.
13. Covenant Regarding 83(b) Election.
Except as the Company may otherwise agree in writing, the Purchaser
hereby covenants and agrees that he will make an election provided pursuant to
Treasury Regulation 1.83-2 with respect to the Stock, including without
limitation, the Stock to be acquired pursuant to Section 1 and the Stock to be
acquired upon each exercise of the Purchaser's Options; and Purchaser further
covenants and agrees that he will furnish the Company with copies of the forms
of election the Purchaser files within 30 days after the date hereof, and within
30 days after each exercise of Purchaser's Non-Qualified Options and with
evidence that each such election has been filed in a timely manner.
14. Notice of Change of Beneficiary.
Immediately prior to any transfer of Stock to a Purchaser's Trust or a
Purchaser's L.P., the Purchaser shall provide the Company with a copy of the
instruments creating the Purchaser's Trust or Purchaser's L.P., as the case may
be, and with the identity of the beneficiaries of the Purchaser's Trust or the
general and limited partners of the Purchaser's L.P., as the case may be. The
Purchaser shall notify the Company immediately prior to any change in the
identity of any
<PAGE>
18
beneficiary of the Purchaser's Trust or any and limited partner of the
Purchaser's L.P., as the case may be.
15. Expiration of Certain Provisions.
The provisions contained in Sections 4, 5 and 6 of this Agreement and
the portion of any other provision of this Agreement which incorporates the
provisions of Sections 4, 5 and 6, shall terminate and be of no further force or
effect with respect to any shares of Stock sold by the Purchaser (i) pursuant to
an effective registration statement filed by the Company pursuant to Section 10
hereof or (ii) pursuant to the terms of the Sale Participation Agreement of even
date herewith, among the Purchaser, KKR Partners II, L.P. and KLC Associates,
L.P.
The rights and obligations of the parties hereto under Sections 3, 4,
5 and 6 hereof shall all terminate if a Change of Control occurs. A "Change of
Control" means (i) a sale of all or substantially all of the assets of the
Company (other than in connection with financing transactions, sale and
leaseback transactions or other similar transactions) to a Person who is not a
KKR Entity, (ii) a sale by KKR or any of its Affiliates resulting in more than
50% of the voting stock of the Company being held by a person or group that does
not include a KKR Entity or (iii) (a) a merger or consolidation of the Company
into another person which is not a KKR Entity or (b) any dilution of KKR's
beneficial ownership interest in the Company which results in the KKR Entities
owning less than a 50% of the outstanding shares of the Common Stock of the
Company; if and only if any such event described in either (iii) (a) and (b),
results in the inability of the KKR Entities to elect a majority of the Board of
Directors of the Company (or the resulting entity).
16. Recapitalizations, etc.
The provisions of this Agreement shall apply, to the full extent set
forth herein with respect to the Stock or the Options, to any and all shares of
capital stock of the Company or any capital stock, partnership units or any
other security evidencing ownership interests in any successor or assign of the
Company (whether by merger, consolidation, sale of assets or otherwise) which
may be issued in respect of, in exchange for, or substitution of the Stock or
the Options, by reason of any stock dividend, split, reverse split, combination,
recapitalization, liquidation, reclassification, merger, consolidation or
otherwise.
17. Purchaser's Employment by the Company.
Nothing contained in this Agreement or in any other agreement entered
into by the Company and the Purchaser contemporaneously with the execution of
this Agreement (i) obligates the Company or any subsidiary of the Company to
employ the Purchaser in any capacity whatsoever or (ii) prohibits or
<PAGE>
19
restricts the Company (or any such subsidiary) from terminating the employment,
if any, of the Purchaser at any time or for any reason whatsoever, with or
without cause, and the Purchaser hereby acknowledges and agrees that neither the
Company nor any other person has made any representations or promises whatsoever
to the Purchaser concerning the Purchaser's employment or continued employment
by the Company.
18. State Securities Laws.
The Company hereby agrees to use its best efforts to comply with all
state securities or "blue sky" laws which might be applicable to the sale of the
Stock and the issuance of the Options to the Purchaser.
19. Binding Effect.
The provisions of this Agreement shall be binding upon and accrue to
the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. In the case of a transferee permitted
under Section 2(a) hereof, such transferee shall be deemed the Purchaser
hereunder; provided, however, that no transferee (including without limitation,
transferees referred to in Section 2(a) hereof) shall derive any rights under
this Agreement unless and until such transferee has delivered to the Company a
valid undertaking and becomes bound by the terms of this Agreement.
20. Amendment.
This Agreement may be amended only by a written instrument signed by
the Parties hereto.
21. Closing.
Except as otherwise provided herein, the closing of each purchase and
sale of shares of Stock and the payment of the Option Excess Price, if any,
pursuant to this Agreement shall take place at the principal office of the
Company on the tenth business day following delivery of the notice by either
Party to the other of its exercise of the right to purchase or sell such Stock
hereunder or to cause the payment of the Option Excess Price, if any.
22. Applicable Law.
The laws of the state of Delaware (or if the Company reincorporates in
another state, of that state) shall govern the interpretation, validity and
performance of the terms of this Agreement, regardless of the law that might be
applied under principles of conflicts of law. Any suit, action or proceeding
against the Purchaser, with respect to this Agreement, or any judgment entered
by any court in respect of any thereof, may be brought in any court of competent
jurisdiction in the State of
<PAGE>
20
Delaware (or if the Company reincorporates in another state, in that state) or
the State in which the Company's headquarters is located, and the Purchaser
hereby submits to the non-exclusive jurisdiction of such courts for the purpose
of any such suit, action, proceeding or judgment. Nothing herein shall in any
way be deemed to limit the ability of the Company to serve any such writs,
process or summonses in any other manner permitted by applicable law or to
obtain jurisdiction over the Purchaser, in such other jurisdictions and in such
manner, as may be permitted by applicable law. The Purchaser hereby irrevocably
waives any objections which he may now or hereafter have to the laying of the
venue of any suit, action or proceeding arising out of or relating to this
Agreement brought in any court of competent jurisdiction in the State of
Delaware (or if the Company reincorporates in another state, in that state) or
the State in which the Company's headquarters is located, and hereby further
irrevocably waives any claim that any such suit, action or proceeding brought in
any such court has been brought in any inconvenient forum. No suit, action or
proceeding against the Company with respect to this Agreement may be brought in
any court, domestic or foreign, or before any similar domestic or foreign
authority other than in a court of competent jurisdiction in the State of
Delaware (or if the Company reincorporates in another state, in that state) or
the State in which the Company's headquarters is located, and the Purchaser
hereby irrevocably waives any right which he may otherwise have had to bring
such an action in any other court, domestic or foreign, or before any similar
domestic or foreign authority. The Company hereby submits to the jurisdiction of
such courts for the purpose of any such suit, action or proceeding.
23. Assignability of Certain Rights by the Company.
The Company shall have the right to assign any or all of its rights or
obligations to purchase shares of Stock pursuant to Sections 4, 5 and 6 hereof;
provided, however, that the Company shall remain obligated to perform its
obligations notwithstanding such assignment in the event that such assignee
fails to perform the obligations so assigned to it.
24. Miscellaneous.
In this Agreement (i) all references to "dollars" or "$" are to United
States dollars and (ii) the word "or" is not exclusive. If any provision of this
Agreement shall be declared illegal, void or unenforceable by any court of
competent jurisdiction, the other provisions shall not be affected, but shall
remain in full force and effect.
25. Notices.
All notices and other communications provided for herein shall be in
writing and shall be deemed to have been duly given if delivered by hand
(whether by overnight courier or
<PAGE>
21
otherwise) or sent by registered or certified mail, return receipt requested,
postage prepaid, to the Party to whom it is directed:
(a) If to the Company, to it at the following address:
KinderCare Learning Centers, Inc.
825 N.E. Multnomah
Suite 1050
Portland, Oregon 97232
Attn: General Counsel
with copies to:
Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Clifton S. Robbins
and:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3909
Attn: David J. Sorkin, Esq.
(b) If to the Purchaser, to him at the address set forth below under
his signature;
or at such other address as either party shall have specified by
notice in writing to the other.
26. Confidential Information.
(a) Except as required by law or judicial process, the Purchaser will
not disclose or use at any time, any Confidential information (as defined below)
of which the Purchaser is or becomes aware, whether or not such information is
developed by him, except to the extent that such disclosure or use is directly
related to the Purchaser's performance of duties, if any, assigned to the
Purchaser by the Company. As used in this Agreement, the term "Confidential
Information" means information developed by or on behalf of the Company that is
not known to the public or within the industry and that is used, developed or
obtained by the Company or its subsidiaries in connection with its business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv) computer software, including operating
systems, applications and program listings, (v) flow charts, manuals and
documentation, (vi) data bases, (vii) accounting and business methods, (viii)
inventions, devices, new developments, methods and processes,
<PAGE>
22
whether patentable or unpatentable and whether or not reduced to practice, (ix)
customers and clients and customer or client lists, (x) other copyrightable
works, (xi) all trade secrets and (xii) all similar and related information in
whatever form. Confidential Information will not include any information that
(a) is a matter of public knowledge through no fault of Purchaser, (b) is
disclosed by Purchaser with the Company's prior written consent to unrestricted
disclosure, (c) was known by Purchaser prior to the date hereof, (d) is
independently developed by Purchaser without using any Confidential Information
or (e) is lawfully obtained by Purchaser from any third party who did not obtain
the information directly from the Company or its representatives or agents. The
Purchaser acknowledges and agrees that all copyrights, works, inventions,
innovations, improvements, developments, patents, trademarks and all similar or
related information which relate to the actual or anticipated business of the
Company and its subsidiaries (including its predecessors) and conceived,
developed or made by the Purchaser while employed by the Company or its
subsidiaries belong to the Company. The Purchaser will perform all actions
reasonably requested by the Company to establish and confirm such ownership at
the Company's expense (including without limitation assignments, consents,
powers of attorney and other instruments).
(b) Because the Purchaser's services are unique and because the
Purchaser has had access to Confidential Information, the parties hereto agree
that money damages will be an inadequate remedy for any breach of this
Agreement. In the event a breach or threatened breach of this Agreement, the
Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive relief in order to enforce, or
prevent any violations of, the provisions hereof (without the posting of a bond
or other security).
<PAGE>
i
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
KINDERCARE LEARNING CENTERS, INC.
By EDWARD L. BREWINGTON
-----------------------------------
Name: Edward L. Brewington
Title: Vice President, Human Resources
DAVID J. JOHNSON
--------------------------------------
DAVID J. JOHNSON
12621 SW Edgecliff Road
--------------------------------------
Portland, OR 97219
--------------------------------------
June 24, 1997
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of February 14, 1997 is made by and between
KINDERCARE LEARNING CENTERS, INC., an Alabama corporation (hereinafter referred
to as the "Company"), and DAVID J. JOHNSON, an employee of the Company or a
Subsidiary (as defined below) or Affiliate (as defined below) of the Company,
hereinafter referred to as "Optionee".
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Common Stock ("Common Stock");
WHEREAS, the Company wishes to carry out the Plan (as hereinafter
defined), the terms of which are hereby incorporated by reference and made a
part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Company and its stockholders to grant the Non-Qualified Options
provided for herein to the Optionee as an incentive for increased efforts during
his term of office with the Company or its Subsidiaries or Affiliates, and has
advised the Company thereof and instructed the undersigned officers to issue
said Options;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall
have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
Section 1.1 - Affiliate
"Affiliate" shall mean, with respect to the Company, any corporation
directly or indirectly controlling, controlled by, or under common control with,
the Company or any other entity designated by the Board of Directors of the
Company in which the Company or an Affiliate has an interest.
<PAGE>
2
Section 1.2 - Cause
"Cause" shall mean (i) the Optionee's willful and continued failure to
perform Optionee's duties with respect to the Company or its Subsidiaries which
continues beyond ten days after a written demand for substantial performance is
delivered to Optionee by the Company and which could reasonably result in
demonstrable and substantial injury to the Company or (ii) misconduct by
Optionee (x) involving dishonesty or breach of trust in connection with
Optionee's employment, (y) which would be a reasonable basis for an indictment
of Optionee for a felony or a misdemeanor involving moral turpitude or (z) which
results in demonstrable and substantial injury to the Company.
Section 1.3 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.4 - Committee
"Committee" shall mean the Compensation Committee of the Company.
Section 1.5 - Grant Date
"Grant Date" shall mean the date on which the Options provided for in
this Agreement were granted.
Section 1.6 - KKR
"KKR" shall mean Kohlberg Kravis Roberts & Co., L.P.
Section 1.7 - KKR Affiliate
"KKR Affiliate" shall mean, with respect to KKR, any corporation
directly or indirectly controlling, controlled by, or under common control with,
KKR.
Section 1.8 - Management Stockholder's Agreement
"Management Stockholder's Agreement" shall mean that certain
Management Stockholder's Agreement dated as of February 14, 1997 between the
Optionee and the Company.
Section 1.9 - Options
"Options" shall mean the non-qualified options.
Section 1.10 - Permanent Disability
The Optionee shall be deemed to have a "Permanent Disability" when the
majority of the Board of Directors of the
<PAGE>
3
Company shall, in good faith, determine that the Optionee is unable to engage in
the activities required by the Optionee's position by reason of any medically
determined physical or mental impairment which can be expected to result in
death or which has lasted or can reasonably be expected to last for a continuous
period of not less than 12 months.
Section 1.11 - Plan
"Plan" shall mean the 1997 Stock Purchase and Option Plan for Key
Employees of KinderCare Learning Centers, Inc. and Subsidiaries.
Section 1.12 - Pronouns
The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.
Section 1.13 - Purchase Date
"Purchase Date" shall mean the date hereof.
Section 1.14 - Retirement
"Retirement" shall mean retirement at age 62 or over (or such other
age as may be approved by the Board of Directors of the Company) after having
been employed by the Company or a Subsidiary for at least three years after the
Purchase Date.
Section 1.15 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.16 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations, or group of
commonly controlled corporations, other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
ARTICLE II
GRANT OF OPTIONS
Section 2.1 - Grant of Options
For good and valuable consideration, on and as of the date hereof the
Company irrevocably grants to the Optionee an Option to purchase any part or all
of an aggregate of [421,052] shares of the Company's $.01 par value Common Stock
upon the terms and conditions set forth in this Agreement.
<PAGE>
4
Section 2.2 - Exercise Price
The exercise price of the shares of stock covered by the Options shall
be $19 per share without commission or other charge.
Section 2.3 - Consideration to the Company
In consideration of the granting of these Options by the Company, the
Optionee agrees to render faithful and efficient services to the Company or a
Subsidiary or Affiliate, with such duties and responsibilities as the Company
shall from time to time prescribe. Nothing in this Agreement or in the Plan
shall confer upon the Optionee any right to continue in the employ of the
Company or any Subsidiary or Affiliate or shall interfere with or restrict in
any way the rights of the Company and its Subsidiaries or Affiliates, which are
hereby expressly reserved, to terminate the employment of the Optionee at any
time for any reason whatsoever, with or without cause.
Section 2.4 - Adjustments in Options
Subject to Section 9 of the Plan, in the event that the outstanding
shares of the stock subject to an Option are, from time to time, changed into or
exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares, or otherwise, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares or other consideration as to which
such Option, or portions thereof then unexercised, shall be exercisable. Any
such adjustment made by the Committee shall be final and binding upon the
Optionee, the Company and all other interested persons.
ARTICLE III
PERIOD OF EXERCISABILITY
Section 3.1 - Commencement of Exercisability
(a) Options shall become exercisable as follows:
Percentage of Option
Date Option Shares Granted As to Which
Becomes Exercisable Option Is Exercisable
- ------------------- ---------------------
After the first anniversary
of the Grant Date 20%
After the second anniversary
of the Grant Date 40%
<PAGE>
5
After the third anniversary
of the Grant Date 60%
After the fourth anniversary
of the Grant Date 80%
After the fifth anniversary
of the Grant Date 100%
Notwithstanding the foregoing, the Option shall become immediately
exercisable as to 100% of the shares of Common Stock subject to such Option
immediately prior to a Change of Control (but only to the extent such Option has
not otherwise terminated or become exercisable). A "Change of Control" means (i)
a sale of all or substantially all of the assets of the Company (other than in
connection with financing transactions, sale and leaseback transactions or other
similar transactions) to a Person who is not an Affiliate of Kohlberg Kravis
Roberts & Co., L.P. ("KKR"), (ii) a sale by KKR or any of its Affiliates
resulting in more than 50% of the voting stock of the Company being held by a
Person or Group that does not include KKR or any of its Affiliates or (iii) (a)
a merger or consolidation of the Company into another Person which is not an
Affiliate of KKR or (b) any dilution of KKR's interest in the Company which
results in KKR and any of its Affiliates owning less than 50% of the Common
Stock of the Company; if and only if any such event described in either (iii)
(a) or (b), results in the inability of the KKR Partnerships to elect a majority
of the Board of Directors of the Company (or the resulting entity). "Person"
means an individual, partnership, corporation, business trust, joint stock
company, trust, unincorporated association, joint venture, governmental
authority or other entity of whatever nature. "Group" means two or more Persons
acting together as a partnership, limited partnership, syndicate or other group
for the purpose of acquiring, holding or disposing of securities of the Company.
(b) Notwithstanding the foregoing, no Option shall become exercisable
as to any additional shares of Common Stock following the termination of
employment of the Optionee for any reason other than a termination of employment
because of death or Permanent Disability of the Optionee and any Option (other
than as provided in the next succeeding sentence) which is non-exercisable as of
the Optionee's termination of employment shall be immediately cancelled. In the
event of a termination of employment because of such death or Permanent
Disability, the Options shall immediately become exercisable as to all shares of
Common Stock subject thereto.
<PAGE>
6
Section 3.2 - Expiration of Options
The Options may not be exercised to any extent by Optionee after the
first to occur of the following events:
(a) The tenth anniversary of the Grant Date; or
(b) The first anniversary of the date of the Optionee's termination of
employment by reason of death, Permanent Disability or Retirement; or
(c) The first business day which is fifteen calendar days after the
earlier of (i) 75 days after termination of employment of the Optionee for
any reason other than for Cause, death, Permanent Disability or Retirement
or (ii) the delivery of notice by the Company that it does not intend to
exercise its call right under Section 6 of the Management Stockholder's
Agreement; provided, however, that in any event the Options shall remain
exercisable under this subsection 3.2(c) until at least 45 days after
termination of employment of the Optionee for any reason other than for
death, Permanent Disability or Retirement; or
(d) The date the Option is terminated pursuant to Section 5, 6 or 8(b)
of the Management Stockholder's Agreement;
(e) The date of an Optionee's termination of employment by the Company
for Cause; or
(f) If the Committee so determines pursuant to Section 9 of the Plan,
the effective date of either the merger or consolidation of the Company
into another Person, or the exchange or acquisition by another Person of
all or substantially all of the Company's assets or 80% or more of its then
outstanding voting stock, or the recapitalization, reclassification,
liquidation or dissolution of the Company; provided, that if the Committee
deems it necessary to cancel the Options to facilitate a business
combination, the Optionee shall be paid, in cash or other consideration
that the Shareholders receive pursuant to such business combination, the
excess of the fair market value of the Common Stock at the time of such
business combination over the exercise price for the cancelled Options
including any unvested Options which are being cancelled. At least ten (10)
days prior to the effective date of such merger, consolidation, exchange,
acquisition, recapitalization, reclassification, liquidation or
dissolution, the Committee shall give the Optionee notice of such event if
the Option has then neither been fully exercised nor become unexercisable
under this Section 3.2.
<PAGE>
7
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
The Option, and any portion of the Option, may be exercised by
Optionee or any transferee permitted by Section 5.2. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when an
Option becomes unexercisable under Section 3.2, be exercised by Optionee's
personal representative or by any person empowered to do so under the Optionee's
will or under the then applicable laws of descent and distribution or by any
transferee permitted by Section 5.2.
Section 4.2 - Partial Exercise
Any exercisable portion of an Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior to
the time when the Option or portion thereof becomes unexercisable under Section
3.2; provided, however, that any partial exercise shall be for whole shares of
Common Stock only.
Section 4.3 - Manner of Exercise
An Option, or any exercisable portion thereof, may be exercised solely
by delivering to the Secretary or his office all of the following prior to the
time when the Option or such portion becomes unexercisable under Section 3.2:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the Option
or portion thereof is thereby exercised, such notice complying with all
applicable rules established by the Committee;
(b) Full payment (which shall be made (i) in cash, (ii) by check,
(iii) by delivery of shares of Common Stock owned by the Optionee or a
portion of the Common Stock then being purchased, which Common Stock shall
be valued at the fair market value as determined in good faith by the
Committee, or (iv) by a combination thereof), for the shares with respect
to which such Option or portion thereof is exercised;
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the
shares of stock are being acquired for the holder's own account, for
investment and without any present intention of distributing or reselling
said shares or any of them except as may be permitted under the Securities
Act of 1933, as amended (the
<PAGE>
8
"Act"), and then applicable rules and regulations thereunder, and that the
Optionee or other person then entitled to exercise such Option or portion
thereof will indemnify the Company against and hold it free and harmless
from any loss, damage, expense or liability resulting to the Company if any
sale or distribution of the shares by such person is contrary to the
representation and agreement referred to above; provided, however, that the
Committee may, in its absolute discretion, take whatever additional actions
it deems appropriate to ensure the observance and performance of such
representation and agreement and to effect compliance with the Act and any
other federal or state securities laws or regulations;
(d) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option;
and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
option.
Without limiting the generality of the foregoing, the Committee may require an
opinion of counsel acceptable to it to the effect that any subsequent transfer
of shares acquired on exercise of an Option does not violate the Act, and may
issue stop-transfer orders covering such shares. Share certificates evidencing
stock issued on exercise of this Option shall bear an appropriate legend
referring to the provisions of subsection (c) above and the agreements herein.
The written representation and agreement referred to in subsection (c) above
shall, however, not be required if the shares to be issued pursuant to such
exercise have been registered under the Act, and such registration is then
effective in respect of such shares.
Section 4.4 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of an Option, or any
portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Company. Such shares shall
be fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of an Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The obtaining of approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(b) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may
<PAGE>
9
from time to time establish for reasons of administrative
convenience.
Section 4.5 - Rights as Stockholder
The holder of an Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares purchasable
upon the exercise of the Option or any portion thereof unless and until
certificates representing such shares shall have been issued by the Company to
such holder.
ARTICLE V
MISCELLANEOUS
Section 5.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee shall be final and binding upon the Optionee, the Company
and all other interested persons. No member of the Committee shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan or the Options. In its absolute discretion, the Board of
Directors may at any time and from time to time exercise any and all rights and
duties of the Committee under the Plan and this Agreement.
Section 5.2 - Transferability of Options
The Option may be transferred to the same extent that Common Stock
subject to the Option may be transferred pursuant to the Stockholder's
Agreement. Except for such permitted transfers, neither the Options nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect.
Section 5.3 - Shares to Be Reserved
The Company shall at all times during the term of the Options reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
<PAGE>
10
Section 5.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall
have been deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
Section 5.5 - Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 5.6 - Applicability of Plan and Management Stockholder's
Agreement
The Options and the shares of Common Stock issued to the Optionee upon
exercise of the Options shall be subject to all of the terms and provisions of
the Plan and the Management Stockholder's Agreement, to the extent applicable to
the Options and such shares. In the event of any conflict between this Agreement
and the Plan, the terms of the Plan shall control. In the event of any conflict
between this Agreement or the Plan and the Management Stockholder's Agreement,
the terms of the Management Stockholder's Agreement shall control.
Section 5.7 - Amendment
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
Section 5.8 - Governing Law
The laws of the State of Delaware (or if the Company reincorporates in
another state, the law of that state) shall govern the interpretation, validity
and performance of the terms of this Agreement, regardless of the law that might
be applied under principles of conflicts of laws.
<PAGE>
11
Section 5.9 - Jurisdiction
Any suit, action or proceeding against the Optionee with respect to
this Agreement, or any judgment entered by any court in respect of any thereof,
may be brought in any court of competent jurisdiction in the State of Delaware
(or if the Company reincorporates in another state, in that state) or the state
in which the Company's headquarters is located, and the Optionee hereby submits
to the non-exclusive jurisdiction of such courts for the purpose of any such
suit, action, proceeding or judgment. Nothing herein shall in any way be deemed
to limit the ability of the Company to serve any such writs, process or
summonses in any other manner permitted by applicable law or to obtain
jurisdiction over the Optionee, in such other jurisdiction and in such manner,
as may be permitted by applicable law. The Optionee hereby irrevocably waives
any objections which he may now or hereafter have to the laying of the venue of
any suit, action or proceeding arising out of or relating to this Agreement
brought in any court of competent jurisdiction in the State of Delaware (or if
the Company reincorporates in another state, in that state) or the state in
which the Company's headquarters is located, and hereby further irrevocably
waives any claim that any such suit, action or proceeding brought in any such
court has been brought in any inconvenient forum. No suit, action or proceeding
against the Company with respect to this Agreement may be brought in any court,
domestic or foreign, or before any similar domestic or foreign authority other
than in a court of competent jurisdiction in the State of Delaware (or if the
Company reincorporates in another state, in that state) or the state in which
the Company's headquarters is located, and the Optionee hereby irrevocably
waives any right which he may otherwise have had to bring such an action in any
other court, domestic or foreign, or before any similar domestic or foreign
authority. The Company hereby submits to the jurisdiction of such courts for the
purpose of any such suit, action or proceeding.
<PAGE>
12
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
KINDERCARE LEARNING CENTERS, INC.
By: EDWARD L. BREWINGTON
-----------------------------
Edward L. Brewington
Vice President, Human Resources
DAVID J. JOHNSON
- ----------------------------------
David J. Johnson
12621 SW Edgecliff Road
- ----------------------------------
Portland, OR 97219
- ----------------------------------
Address
Optionee's Taxpayer
Identification Number:
###-##-####
- ----------------------------------
SALE PARTICIPATION AGREEMENT
February 14, 1997
David J. Johnson
Chief Executive Officer
KinderCare Learning Centers, Inc.
2400 Presidents Drive
Montgomery, Alabama 36116
Dear Mr. Johnson:
You have entered into a Stockholder's Agreement, dated as of February
14, 1997 between KinderCare Learning Centers, Inc., a Delaware corporation ("the
Company"), and you (the Stockholder's Agreement") relating to the purchase from
the Company of shares of the common stock, par value $.01 per share, of the
Company. The undersigned, KKR Partners II, L.P., a Delaware limited partnership
("KKR Partners"), and KLC Associates, L.P., a Delaware limited partnership ("KLC
Associates"), also have purchased shares of common stock of the Company and
hereby agree with you as follows, effective upon such purchase of common stock
by you:
1. In the event that at any time KKR Partners, or KLC Associates, as
the case may be (each, a "Selling Partnership" and collectively, the "Selling
Partnerships"), proposes to sell for cash or any other consideration any shares
of common stock of the Company owned by it, in any transaction other than a
Public Offering (as defined in the Stockholder's Agreement) or a sale to an
affiliate of KKR Partners or KLC Associates, as the case may be, the Selling
Partnership will notify you or your Purchaser's Estate or Purchaser's Trust or
Purchaser's L.P. (as such terms are defined in Section 2 of the Stockholder's
Agreement), as the case may be, in writing (a "Notice") of such proposed sale (a
"Proposed Sale") and the material terms of the Proposed Sale as of the date of
the Notice (the "Material Terms") promptly, and in any event not less than 15
days prior to the consummation of the Proposed Sale and not more than 5 days
after the execution of the definitive agreement relating to the Proposed Sale,
if any (the "Sale Agreement"). If within 10 days of your or your Purchaser's
Estate's or Purchaser's Trust's or Purchaser's L.P.'s, as the case may be,
receipt of such Notice the Selling Partnership receives from you or your
Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case may be,
a written request (a "Request") to include Common Stock held by you or your
Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as
<PAGE>
2
the case may be ("Common Stock"), in the Proposed Sale (which Request shall be
irrevocable unless (a) there shall be a material adverse change in the Material
Terms or (b) if otherwise mutually agreed to in writing by you or your
Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case may be,
and the Selling Partnership), the Common Stock held by you will be so included
as provided herein; provided that only one Request, which shall be executed by
you or your Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the
case may be, may be delivered with respect to any Proposed Sale for all Common
Stock held by you or your Purchaser's Estate or Purchaser's Trust or Purchaser's
L.P. Promptly after the consummation of the transactions contemplated thereby,
the Selling Partnership will furnish you, your Purchaser's Trust, your
Purchaser's L.P. or your Purchaser's Estate with a copy of the Sale Agreement,
if any. In the event that both KKR Partners and KLC Associates propose to sell
shares of common stock in the Proposed Sale, the term "Selling Partnership"
shall refer only to KLC Associates and not to KKR Partners.
2. The number of shares of Common Stock which you or your Purchaser's
Estate or Purchaser's Trust or Purchaser's L.P., as the case may be, will be
permitted to include in a Proposed Sale pursuant to a Request will be the lesser
of (a) the sum of the number of shares of Common Stock then owned by you or your
Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case may be,
plus all shares of Common Stock which you are then entitled to acquire under an
unexercised option to purchase shares of Common Stock, to the extent such option
is then vested or would become vested as a result of the consummation of the
Proposed Sale and (b) the sum of the shares of Common Stock then owned by you or
your Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case
may be, plus all shares of Common Stock which you are entitled to acquire under
an unexercised option to purchase shares of Common Stock, whether or not fully
vested, multiplied by a percentage calculated by dividing the aggregate number
of shares of Common Stock which KKR Partners and KLC Associates propose to sell
in the Proposed Sale by the total number of shares of Common Stock owned by the
Selling Partnership or, in the case both KKR Partners and KLC Associates propose
to sell in the Proposed Sale, KKR Partners and KLC Associates. If one or more
holders of shares of Common Stock who have been granted the same rights granted
to you or your Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as
the case may be, hereunder elect not to include the maximum number of shares of
Common Stock which such holders would have been permitted to include in a
Proposed Sale (the "Eligible Shares"), KKR Partners or KLC Associates, or such
remaining holders of shares of Common Stock, or any of them, may sell in the
Proposed Sale a number of additional shares of Common Stock owned by any of them
equal to their pro rata portion of the number of Eligible Shares not included in
the Proposed Sale, based on the relative number of shares of Common Stock then
held by each such holder, and such additional shares of Common Stock which any
such holder or
<PAGE>
3
holders propose to sell shall not be included in any calculation made pursuant
to the first sentence of this Paragraph 2 for the purpose of determining the
number of shares of Common Stock which you or your Purchaser's Estate or
Purchaser's Trust or Purchaser's L.P., as the case may be, will be permitted to
include in a Proposed Sale. KKR Partners and KLC Associates, or any of them, may
sell in the Proposed Sale additional shares of Common Stock owned by any of them
equal to any remaining Eligible Shares which will not be included in the
Proposed Sale pursuant to the foregoing.
3. Except as may otherwise be provided herein, shares of Common Stock
subject to a Request will be included in a Proposed Sale pursuant hereto and in
any agreements with purchasers relating thereto on the same terms and subject to
the same conditions applicable to the shares of Common Stock which the Selling
Partnership proposes to sell in the Proposed Sale. Such terms and conditions
shall include, without limitation: the sales price; the payment of fees,
commissions and expenses; the provision of, and representation and warranty as
to, information requested by the Selling Partnership; and the provision of
requisite indemnifications; provided that any indemnification provided by you,
your Purchaser's Estate or your Purchaser's Trust or your Purchaser's L.P. shall
be pro rata in proportion with the number of shares of Common Stock to be sold.
4. Upon delivering a Request, you or your Purchaser's Estate or
Purchaser's Trust or Purchaser's L.P., as the case may be, will, if requested by
the Selling Partnership, execute and deliver a custody agreement and power of
attorney in form and substance satisfactory to the Selling Partnership with
respect to the shares of Common Stock which are to be sold by you or your
Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case may be,
pursuant hereto (a "Custody Agreement and Power of Attorney"). The Custody
Agreement and Power of Attorney will provide, among other things, that you or
your Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case
may be, will deliver to and deposit in custody with the custodian and
attorney-in-fact named therein a certificate or certificates representing such
shares of Common Stock (duly endorsed in blank by the registered owner or owners
thereof) and irrevocably appoint said custodian and attorney-in-fact as your or
your Purchaser's Estate's or Purchaser's Trust's or Purchaser's L.P.'s, as the
case may be, agent and attorney-in-fact with full power and authority to act
under the Custody Agreement and Power of Attorney on your or your Purchaser's
Estate's or Purchaser's Trust's or Purchaser's L.P.'s, as the case may be,
behalf with respect to the matters specified therein.
5. Your or your Purchaser's Estate's or Purchaser's Trust's or
Purchaser's L.P.'s, as the case may be, right pursuant hereto to participate in
a Proposed Sale shall be contingent on your or your Purchaser's Estate's or
Purchaser's Trust's or Purchaser's L.P.'s, as the case may be, strict compliance
with
<PAGE>
4
each of the provisions hereof and your or your Purchaser's Estate's or
Purchaser's Trust's or Purchaser's L.P.'s, as the case may be, willingness to
execute such documents in connection therewith as may be reasonably requested by
the Selling Partnership.
6. In the event of a Proposed Sale pursuant to Section 1 hereof, the
Selling Partnerships may elect, by so specifying in the Notice, to require you
or your Purchaser's Estate or Purchaser's Trust or Purchaser's L.P., as the case
may be, to, and you or your Purchaser's Estate or Purchaser's Trust or
Purchaser's L.P., as the case may be, will, participate in such Proposed Sale in
accordance with the terms and provisions of Section 2, 3 and 4 hereof.
7. The obligations of KKR Partners and KLC Associates hereunder shall
extend only to you or your Purchaser's Estate or Purchaser's Trust or
Purchaser's L.P., as the case may be, and no other of your or your Purchaser's
Estate's or Purchaser's Trust's or Purchaser's L.P.'s, as the case may be,
successors or assigns shall have any rights pursuant hereto.
8. This Agreement shall terminate and be of no further force and
effect on the fifth anniversary of the first occurrence of a Public Offering (as
defined in the Stockholder's Agreement).
9. All notices and other communications provided for herein shall be
in writing and shall be deemed to have been duly given when delivered to the
party to whom it is directed:
(a) If to KKR Partners or KLC Associates, to it at the following
address:
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Clifton S. Robbins
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: David J. Sorkin, Esq.
(b) If to you, to you at the address first set forth above herein;
(c) If to your Purchaser's Estate or Purchaser's Trust or Purchaser's
L.P., at the address provided to such partnerships by such
entity;
<PAGE>
5
or at such other address as any of the above shall have specified by notice in
writing delivered to the others by certified mail.
10. The laws of the State of Delaware (or if the Company
reincorporates in another state, of that state) shall govern the interpretation,
validity and performance of the terms of this Agreement. No suit, action or
proceeding with respect to this Agreement may be brought in any court or before
any similar authority other than in a court of competent jurisdiction in the
States of Delaware (or if the Company reincorporates in another state, of that
state) or New York, as the Selling Partnerships may elect in their sole
discretion, and you hereby submit to the non-exclusive jurisdiction of such
courts for the purpose of such suit, proceeding or judgment. You hereby
irrevocably waive any right which you may have had to bring such an action in
any other court, domestic or foreign, or before any similar domestic or foreign
authority.
11.If KKR Partners or KLC Associates transfers its interest in the
Company to an affiliate of KKR Partners or KLC Associates, as the case may be,
such affiliate shall assume the obligations hereunder of KKR Partners or KLC
Associates, as the case may be.
<PAGE>
6
It is the understanding of the undersigned that you are aware that no
Proposed Sale presently is contemplated and that such a sale may never occur.
If the foregoing accurately sets forth our agreement, please
acknowledge your acceptance thereof in the space provided below for that
purpose.
Very truly yours,
KKR PARTNERS II, L.P.
By: KKR Associates L.P., the
General Partner
By: _______________________________
KLC ASSOCIATES, L.P.
By: KKR Associates L.P., the
General Partner
By: _______________________________
Accepted and agreed to:
By: ______________________________
DAVID J. JOHNSON
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